Strathmore gas prices have once again seen a jump last week, as most of our stations now sit at 134.9 cents per litre, a seven cent jump from the 127.9 cents per litre price we got accustomed to for most of January. The consistently high gas prices has been a big source of frustration for many, which has also led some to direct their anger at gas stations for their prices. Some suspect gas stations are cranking their prices up to drive their profits up simply because they can, but is this true?
Gas Buddy's Head of Petroleum Analysis Patrick De Haan explained this is not the case, as gas stations are middle men to the evolving oil market.
"Stations selling that fuel are seeing nowhere near the profits that big oil companies do. They're simply taking a commodity, buying it, and reselling it. Oil companies don't set price, prices are set based on global supply and demand. If consumers were not filling up as much or if they weren't buying as much, the profits would not be as high," he explained.
De Haan compared it to the housing market, and how individual home owners sell their homes at market value, rather than set their own prices. Similar to how home owners can sell for a profit due to the market, oil companies are enjoying the benefits of the oil market being particularly profitable. Similar to the house market, oil companies also aren't immune to market crashes though. If you still doubt that prices are market driven vs. corporate greed driven, De Haan pointed to the 2020 bust as proof that the market dictates prices.
"During 2020 when demand plummeted and when prices plummeted, Canadian oil companies were hemorrhaging billions of dollars simply because demand wasn't there. So keep in mind that while the profits may swing one way one day, this future will likely not hold."
The boom-bust cycle of oil prices is a several year process, as the lack of oil production during a bust results in supply being thin as demand increases. Now that we're in a boom, oil companies will look to capitalize and increase production, but as production increases so will supply, thus balancing out the market and lowering prices. While this cycle is nothing new, De Haan noted the last couple of years in particular have lead to rather extreme booms and busts.
"China has reopened its economy, the US has seen an end to its release of oil from the strategic reserve, and all of that is putting upward pressure on prices. Not only that, but we are also seeing concern of the EU's sanctions on Russia, which will extend on February 5 for pushing oil prices up. Also the cold snap back from December still is holding back refining capacity and that's holding back product."
In general, gas stations don't have incredible profit margins in the same way other companies might. For example, De Haan noted companies like Apple have a 40% profit margin, but on average gas stations make a few cents per litre, so the percentage is very low. With billions of litres being consumed this can add up quickly, but sometimes gas stations will operate at a loss as they adjust to the oil market, meaning some days you could just as quickly lose that money. Like the market itself, De Haan added gas station profits can vary wildly depending on circumstance.
"When oil prices are actively climbing stations will break even or may even lose money, whereas when prices are declining, stations are generally doing better. They can make upwards of 10 to 15 cents a litre in good times, but they also can lose some money when prices are going up and then during bad times"
For the immediate future, De Haan said we can expect prices to continue to rise, but said brighter days are ahead as the boom-bust cycle continues, although this will likely take a couple of years to play out.
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