Refining and Wholesale Markets
- Oil travels to Canadian refineries by ship and/or pipeline.
- Canada is a net exporter of gasoline, but still imports some – 4.6 billion litres in 2007, mostly into Quebec, though much of this is subsequently shipped to Ontario.
- Like crude oil, petroleum products such as gasoline are traded on world markets and wholesale prices are heavily influenced by these markets.
Despite the different choices available on the street, little physical difference exists between different brands of gasoline. In fact, selling companies regularly trade gasoline among themselves.
For example, Imperial Oil has two refineries in Ontario which produce more gasoline than they sell in the province, but has no refineries in Quebec. Rather than haul gasoline between provinces, the companies exchange products with one another. For this system to work properly, there has to be a generally acceptable quality standard.
This standard was developed and is updated as required by the Canadian General Standards Board (CGSB). With some exceptions, meeting CGSB standards is not required by regulation but it forms the basis of all exchange agreements between the major companies. In the jargon of the industry, gasoline is fungible, that is, interchangeable.
The major companies all have their own proprietary additive packages which they add at the terminal level. These additives are designed to ensure clean burning. For practical purposes, these additives are the only difference among brands.
International gasoline trade
Like crude oil, gasoline is traded internationally. In Europe, a large market exists for diesel. To produce enough diesel to meet the demand, European refineries process so much crude oil that they end up with a surplus of gasoline. Much of this is exported to North America which cannot produce enough to satisfy its own demand. This links markets in Europe to those in North America.
The New York market heavily influences wholesale markets in Eastern Canada. Cargos and futures are traded on the New York Mercantile Exchange or NYMEX. Markets furrther west are more affected by Gulf Coast markets. Output from western Canadian refineries competes with products shipped by pipeline from the Gulf to the US Midwest. Canadian market prices tend to follow those in these pricing centres. If Canadian prices rose too far above the relevant U.S. price then imports would flow in and undercut the local refineries, forcing them to lower their prices. Similarly, if prices fall below those in the U.S., traders in the US would buy up our supplies creating a shortage.
A look at charts included in Natural Resource Canada’s Fuel Focus Report reveals the close relationship between prices north and south of the border.
However, prices in different places do not move in lock step. Sometimes a major supply disruption in a given region leads to a price rise, as local suppliers scramble for additional gasoline, often paying a higher price. They then try, not always completely successfully, to pass this extra cost to consumers.
For example, in February, 2007 a fire at Ontario’s largest refinery closed it for an extended period. This happened as other refinery problems had already reduced capacity in the system. Plus, winter closure of the St. Lawrence Seaway and a rail strike made it difficult to import additional supplies. A small pipeline that might have brought fuel in from Toledo was being used in the opposite direction and could not be reversed for some time. Ontario gasoline prices rose. The difference between the NYMEX price and the Toronto ‘rack’ price widened by six cents a litre.
What is the ‘rack’ price?
The major oil companies sell gasoline from a number of terminals across the country. Every day, they post the wholesale price at these terminals. In the industry, this is known as the ‘rack price’ because the equipment used for loading trucks with gasoline is known as a rack. You can see the rack price at 23 terminals across Canada by visiting the website of the Kent Group.
The rack price is the price that the companies offer to independent resellers. In practice, larger customers can negotiate a small discount off the rack price. Prices to other buyers such as industrial accounts and the companies’ own branded retailers are set in relation to the rack price. So, although you cannot tell exactly what your dealer is paying on any given day, you can tell how much his cost changes from day to day simply by tracking the posted rack prices at the nearest terminal.
The difference between the rack price and the cost of crude oil is the refiner’s gross margin. This is not profit. Out of this is paid all the costs of operating the refinery and delivering the gasoline to the terminal. Refinery margins are affected by both costs and market conditions. Traditionally, margins rise during the summer because of high demand. This did not happen in 2008, probably because the price of gasoline caused people to drive less.
Learn more by reading about > Distribution
Where does my gasoline dollar go?
The biggest cost component in producing gasoline is the highly variable cost of crude oil. In July 2008, the cost briefly reached 93 cents per litre. Six months later, this had dropped to 28 cents per litre.
Taxes are also a major factor. The federal government charges an excise tax of 10 cents per litre as well as the 5% GST. Provinces levy gasoline taxes averaging about 14 cents per litre.
Refining and marketing costs and margins vary considerably from place to place but average about 21 cents per litre.