Gasoline and Diesel Pricing

Supply and demand effectively keep Canadian drivers supplied with gasoline and diesel fuel that is among the least expensive in the world. Price changes are a direct result of fierce competition as Shell vies for your business. At Shell Canada, while we may not be able to take away your frustration with volatile prices, we can try to describe how our gasoline pricing works by answering your common questions.

But you don't have to take only our word for it. Retail fuel prices are tracked in a publication called Fuel Focus, a bi-weekly report produced by Natural Resources Canada that analyzes petroleum product prices, trends and events influencing the Canadian market.

1. What makes up the price of a litre of Shell gasoline?

Four costs go into Shell's pump price: crude oil, taxes, refiner margin, and marketing margin.
Gasoline prices go up and down over time and vary from place to place, so the price breakdown for a litre of gasoline also varies.

  • 40 - 55 per cent is crude oil costs (the raw material for making gasoline and diesel fuel)
  • 25 - 35 per cent is federal, provincial and municipal taxes and the GST
  • 10 - 25 per cent is the refiner's margin (the difference between what it costs to buy crude oil and the price refined gasoline sells for in the wholesale market which, in turn, is influenced by supply and demand)
  • 4 - 6 per cent is the marketing (or retail) margin that covers retail stations’ expenses and profits.

Source: Natural Resources Canada Fuel Focus Reports, 2007-2008

2. Given strong profits, why can’t Shell offer customers a break at the pumps?

The energy industry is one of the world’s largest and most complex industries. Profits are large because our business is large and we have made large investments over a long period. Although revenues are currently high, so are the costs associated with meeting growing consumer demands for energy. It would be fiscally irresponsible for Shell to subsidize pump prices at the expense of other investments in much needed new energy production.

3. What affects Shell’s pump price?

Three factors influence Shell's pump prices, and what customers pay on any given day can move up or down based on ANY or ALL three factors:

  1. The price of crude oil, the raw material from which gasoline is made.
  2. The cost of refining crude oil at Shell’s three Canadian refineries and the effect of supply and demand conditions in North America are major factors in Shell’s wholesale price.
  3. Local retail forces, which affect the day-to-day price, as retailers compete for customers. About 60 per cent of all Shell-branded sites are independently owned and set their own prices.

4. What affects Shell’s wholesale price and the refiner's margin?

Refined products like gasoline and diesel fuel are internationally traded commodities at the wholesale level. As a refiner, Shell Canada sets its wholesale price for each commodity based on supply and demand in Canada and internationally. To do this, we look at posted commodity prices - known as benchmarks - that are set, for the most part, in places like New York, Seattle, and Minneapolis. These then help us determine what our competitive domestic wholesale prices will be in places like Montreal, Vancouver and Edmonton.

The refiner's margin is the difference between the cost of crude oil and the wholesale price we receive from the market. The refiner's margin represents the amount out of which Shell must pay all of its refining costs. The profit is what's left over.

5. Why does the price vary from region to region?

The cost of transportation and taxes (provincial and municipal) varies between regions.

  • The amount of fuel a station can sell may also affect price. A Shell station that sells more fuel and other products may be able to offer customers a lower price than a station that sells less fuel. Retailers in a market like Toronto, need a smaller operating margin to make a reasonable profit because they are selling more gasoline. Retailers in a market like Regina, require a greater operating margin to make a reasonable profit because they are selling less volume. Shell retail sites that can support successful convenience food stores, car washes, etc. are in a better position to reduce the revenue they need from fuel sales to have a profitable business.
  • The level of competition in a region, which includes the number and strategies of local retailers as they try to win your business. We know that our customers largely base their purchase decisions on price. Given this sensitivity, the local laws of supply and demand work very effectively among competing gas stations in a local area. As they vie for customers, volumes and a viable profit margin, the posted prices move up and down.

6. Why do Shell's prices seem to move in unison with competitors?

Simple. Canadians are determined to buy gasoline at the lowest price.

Shell observes posted prices to ensure our prices are competitive in the market and can adapt quickly to market conditions.

Gasoline is the only thing people can shop for while driving 60 km/h because prices are posted on large signs.

People will drive across town for as little as two tenths of a cent a litre - a savings of a dime on a 50-litre fill-up.

This means Shell retailers have to stay competitive on price or our customers will shop elsewhere.

(Keep in mind this applies only to sites Shell actually controls. Independent retailers, who display the Shell brand, set their own pump prices based on their assessment of the same market conditions and considerations.)

7. How does Shell respond to claims about agreement on pricing among competitors?

We take this matter very seriously and Shell complies with all federal competition laws. The explanation is simple. At Shell, we are competitive on price at the local level, so what may look like unlawful collusion from a consumer perspective is really a highly competitive market working well.

Shell observes posted prices in order to ensure our prices are competitive in the market and can adapt quickly to market conditions. In recent years, our company controlled sites across Canada have averaged 450,000 price changes per year.

8. Why does it seem that when crude oil prices drop, Shell's pump prices are slow to follow? 

Canadian consumers are often confused about the relationship between crude price and gasoline price, and how long it can take changes in crude oil price to reach the pumps. That is because crude oil is one of several factors influencing pump prices (see question 4 above). Gasoline is made from crude oil so over the long term, gasoline prices move up and down with world oil prices.

9. Why is there a difference between gasoline prices in Canada and the US? 

We pay more tax in Canada. According to MJ Ervin and Associates, the average retail pump price for regular unleaded gasoline in Canada for 2007 without taxes was 69.3 cents per litre (101.8 cents per litre with tax), while the comparable US price (based on limited sampling) was 65.1 cents per litre (82.3 cents per litre with tax).

10. Why are diesel prices higher than in the past? 

Diesel demand has increased steadily driven by strong industrial growth in Canada and the growing number of diesel-powered vehicles, particularly in areas such as Europe. As a component of home heating oil, diesel is in far greater demand in the winter, which tends to impact wholesale diesel prices.

11. Why do gasoline prices seem to go up before a long weekend? 

Statistically, prices tend to rise throughout the summer months when demand increases due to increased summer travel. Consumers tend to pay attention to the price of gasoline on long weekends because they drive more - and refill their gas tanks more often. However, industry data shows no consistent pattern of prices in the days leading up to a long weekend relative to any other summer weekend.

12. Where can I get more information on fuel pricing? 

Fuel Focus is a bi-weekly newsletter produced by Natural Resources Canada that analyzes petroleum product prices, trends and events influencing the Canadian market at any given time.

The Canadian Automobile Association has a website geared towards motorists concerned about pump prices. The site provides answers to frequently asked questions on gas pricing along with gasoline conservation tips.

The Canadian Centre for Energy Information website contains details on gas pricing based on information from leading industry experts. The site also has a comprehensive Q&A section on gasoline in addition to a youth learning section to help students understand how gasoline is priced in their own community.


Natural Gas Pricing

Answers to commonly asked questions about natural gas prices. 

1. What influences the price of natural gas?

Natural gas prices, like other commodities, are strongly influenced by supply and demand within North America.

2. What drives the demand for natural gas?

Natural gas is a cleaner burning fuel than oil or coal which makes it the fuel of choice for numerous residential, commercial, industrial and power generation applications. Residential and commercial demand is driven primarily by space heating or cooling and powering major appliances. Gas intensive industrial applications include natural gas as a source of process heat, steam generation, and as a feedstock in the production of petrochemicals. The fastest growing sector of natural gas demand is for use in power generation to produce electricity.

Seasonal demand can also influence the price of natural gas. During any summer or winter period, market conditions can easily change. The North American natural gas market is very weather dependent, particularly with hot or cold extremes. Cold weather means more heating needs and hot weather means more use of natural gas to generate electricity for air-conditioning.

3. What are some of the other factors besides supply and demand that can influence the price of natural gas?

Other factors that can influence the price of natural gas are:

  • Storage volumes
  • Cost of other energy choices including coal, oil, hydroelectric and nuclear.

Storage acts as a buffer filling the gap between supply and demand. Gas is injected into storage over the summer and withdrawn throughout the winter to meet peak gas demand requirements. If the combination of production and storage is insufficient to meet peak demand, it is likely natural gas prices will rise.

Natural gas prices may be influenced by the cost of alternate fuels to the extent that energy consumers can use other fuels. A good example of this is in the industrial and electric utility sectors where many users have the ability to switch between oil and natural gas.

4. Can you predict natural gas prices?

Prices are hard to predict with certainty on any freely marketed commodity. However, like most commodities, the price of natural gas tends to be cyclical in nature. Greater demand for natural gas causes prices to increase, which stimulates increased exploration and production activity. Over time, increases in supply bring supply and demand back in balance and influence prices downwards. For example, low natural gas prices between 1995 to 1998 resulted in a slowdown in exploration and production activity that contributed, in part, to a recovery of natural gas prices in 2000 and 2001.

5. Why does the price of natural gas increase in the winter?

Historically, natural gas prices tend to increase in the winter because many North Americans use natural gas to heat their homes. Conversely, gas prices would decline throughout the summer as heating demand subsides.

Changing weather patterns in North America have had a direct impact on this price trend and it is now more common to see two natural gas price peaks in a calendar year.

Both winter and summer demand can be driven by temperature extremes - cold weather means more heating needs and hot weather means more electrical power for air-conditioning.

April through October are known as gas injection months and these months are critical in ensuring a suitable amount of gas is stored to meet winter demand needs.

The increased demand for electrical generation in the summer combined with gas injection requirements leads to seasonal gas price fluctuations becoming less pronounced.

6. How much impact do higher natural gas prices have on home heating costs?

Like gasoline, the price of the commodity is only one of the components of the price the end user pays for the product.

The price residential users pay for home heating is based on three main components: pipeline transportation costs, local distribution costs and the price of natural gas. Although the natural gas price fluctuates, the other charges remain fairly constant. As the price of natural gas increases, it comprises a larger percentage of the total amount consumers pay for home heating and results in higher monthly bills.

7. What impact do gas prices have on Shell's exploration and development activities?

As with most commodities, natural gas prices are cyclical in nature. While natural gas prices may fluctuate in the short-term, longer term we expect that natural gas prices will remain at a strong level and provide a good environment for future investment.

Crude Oil Pricing

Answers to commonly asked questions about crude oil pricing.  
1. What drives the price of crude oil?

  • The world price of crude oil is driven by supply and demand.
  • In 1998 a barrel of West Texas Intermediate (WTI) Nymex crude sold for as little as US $12 - a low price that reflected a significant glut of crude available on the world market.The world price for crude oil has increased dramatically since 1998.
  • WTI Nymex crude averaged US $56.69 in 2005 and hit a high of over US $70 in July 2006 due to geopolitical concerns about Iran’s nuclear program. The interaction between supply and demand of crude oil constantly affects the price.
  • When a significant source of supply or refining capacity is compromised, or is in jeopardy of being compromised, there can be upward pressure on the world price of crude oil.
  • The world price for crude oil can be influenced by extreme weather and natural disasters as well as by political, civil and military unrest, particularly when these activities take place in a significant oil-producing region.
  • For example, 2005 saw record crude prices driven by increased demand during an unseasonably cold winter in North America, along with growing global demand in China and India. The supply of crude oil was further tightened when hurricanes along the Gulf of Mexico shut down crude production and distribution infrastructure, and affected refinery operations.

2. What do crude prices mean to Shell Canada?

  • Shell Canada is an integrated energy company involved in the exploration and production, manufacturing and marketing of petroleum products. At any point in time, while one part of our business may benefit from high commodity prices, others may be negatively affected.
  • For example, the oil sands side of our business benefits from a higher world market price for crude oil.
  • However, as an oil products business, we must incur the higher cost of crude oil as the raw material of our finished products.
  • While Shell’s Scotford Refinery runs almost entirely on synthetic crude from Alberta’s oil sands, Shell’s other two refineries run on a combination of domestic and international crude purchased at prevailing market prices.
  • A price increase in world crude and wholesale markets does not necessarily translate into an increased profit for Shell’s oil products business.
  • Price increases affect input costs for manufacturing and distributing our products and it is often difficult to recapture this cost.

3. How do crude prices affect Shell consumers?

  • Changes in the world price of crude oil are reflected in the wholesale and retail price of refined products such as gasoline, diesel fuel, jet fuel and home heating oil as the cost of raw material is passed along to the customer.

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