For those hoping rock-bottom oil prices will mean paying pennies at the pump — it’s reality check time.
Red Deer’s price of 63.9 cents a litre at most stations on Friday is close to as low as it is likely to get, said Dan McTeague, president of Canadians for Affordable Energy.
“They could go lower, but I think there’s also a resistance point,” said McTeague. “The market for gasoline is significantly different than for oil.”
He uses the analogy of house building. If lumber prices collapsed, homebuyers could not expect to pay tens of thousands less for new accommodation.
Like house building, there is plenty else going on in the gasoline business besides raw material costs.
“There is a glut of oil, but there isn’t that same glut of oil for refineries. They’ve been able to cut back, so what they’re producing is pretty much on par with what is being demanded. They’ve been able to find that balance.”
So even though gasoline demand has been cut by 40 to 50 per cent because of the pandemic, “don’t expect any deep decreases any time soon.
“I don’t see things getting much cheaper.”
McTeague said he’s been fielding questions all week about gasoline pricing and the impact of plummeting oil prices, especially on Monday. Oil producers were basically paying people to take oil off their hands.
Benchmark West Texas Intermediate had recovered to over $20 by Friday.
The “unprecedented” situation was created by an oil glut, lack of storage space and plummeting demand as pandemic precautions closed businesses and kept cars in driveways.
Even though gasoline prices have not fallen off a cliff as oil prices did, gas stations are facing razor-thin margins. The rack price — what gas stations pay for a litre with taxes included — is 63.5 cents a litre.
Gas station owners use their convenience stores to boost profits, and that is why many chains have upgraded their shops over the years.
“If they’re selling for 63 cents, they are having to sell a lot of beef jerky to make up the difference,” he said. “That’s the only place you can make any money. The margins on beef jerky are a lot better than they are on gas.”
What the current oil economics will do to the industry will not be known for a while. But if a large number of companies are driven out of business, there may be fewer players left with less ability to meet growing demand, which could lead to higher oil prices, said McTeague.