A Guide to Retail Gasoline Pricing in Canada

Bulletin

May 17, 2019


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Introduction

The retail gas industry in Canada and other countries is highly complex. Reasons for this include the fact that it has many different levels in its supply chain, is a global commodity and is subject to regulation and taxes.

With all these moving parts, it can be difficult to determine which of the many factors that affect gas pricing is the cause when you see a spike in gasoline at the pumps. This guide is intended to help Canadians better navigate those muddy waters by providing an overview of how gasoline gets from the ground to the pump, and what happens to pricing along the way.

This guide is also intended to let Canadians know how to recognize signs of possible price fixing, and distinguish them from signs of healthy competition in the retail gasoline industry. Our goal is to inform you of the evidence we need to prove that companies are acting illegally. This way, if you want to file a complaint about possible price-fixing, you will know what information to provide us.

It is common for Canadians to suspect that gas stations are acting together illegally when, within a half an hour—and often right before a long weekend—most of the gas stations near your home raise their prices. Many have asked - isn’t this behaviour proof enough of illegal activity? And when gas prices fall together the next week, price-fixing may seem to be the only reason.

But gas prices that rise and fall in step are not in themselves evidence of price-fixing and, in fact, can actually be evidence of competition functioning as it should.

If companies are to be prosecuted for fixing prices, we need to prove that they agreed to set those prices. Since, as this guide explains, gas prices can rise and fall more or less in unison for legitimate reasons.

We take complaints of price-fixing or anti-competitive behaviour seriously. And we review all complaints and tips Canadians send us. Consumers can play and have played a valuable role in helping the Competition Bureau gather evidence to uncover price-fixing or anti-competitive behaviour.

Here’s what this guide includes

The guide starts by describing the Competition Bureau and its role in the retail gasoline industry. We hope that this insight will give you a good idea of what we do and what information we need to uncover illegal activity.

Then, we answer several questions that Canadians commonly ask about gas prices in Canada.

To wrap up, we outline the information we need to prove that gas stations are fixing prices. Suspicion alone isn’t enough: we need hard evidence, and this section explains what constitutes hard evidence.

If you’re not familiar with some of the terminology or, are interested in learning more about how this industry works, we describe the main stakeholders in the retail gasoline industry in Appendix A. We also explain how each of these stakeholders and other market forces influence the price you pay for gas at the pumps.

Overview of the Competition Bureau

The Bureau is an independent law enforcement agency that enforces Canada’s competition laws. We help consumers and businesses benefit from market competition.

Part of the Canadian federal government, and headed by the Commissioner of Competition, the Bureau enforces the Competition Act.

Competition makes the economy work more efficiently, and provides consumers with competitive prices and product choices. It also inspires businesses to innovate and helps spread the gains they make throughout the economy. When competition is impeded, the economy can suffer. Behaviour that harms competition can act like a roadblock, causing businesses and consumers to end up paying more than necessary for goods and services.

The Bureau helps clear that roadblock. We do this by enforcing the law fairly and predictably. This means acting against anti-competitive behaviour and dishonest marketing practices and reviewing mergers to ensure they do not hurt competition.

The Bureau’s role in the retail gasoline market

We do not regulate retail (or wholesale) gasoline prices. However, when the Bureau finds evidence of price-fixing or other anti-competitive behaviour in any gasoline market, it won’t hesitate to take action.

Where the Bureau can and has played a role in this market

In retail gasoline, two types of business actions are candidates for the Bureau’s attention: 1) cartels and 2) mergers and acquisitions.

Cartels

Cartels form when businesses act together instead of competing against one another. For example, if gas stations agree to set the price of gas, they are engaging in a cartel. Cartels are illegal in Canada because they lead to higher prices, fewer product choices, and less innovation.

A cartel can behave in different ways:

  • Fixing prices—Two or more competitors agree to set prices for goods or services.
  • Allocating markets—Two or more competitors divvy up sales, territories, customers, or markets among themselves.
  • Restricting outputs—Two or more competitors agree to control or limit the supply of goods and services.
  • Rigging bids—Two or more people or businesses conspire to bid on contracts without the knowledge of those seeking the contract.

These types of cartels are difficult to detect and prove. For instance, to prove price fixing, we need clear evidence that competitors have agreed with one another to set prices. If an investigation finds evidence of a cartel, and the offence can be proven beyond a reasonable doubt, we may refer the case to the Attorney General of Canada for criminal prosecution. Once we refer a given case, the Director of Public Prosecution determines whether to prosecute. The Director is independent of the Competition Bureau and acts on behalf of the Attorney General of Canada.

We have exposed gasoline cartels in Canada before. For example, from 2009-2013 a Bureau price fixing investigation led to charges being laid against 39 individuals and 15 companies for their role in a gasoline price fixing conspiracy in four local areas in Quebec. The investigation led to fines totalling over $4 million and terms of imprisonment totalling 54 months.

In another case, Pioneer Energy LP, Canadian Tire Corporation, and Mr. Gas pleaded guilty to fixing gasoline prices in Kingston and Brockville, Ontario. The companies were fined $2 million.

Mergers and Acquisitions

The second area of focus for the Bureau in the retail gasoline market is when two (or more) gas station owners combine through a merger or acquisition. The Bureau will review these types of transactions to determine whether their impact on competition is substantial (a specific legal test). Determining whether a transaction may have a substantial impact on competition typically involves analysis of large amounts of information gathered from numerous sources, such as from market participants or from the merging parties’ internal company documents, as well as a detailed economic analysis.

If it’s found that the merger is likely to have a substantial impact on competition the Bureau may negotiate a remedy with the merging parties or, if an agreement cannot be reached, make an application to the Competition Tribunal (a specialized court that deals with civil competition issues) to stop the merger, in whole or in part, from proceeding or to prohibit certain action by the merging parties.

For instance, in 2017 Alimentation Couche-Tard Inc. (Couche-Tard) sought to buy CST Brands Inc., whose operations included selling gasoline under the Ultramar banner. The Bureau concluded that Couche-Tard’s proposed purchase would likely result in a substantial lessening of competition in many local markets in eastern Canada. To address this concern, Couche-Tard agreed to sell 366 gas stations and gasoline supply contracts.

In 2016, Parkland Fuel Corporation (Parkland) wanted to buy Pioneer Energy. The Bureau was concerned that this deal would substantially lessen competition in a number of local markets and filed an application with the Competition Tribunal to stop part of the merger from proceeding. The Bureau and Parkland reached an agreement in which Parkland would sell gas stations or exclusive gasoline supply agreements in six markets in Ontario and Manitoba. The company also agreed not to increase any margin earned on gasoline sales in two markets in Manitoba where it acts as a wholesaler for a six year period.

Now that you have an understanding of our role in the retail gasoline industry, we can discuss some of the questions we frequently get when speaking to Canadians.

Answering some common questions about retail gas prices in Canada

In this section we address questions that Canadians frequently ask about gas prices in Canada.

How is the retail price of gas set?

Every step of the gasoline supply chain impacts gasoline prices because each stakeholder adds an amount to cover costs and generate profit. The four main stakeholders are:

  • exploration and development companies;
  • refineries;
  • marketers and wholesalers; and
  • retailers.

The price you pay for a litre of gasoline is made up of four different costs: the cost of crude oil, refining costs, distribution and marketing costs, and taxes. The chart below shows the average relative weight of each part, based on industry information.

how the retail price of gas is set
Figure 1: The Average components of the price for a Litre of Gasoline at the Pump in Canada
  • Crude oil: 40%
  • Taxes: 35%
  • Refining: 17%
  • Distribution and marketing: 9%

Why does the price of gas vary from region to region?

There are several factors that affect the price you pay at the pump.

Differences in competition—Wholesale and retail prices can differ by market depending on how vigorously the companies in given markets compete. Generally speaking, all else equal, prices will be lower where competition is stronger. But, as described below there are many factors that influence gas prices like transportation costs and taxes. Without knowing all the facts, it is difficult to know if you’re comparing apples to apples when looking at gasoline pricing in different areas.

Crude oil prices—Refineries buy different grades of crude oil depending on the refineries’ set-up and production plans. The prices of these crude oils can vary, which can lead to regional differences in gasoline prices. For example, if a refinery in western Canada were using a higher priced crude than a refinery in eastern Canada, all else equal, the western refinery would charge more for its gasoline than would the eastern refinery. These higher rack prices would reflect the western refinery’s higher costs.

Refinery utilization—When refineries run at high capacities (meaning they are close to their peak limits of production), higher rack prices typically result. Refineries each have certain capacities to produce their products. When demand nears the limit of production, the market will bid up the price of the now-scarcer gasoline supplies. This bidding raises the rack price of gasoline.

Differences in taxes—Within Canada, there are differences in the taxes that provincial governments apply to gasoline sales. These differences contribute to varying gas prices from province to province.

Exchange rates—When the Canadian dollar is worth less than the U.S. dollar, rack prices will be higher in Canada compared with those south of the border. These differences occur because Canadian wholesalers compete for supply with U.S. wholesalers. If our dollar is worth less than the U.S. dollar, Canadian wholesalers will have to pay relatively more for gasoline than would their U.S. counterparts.

Distribution costs—Typically, the greater the distance from the refiner and/or terminal to the retailer, the greater the distribution costs.

Volume of sale at a site—Higher volume gas stations, such as those in cities, have lower operating costs per litre than do more remote gas stations. Lower costs may result in high-volume gas stations offering reduced prices.

Other revenue—Gas stations with convenience stores can use profits from non-gas sales to subsidize the cost of wholesale gasoline (or diesel), allowing lower pump prices.

How does the Bureau assess competition in gasoline?

Depending on what kind of case the Bureau is investigating (for example, price-fixing, or a merger), our assessments will vary. This is because the legal test that we have to meet under the Competition Act is different. In the case of a merger investigation, a variety of factors are evaluated such as who the relevant set of competitors are, how effectively they compete, and whether there are new stations that may soon enter the market. When investigating price-fixing, the focus of the investigation is determining whether there is an illegal agreement between competitors to fix the price of gasoline.

Why do gas prices seem to move in unison? Isn’t that illegal?

Gas prices moving in unison could be evidence of illegal conduct. However, that’s not the only possible explanation. For instance, gas stations typically post their prices on large street-side signs. Since consumers are sensitive to price, a given station risks losing business if it prices its gas higher than that of its competitors. As a result, competing gas stations often charge similar or the same prices. Competing gas stations may legally charge the same price as long as they have not agreed to do so.

Now, in some cases, by following each other’s prices closely and reacting with their competitors in mind, companies may reach the point where one could assert that they compete less aggressively with one another. This is called “price coordination” and refers to situations in which something is understood or implied between competitors without it being negotiated or expressly communicated. Coordinated pricing differs from agreements between companies to fix prices; however, we may be able to prove that the parties agreed to act together if there is evidence of coordination coupled with certain practices. These practices include things such as sharing competitively sensitive information or activities that help competitors keep track of one another's prices.

What causes drastic swings in retail gasoline prices?

Like any commodity, gasoline is subject to the forces of supply and demand. Prices often rise when global supply drops (for example, when oil refineries shut down for maintenance or to wait out a hurricane). When gas supplies increase, prices typically go down. Consumer demand also causes swings in gas prices. Prices typically go up when demand is higher (for example, in the summer, when more people travel) and go down when demand is lower.

Why are retail gasoline prices in Canada and the U.S. different?

Differences in prices at the pumps in Canada and the U.S. are generally due to our different currency values and tax rates. When we factor in currency exchange and remove taxes, Canadian and American gasoline prices are, generally, comparable.

Why do retail gasoline prices seem to go up before a long weekend?

Wholesale gasoline prices tend to rise in the late spring and early summer because refineries shut down around then for short periods to maintain or upgrade their operations. This timing allows refineries to prepare for summer’s high demand. Retailers will often pass along those wholesale price increases to customers, and these increases may (but not always) take effect before a holiday weekend. Conversely, when gasoline demand drops in the fall, wholesale and retail prices generally drop as well. These declines may (but not always) happen before a holiday weekend.

Why don’t prices of retail gasoline, diesel fuel, and home heating oil rise and fall together?

Unlike the demand for gasoline, the demand for home heating oil is seasonal. As well, wholesalers usually sell home heating oil under contract for an entire season at consistent prices. Truckers and farmers are the biggest consumers of diesel fuel, and their demand tends to be consistent. As with purchasers of home heating oil, trucking fleets usually negotiate a diesel contract with one supplier. As a result, diesel prices tend to be more stable than gasoline prices.

How you can help stop anti-competitive behaviour in the retail gasoline industry

If after reading this guide, you believe that you have information the Bureau needs to pursue a company for price-fixing, please let us know.

You can help unroot any possible anti-competitive behaviour in the retail gasoline market by answering the following three questions.

Do you have information that gas stations where you live have agreed to set prices?

If you have heard of or have information of gas stations or any other companies agreeing to set prices, call the Bureau at 1-800-343-5358 or write to us using our online form. Before doing so, please consider whether you have information beyond gas prices moving in unison. As this information guide explains, gas stations are legally allowed to charge the same or similar prices as long as the stations, including those who own or operate them, have not agreed to do so. Valid market forces can affect the similarity of gas prices in a given area.

Do you think that your employer has an illegal agreement with its competitors?

If you tell us that you suspect your employer has agreed to set retail gas (or any) prices with competitors, you can ask to keep your identity secret. You cannot be fired, disciplined, or harassed by your employer for giving us information. It is a serious criminal offence for employers to discipline or threaten to discipline employees who have provided information to the Bureau.

Do you think you may be involved in an illegal agreement?

If you come forward with information about an illegal agreement and you help our investigation and any resulting prosecution, you may receive immunity or favourable treatment in exchange for your full cooperation. Described below, these programs are administered by the Bureau and the Public Prosecution Service of Canada.

Immunity Program

Under the Immunity Program, you may get immunity from prosecution from the Public Prosecution Service of Canada if one of the following two situations applies:

  • You are the first party to make the Bureau aware of a previously unknown offence.
  • You provide evidence that leads to us referring a case to the Public Prosecution Service of Canada.

Leniency Program

If you do not qualify for immunity, you can still apply for leniency. In these cases, the Bureau will recommend to the Public Prosecution Service of Canada that you receive favourable treatment in exchange for cooperating with the Bureau's investigation and any subsequent prosecution. To receive leniency, you must plead guilty to an offence under the Competition Act.

Conclusion

As this guide reveals, the Canadian oil and gas industry is complex, and many factors influence the price Canadians pay for gasoline at the pumps. We hope that this guide has provided you with information on the retail gasoline market, what we do at the Bureau to help clear any roadblocks that prevent competition from thriving and how to contact us if you have you have the hard evidence the Competition Bureau needs to pursue gas stations which may be fixing prices.

Annex A: Overview of the Canadian gasoline supply chain

In this section, we describe the Canadian gasoline supply chain and its main players. To understand gasoline prices in Canada, it’s helpful to know who these stakeholders are and how each influences retail gasoline prices. We also explain some terms and relationships to help you understand how the industry operates.

The Canadian oil and gas industry can be divided into upstream and downstream activities. Together these levels of the supply chain include all the steps required to get crude oil out of the ground and gasoline into our vehicles. These two levels include four primary stakeholders:

Overview of the Canadian gasoline supply chain
Stakeholder Role Level of Supply Chain
Oil and gas exploration and development companies Extract crude oil out of the ground. Upstream
Refineries Refine crude oil into its various useable forms (for instance, gasoline or diesel fuel). Downstream
Marketers/wholesalers Collect gasoline from refineries, store it, and transport it to retailers. Downstream
Retailers Sell gasoline to Canadians. Downstream

Upstream market

The upstream sector explores for, extracts, and produces crude oil (also known as “petroleum”), natural gas, and natural gas liquids. Crude oil is the primary input to making products such as gasoline and diesel fuel. Crude oil is classified primarily by its density—light, medium, or heavy—or its sulphur content—low or high. Low sulphur crude is known as “sweet” and high sulphur crude is known as “sour.”

The quality of crude oil can differ greatly from one oilfield to another, and quality affects the crude’s price. Light sweet crude is the easiest and least expensive to turn into gasoline and other refined products. For this reason, it typically sells for higher prices than do heavier and sour crudes. Heavier and sour crudes cost more to extract and process, but because of their relatively low quality, they tend to sell for prices lower than those of light sweet crudes. In 2017, heavy crudes made up almost half of Canada’s crude oil production. That year, Alberta and Saskatchewan produced the vast majority of the country’s crude oil—80 and 12 percent respectively.

Downstream market

The downstream part of the gasoline supply chain includes the refining, supply and distribution, and selling of petroleum products.

Refining

Refining is the manufacturing process that turns crude oil into gasoline, diesel fuels, heating fuels, and other marketable products. Refineries can differ in their ability to refine certain types of crude. Less complex refineries can process only light sweet crude. More complex (and costly to run) refineries can process heavier crudes. Once refined, gasoline is sent to large storage tanks either by pipeline or ship. These storage tanks are referred to as terminals.

Wholesaling

From there, the gasoline can be sent to smaller terminals by truck or rail car or to businesses such as aviation companies and ultimately to retail gas stations by tanker truck. This process makes up the wholesale part of the downstream petroleum industry.

Retailing

Retailers sell gas at the pumps. The Canadian gasoline retail market is varied in its ownership structure and players.

Vertically integrated vs. independent retailers

In some cases, refiners sell (or “market”) their gasoline through their own branded retail gas stations. These companies, such as Petro Canada and Shell, are known as integrated refiner-marketers.

In other cases, companies buy gas from refiners and market it under their own brands or a refiner’s brand. These companies are known as non-refiner marketers and their business relationships with retailers can take multiple forms.  Some of these stations are big-box store and grocery store gas bars, the number of which has been rising in Canada. These retailers use gasoline to attract customers to their stores, often reducing gasoline prices as part of this strategy.

Retailer business models

The following table presents the four most common relationships between marketers and retailers:

Retailer business models
Type of Gas Station Who owns the retail outlets? What type of business model applies? Who controls the pump price? This type applied to what % of gas stations in 2017?
Independent retail gas stations Retailer Retailer buys gas from marketer Retailer 46%
Commission operator gas stations Marketer Retailer receives a commission (cents per litre) from marketer on gas that’s is sold Marketer 40%
Marketer-operated gas stations Marketer Marketer owns and controls the station Marketer 13%
Lessee gas stations Marketer Retailer leases outlets and buys gas from marketer Retailer ~1%

Pricing

The table below, which is based on industry information, shows prices that stakeholders in the gasoline supply chain both pay and charge for their products. Like any business involving a number of stakeholders in a supply chain, each participant adds its own markup, which affects the final price of gasoline at the pumps.

Pricing
Stakeholder What price do they pay? What price do they charge? What influences the charged price?
Oil and gas exploration and development companies Cost to remove crude oil from the ground. Crude priceFootnote 1 Global supply and demand for crude oil, and a profit margin.
Refineries Crude price Rack priceFootnote 2 Cost of crude oil and related refining costs, and a profit margin.
Marketers and wholesalers Rack price Wholesale price Rack price, overhead, and the distance between the refinery and the terminal as well as between the terminal and the retailer, and a profit margin.
Retailers Wholesale price Retail price Wholesale price plus wages and salaries, benefits, equipment, rent, insurance, other overhead, and a profit margin.
End customers Retail price    
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