Gas price math

A look at how prices are set in Nova Scotia, P.E.I.

Why are gas prices hitting record highs as another winter raises its head?

How can a hurricane in Texas or political instability halfway around the world impact the price at the pump in Charlottetown or Halifax?

There is no simple answer to those questions, but rest assured, the price at the pump is definitely not a figure pulled out of a hat.

Prices in all four Atlantic provinces are regulated by a government body, with minimum and maximum thresholds set weekly - Wednesdays in the case of Nova Scotia, Thursdays in Newfoundland and Labrador, and Fridays in P.E.I.

NOVA SCOTIA PRICES

The executive director of the Nova Scotia Utility and Review Board is the first to admit the issue defies easy explanation. Paul Allen says that's due, in part, to the fact the entire Atlantic region is a small player in a marketplace that is global in nature.

The starting point for setting the Nova Scotia pump price is determining the benchmark price. That figure represents the daily average for refined gasoline on the New York Mercantile Exchange for the past week. If it is necessary, a forward averaging correction is added to account for the difference between the historical numbers used to set the price and the actual price.

The Utility and Review Board divides Nova Scotia into six zones, and the executive director explained that is largely to determine the transportation adjustment - the cost of shipping the gas from the tank farm in Eastern Passage to a retail service station.

"Obviously, trucking to a station in Dartmouth is going to be considerably less than for a service station in Cape Breton," he explained.

Nova Scotia has a cap and trade system for carbon and Allen admits how that figure fits into the calculation is complicated. It's based on auction prices, and the board uses those prices to set the wholesale margin.

It then adds on federal and provincial taxes to determine the wholesale selling price - in other words, what the oil company charges the service station to deliver the gasoline to its tanks.

RANGE OF PRICES, ADJUSTMENTS AVAILABLE

The minimum and maximum retail mark-up is set by the board and can only be changed by holding a public hearing. As of mid-November, the minimum mark-up in Nova Scotia was 5.4 cents per litre, with a maximum of 7.4 cents.

Allen says the price range is both to allow competition and reflect the fact that a service station may have just received a fuel supply prior to a price adjustment.

Part of its pandemic response, Allen added, is a mark-up adjustment of between 0.4 and 0.6 cents per litre that's added to help compensate for lower sales volumes.

The final item in the formula is the 15 per cent Harmonized Sales Tax.

Looking at the Nov. 12 weekly formula in Nova Scotia, the benchmark price was .7373 cents and the final retail price was between $1.398 and $1.423 cents per litre. That represented a 1.7 cents per litre decrease from the week before.

The board also has the authority to use what is called an "interrupter" if there is a price shift of more than six cents per litre since the last time the price was set.

Allen admits most people associate use of that clause with a sharp price increase - "because that is what tends to get people's attention," he says - but that is not actually the case. The interrupter has been used 18 times for either gas or diesel in Nova Scotia since May 2011. In all but five cases, the price fell sharply downward.

P.E.I. PROCESS SIMILAR

While there are some differences, Kim Devine of the Island Regulatory and Appeals Commission says the process is similar in PEI.

Devine, who is the senior communications officer with the commission, said the Island committee starts with a rack price based on the price of gas traded as a commodity on the New York Mercantile Exchange.

"The rack price is the price of delivery of refined product to Charlottetown set by oil companies," she explained, adding the price rises and falls according to changes in the NYME price.

Both Allen and Devine said world events - like storms that impact major oil-producing areas - can have a major impact on the market price.

Changes in the prices of petroleum products are tracked by the commission daily and an average price is calculated over the previous week, as well as a year-to-date weighted average price.

"One of the factors considered when calculating price adjustments is weighted average price, which means that prices are adjusted according to volumes sold," Devine explained

"For example, the price of gas sold in the higher-volume summer months is given more weight than the price of gas sold in the lower-volume winter months."

At its weekly pricing meeting, Devine said the commission's Petroleum Panel reviews three prices: the daily price for each petroleum product; the average price for each petroleum product over the prior one-week period; and the year-to-date weighted average price for each petroleum product calculated using actual volumes sold.

The Island regulator then adds on a wholesale margin - five cents per litre - as well as the federal and provincial taxes, a carbon levy of 6.63 cents per litre, and factors in a retail margin of between 6.0 and 7.0 cents per litre for self-serve and 6.0-10.5 cents per litre for full-serve to determine the retail prices.

Looking at the week of Nov. 12, the Island regulator started with a base price of 88.4 cents for regular gasoline and ended up with retail prices of between $1.432 and $1.443 for self serve and $1.432 and $1.484 at fullservice stations.

The PEI regulator also has the ability to make unscheduled price adjustments

"High gas prices can reduce demand and a typical market reaction is that prices fall off when demand drops," Devine explained. "The combined volume of the four Atlantic provinces is small in comparison to the North American East Coast market and the volume of petroleum product sales in PEI would be the smallest in Atlantic Canada."

How can a hurricane in Texas or political instability halfway around the world impact the price at the pump in Charlottetown or Halifax? There is no simple answer to those questions, but rest assured, the price at the pump is definitely not a figure pulled out of a hat.