Many in the public, media, and petroleum industry have taken notice of the fact that Canadian gasoline and diesel prices have fallen considerably less than those in the U.S. since crude prices began to decline in mid-2014. Crude prices have been more than halved in both countries, yet Canadian wholesale gasoline prices are down roughly 35 percent from their peak in June 2014, while U.S. wholesale gasoline prices are down nearly 50 percent over that time. What has driven this disparity? While there have been a range of explanations put forth, our analysis suggests that it is almost exclusively the result of the devalued Canadian dollar, and its effect on wholesale refined product prices.
The Canadian dollar has weakened substantially in 2015; driven largely by the continued decline in crude prices and the significant role of energy prices in both the Canadian economy and its trade balance. Over the past decade, the Canadian dollar averaged 94 percent of the value of the U.S. dollar (2006-2014 inclusive, Bank of Canada daily noon rate). Since the beginning of this year, the dollar has averaged just 79 percent of the value of the U.S. dollar, falling to its lowest relative value on September 29, 2015 at just 74 percent. The weakening of the Canadian dollar has meant that Canadian rack prices have been pushed higher (in a relative sense), in order to remain competitive with U.S. rack prices.
Like crude, finished gasoline and diesel are traded internationally and so their prices must remain competitive across currencies. Due to the proximity and ease of product movement across our border with the U.S., wholesale refined product prices in most major Canadian cities track those in corresponding U.S. markets very closely on an exchange rate adjusted basis (Figure 1). Should Canadian rack prices move too far above or below U.S. rack prices, an opportunity for arbitrage is created for fuel buyers in either market.
Figure 1: Regular Gasoline Wholesale Price 2006-2015 (in Canadian dollars)
Kent’s price data for September 2015 shows that wholesale gasoline prices were nearly 15 cents per litre higher than if the dollar was at parity, and they sit roughly 10 cents per litre above where they would have been without the movement of exchange rates since June 2014 (Figure 2). This difference accounts for virtually all of the disparity in the rates of decline for Canadian and U.S. rack prices over this time.
The exchange-adjusted differentials between average Canadian and U.S. wholesale prices (Figure 3) provides an additional perspective on this. The average differential (which has hovered around 2 cents per litre since 2006) has actually decreased and become less volatile since the beginning of 2014, signalling that Canadian rack prices have remained competitive with U.S. wholesale markets throughout this period despite the disconnect in their nominal prices.
Figure 3: Regular Unleaded Wholesale Price Differential 2006-2015
For the most part, these higher nominal Canadian wholesale prices are directly passed along to the consumer through the price at the pump; this is because of the relatively stable nature of the retail margin and tax components in gasoline and diesel prices. Consequently, Canadians have not benefited from the drop in crude prices to the same degree as their neighbours to the south – primarily because of the effect of a steadily devalued currency over that time. Most foreign exchange predictions indicate that the Canadian dollar will remain low relative to the U.S. dollar for the balance of 2015 and well into 2016, suggesting that there will not be much short-term relief for Canadians in the form of comparatively lower wholesale prices, and by extension, at the pump.
The Kent Group Ltd is Canada’s leading provider of retail petroleum data, analytics, and consulting, including regular volumetric (market share) reporting, and petroleum price data. More information about our products, market coverage, methodologies, and pricing is available at www.kentgroupltd.com
About the Author: Mr. Parent is the Vice President Consulting of Kent Group Ltd. His career in the downstream petroleum industry has spanned nearly 15 years, and he has worked with wide range industry and government clients from across North America. Mr. Parent’s functional expertise includes petroleum marketing economics, downstream operations, as well as petroleum markets and pricing.
© 2015 Kent Group Ltd.