Petroleum Pricing Questions and Answers
Question 1: (REVISED 01-28-2010)
Question: 1 (REVISED 01-28-2010)
Which fuel products are regulated in Newfoundland and Labrador?
Fuel-pricing regulation has existed in Newfoundland and Labrador since 2001. The Board of Commissioners of Public Utilities (the "Board") was given the responsibility of fuel-price regulation in 2004. The refined fuels for which maximum prices are set include all types of motor fuels (gasoline and diesel) and heating fuels (furnace oil, stove oil and propane).
The Board's mandate is to set the maximum price at which regulated products may be sold. As a result, a supplier or retailer of regulated petroleum products may sell such products to consumers at any price at or below the maximum at any time, but at no time may they sell regulated products above the maximum price.
Question: 2 (REVISED 01-28-2010)
What is the schedule for maximum price adjustments?
The Board makes regular weekly maximum price adjustments for all products every Thursday at 12:01 a.m. For these adjustments, maximum prices are determined using the average of NYMEX (New York Mercantile Exchange) commodity market data for the preceding seven-day period up the Tuesday of that week.
Intervention adjustments may also be made in extraordinary circumstances in response to significant volatility in commodity market pricing. Such interventions are extremely rare. The intervention adjustment was last used in 2008 in response to market volatility caused by Hurricane Ike and prior to that was used in 2005 in response to market volatility caused by Hurricane Katrina.
Question: 3 (REVISED 01-28-2010)
What is the relationship between crude oil prices and gasoline motor fuel prices?
In much the same way that steel is an input cost in manufacturing an automobile, crude oil is but one of the inputs necessary in manufacturing refined petroleum products. Market prices for regulated petroleum products are also affected by other factors such as supply and demand for refined products and refining capacity. There are also occasions, such as Hurricane Ike in September 2008, which may result in significant changes in refined petroleum product prices while at the same time having no impact on the price of crude oil.
Maximum fuel prices in this province are calculated based on the individual market-pricing data of each of the regulated petroleum products gasoline, furnace oil, ultra low sulphur diesel and propane. The Board does not use the price of crude oil in any of its pricing calculations.
While it is true that crude oil represents a significant component cost of the price of a litre of gasoline it is not the single determining factor for price. Information obtained from the Natural Resources Canada (NRC) website (http://nrcan.gc.ca/eneene/sources/pripri/whypou-eng.php) indicates that crude costs represent approximately 47% of the cost of a litre of gasoline while refining, transportation and margin costs accounts for 21%. Various provincial and federal taxes account for the remaining 32%.
Crude is the unrefined base product from which gasoline is derived and is traded on the commodities market as a stand alone commodity. Gasoline refined from crude also trades as a stand alone commodity on world markets and is priced independent of crude. Other commodities traded on world markets include precious metals such as gold, silver and platinum, as well as livestock, corn and soybeans to name a few. Commodity prices for crude and gasoline can and do vary significantly and at any point in time, crude prices may be increasing while gasoline prices fall or visa versa. However, generally over the long term, gasoline and crude prices tend to follow similar trends.
As can be seen in the attached graph (Click Here), the regulated maximum price of gasoline moves in the exact same manner as the NYMEX gasoline benchmark price upon which the regulated price is based as required by the Petroleum Products Act and Regulations. The graph also shows that the NYMEX gasoline benchmark price does follow closely the price swings of crude oil. As a result, the price of gasoline, while not based on the price of crude oil, does go up and down in a timely and very similar manner as crude oil prices rise and fall with some notable exceptions. During 2008 one notable exception was the influence exerted on the NYMEX gasoline benchmark price by the anticipated impacts on oil refining infrastructure expected from Hurricane Ike. This caused a significant and sudden upswing in the NYMEX gasoline benchmark price on September 15, 2008. By September 18, as the threat to refinery infrastructure and capacity passed without being realized, the NYMEX gasoline benchmark price returned to its pre-September 15, 2008 levels and continued to decline thereafter. Other significant world events may also impact the NYMEX gasoline benchmark price such as the loss of refining capacity occasioned by Hurricane Katrina on August 2005 or production cuts by oil exporting countries.
In addition to the price of crude, other factors influencing the price of gasoline as a traded commodity on world markets include refining costs, refining capacity, transportation and distribution costs, and most importantly supply and demand for the commodity. There may be a glut of crude available on world markets but if there is a capacity problem in refining (for example when refineries are shut down for repair or maintenance or in the case of damage to refining infrastructure) supply of the refined product will be reduced and prices will rise. According to the National Research Council, current production at most North American refineries is at or near maximum capacity thus if demand increases existing refineries have little room to expand to increase supply. In addition, environmental regulations and restrictions limit where refineries can be built. Since 1970, it is reported that 31 refineries have closed and six new ones opened in Canada. Presently only 16 major refineries operate in Canada producing 80% of the total refining capacity. The last new refinery capacity in Canada (Come by Chance) was brought on line in 1984. (http://www.cppi.ca/Refining_Marketing_Distribution.html) In the United States the last new refinery production was brought on line in 1976.
Another significant factor that is often overlooked when the price of crude and gasoline are compared is the timing of when the commodity is received. Generally gasoline and other refined commodities are usually traded for delivery and consumption within a relatively short period of time (anywhere from days to weeks). Crude, on the other hand, is mostly traded on a futures basis meaning that it is not delivered and consumed in the short term. Crude futures are bought and sold for later delivery (months and sometimes years in advance) and usually in marine tanker lots. This commodity must be loaded and shipped to a refining facility, refined and then distributed to market. As a result, the price of crude quoted in the media today does not reflect the cost of crude from which the gasoline currently in the distribution system network is refined. It does represent what the cost of the crude input will be for refined product entering the distribution system in months to come. This is what gives rise to the lag in pricing between gasoline and crude and why a direct comparison of the two may be misinterpreted.
Another factor influencing petroleum products pricing is fluctuations in the exchange rate for the Canadian dollar. The NYMEX benchmark price is reported in U.S. volumes and currency. In order to establish the price of regulated products in this province we convert the NYMEX price to Canadian dollars. As the Canadian dollar rises or falls in relation to its American counterpart, the price of regulated petroleum products in Newfoundland and Labrador is affected. As the value of the Canadian dollar increases relative to the American dollar, the cost of regulated products falls, and as the Canadian dollar falls in value the price of regulated petroleum products increases. Changes in the exchange rate are accounted for at each price adjustment.
Linking crude oil with gasoline prices and saying gas must rise and fall with crude oil prices is the same as saying the price of new cars should go up and down in the same manner that the price of steel as a commodity does. The problem is that the gasoline we purchase today is made from crude oil bought months previous, the same as cars being sold today are made from steel that was produced many months ago. The price of steel today has no current relationship to the cost of the materials that went into the car that is being sold on the lot today. In the same manner, the cost of oil today is not the same as the cost of the oil that has already been refined and turned into gas and sits in retailer's underground tanks.
Question: 4 (REVISED 01-28-2010)
From where does the Board receive its pricing information?
The Board uses the daily published data from Platts US Marketscan, an internationally recognized, used and accepted source for fuel-pricing information for motor fuel (gasoline and diesel), heating fuel (furnace oil, stove oil and propane), ultra low sulphur kerosene (ULS Kero) and jet fuel (for calculations in the winter blend products). Propane data are received weekly from the Bloomberg Oil Buyer's Guide, and are based on the Sarnia rack in Ontario. The Board is required to use these sources by law, as it is outlined in the Petroleum Products Regulations; therefore, any other source used to estimate or calculate prices is unrecognized and not official.
Question: 5 (REVISED 09-08-2011)
How does the Board determine maximum fuel prices in the province?
The Board receives pricing information daily from Platts MarketScan in U.S. volumes and currency. This information is then converted from U.S gallons to litres and, from U.S. currency to Canadian currency using the daily Bank of Canada exchange rate. The average of these figures for the period is then taken to arrive at what is known as the benchmark base for the pricing period. A representative example of this process for gasoline is shown below.
Once the pricing period benchmark has been determined the total allowable mark-up is added for each respective fuel to give the base prices for the base zones in the province. For motor fuel (gasoline and diesel), the base zone is Zone 1 (Avalon Peninsula); for heating fuel (furnace oil and stove oil), it is Zone 1ANE (Avalon Peninsula Northeast); and, for residential propane, it is Zone 2 (Burin Peninsula / Bonavista Peninsula / Bonavista Bay). Zone differentials are then added to these base prices to reflect the costs associated with the storage and distribution of fuel products to the different pricing zones in the province. Taxation, if applicable, is then added to arrive at the consumer price. In some cases taxation may be added at the retail level while in other cases, it may already be built into the price charged the consumer. As an example for gasoline, the Federal Excise Tax of 10.0 cents per litre (cpl) and Provincial Fuel Tax of 20.5 cpl along with the HST are included in the established maximum regulated price that can be charged for this product in each of the pricing zones in the province. The listed maximum regulated prices for heating fuels (furnace oil, stove oil and propane) exclude the HST.
What's the breakdown for the price of a litre of gasoline?
The Board sets the maximum price for numerous fuel products, but it's the price of gasoline that seems to garner the most public attention. A breakdown of the components for gasoline is as follows:
Differentials are added to the base zone (Zone 1 - Avalon Peninsula) price to allow for the increased costs of supplying product to all the various regions of the province. The amount of these differentials varies throughout the province mainly because the costs for getting product from one pricing zone to another differ. The boundary descriptions for all pricing zones can be found at this link.
Question: 7 (REVISED 01-28-2010)
Why doesn't NL see the same pricing movements as the other provinces in Atlantic Canada where fuels are regulated?
When discussing fuel-pricing regulation in Atlantic Canada, while each province may receive pricing data from the same sources, there are numerous differences, such as formulaic methodologies (i.e. number of applicable days, margins, taxation) or use of discretionary authority, which can create varied results. While this can lead to short-term differences in maximum pricing, over the longer term, these differences tend to average out. The following represents an overview between the regulatory systems in the Atlantic provinces:
What do I do if I think I've been overcharged for my fuel purchase?
Whenever a retailer or wholesaler sells above the allowable maximum, it is a violation of the Petroleum Products Act and is subject to penalty. The Board takes any violation of its legislation seriously, and because of the vastness of this province and the large number of retailers in the province, the Board appreciates any assistance from the public to effectively deal with any possible infractions.
If anyone believes they have been overcharged for their purchase, it should be reported immediately to the Board at firstname.lastname@example.org.
In order to pursue the complaint, staff will require a copy of the sales receipt that clearly displays the following information: the date of the sale; the type of fuel that was purchased; the price per litre of the fuel product; and, the name and location of the retailer/wholesaler. The complainant must also provide his/her name and address.
Please note: fuel-pricing regulation does not cover commercial transactions when it comes to fuel purchases.
Why do international events affect fuel prices in Newfoundland and Labrador?
Commodities, such as crude oil and gasoline, are traded on the global market and their prices are largely influenced by factors not solely related to the fundamentals of regional demand/supply, but also by the many geopolitical events, military activity, natural disasters or labour unrest that can occur internationally. Because we live in a more immediate communications-based society, news of anything that can affect output or refining capacity may also affect the fuel products' value and perceived supply availability globally, or conversely, any event that reduces apprehension on the marketplace may contribute to lowering prices.
For example, political unrest in major oil-producing nations, such as Nigeria, Venezuela or Iraq, can translate into threats on the oil infrastructure in either of these areas. Just the potential of something happening to production capabilities can increase traders' anxiety that there may be insufficient fuel supplies available to the global market when demand is at its highest. As well, the growing economies in China, second only to the U.S. in fuel consumption, and India can place added pressure on the fuel market.
Therefore, any combination of these and other factors, or the absence thereof, can impact the commodities market either positively or negatively, and since local prices are based on this market, its impact will quickly find its way into the local fuel distribution network.
Newfoundland and Labrador has its own source of offshore oil and a refinery, so why aren't fuel prices cheaper here?
The provincial government receives significant revenue from both of these entities, which are operated by private enterprise. These businesses seek to remain profitable because they are required, by law, to get the greatest return on their investments for their shareholders. As a result, their products are sold for what they are worth on the commodity markets.
Like the production of any good, from firewood to microchips, the object is to seek the best return possible based on current market values. The same can be said for fuel products. A company will sell fuel products at the greatest return that can be achieved. Therefore, even if all the offshore products were available to the local market, it doesn't necessarily mean that fuel prices would be cheaper.
Why can't there be just one price for the entire province?
It would be possible to have one price for the entire province, say for gasoline, but such a notion would in all probabilities not yield positive results for all consumers. NL has such a vast geography with many rural and remote areas. When fuel-price regulation was first established, the province had to be divided into several pricing zones to account for this variety of local factors and associated costs that can affect getting fuel products to a particular region (i.e. ferry delivery, marine tanker, drum delivery, whether or not an area had sufficient storage, tractor trailer/tank wagon costs, volume of sales/product turnover and so on).
Therefore, in order for there to be one price for the entire province that would still allow for all the other cost variables listed above, the maximum price would have to be on the higher end of the current scale. That way, smaller communities would still be able to access fuel products without disruption. However, this would result in most consumers paying prices higher than necessary since the costs associated with supplying them are lower than for other areas.
There is no requirement for fuel suppliers in the province to sell or deliver their product if it isn't economically feasible for them to do so. Setting artificially low prices without a reasonable rate of return would likely result in several areas of the province being cut off from fuel deliveries; therefore, establishing fuel prices that reflect the uniqueness of each zone is paramount in ensuring all areas of this large province has access to fuel.
Question: 12 (REVISED 01-28-2010)
Why do maximum prices for regulated petroleum products in some areas of Labrador not change during the winter season?
The policy of suspending maximum price adjustments in some areas of Labrador during the winter months was developed in consultation with stakeholders from these regions. It is largely based on historical practices in place prior to the introduction of regulation and having regard for difficulties encountered in supplying fuels to Labrador given the winter freeze-up which affects the shipping season, as well as problems of road access during the winter months. This process has become known as, and is often referred to as, the 'price freeze'. In reality there is no difference in the pricing process from other times of the year other than the Board suspends adjusting the maximum price of regulated petroleum products for the winter months.
The term 'price freeze' is somewhat misunderstood and has become interpreted to mean the price is 'frozen' and is the absolute or only price at which regulated petroleum products must be sold in an area. This is incorrect. The Board's mandate is to set only the maximum price at which regulated products may be sold. As a result, suppliers and retailers of regulated petroleum products may sell such products to consumers at any price at or below the maximum at any time, but at no time may they sell regulated products above the maximum.
The suspension of price adjustments normally coincided with the last shipments of the season in late fall; however, in 2006 the Board moved to a biweekly price adjustment process, and then effective January 28, 2010, the Board implemented weekly pricing adjustments. The timing for setting maximum prices for regulated petroleum products for the winter season in the affected areas of Labrador is the first scheduled price adjustment in November. The suspension of price adjustments continues throughout the winter until deliveries to the region resume in the spring of the year.
Why does the price of heating fuel sometimes increase during the summer months when the temperatures are warmer and one would expect that consumption has decreased?
The regulated maximum price of heating fuel, such as furnace oil, stove oil is directly tied to the NYMEX (New York Mercantile Exchange) pricing movements of these products. While it is true that as temperatures get warmer demand may decrease for heating fuel, there are many other factors that can influence market pricing outside of demand/supply issues during that time of year. For example, between the months of June and October of 2006, the maximum price of furnace oil increased twice (both during the month of August), but in 2005, the maximum price of furnace oil was higher during summer months than in January/February of that year. Therefore, the time of year doesn't automatically guarantee where fuel prices are headed.
Furnace oil is a member of the distillate family of fuels. Other products belonging to this group include diesel, kerosene, and jet fuel to name a few. While each product is an individual commodity with its own purpose, the products' physical similarities permit refiners to easily turn one product of this group into another. Also, in some cases, higher grade products can act as substitutes for lower grades with negligible differences in performance. Therefore, what affects the market price of one product also affects the prices of the others, though not necessarily to the same degree. This can happen at any time of year.
Question: 14 (REVISED 01-28-2010)
Why is a winter blend necessary for some products?
The Board currently implements a blend on two regulated fuel products: furnace oil and diesel motor fuel
Maximum prices for furnace oil (No. 2) see the seasonal incorporation of what is known as the jet blend usually around mid-November. This practice has been ongoing in NL for several heating seasons to accommodate the costs associated with mixing 75 per cent jet fuel with 25 per cent furnace oil to improve this fuel's performance in colder climates over winter.
Maximum diesel motor fuel prices are based on a 25%-75% blend of ultra low sulphur diesel (ULSD) and ultra low sulphur kerosene (ULS Kero). This blend reflects the specifications of the product which must meet the sulphur content requirements set out in federal regulations and must ensure pourability in cold temperatures.
Question: 15 (REVISED 11-19-2009)
Does the Board regulate the price of propane used in barbecues or other appliances?
Under the Petroleum Products Act the Board has the authority to establish a maximum price for propane when it is used as a heating fuel only. Under the existing legislation the Board does not have the mandate to establish a maximum price for propane when it is used in appliances for such things as refrigeration, cooking or barbecuing or when propane is used for other applications or activities.
Why does it seem like fuel prices are quick to increase, yet they don't seem to fall as quickly?
The Board has specific criteria when it comes to setting the maximum price of any of the refined fuel products under regulation. The same standards are applied no matter which direction fuel prices are headed.
The ongoing and heightened volatility of the commodities market over the past few years has been such that any negative news can quickly lead to market-pricing increases due to anxiety or fears that fuel supply availability has been somehow impacted; demand outpaces supply; natural disasters, infrastructure problems, or geopolitical events may disrupt or cut production; and so on. Like any reaction to a serious situation, the onset of fear can occur at a rapid rate, yet often when conditions improve, the easing of these fears may not occur at the same pace.
However, it should be noted that there have been occasions in the province when prices have also dropped rapidly following sharp increases. For example, maximum gasoline prices between Aug. 15 and Sept. 15 of 2006 decreased by nearly 20 cents per litre because of significant declines in the market. As well, in September 2005, gasoline prices fell more than 30 cents per litre in two weeks as the markets recovered from the impact of Hurricanes Katrina and Rita.