There's something "fishy" going on with Gas pricing

Published by on

I just heard on the radio on January 20th, 2016 that gas prices are set to remain unchanged overnight. That is to say they are going to remain at an average of $0.919/ litre in the GTA. I simply can't wrap my head around the gas prices and the correlation to oil prices. I know there have been all kinds of rationalizations about the prices and the disparity between the pump prices and oil prices. Excuses such as the Canadian vs. the US dollar, taxes, the higher cost of refining etc. 
Consider this:

From http://www.fuelgaugereport.com/

US gas prices as of: 
1/20/2016 3:45am 
Regular Mid Premium Diesel 
Current Avg. $1.870 $2.157 $2.391 $2.130 
Yesterday Avg. $1.882 $2.169 $2.404 $2.137 
Week Ago Avg. $1.946 $2.226 $2.459 $2.195 
Month Ago Avg. $2.000 $2.276 $2.505 $2.314 

Within the last week we have seen the average cost of gas in the US drop $.07/gallon and $0.13/ gallon from a month ago.

There are 3.78 litres per US gallon and a straight conversion of gallons to litres would mean that we would be paying $0.49 US/litre. If you factor in $0.40 parity between the US and Canadian dollar (a more aggressive rate than what is truly the exchange) then the converted cost would be $0.68/litre.

I also recognize that there are tax variances between the two countries and this variability will be predicated on what state/province the gas is being purchased.

From the American Petroleum Institute, the following are the average State and Federal taxes across the United States: 
Gasoline 
IState Excise Tax 20.88 ˘ per gallon 20.21 ˘ per gallon 
Other State Taxes/Fees 8.71 ˘ per gallon 9.16 ˘ per gallon 
Total State Taxes/Fees 29.59 ˘ per gallon 29.38 ˘ per gallon 
Total State and Federal Taxes 47.99 ˘ per gallon 
$0.48 average tax on an average gas price of $1.87 it works out to a 26% tax rate.

In Ontario our taxes on gas break down as follows:

13% HST 
$0.10 federal excise tax 
$0.147 provincial tax

On an average price of $0.919 the taxes break out to be 35%. The math breaks down as follows $0.595 base cost x 13% HST + $0.10 excise tax + $0.147 provincial taxes. I have made the assumption that we are not paying HST on the federal excise or provincial taxes (at least I would hope that we would not be taxed on tax). If we take the aggressively exchanged cost of $0.68/litre and gross that up to compensate for the difference in taxes of 9%, the cost of gas would be $0.74 or $0.18 cheaper than the current cost in the GTA or about $0.022 cheaper than the average cost in Ottawa. 

Is it a coincidence that Ottawa pays about $0.16 cheaper than the GTA and happens to be home to many federal politicians?

The above analysis is sure to be fraught with mistakes. With a percentage tax as part of the basis of the overall cost of gas, we will see fluctuations in the overall percentage of average tax being applied to a litre/gallon as gas prices fluctuate. Therefore, an apples to apples comparison makes more sense.

Current average price in GTA is $91.9 today Jan 20, 2016 oil prices closed at $28.72 
Current average price in Ottawa yesterday was $76.9

Current price of gas in the GTA 1 year ago was $90.9 Jan 31 2015 oil prices were $47.11/ barrel

That represents a 39% decrease in the cost of a barrel of oil, but a 1.08% increase in the price at the pumps from almost a year ago. If we applied a 39% decrease to the price at the pumps on $91.9 we should see gas prices be in the neighbourhood of $0.55. Dollar parity you say, even at a 40% exchange rate, we should be at $0.78, and that would be assuming that we imported all of our oil.

Yes there is something very fishy going on, but as typical Canadians we sit back and take it.

This Blog was written by Brad Amlin, CFP, Financial Advisor with Cornwall Wealth Management