Fuel

Gasoline prices are influenced by a variety of direct and indirect factors including: the world price of crude oil; the North American wholesale commodity price for gasoline; refining, distribution and marketing costs; taxes; and the level of local competition.

More specifically, crude oil prices and wholesale gasoline prices are established by international and regional commodity markets respectively, and fluctuate in response to patterns of supply and demand within each of these two distinct markets. These fluctuations influence the general level of gasoline prices in all markets.

At the retail level, business operating costs and 'corner competition' are the two predominant factors influencing local pump prices. Retailers must find a balance between a price that covers all of their ownership and operating costs, and a price that is competitive to attract and retain customers over time.

Finding a balance between these two competing demands can result in prices moving up to cover costs, and then down to guard against loss of market share to competitors, and results in price volatility being a characteristic in many markets. In the end, however, competition among retailers for market share has the most direct influence on pump prices on a day-to-day basis.

This dynamic of continuing price adjustments in response to market conditions results in prices cycling down, then up, at the local retail level. Typically, corner competition among retailers prompts them to discount their prices in small increments of less than a cent in order to gain or retain customers. In fact, research indicates consumers will switch brands for as little as two-tenths of a cent per liter.

Over a period of time these incremental price discounts result in an overall market price cut that can eventually total several cents per liter. Such discounting is eventually unsustainable to some retailers who cannot cover their operating or ownership costs, which prompts them to suddenly post a new, higher price that meets their requirements. While the move to higher prices will only last until one retailer decides to discount their price and repeat the cycle, the effect on consumers is dramatic as it appears as if prices have increased without reason.

In fact, the price volatility of gasoline is the most transparent example of pure price competition driven by the knowledge that the lowest price gets consumer attention and sales volume.

Gasoline prices vary throughout the country for a number of reasons. First, transportation costs and taxes (provincial and municipal) vary between regions. Second, volume may have a major influence on pricing. Third, the level of competition in each market at any given time must be considered, as competition clearly has an effect on prices.

Research conducted in 2012 by M.J. Ervin & Associates examined price variation in large cities and smaller cities in Canada. What emerged was fuel margins in smaller cities were about 40% more than margins in large cities, however, liters of fuel sold were approximately 25% greater in large cities than smaller cities.

This demonstrates the relationship that smaller urban centers with lower throughputs per site require larger margins to remain profitable and therefore have higher gasoline prices.

In 2013 the average regular unleaded gasoline sold in Canada was $1.279 per litre. That price consisted of: $0.394 in federal and provincial taxes; $0.642 for crude oil; $0.169 for refining; and $0.074 for marketing and retailing.

Prices will always fluctuate in response to market conditions. A study done by MJ Ervin & Associates showed that from 1995 to 2012, the pre-tax price of gasoline has increased nearly 62 cents per liter measured in current dollars, or by nearly 27 cents per liter measured in inflation-adjusted constant dollars. This change is largely due to increases in crude costs.

The taxes levied on these products sold in Alberta are as follows:

Please note:

• cpl - cents per litre

The 5% goods and services tax is calculated after the provincial and federal taxes are added to the fuel.

Why do prices rise just before weekends and holiday?

If you track gasoline prices, you'll find that they fluctuate regardless of the day of the week of the time of the year, as local competitors fight for customers in a very price-sensitive business.

Discounting and sale prices are common practices in virtually all retail businesses. For example prices on Boxing Day tend to be lower than during the pre-Christmas period; travel fares vary with the season or demand patterns; movie tickets are often discounted on Tuesday, but not on Saturday night.

Gasoline retailing is no different. As demand tends to be higher on weekends and in summer, there's a greater chance that prices will be discounted when demand is lower, on weekdays and in winter. There are, nonetheless, exceptions to this trend.

If you track gasoline prices, you'll find that they fluctuate regardless of the day of the week of the time of the year, as local competitors fight for customers in a very price-sensitive business. Discounting and sale prices are common practices in virtually all retail businesses. For example: prices on Boxing Day tend to be lower than during the pre-Christmas period; travel fares vary with the season or demand patterns; movie tickets are often discounted on Tuesday, but not on Saturday night. Gasoline retailing is no different. As demand tends to be higher on weekends and in summer, there's a greater chance that prices will be discounted when demand is lower, on weekdays and in winter. There are, nonetheless, exceptions to this trend.

Consumers are very price-sensitive when it comes to gasoline. As a result, in a competitive market, retailers are forced to react extremely quickly to their competitors' actions. If one retailer lowers the price, the others tend to do the same or risk losing sales and market share. Similarly, if one retailer raises the price, in order to recover an operating margin lost through price discounting, other retailers will tend to follow for the same reason.

The prices appear to change in unison due to the speed at which the competitors react to one another. Consumers are exposed to a large number of competing stations during the period of time when they need to refuel.

As a consequence, retailers attempt to attract their eye, and their business, by posting gasoline prices prominently on visible curbside signs where they'll be spotted first. Of course, their rivals note the price changes as well and often react immediately.

As the market exists, consumers can choose the station that offers the best price and service mix. The diversity of retail brands, openly posted prices and retailers who compete on price, service and convenience all add up to a competitive marketplace.

Numerous investigations, including those conducted by both Federal and Provincial government bodies, have concluded that price swings are the functions of market competition and the cost of the product.

Over time, gasoline prices are influenced by factors such as the cost of crude oil, refining and related costs and the supply/demand of gasoline as an international commodity. Short term, however, local competition has the greatest influence on the price.

In a typical market, most consumers purchase gasoline based on price. It has been shown that a difference of two-tenths of a cent per litre (6¢ - 8¢ for an average fill-up) may be enough to sway consumers' buying decisions. Because of this, service stations quickly react to the price posted on the street corner by their competition and adjust their price accordingly. If not, they risk the possibility of losing their customers.

Market competition can also lead to price wars, with retailers fighting to increase their respective market share. Retailers may also reduce the price of gasoline to attract customers into their stores, car washes, repair services or other businesses. Ultimately, however, prices will normally rise to a level that ensures a reasonable return to the owners and investors. The cycle then starts over.

Depending on the type of station, it could be the individual owner or leasee or the company which owns the business, who decides on the selling price at any given time.

The name on the sign outside the station does not necessarily indicate who sets the price. Generally speaking, about half of the retailers are individuals who set their own prices.

Prices for the other half are set by the individual companies who own the business.

The main reason is taxation. On a pre-tax basis, the price of a litre of gasoline in Canada is competitive with an equivalent volume in the U.S.

For example, in 2013 M.J. Ervin & Associates noted that American State and Federal consumption taxes were $0.158 Canadian per liter. By comparison, Canadian taxes were $0.394 per liter.

Or put another way, the average price of self-serve regular gasoline in the U.S. - excluding taxes - was $0.845 Canadian per liter. The equivalent price in Canada was $0.885 per liter.