When gas prices spike, the pain to your pocketbook can feel close to home, but the forces driving the increases are anything but local.
Even in a country that produces more oil than it consumes — Canada is the world’s fourth-largest oil producer — the price Canadians pay at the pump is shaped by a global system that stretches from Mideast shipping routes to Wall Street trading floors.
The price of gasoline isn’t a single figure decided overnight, but rather a sum of moving numbers that begins with the price of oil.
“Without crude, you don’t have any gasoline,” said petroleum analyst Roger McKnight.
In other words, everything begins with oil, and oil is priced globally.
Supply and demand still play a role
Before a single barrel of oil is traded, analysts try to answer a deceptively simple question: how much oil will the world need?
Organizations such as the International Energy Agency and major banks publish forecasts about future oil demand based on economic growth, industrial activity and seasonal consumption patterns. Traders and oil companies use those forecasts to help decide how much oil may be needed in coming months, influencing market expectations and, in turn, prices.
“Oil and gas are global commodities,” said Moshe Lander of Concordia University. “They’re determined by supply and demand like anything else.”
In 1960, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela formed an allied group known as OPEC+. The organization currently has 12 member nations that coordinate production targets among some of the world’s largest oil-producing nations.
At the same time, U.S. shale producers act as a counterweight. When prices are high, they drill more to maximize profits. When prices fall below profitable levels, they scale back. This constant push and pull helps determine how tight or oversupplied the global market is.
Most oil sold globally is priced relative to benchmark crudes such as Brent crude, the international standard, and West Texas Intermediate (WTI), the North American standard. Canadian oil is priced relative to these benchmarks, taking into account that it is heavier and more costly to transport.
Oil prices are influenced by geopolitical events
Right now, the balance between global oil supply and demand has been disrupted by geopolitical tensions. The partial shutdown of the Straight of Hormuz, a key shipping route, has taken a significant share of global supply offline, pushing prices higher. When Brent rises due to geopolitical tensions, prices across North America tend to follow.
On exchanges such as the New York Mercantile Exchange, traders buy and sell futures contracts, which are agreements to purchase oil at a set price months or even one year in the future.
When news about geopolitical events or supply disruptions breaks though, traders can immediately adjust their expectations and cause prices to swing sharply in a single day.
“It’s like a stock market,” said economist Jim Stanford. “Investors are making bets on what’s going to happen next.”
McKnight described a roughly three-day chain reaction in gasoline markets: crude oil future prices move first, wholesale gasoline prices adjust next, and retail gas stations follow shortly after.
“It’s really as crazy as that,” he said.
Oil prices determine the price at the pump
Gasoline is, at its core, a refined petroleum product.
“A refinery buys oil from a producer and then processes it into gasoline and other fuels,” said Stanford. “So an increase in the price of oil is going to translate into a higher cost of gasoline.”
Roughly speaking, crude oil makes up about 40 to 55 per cent of the cost drivers pay at the pump. Taxes account for 25 to 35 per cent (depending on your province), and refining adds another 10 to 25 per cent. Distribution and retail margins take the remaining share.
Because so many costs are built in, those components act as a buffer that help pump prices rise more gradually.
“Because people have to get to work and goods have to be shipped to their destinations, it takes a very sharp price hike to curtail demand sufficiently to adjust to any significant hit to oil supply,” said Avery Shenfeld, chief economist at CIBC Capital Markets.
Canada’s annual inflation rate jumped to 2.8 per cent in April — the highest level in nearly two years — as surging gasoline prices tied to the war in Iran pushed costs higher across the country, according Statistics Canada.
Higher fuel costs feed into transportation, food and household energy bills — a pattern seen during previous oil shocks and one economists warn could intensify. Add in refining constraints, elevated retail margins and significant taxes, and there is little downward pressure left.
Even policy changes can be short-lived. McKnight pointed to the temporary suspension of the fuel excise tax in mid-April that briefly lowered prices, only to be erased within days by rising global oil costs.
“It’s a teeter-totter,” he said. “And the one that gets all the bumps is the consumer.”
Why aren’t domestic prices lower?
Because oil is treated as a globally traded commodity, once Canadian crude enters that system, it competes on the same terms as oil from anywhere else and Canadians end up paying the prevailing world price.
“We export much of our oil, and producers won’t sell it to Canadian refiners at less than what they get elsewhere,” said Shenfeld.
“Our refineries also import oil from other countries, at world prices. Canada also imports gasoline, mostly from the U.S., so again, we are exposed to world pricing trends.”
Canadian cities track nearby U.S. wholesale markets. Toronto follows Buffalo and Rochester, Montreal tracks Albany, and Western Canada aligns with the U.S. Midwest and West Coast markets.
“The 49th parallel does not exist when it comes to gasoline pricing,” McKnight said. “Any changes south of the border with affect prices north of the border.”
