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Why gas prices are driving you around the bend

(Yahoo Finance)

When gas prices rise, stories like this one start appearing in the media, with writers and drivers bemoaning the increased commuting costs as the busy summer travel season approaches. 

And prices have been rising quickly: the average price in Canada on Wednesday, May 23 was $1.359 per litre, up 26.2 cents over last year’s average.

“Of course, smart drivers in many Canadian cities know that they can save money by shopping around and buying at the right time,” says Dan McTeague, Senior Petroleum Analyst at GasBuddy.com. “Most people know that the best time to buy is never in the morning, and those who don’t obviously don’t mind losing eight or nine cents on a litre of gasoline.” 

With a full tank of gas running well over $100 for a large vehicle now, gas stations seem like they have a license to make money, but that assumption is not always correct. We’ll look at where the money goes when you fill up your tank.

Setting prices

“Every station pays the same for their gas, within a penny or so,” says McTeague. “The wholesale price and taxes are the same, the only difference is the last 10 to 12 cents which represents the retail profit margin,” he says, adding that unlike Costco, which doesn’t take most credit cards, the owners also pay a three to four per cent premium to the credit card companies out of that margin. “Unless you’re selling other stuff to compensate, these charges can really hit,” he says. 

“Some retailers use gasoline as a loss leader, to attract more people onto their sites to get more volume (and potentially get about a half-cent discount)… or they use it to match the big box stores,” says McTeague.

Prices at the pumps in most major cities rise and fall quickly with demand. “Most companies have a formula, if they see someone down the street moving down, they’ll try to match them,” says McTeague. Prices in Quebec and the Atlantic provinces are regulated weekly or monthly. 

McTeague offers London, Ont., where gas dropped from $138.9 to $127.4/litre in a day, as an example of this thin margin. “You’re buying gas at $1.25, and you’re selling for $1.27.4 and half your customers are using 3 per cent credit cards… you can’t sustain that,” he said. “Some of them make a little money in the morning and then use that to subsidize what they lose in the day. You try to minimize your losses on gas and make money elsewhere.”

Another factor in the price is that refineries are required to use more expensive additives in their gas blend in the summer months, which translates to a 4-cent increase in prices at the pumps from April 15 to September 15.

Who’s making money?

McTeague explained that with the slim margins on gas sales, it’s no accident that most gas stations in Eastern Canada have been taken over by convenience stores like Couche-Tard, which bought most of the Esso stations last year. “There’s plenty of money in pop, chips, coffee, doughnuts… you incentivize people to come into the store, that’s where they make up the difference. They also make up the difference on other forms of fuel, diesel sometimes has more value added, so does premium gasoline.”

He says that the “mom-and-pop” stores were the big innovators, bringing in car washes, convenience stores and drive-thrus, but have since been pushed out by the suppliers. “Now they’re franchise owners making money on the margins… it’s not a great business to be in,” says McTeague. “If you’re looking to be a millionaire, you might want to choose another business.”

How much money are we talking about? 

Let’s say you drive from Mississauga or Markham, Ont. to downtown Toronto; that’s 60 km round trip, or 300 km per week. A mid-size SUV uses approximately 10 litres/100 km for stop-and-go city driving, or about 30 litres of gas for that weekly commute. At $1.35/litre, the current price in Toronto, that commute will cost $40.50; last year at this time it was $33.60, with gas at $1.12, or an increase of about $7 per week. 

In Vancouver, the prices are about 20 cents higher now compared to this time last year. A 30 km commute there was $40.50 per week last year, and $46.50 now with gas at $1.55/litre. 

Will people seek alternatives to driving? 

Prices might have to climb higher before people start looking for alternatives. “It’s not easy to use alternatives outside of Toronto, or even in Toronto,” says McTeague. “What most people are looking for is better efficiency from the cars they buy. Vehicles like [the Toyota] Prius are the ones that people will looking at, giving better fuel efficiency within a reasonable price.” 

Summer driving predictions

“Prices will go up another 5 cents per litre on average,” says McTeague. He speculated that there might be a dip in the middle of June, with geopolitical and meteorological events as an unknown variable. “All of these things are unpredictable but very much a part of the pattern we see in the summer,” he said. “On January 3, we predicted 2018 would be the most expensive year since 2014, which seems true but we should have gone even higher on our estimate.” 

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