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:
- The price of crude oil, the raw material from which gasoline is made.
- 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.
- 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.