The Central Canada gas price puzzle

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Record gasoline prices are hammering consumers in Central Canada, even though oil prices are sitting well below recent highs and most regions in the West and Atlantic Canada are so far seeing little change at the pumps.

The huge regional disparity of gas prices - as much as 30 cents a litre - has some motorists fuming and asking why - and who is to blame.

In Toronto, drivers were shocked to see record gas prices at pumps across the city Tuesday. Prices jumped about six cents overnight to nearly $1.40 a litre, despite oil prices that plunged $17 (U.S.) a barrel last week and remain slightly above $100 a barrel. Gasoline in the city now costs more than it did in 2008, when crude oil prices soared to nearly $150 a barrel before collapsing amid the global financial crisis.

And not only is Ontario's pain likely to get worse, it serves as a warning for the rest of the country, which will likely see price hikes in the coming days.

"It is spreading. It's like a plague," said Jason Toews, co-founder of price tracking website gasbuddy.com.

Historically, gas price hikes have put the spotlight on unrest in the Middle East, production problems in far-flung oil nations or rising demand in the summer driving season.

This time, industry officials say a confluence of events has created a swell of pressure on pricing. They include an unusual price discrepancy between European and North American oil and below-average gasoline supplies in the United States, which drives up wholesale prices that also affect Canada.

Canadian geography also plays a role, as does bad weather south of the border, which has an impact on the facilities that produce gasoline.

A crucial factor is where different regions in Canada get their oil from before it is refined into gasoline. Refineries in Eastern Canada often rely on North Sea crude oil, which is trading at a sharp premium to crude oil produced in Western Canada or the U.S. Those refineries also have to pay transportation costs.

Those added costs are being passed on through higher gas prices.

Then there is the gasoline market in the United States. Right now, the supply of gasoline in the U.S. is below its five-year average, said Michael Ervin, a petroleum industry consultant at Kent Marketing Services Ltd. As a result of this shortage, the wholesale price of gasoline in the U.S. is climbing as wholesalers race to secure inventory. Canadian prices also rise, because if they don't, American wholesalers will buy gas north of the border and ship it south.

"We have to have parity with the United States or we'll run out of gasoline to sell to [Canadian]stations," Mr. Ervin said.

Canada's refiners largely decline to discuss price fluctuations, instead issuing blanket statements about how pump prices stem from a combination of crude costs, wholesale gasoline prices and local retail competition - and referring further questions to third-party analysts.

"We have pricing people that do their job and price stuff. We're not going to get into details on margin and how margins are created. It's the same as anybody else - when you sell a product, you have a margin on it and that margin changes over time," said Jeff Gabert, a spokesman for Shell Canada.

What's clear, though, is that those margins have been growing at a rapid rate. After years of profits so thin that some refineries were driven out of business, the industry is swelling with cash. Take Canadian energy giant Suncor Energy Inc., for example. In the first quarter of 2010, its refining and marketing group earned $147-million. This year, it made $627-million, a more than four-fold increase.

Geography within provinces also plays a role in gasoline pricing. For example, gas prices in Toronto move in sync with the overnight wholesale price, while gas prices in rural areas tend to lag. This is because larger cities like Toronto go through much more fuel than less-populated centres. Gas stations that are not as busy often sit on one or two days' worth of supply, and as a result of this spare inventory, are not immediately affected by changes in the wholesale price.

British Columbia, which is short on refineries as well as oil production, has a unique factor affecting gasoline prices: a carbon tax. While an average of 32-per-cent tax is built into gas prices across the country, drivers in B.C. pay more because of the carbon levy, said Ralph Glass, vice-president of operations at AJM Petroleum Consultants, a Calgary-based firm.

In Atlantic Canada, meanwhile, prices are regulated by the provinces. In New Brunswick and Newfoundland, they are updated every Thursday; in Nova Scotia, every Friday; in Prince Edward Island, on the first and 15th of the month.

"So there would be somewhat of a distortion here now where prices in Atlantic Canada are lower. But come Friday morning, those prices will be adjusted. And then you might see the reverse happening, where Ontario prices will be lower than Maritime prices," said Bill Simpkins, an energy industry consultant in Halifax.

There are other big-picture reasons for surging gas prices, too. Mid-spring is when refineries tend to switch their product mix, lowering their output of diesel and heating fuel and raising how much gasoline they make in preparation for the summer driving season. While that happens, inventories tend to be sucked down.

"Always around May, you do get a hike in prices," Mr. Simpkins said.

This year, such gains have been exacerbated by flooding along the Mississippi, which threatens to hurt operations in the southern U.S., which is one of the most important refining areas on the continent.