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FAQ's - Petroleum Pricing - Island Regulatory and Appeals Commission
(IRAC), Prince Edward Island, Canada
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Frequently Asked
Questions
Petroleum Pricing
The following FAQs are intended as a general guide to
petroleum
pricing in Prince Edward Island.
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1.
How can petroleum product pricing rise
while the market price of crude is declining?
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While crude is often the most frequently used barometer of
petroleum product pricing and certainly the one most quoted by
the news media, the Commission utilizes actual refined product
wholesale market pricing in the determination of its pricing
adjustments. Adding to the confusion, crude pricing often tracks
quite differently from refined product pricing due to seasonal
or other market factor determinants. Accordingly there are
times, such as in January 2009, when crude prices were falling while
refined product prices were rising.
Referencing the price of gasoline to the last time crude was
trading at a certain dollar value a barrel, for example, is to a large degree
meaningless as so many other factors including tax rate
differentials, changes in the Canadian and U.S. exchange rates,
seasonal market demand variables and other relevant market
determinants would have to be taken into consideration in order
to make the comparison accurate. To illustrate, crude traded at
an average of $40.28 in May of 2004. During that month, the
average price of gasoline on PEI amounted to 87.7 cpl. On
January 9, 2009 crude closed at $40.83 on a day when
the maximum posted price for regular unleaded gasoline on PEI
was to 69.1 cpl. As you can see, the relationship between crude
and refined product pricing does not always correspond
intuitively.
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2. What is the relationship between world crude prices and
what I pay at the pumps for gasoline?
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There is an indirect relationship. Pump prices as established by
the Commission are based on changes in refined gasoline product
prices as traded on the New York Mercantile Exchange (NYMEX).
While over time, the trending of crude prices should correlate
with refined product pricing, it is not uncommon, in the short
term, for crude prices to be heading in one direction while
refined product prices head in the other. Both are
internationally traded commodities and as such can be subject to
different market influences. Crude prices for instance may be
falling due to global economic conditions while refined gasoline
prices may be rising due to local and regional supply
circumstances.
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3.
How do PEI prices compare to other Canadian markets?
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The attached table offers a comparison of consumer prices across
Canada. It should be noted that prices in regulated markets are
much more stable than in unregulated markets where prices can
vary daily and, in some cases, several times throughout the
day. It should also be noted that the volume of product sold in
a particular market influences consumer prices. For example,
the Atlantic Provinces account for 7.5% of the gasoline consumed
in Canada, whereas Ontario and Quebec represent 40% of total
consumption.
See M. J. Ervin & Associates Inc. - Weekly Pump Price Survey
[click here]
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4.
Which petroleum products are regulated in P.E.I.?
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The Commission is responsible for regulating the prices of
gasoline, diesel, stove oil, furnace oil and most propane
products sold within the province of Prince Edward Island. A
minimum and maximum price range is set for retail gasoline and
diesel products whereas maximum prices are set for furnace oil,
stove oil and propane.
View
currently authorized petroleum prices
[click here]
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5.
Where does the Commission get its authority to regulate
prices?
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Authority for price regulation is contained in the Petroleum
Products Act. Under the legislation, the Commission's role is to
"ensure at all times a just and reasonable price for heating
fuel and motor fuel to consumers and licensees within the
province."
See section 2 of the
Petroleum Products Act
[click here]
6. How is the decision to change prices made, what steps are
followed and what factors are considered?
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The Commission's pricing decision process involves the daily
monitoring of regional, national and international information
relative to ongoing developments in petroleum product markets.
Based on an analysis of this information, the Commission
determines the price adjustment that normally occurs on the 1st
and the 15th of each month.
More specifically, the foundation for price changes is the
average change in the market price for refined products traded
on the New York Mercantile Exchange (NYMEX)
over a defined period of time (usually 2 weeks). For example, a
5 cent increase (or decrease) in the average NYMEX price over a
defined time period will usually result in a 5 cent increase (or
decrease) at the pumps.
When arriving at the price adjustment, the Commission also takes
into account the volumetric impact (the influence of price times
volume over time) of any proposed change and also international,
national and regional market conditions.
The averaging process often results in retail prices that are
either above or below prices in neighbouring provinces. This is
the normal effect of price averaging and often results in PEI
prices being several cents a litre either above or below those
in effect in other jurisdictions at any given time. When prices
are rapidly increasing in other provinces, PEI prices tend to be
lower. The opposite is true when prices are rapidly decreasing.
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7. What factors influence the world price of crude oil?
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Refined products such as gasoline, furnace oil, stove oil and diesel are
made from the processing of crude oil. Crude oil is sourced from all over the
world, including the Middle East, Africa, the North Sea, Russia, South
America as well as the United States and Canada.
Crude oil and its refined product derivatives are bought and sold on
various commodities exchanges around the world, such as NYMEX, with the price of
these products changing every day and, indeed, several times a day.
A variety of factors can influence world prices of crude oil and its refined
derivatives. These factors include:
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the supply and demand for oil products;
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interruption of supply as a result of
geopolitical occurrences such as civil
unrest or war;
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natural disasters and weather patterns;
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speculative actions on the part of money
managers; and
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seasonal demands.
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8. What is the difference between crude oil and refined oil products?
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Crude oil is the base product from which most refined oil products such as
gasoline, diesel and home heating fuel are produced. Crude processed in
Atlantic Canada is typically sourced from overseas locations such as
Venezuela and Nigeria, shipped to Canada by ocean going crude tankers and
refined into finished products in refineries located in Saint John, New
Brunswick, and Come By Chance, Newfoundland.
Refined products produced at these refineries are then shipped throughout
Atlantic Canada, the U.S. and Europe.
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9. What factors influence refined product prices?
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Refined product prices are impacted primarily by supply and demand issues. Traditionally, gasoline
and diesel product prices are higher in the spring and summer months when demand related to domestic traffic patterns peak.
Alternatively, home heating prices are higher in the fall and winter months when demand is highest. Occasionally, production
interruptions resulting from storms or unscheduled refinery or pipeline shut downs can impact supply therefore impacting market
prices. At times, speculative activity and currency issues can also influence refined market prices in a dramatic fashion.
10. How does the value of the Canadian dollar versus the U.S. dollar impact
local petroleum prices?
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As crude is priced in terms of the U.S. dollar, a devaluation of the Canadian
dollar can make crude more expensive for Canadian refineries to purchase and, in
turn, can make refined products such as gasoline, furnace oil and diesel more
expensive to produce. A rising Canadian currency alternatively serves to reduce
the cost of production which ultimately results in lower petroleum products prices.
The relationship is a critical component in the determination of local prices as
has been demonstrated in the fall of 2015 when during times of declining
global crude prices, a devalued Canadian dollar limited our ability to benefit
from lower U.S. dollar priced crude prices.
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11. Why do events in some other part of the world impact the price I pay for
petroleum products in P.E.I.?
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When events such as natural disasters, military activity, labour strife or geopolitical
issues interfere with the production of crude and refined products, overall world supply is affected.
The implications of supply-side problems usually result in a
price impact throughout the world, including the cost of
products being shipped into PEI. Although Canada, itself,
produces significant amounts of crude, much of Canada's oil
production is shipped directly into the United States.
Although the Commission regulates the price of heating fuel and motor fuel sold in PEI,
it has no authority over world oil prices. Because it is a
globally-traded commodity, oil producers can and will sell to
the highest bidder. In order to ensure continued access to these
products, regulated prices must be fair
- or just and
reasonable - to both the consumer and product wholesalers and marketers.
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12. What do international market prices and refinery
rack prices have to do with what we pay here?
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The reference price for refinery rack prices in the region is the
New York Mercantile Exchange (NYMEX) price. Product is
bought in all of Atlantic Canada on the basis of refinery rack prices. Rack prices are normally priced
slightly above the NYMEX price. The Commission uses the Charlottetown rack price
when setting petroleum prices. (Previous to February
2011 the Commission used the Halifax rack price).
Both the major oil companies and industry marketers are directly
affected by the rack price. Marketers buy on the basis of
the rack price and the retail arms of the major oil companies
measure their profitability in a particular area on the basis of
the rack price. When the price approved by the Commission is
below the rack price, the industry sells into the Prince
Edward Island market at a loss and marketers sell below cost.
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13. Why doesn't the Commission simply ignore world market and regional rack prices and set
the retail price at some amount that is more affordable?
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By legislative mandate the Commission is required to ensure at all times a just and reasonable
price for heating fuel and motor fuel to consumers and licensees within the province. This
means that the Commission is charged with the responsibility of ensuring that Island consumers pay no
more than they should for petroleum products while ensuring that the wholesale suppliers providing petroleum
products to the Island market are enabled to make a reasonable rate of return.
The prices at which
PEI petroleum distributors purchase products are outside the jurisdiction of the Commission. In fulfilling its
legislative mandate, the Commission is obliged to set prices on PEI at a level which permits these companies
to recover costs. The viability of the wholesale industry is necessary in order to ensure the supply of
petroleum products to PEI.
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14. What can I do to reduce my monthly gasoline and home heating bills?
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Reducing your consumption of both gasoline and
home heating fuel is your best defense against high petroleum bills.
There are a number of
excellent websites with information on managing home heating costs:
Province of Prince Edward Island, Office of Energy Efficiency
(http://www.gov.pe.ca/oee.ca)
Natural Resources Canada, Office of Energy Efficiency
(http://oee.nrcan.gc.ca/)
Canada Mortgage and Housing Corporation
(
http://www.cmhc-schl.gc.ca
)
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15. Why doesn't the Commission give notice of impending
price changes?
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Commission authorized price changes are currently scheduled
for the 1st and 15th of each month. Price changes take effect at 12:01 am and it is a policy of the Commission to issue
a news release at the same time. The news release is an effort to inform the public of what the currently authorized petroleum product prices are for
Prince Edward Island as well as to provide some background to the Commission's pricing decision. It does not attempt to reflect all of the
factors considered by the Commission.
Given the volatility of energy markets and a desire to have the most up to date data available to the Commission, the meetings at which
pricing decisions are made are typically scheduled late in the morning of the day before a pricing decision comes into effect. Once a decision is
made it must be communicated to the wholesale industry to allow implementation of the new pricing information into various accounting, invoicing and
taxation record keeping systems. The Commission informs the wholesale fuel suppliers later in the afternoon with the wholesalers being responsible
for informing their respective retail networks.
The Commission's legislated mandate requires it to be fair both to industry and consumers. At one time the news release was issued a number of hours
prior to the price changes taking effect; however, this practice had a detrimental effect on the independent retail operators in the province. More than 80% of the
retailers on the Island are classed as independents, meaning they are local businesses operating only on the retail margin
fixed by the Commission, a margin which does not change when the prices of fuel changes. Advance notice of price changes would permit the consumer to take
unfair advantage of such local retailers by affording them the opportunity to plan their purchases in light of pending price changes.
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16. What about the home heating market?
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The logistics of home heating delivery normally require that
delivery truck schedules be planned several days in advance.
This ensures efficient utilization of both personnel and
equipment and lowers the overall costs of delivery. The minimal
notice period used by the Commission eliminates the potential
for furnace oil sellers to alter delivery schedules to maximize
revenues and also serves to protect these same sellers from
being forced into making inefficient and costly deliveries due
to an influx of last minute orders. In today's volatile
marketplace, a single day can have a significant impact on world
oil prices. When making pricing decisions, the Commission
reviews and assesses pricing information that is as current as
possible. Information is analyzed on a daily basis and includes
information obtained on the very day the decision is made.
Accordingly, the ability to give notice is also limited by the
time sensitivity of the decision making process.
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