Currency, demand driving up gas prices

It goes hand in hand with summer — gasoline prices go up and the grumbling begins.

It goes hand in hand with summer — gasoline prices go up and the grumbling begins.

But simple supply and demand is a bit more complicated this time.

Stephanie Powers, an economics instructor at the Donald School of Business at Red Deer College, provides the answer to the big question a lot of annoyed consumers are asking: Why is the price of gasoline climbing, yet the price of oil is low?

There are two things driving up gas prices even though oil is low, said Powers. Powers, who has a doctorate, has degrees in finance, economics, and statistics. She teaches economics, marketing research and operations management at the college.

In Red Deer, the price of gasoline has recently been moving upwards. Regular gasoline was as high at $114.9 per litre on Thursday. The price of a barrel of oil was US$60.39.

Powers said every year, at the end of May and beginning of June, gas prices go up because people do more travelling in the summer. The increase in demand pushes prices up.

But there’s another factor now — even though the price of oil is low because there is a Saudi-driven surplus of it, oil prices are based in American dollars.

In Canada when a gas station goes to buy fuel to reload its tanks, it’s paying in U.S. dollars. And the U.S. dollar continues to go up compared to the value of the Canadian dollar. So gas stations must spend more Canadian dollars to get that same gas. The Canadian dollar was worth .82 cents U.S. on Thursday.

Powers expects gasoline prices to be fairly stable over the summer, fluctuating a bit as the U.S. and Canadian currency exchange rate changes.

Private gas stations only see a profit margin of about two or three per cent, she said. “That’s small, much smaller than most retail companies,” said Powers.

The profit margin is a little higher, but not much, for stations tied to large companies.

Gas stations are always looking at what it is going to cost to reload their tanks. When they see the Canadian dollar decline, they are concerned that the next tank of gas is going to be even more expensive than the one now, she said.

If you are forecasting the future, you are not necessarily going to instantly drop the price if you think the Canadian dollar is going to strengthen — you hesitate because maybe it’s temporary.

That’s why there is a lot more reaction to raise the price than there is an instant reaction to drop it as the exchange rates fluctuate, Powers said.

It’s scarier to drop the price, then raise it when the profit margin is so tight, she said.

On the horizon, the price of gasoline could continue to rise more in the fall, even though the summer demand will have dropped off, said Powers.

Most U.S. financial institutions are forecasting that come September, the U.S. is going to raise interest rates. If this happens, and rates are higher then they are in Canada, investors will head to the U.S.

That would put a run on U.S. dollars, translating into a higher U.S. dollar, further increasing the cost of buying gasoline in Red Deer, Powers said.

barr@bprda.wpengine.com

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