The price of gasoline has been rising quickly since the pandemic. Where do we expect gas prices to be headed and what factors are influencing the outlook?
Background
We are used to buying gas at the pumps but it is also traded as a commodity on the futures markets. That futures contract provides market participants a way to speculate or hedge in the gasoline market and helps determine the prices we can expect in the months and years ahead.
At its core, the price of gasoline is driven by supply and demand: What goes into the price you pay for gasoline?
- The cost to locate and get crude oil out of the ground
- The cost to change crude oil into gasoline
- The cost to transport it to end destinations
- The cost to operate the local station (retail margin)
- Taxes to provincial, federal and sometimes municipal governments
One year ago, in the United States the price for gasoline was US$3.03 a gallon, and at time of writing was US$4.59. The accompanying chart shows the U.S. price of gasoline over the past 32 years.
What’s been happening recently?
With crude oil accounting for more than 60 per cent of the underlying price of gasoline we must therefore ask where the price of crude is headed. The Organization of Petroleum Exporting Countries produces about 40 per cent of the world’s crude; the war in Ukraine, sanctions on Russian gas and oil, and the global economic outlook all play a part in supply and demand, which in turn determines the price at the pump. Summer driving season also affects demand and JPMorgan sees US$6.20 a gallon by August, which, according to my calculations, implies $2.80 a litre in Canada, when taxes are considered. With the world economy projected to slow, and as the U.S. Federal Reserve increases interest rates to curtail inflation, we expect to see moderating oil prices later in the year.
Canada’s carbon pricing
Factors such as climate change and carbon pricing are also affecting the price of gasoline. In the summer of 2018, the Greenhouse Gas Pollution Pricing Act was passed with the goal to cut Canada’s carbon pollution by 40 per cent below 2005 levels by 2030. The minimum carbon price started at $20 a tonne of CO2 equivalent in 2019 and rose $10 a tonne each year, reaching $50 a tonne this year.
In terms of gas prices, this carbon tax now accounts for about 11 cents a litre, according to the Canadian Taxpayers Federation. The federal minimum price is slated to rise to $170 a tonne of CO2 equivalent by 2030, which equates to 37.6 cents per litre of gas. Add another 11 cents a litre for fuel regulations and carbon taxes alone will account for 48.6 cents a litre by the end of the decade, the CTF says.
Electrification
Some reports have electric vehicles overtaking internal combustion engines by 2033, which implies demand for gasoline will be reduced, thereby lowering price. At some point that lower price becomes an incentive to use gasoline as it becomes cost-effective again, leading us to believe we will see a long-term equilibrium in gasoline supply/demand.
What all this suggests is that, in the shorter term, we can expect higher gasoline prices through the summer driving season, but then a gradual decrease in prices out into 2023 and beyond.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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