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Why we're paying more at the pump relative to oil price

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Gas prices high compared to oil The Bank of Canada today offers the explanation behind the complaints of everyone who has banged their head against the gas pump: Gasoline prices are definitely higher than oil prices would suggest. And, worse, it expects them to remain high.

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Here's how the central bank explained it all in its Monetary Policy Report today:

The price at the pump is a combination of oil costs, taxes and profit margins among refiners and retailers, with crude being the biggest factor. Though what's refined in Canada comes from different grades, West Texas Intermediate crude, the U.S. benchmark, has "historically been a good proxy for the crude costs of Canadian refineries, closely tracking fluctuations in Canadian gasoline prices."

Since the beginning of the year, though, pump prices have climbed more than WTI, and, until September at least, didn't come down when crude fell last spring. That's also added into a jump in inflation, as measured by the consumer price index.

"In September 2011, gasoline prices were about 20 per cent higher than their historical relationship with WTI would suggest, a difference amounting to an additional 1.2 per cent on the level of total CPI," the central bank said.

Canadian refineries use different blends, of both WTI and Brent, which is the benchmark beyond North North America. Central Canadian refiners are heaving on WTI pricing, while those on both coasts lean toward Brent. Nationally, of course, their use is about equal, which until recently didn't matter as their prices were largely similar.

But because of a supply surge in a main U.S. oil hub, WTI has been cheaper than Brent, and cheaper in comparison historically.

"In this context, the crude costs paid by Canadian refineries have, on average, been higher than those implied by WTI," the Bank of Canada said. "Partly as a result, gasoline prices in Canada have remained relatively elevated at the national level. Taxes and profit margins have also played a role."

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This WTI discount, by the way, is expected to last for "a few more years." That means Canadian crude costs "are thus expected to remain peristently elevated relative to WTI." And you know what that means.

Overall today, the central bank's report mirrored yesterday's statement, painting a picture of slower growth amid troubles in the euro zone and the United States, The Globe and Mail's Jeremy Torobin writes.

The Globe and Mail's Shawn McCarthy has also done a good primer on the gas price issue.

EU leaders meet Europe's dysfunctional family holds its reunion today. The question is whether at the end of the gathering it will be celebrating a rebirth or mourning a death.

Already, markets are filled with rumour, speculation and various reports, though German Chancellor Angela Merkel made a passionate plea to her Bundestag today in defence of the euro zone, spelling out the crucial nature of today's summit in Brussels.

And Italy's Prime Minister Silvio Berlusconi managed to save his government from collapsing, as The Globe and Mail's Eric Reguly reports, though there was an actual fist fight in Parliament.

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Reuters reports that the deputies from the governing coalition got into it with some from the opposition, at least two of them grabbing each other by the throat. This apparently was started by a comment on TV by the speaker of the opposition party about the wife of the leader of the Northern League party. (They take "at each other's throat" literally in Italy's parliament.)

Today's meeting is billed as a make-it-or-break-it moment, and the tense leaders of the 17-member monetary union are under intense pressure by other governments to settle the debt crisis with a Grand Plan once and for all given the potential to derail the global recovery.

Of course, Ms. Merkel and her ally, France's Nicolas Sarkozy, set the bar extremely high for the summit, saying there would be a plan. It has been two years since this crisis began, and Europe's leaders have been slammed for letting it heighten and spread.

"Needless to say, all eyes are on the EU summit and it is unclear whether we get full disclosure or if the details will be left for another day," said Sue Trinh, senior currency strategist at RBC in Hong Kong.

Observers are already taking a dim view, noting that the cancellation of what was to have been a pre-summit meeting of EU finance chiefs does not bode well.

"Yesterday's sudden cancellation of the finance ministers meeting doesn't generate confidence that EU leaders have a coherent plan to deal with the debt crisis, and the pathetic reasons for the cancellation, saying there wasn't really a definite meeting scheduled in the first place, only serve to reinforce this perception," said CMC Markets analyst Michael Hewson.

Added to that is the fact that Ms. Merkel, the main player at the table, gave no details or figures in her pre-summit speech today, when she noted that the debt troubles make for Europe's most serious crisis since the Second World War. (To which Mr. Hewson remarked: "If Merkel feels she has to use the war card methinks she's losing the argument.)

Under discussion is a three-pronged plan that would boost the heft of the euro zone's bailout fund, known as the EFSF, to somewhere around €1-trillion, recapitalize the region's banks to the tune of more than €100-billion, and arrange a "haircut" of between 40 per cent and 60 per cent (or more?) for holders of Greek debt.

The Bundestag voted today to approve the EFSF plan.

A draft statement on one aspect, obtained by The Wall Street Journal, says banks should have a capital ratio of 9 per cent by June 30, 2012, and that financial institutions should first try to find private sources for that, via restructuring and debt-to-equity vehicles. Dividends and bonuses should be delayed to meet that target, and, only if necessary, should they tap governments or borrow from the bailout fund.

The main concern is the extent to which private debtholders, primarily banks, will take a hit.

"This could remain a sticking point with banks reluctant to take more than a 40-per-cent hit while the IMF, and EU leaders insistent on a much bigger haircut. This impasse could well delay the second Greek bailout, and we may well find that some parts of any agreement could get kicked down to G20 at Cannes next week."

As it stands now, Ms. Merkel's speech has set the stage and lowered expectations.

"With guidance from German Chancellor Angela Merkel that both EFSF leverage options will be discussed at today's EU Summit, it is clear that no agreement with firm details is in place as yet," said Derek Holt and Karen Cordes Woods of Scotia Capital.

"That's partly because an EFSF leverage proposal requires agreement on the size of a Greek aid package including markdown targets before understanding what is left to leverage. What bolsters lowered expectations for today were Merkel's comments during an early morning speech delivered before the Bundestag that more measures will be needed following today, and more IMF crisis financing may be required."

RIM delays system launch Research In Motion Ltd. has has delayed the launch of an updated operating system for its PlayBook tablet until February 2012, marking yet one more setback in the company's efforts to come out with a viable alternative to the ipad from Apple Inc. , The Globe and Mail's Iain Marlow writes today.

Many have been looking forward to the updated PlayBook OS 2.0 because it was expected to include the native e-mail application and other features that were notably missing when the PlayBook launched, contributing in part to the device's negative reviews and its lack of traction in the marketplace.

Rogers profit jumps Rogers Communications Inc. today posted a better-than-expected third-quarter profit but relatively weak wireless growth, highlighting the struggle of Canada's largest wireless company through one of the toughest competitive environments it has ever faced.

Rogers earned $485-million or 89 cents a share in adjusted net income in the usually lucrative back-to-school quarter, compared to $479-million or 83 cents per share in the same quarter last year, The Globe and Mail's Iain Marlow reports. Analysts had expected adjusted earnings per share of 82 cents.

The company also announced the retirement of its chief financial officer Bill Linton, who will be replaced by Anthony Staffieri, who joins the company from rival BCE Inc. Mr. Linton will remain with Rogers until the end of 2012, the company said.

Ford profit dips Ford Motor Co. posted a slightly lower third-quarter profit today but it's still on a roll.

The auto maker, alone among the Detroit Three in not needing a recession-era bailout, earned $1.65-billion or 41 cents a share, compared to $1.7-billion or 43 cents a year earlier. Revenue climbed 14 per cent to $33.1-billion.

"We remain well on track to deliver improved full year pre-tax operating profit and automotive operating-related cash flow, consistent with our guidance," CFO Lewis Booth said in a statement. "Our liquidity remains strong, and we will continue to take actions when appropriate to strengthen our balance sheet."

Delaying retirement Canadians are delaying their retirement and staying on the job for longer, a trend that had profound implications for the country's current and future work force, The Globe and Mail's Tavia Grant reports.

A 50-year-old worker in 2008 stayed in the labour force three and a half years longer than in the mid-1990s, according to a Statistics Canada indicator that tracks peoples' retirement behaviour.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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