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Sunday, June 15, 2008

Soaring gas prices at the local pump influenced by web of international factors

David Friend, THE CANADIAN PRESS
TORONTO - From the ground to the pump, the price of gasoline has been on a relentless upwards trek, hitting the highest levels ever seen in Canada.

Motorists grumble at $1.50 per litre plus gas in some markets, oil companies get defensive and lawsuits are threatened alleging collusion by the industry.

This week, motorists saw the federal Competition Bureau clamp down on a network of gasoline cartels in Quebec, laying criminal charges against 13 people and 11 companies for allegedly fixing prices, the first such charges in Canada since 1955.

But while it may seem like only a few faceless individuals decide what you'll pay for fuel, there is actually a lengthy process that starts on Wall Street and continues through a number of middlemen all the way to your local gas station.

For Jim Stonley, 44, owner of the independent Corktown Esso gas station in east end downtown Toronto, the process starts at about 9 p.m. each night with an e-mail from his gasoline dealer, Imperial Oil Ltd. (TSX:IMO), the country's largest gasoline refiner and marketer through the Esso brand.

After seeing the distributor's price "I can in turn determine what price I'd like to sell my fuel at, or what the market can bear," said Stonley.

Then, "I would have a look and see what everyone else is selling at."

It's practically a legend in the world of gasoline retailing - basing the price of fuel slightly above or below nearby competitors every morning - whatever it takes to bring in business that day.

But the process starts long before the morning commute, stretching back to the previous trading day on the New York Mercantile Exchange, where much of the world's oil and gasoline trade is conducted.

The so-called Nymex is where the wholesale price of crude oil is rising or falling on the latest oil inventory supply data and political developments from around the world.

The "futures contract" trades on the Nymex and it determines how much suppliers can get by selling each barrel of oil delivery during a given month.

The price of crude oil, hovering around US$135 a barrel, plays a major role in determining how much you pay for gas because gasoline is a product of the oil refinery process - a complex process of heat, pressure and chemical reactions that churns out other fuels.

"Crude is obviously the most significant input to the process of refining gasoline," said Peter Boag, president of the Canadian Petroleum Products Institute, which represents the country's major refiners.

"The price of crude by and large is the majority of the price of a litre of gas at the pump."

That's why when the futures contact for crude oil rises on the market, gasoline tends to follow suit. Overall, crude oil represents about half the final retail price of gasoline.

The price of crude is tied to external supply factors, and political turmoil, so its price tends to be volatile. Comparatively, the price of gasoline will get pushed up by higher oil prices, but then hovers at those heights on demand, rather than slipping lower when oil prices decline.

In recent weeks that was evident when crude prices surged, followed quickly by higher gasoline prices. However, instead of slipping lower gasoline stuck, and observers say it was partly because the summer travel season is upon us.

On Friday, the July crude contract on the Nymex declined $1.86 to US$134.86 a barrel.

Oil prices have dominated headlines this week as the Organization of Petroleum Exporting Countries said oil's recent volatility "reconfirms the view that current price levels do not reflect supply and demand realities."

Officials will meet in Saudi Arabia to discuss solutions to the relentless rise of crude on June 22 as some suggest that it'll hurt world economies.

With so much emphasis put on crude oil, you'd think that Canada might have a price advantage since the country's thriving oil industry supplies much of the market.

But while Canadians deliver plenty of the product, they don't even represent 10 per cent of the overall demand for gasoline in North America, Boag said.

For that reason Canadians don't really have much influence over the price.

"From an economics point of view Canadians are price takers, they're not price setters," Boag said.

The big kahunas aren't necessarily on Wall Street either. These days they're the citizens developing nations like China and India, where growing economies call for more oil and gas to fuel their cars and feed growing industries. That demand is eating up supplies and making fuel pricier across the world.

"We've seen the price of crude more than double over the past year and that really substantially is driven by supply and demand factors," Boag said.

Major suppliers like Imperial Oil and Petro-Canada buy their fuel supplies by the barrel and it's shipped in by the boatload.

Taking into account how much they paid on the market, the companies start to build in several other factors such as the exchange rate between the U.S. and Canadian dollar, provincial taxes, refining margins and other markups like transportation.

Then the gasoline is trucked to local markets, where owners download the latest prices from their distributor and decide what selling price they're going to post on their signs.

Depending on where you live in Canada the price of gas can be drastically different.

"Notwithstanding the differentials in taxes, there's also wild differences in prices between east and west Canada, particularly in the prairie provinces which are literally landlocked," said Dan McTeague, a Liberal MP from the Toronto area and avid watcher of gas prices.

"The only way they can get product is either by truck or by pipeline."

In Canada's big cities there tends to be more competition between the gas stations both because there are more locations to lure away customers, and because higher trafficked pumps are more used and help strengthen profit margins.

At Corktown Esso, Stonley said he watches websites like TorontoGasPrices.com to see what his competitors are charging before deciding how to compete.

Stonley also said he has to factor in costs that often go unconsidered, like the charges he pays for customers to pay on their credit cards - an increasingly popular trend as the price of gas moves higher.

He said just because gas prices are higher that doesn't mean he's making more profits off his customers.

"It's still the same margin," Stonley said.

"We had a meeting just this week from Imperial Oil because my margin has gone down."

He remembers a time when those issues weren't at the forefront:

"There was more of a variety before, it was a little more competitive. (The industry) seems a little more streamlined now, there's not as many independents (gas stations)."

According to the Canadian Petroleum Products Institute margins for selling gasoline have been "extremely low" for several years, coming in at between zero and five cents per litre.

The Canadian Press, 2008

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