Ottawa Citizen

Analysts fear $1-a-litre gasoline

Michael Prentice The Ottawa Citizen

A litre of regular unleaded gasoline -- already nudging 80 cents -- could hit 90 cents, maybe even $1, in Ottawa this summer, analysts fear.

In the past five weeks, wholesale gasoline prices in Ottawa have soared by more than nine cents a litre. That's why drivers are now paying about 79 cents a litre, or about 11 cents more than the best deals a month ago.

Retail gasoline prices in Ottawa are already at record highs. No one knows how much higher they will go. But there is widespread agreement among analysts that further increases are likely, and sharp increases are possible.

The root cause is persistently high world prices for crude oil, due to a combination of strong demand and limited supply.

Recent sharp increases in gasoline prices have been fuelled by uncertainty over whether oil refineries in the United States can meet consumer demand in this summer's peak driving months.

Canadians are vulnerable to price increases in the U.S. because of free trade between the two countries, says Spencer Knipping, who tracks gasoline prices for the Ontario Ministry of Energy.

Wholesale prices in the two countries are inextricably linked, he says.

The best independent authority for forecasting North American gasoline prices is the U.S. Department of Energy and its price-tracking agency, the Energy Information Administration.

Dr. John Cook, the department's top expert on gasoline prices, warned this week that further increases in retail prices are coming.

U.S. wholesale prices of gasoline have risen by about 11 cents a litre since mid-March, he said.

"Retail prices have begun to respond accordingly, and further increases should be expected over the next several weeks," he told a Senate panel on consumer affairs.

In some parts of the United States, motorists are already paying the equivalent of more than 67 cents a litre for regular unleaded, Dr. Cook said. (These drivers are paying more than $1.70 U.S. for an American gallon. Prices are highest in California and other western states, he said.)

As in Canada, U.S. gasoline prices vary considerably between regions and, occasionally, between gas stations in the same city.

Gasoline prices are almost invariably lower in the United States than in Canada due to the fact Americans pay lower fuel taxes. But, within the U.S., state taxes on gasoline vary by as much as the equivalent of 10 cents a litre, the Energy Information Administration says.

The U.S. government agency warned in its gasoline price outlook for this summer: "The general tightness of domestic supply leaves the U.S. gasoline market vulnerable to sharp price runups if supply disruptions or bottlenecks occur. Thus, it is a conservative statement to say that the probability of a real gasoline price increase this summer over last year's average is high."

But the outlook is not all bad.

Dr. Cook told the Senate panel: "To conclude on a brighter note, retail prices may be nearing an early seasonal peak."

The recent surge in wholesale gasoline prices has sparked a sharp increase in U.S. refinery production and imports (from Canada and elsewhere) over the past two weeks, he said.

"Continued high supplies may yet stabilize inventories and weaken prices going forward into summer," Dr. Cook concluded.

The retail price of gasoline is broken into four parts by the industry. In Ontario, Quebec and much of the rest of Canada, taxes account for at least 29 cents a litre.

The cost of crude oil to make regular unleaded gasoline is now about 27 cents for a litre of gas.

On each litre, the oil company collects about 10 cents, known as the refiner's margin, which includes costs and profit.

Finally, there is the dealer's margin, which includes the dealer's costs and profit.

Dealers in Ottawa made little, if any, profit on gasoline sales in recent weeks, according to data from Fuel-Facts, a publication supported by the Canadian Petroleum Products Institute.

In the four-week period to April 10, the dealer's margin in Ottawa averaged just 1.7 cents a litre, according to Fuel-Facts. Such a thin margin might not even cover a dealer's costs, analysts say.

However, the dealer's margin jumped to an average of 3.8 cents a litre in Ontario this month, much closer to the average margin of 4.9 cents a litre for the past 12 months, FuelFacts reported.

Thus, part of recent price increases appears to have gone into dealers' pockets.

-- Rachel Gibson (rgibson@hotmail.com), April 30, 2001