May 7, 2014
Several factors behind Quebec’s high gas prices
Gas prices recently climbed near $1.50 per litre in some areas of Quebec. It’s surprising to see prices at the pump return
to their historic high, as oil prices are still well below the peaks reached in the summer of 2008. This primarily reflects
the loonie’s slide and higher fuel taxes, as well as seasonal factors that are inflating North American refiners’ margins.
Gas prices are likely to edge down over the next few months, but everything suggests that prices at the pump will stay
relatively high.
Gas returns to $1.50 per litre
Many Quebec motorists, especially in the Montreal
region, were unpleasantly surprised as gas prices recently
climbed back over $1.50 per litre. With all this talk about
an “energy revolution” and U.S. oil production posting a
spectacular surge (graph 1), we can understand motorists’
frustration at seeing gas prices near 2008 peaks, at a time
when global oil shortages were feared.
Graph 1 – U.S. crude oil production has never advanced
this quickly
at the pump quickly fell closer to $1.45 per litre. More
generally, we could assume that the lack of competition
in Quebec’s gas market is leading to higher prices for
motorists. However, this situation has been ongoing for
several years now and does not, in our opinion, explain the
growing spread between prices at the pump and WTI (West
Texas Intermediate) oil prices (graph 2).
Graph 2 – Gasoline prices are much closer to their historic peak
than oil prices are
US$/barrel
Ann. var. in million barrels/day
160
1.0
1.0
140
0.8
0.8
120
0.6
0.6
100
0.4
0.4
80
0.2
0.2
60
0.0
0.0
40
-0.2
-0.2
20
-0.4
-0.4
Ann. var. in million barrels/day
-0.6
1900
160
140
120
100
80
60
2005
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
2006
2007
2008
2009
WTI* oil prices (left)
-0.6
1910
¢/litre
2010
2011
2012
2013
2014
Gas prices in Montreal (right)
* West Texas Intermediate.
Sources: Datastream, Natural Resources Canada and Desjardins, Economic Studies
Sources: Energy Information Administration and Desjardins, Economic Studies
Retailers are often first to get the blame when gas prices
surge suddenly. True, when gas recently jumped to $1.53 a
litre at some Montreal gas stations, this was partially caused
by some retailers’ greed: they had suddenly increased their
margins to more than 10¢ per litre over the floor price. Such
exaggerated margins never last long, however, and prices
François Dupuis
Vice-President and Chief Economist
Oil prices reflect the global context,
not just the situation in North America
The main determinant for prices at the pump remains the
cost of crude oil. In recent years, non-traditional crude
production has boomed in North America. However,
oil is a resource whose price reflects the global, not the
local situation. This is especially true for areas like the
Yves St-Maurice
Senior Director and Deputy Chief Economist
514-281-2336 or 1 866 866-7000, ext. 2336
E-mail: [email protected]
Mathieu D’Anjou
Senior Economist
Note to readers: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.
I mportant: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that
are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group
takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are
provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein
are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2014, Desjardins Group. All rights reserved.
May 7, 2014
Economic Viewpoint
Northeastern United States and Eastern Canada, where
refineries are primarily supplied by oil that is delivered by
boat with prices linked to Brent oil prices. Therefore, the
considerable discount on WTI prices in recent years, which
reflected the difficulty of delivering this oil to refineries,
did not benefit motorists. Note that the development of the
energy transportation infrastructure in the United States
now means that WTI oil can reach the big refineries on the
Gulf of Mexico. This narrowed the spread between the two
oil types (graph 3), a trend that should persist in the coming
years.
www.desjardins.com/economics
other moment when gas prices neared C$1.50, Brent prices
were substantially higher, at around US$125 per barrel.
A major difference with summer 2008 and spring 2012
is that the Canadian dollar was close to parity against the
greenback at that time. The situation is different today,
with the loonie down to around US$0.90. This has a major
impact on gas costs. As shown in graph 4, the Brent price
per barrel in Canadian dollars is currently around $120.
Graph 4 – Brent prices are higher if we take the loonie’s recent
depreciation into account
US$/barrel
C$/barrel
Graph 3 – The spread between Brent and WTI* prices has narrowed
over the last few months
160
160
US$/barrel
140
140
120
120
100
100
80
80
60
60
30
40
40
20
20
US$/barrel
140
140
120
120
100
100
80
80
WTI*
60
Brent
30
20
60
10
10
Brent/WTI* spread
-10
2010
2012
2013
2007
2008
2009
2010
2011
2012
2013
2014
Brent – Canadian dollars (right)
Sources: Datastream and Desjardins, Economic Studies
-10
2011
2006
Brent – U.S. dollar (left)
0
0
20
2005
2014
* West Texas Intermediate.
Sources: Datastream and Desjardins, Economic Studies
Rising taxes
As we discussed last year in a previous Economic Viewpoint,
to date, the energy revolution is a North American
phenomenon, not a global one. Tapping unconventional
deposits has helped to ease most fears of a global oil
shortage, but it has not created a real surplus. This is
particularly true as problems in several Middle Eastern
countries (Libya, Iran, ...) limited growth in the global oil
supply. If we add a relatively large geopolitical premium,
reflecting the considerable tensions with Iran and Russia,
it is not surprising that international crude prices remain
high.
1
A weak Canadian dollar
It is Brent oil prices that are currently influencing Quebec’s
gas prices. While this oil remains quite expensive from a
historic standpoint, at around US$110 per barrel, it is well
below its peak of over US$145 per barrel in summer 2008.
That was the first time that prices at the pump reached C$1.50
per litre in some areas of Quebec. Even in April 2012, the
Desjardins, Economic Studies, Economic Viewpoint, “U.S. energy
revolution: we can’t ignore the consequences,” June 11, 2013,
www.desjardins.com/en/a_propos/etudes_economiques/actualites/point_
vue_economique/pv130611.pdf.
1
2
The fact remains that $120 per barrel is still well below
the peak above $145 seen in summer 2008. Why, then, are
gas prices so similar? The culprit here is easy to identify.
One striking difference from 2008 is the marked rise in
Quebec’s fuel taxes. In response to deteriorating public
finances, a result of the 2008–2009 recession, the Quebec
government ordered four consecutive 1¢ per litre increases
in the provincial excise tax. The tax to finance public
transportation in the Montreal metropolitan area was
raised as well by 1.50¢ per litre. A 2% increase in the QST
(Quebec Sale Taxe) also had a direct effect on prices at the
pump. Montreal’s price of $1.45 per litre therefore includes
nearly 51¢ in taxes today, compared to around 43¢ in 2008,
a considerable difference (graphs 5 and 6 on page 3).
Seasonal effects
Even when we include higher gas taxes and calculate crude
prices in Canadian dollars, some of the recent upswing in
prices remains hard to explain. This part of the increase
can also be seen in U.S. gas prices, which have gone from
US$3.30 to US$3.70 per gallon since mid‑February, despite
stable crude prices. The main reason is that seasonal factors
tend to temporarily boost refiner margins and, consequently,
gas prices toward the end of winter (graph 7 on page 3).
Accelerating demand for gasoline as “driving season”
approaches, the temporary closure of several refineries for
May 7, 2014
Economic Viewpoint
www.desjardins.com/economics
Graph 5 – Brent prices in Canadian dollars are behind
the movement in gas prices excluding taxes
C$/barrel
¢/litre
160
maintenance and the shift to summer gasoline production
tend to drive refiners’ margins up each year between
February and May.
115
140
105
120
95
85
100
75
80
65
55
60
45
40
35
20
25
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Sources: Datastream, Natural Resources Canada and Desjardins, Economic Studies
Graph 6 – Gas taxes have gone up by nearly 10¢ per litre
since the end of the 2000s
In ¢
In ¢
Taxes on a litre of gas in Montreal
55
50
50
45
45
40
40
35
35
Temporary drop
linked to falling crude prices
30
2005
30
2006
2007
2008
2009
2010
2011
2012
2013
Graph 7 – Gas prices often go up at the start of the year
4.1
¢/litre
Average price of regular gas
140
4.0
3.9
135
3.8
3.7
The good news is that the seasonal factors currently inflating
refiners’ margins should reverse soon. This could bring gas
prices per litre down a few cents over the next few months.
Conversely, nothing suggests that taxes on gasoline will
go down. The challenge of public finances remains acute
in Quebec and at best motorists can expect fuel taxes to
remain stable over the next few years.
The answer is less clear for crude prices in Canadian
dollars. Our scenarios call for oil prices to edge down over
the coming months, followed by a gradual convergence
of Brent and WTI prices toward US$100 per barrel. The
Canadian dollar should tick up, reaching US$0.925 by
late 2014, which could also bring gas prices down slightly.
2014
Sources: Datastream, Natural Resources Canada and Desjardins, Economic Studies
US$/gallon
To summarize, gasoline prices are near their historic peak
for the following main reasons: oil prices in Canadian dollars
are up, fuel taxes have been raised, and seasonal factors
are affecting prices in both Canada and the United States.
For motorists, the driving question is whether or not these
factors will keep gas prices high over the coming months.
Gas prices in Montreal excluding taxes (right)
Brent – Canadian dollars (left)
55
Some upside pressures will disappear,
but not all
Even if our relatively favourable scenarios come true,
motorists will only catch a limited break, as Montreal’s gas
prices, for example, should not fall durably much below
$1.35 per litre. As Quebec’s market will still be highly
taxed, oil prices would have to plummet significantly for
gas prices to return to the levels we saw as normal a decade
ago.
130
3.6
Mathieu D’Anjou
Senior Economist
125
3.5
3.4
120
3.3
3.2
115
3.1
United States (left)
3.0
2012
Canada (right)
2013
110
2014
Sources: Datastream, Natural Resources Canada and Desjardins, Economic Studies
3