LETTERS TO THE EDITOR: On fuel prices.


Andrew Parsons
MHA Andrew Parsons (Burgeo - La Poile)

I am writing this letter today as a result of a conversation that I had recently with Rosalyn Roy (Editorial Director). It’s a conversation I’ve had with friends, colleagues, and certainly one that I think many of us have had the last number of days weeks and months. While I am not the minister responsible for fuel prices, I do deal with the issue quite frequently given my role as minister responsible for our natural resources. So what we’ve done here is to put in some questions and answers that we’ve heard quite frequently in hopes that people can be informed on this top of mind issue.



Does government have any role in setting the price of gas?

The Provincial Government does not set the price of gas. The Board of Commissioners of Public Utilities (PUB) has the legislated authority under the Petroleum Products Act for setting weekly maximum fuel product (gasoline, diesel and heating fuels) prices in the province.

Who sets fuel prices in the province and how is it set?


The Board of Commissioners of Public Utilities (PUB) is responsible for regulation of maximum prices for petroleum products in the province in accordance with the Petroleum Products Act. The legislation provides the PUB with the authority for periodic adjustment of the maximum price you see at the pumps. They do this based on a formula that considers the inputs to the price of fuel.

There are four inputs into this formula: Benchmark Price for refined fuel, Total Allowed Mark-up (wholesaler mark-up and retailer mark-up), Zone Price Differential and Taxes.

Let’s break those inputs for the formula down.

Benchmark Price is based on the average daily sale price of refined gas at the New York Harbour. This is a major trading centre for fuel (most of Atlantic Canada uses the same benchmark of New York Harbour). The benchmarks fluctuates daily, and the week’s average is often used in the formula.

The Total Allowed Mark-up consists of the wholesaler mark-up and the retailer mark-up. This is a part of the formula that is a set price that can change when the PUB reviews the mark-up or when an application by wholesalers is submitted. A wholesaler buys the gasoline from a refinery, the mark-up covers the wholesalers costs such as operating, storage, transportation and profit. The mark-up is how wholesalers remain in business. Retailer mark-up is very similar to the wholesaler mark-up in that it also covers the operating and transport costs as well as the cost of the product and profit. It contributes to retailers remaining in business and allowing us a place to fuel-up our vehicles.

The total allowed mark-up is added to the benchmark price of gasoline to establish the retail base price for gasoline. This amount is meant to cover all costs in getting the product from its source to the end customer plus provide a reasonable allowance for return on investment to those in the supply chain. While the benchmark changes weekly, the total mark-up (wholesaler and retailer) would only change if the PUB initiated a change or approved a change on application by a retailer or wholesaler. For example, in 2020 the North Atlantic Refinery owners asked the PUB to increase the wholesaler mark-up because North Atlantic Refinery advised that their costs to supply gas to the market had increased since the refinery stopped refining oil and had to start importing refined gas.

Currently the Total Allowed Mark-up (wholesaler and retailer mark-up combined) is 25.93 cents per litre.

The Zone Price Differential amount depends on where you live in the province, the base zone is Zone 1: Avalon Peninsula. The zone differential price is to reflect further costs for transportation and storage of the gas to get to each zone. (Port aux Basques is in Zone 7).

The final input to the benchmark formula is taxes, which before HST is consistent at 33.34 cents per litre; in addition to 10 cents from the Federal Excise Tax which has been applied since it was brought into place in 1995. Nearly nine cents (8.84) is a carbon tax on fuel. The carbon tax was brought in as a measure to combat climate change. Under the carbon tax, the government sets a price that consumers pay for various fuels based on an established cost of carbon by the federal government. The carbon tax, which is collected by the province, is used to help pay for roads, infrastructure, education and many other services. The provincial gas tax accounts for 14.50 cents per litre at the pump. HST is also applied to gasoline.


Formula:

Benchmark price (Average NY Harbour)

Total Mark-up (wholesaler and retailer mark-up)

Zone Price Differential

Taxes (Carbon, Federal Excise Tax, Provincial gas tax) x by HST @ 15 per cent = The price we see at the pumps.

So if there’s a formula why does the price at the pumps change weekly?

Because the benchmark price changes.


Benchmark price (Average NY Harbour) +

Total Allowed Mark-up (25.93) +

Zone Price Differential +

Taxes (33.34)

x HST (0.15) =

Price at the pumps

An example of the equation in work using the Benchmark Price set on Friday, March 11, 2022:


108.14 (Benchmark Price) +

25.93 (Total Allowed Mark-up) +

1.39 (Zone Price Differential for Zone 7) +

33.34 (Taxes) =

169.01

X 0.15

= 194.1 cents per litre at the pumps.

Can government lower the price of gas?

While government does not set the price of gas, it does have several taxes that form part of the cost of gasoline. These are the Gas Tax, the Carbon Tax and the Provincial portion of the HST.

Government is reviewing what actions, if any, it can take to assist consumers; however, there are important considerations and limitations.

The Province applies the Carbon Tax, but this tax is a federally mandated tax. If the Province lowered its Carbon Tax, it would not be consistent with the agreement the provincial government currently has with the federal government on carbon tax. This may result in the provincial tax being deemed non-compliant and result in the federal carbon taxed being applied to home heating fuel.

With respect to the provincial portion of the HST, the tax is administered and collected by the federal government. The federal government then simply sends the province its share of the tax collected.

Since the province does not collect the tax, it does not have the ability to change the tax base to exempt or lower the tax applied to gasoline from the provincial portion of the HST.

If all provincial and federal taxes were removed from a barrel of oil, how much would our gas prices be at the pump?


Applicable taxes on gasoline prices include; Provincial Gasoline Tax, Federal Excise Tax, Carbon Tax and HST. Provincial and Federal taxes on gas account for approximately 58 cents per litre (based on current gas prices as of March 11, 2022).

Ten cents is from the Federal Excise Tax which has been applied since it was brought into place in 1995 at that rate.

Nearly nine cents (8.84) is a Carbon Tax on fuel. The carbon tax was implemented in 2019 and was brought in as a measure to combat climate change, under the carbon tax, the government sets a price that consumers pay for various fuels based on an established cost of carbon by the federal government. The carbon tax, which is collected by the province, is used to help pay for roads, infrastructure, education and many other services.

The provincial gas tax accounts for 14.50 cents per litre at the pump. HST is also applied to gasoline, of which the federal government takes a share of approximately eight cents and the province takes nearly 17 cents based on the current gasoline price.

Can any savings be achieved through the wholesale or retail markup?


In setting the price, the PUB determines the appropriate amount allocated for wholesale and retailers. The Petroleum Products Act and regulations provide for the determination of benchmark prices and adjustments, wholesale and retail mark-ups (transportation, storage, distribution, and marketing costs) and zone differentials. As well, the regulations provide for inclusion of federal and provincial taxes in pricing.

The total allowed mark-up (wholesale and retail markup) is added to the benchmark price of gasoline to establish the retail base price for gasoline. This amount is meant to cover all costs in getting the product from its source to the end customer plus provide a reasonable allowance for return on investment to those in the supply chain. While the benchmark changes weekly, the total mark-up would only change if the PUB initiated a change or approved a change on application by a retailer or wholesaler.

For example, in 2020 the North Atlantic Refinery owners asked the PUB to increase the wholesaler mark-up because North Atlantic Refinery said the costs to supply gas to the market had spiked since the refinery stopped refining oil and had to start importing refined gas.

The total allowed mark-up helps keep wholesalers and retailers in business, which allows us to fill up our tanks.

How do we compare to the rest of Canada?


Gas prices have risen across the country. The price varies throughout Canada based on various factors, including the cost of refining fuels like gasoline, transportation costs linked to infrastructure and geographic location, storage and distribution costs, wholesale and retail margins, taxation (federal and provincial), etc.

Currently, the largest cost driver is the price of crude oil, which is a feedstock used in refining products like gasoline. As it stands, we certainly rank near the top of the country as it relates to cost per litre (and for the reasons I explained), but we are not the highest.

British Columbia generally is higher, as are the territories. However, as we can see, the prices are volatile.

Just in the period of time it took to draft this Q & A, prices have dropped repeatedly and the PUB has used the interruption formula. In fact, the price of oil per barrel has dropped over $30 in days!

What specific measures is the province and/or federal government taking to mitigate these prices at the pumps? What – if anything – can realistically be done?

The provincial government is looking at a range of options to alleviate some of the economic pressure caused by increased fuel prices. But the reality is this – we as a province spend far more than we take in, every single year. Our current deficit is in the range of 17 billion dollars.

As of the provincial Fall fiscal update, our deficit for 2021 was estimated to be 600 million dollars. That means even though the province took in approximately 8.7 billion dollars in revenue, we spent just under 9.3 billion dollars in expenditures, including services. Each cent taken from the gas tax results in $10.4 million in revenue. To take it from one will only result in a further shortfall elsewhere.

Will this make people happy to hear? Of course not.

But the point of this piece was to discuss some of the realities and facts behind the current situation – one that I would point out, is worldwide in nature. There is nothing fun about it, but it remains the reality of living in a world that is heavily reliant on this non-renewable resource.

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