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Amidst news of plummeting crude oil prices throughout the summer, many drivers in Vancouver have been wondering why they aren’t seeing the same price drops at gas stations. Associate Professor Werner Antweiler of UBC’s Sauder School of Business says gas is more expensive than it should be, but probably not for long

Werner AntweilerAre drivers paying too much at the pump?

Right now, prices at gas stations aren’t quite reflecting the low prices of crude oil. Gas prices are generally correlated with crude oil prices, and currently they’re not far off, but the alignment fluctuates based on a host of factors. I’ve put together a model to assess whether current gas prices are overpriced or unexpectedly cheap, by predicting the retail gas prices in Vancouver based on its statistical relationship with the two-week average price of crude oil. In my daily updated chart, red means gas is overpriced, green means it’s priced about right and blue means it’s underpriced.  When the pointer is in the red, you should expect prices to come down eventually, so don’t rush to refuel.

Why don’t prices match up?

For one thing, refining capacity can become a bottleneck, as most refineries have little reserve capacity. Over the last few decades, there has been no significant expansion of refining capacity in North America. As a result, when a refinery goes “offline” for regular maintenance or unexpected other reasons, this reduces supply and puts upward pressure on retail prices. Refining capacity is often taken offline for maintenance at the end of the summer driving season, and this tends to keep prices up during September and October. BP lost significant refining capacity when it had to reduce operations at its Whiting, Indiana plant in August. Ten other companies are expected to take refining capacity offline in September.

People regularly raise concerns about gas vendors intentionally keeping prices high, but Canada’s Competition Bureau has found no systematic evidence for price manipulation. While insufficient competition can be a problem in terms of retail markups, evidence for collusion is very weak.

Why are gas prices so different elsewhere?

Even within British Columbia, taxes on gasoline vary, and more so once you cross provincial and national borders. Plus, some locations are closer to refineries than others. Inventory differences can also affect prices; refineries in Western Canada tend to have much lower levels of crude oil inventories (five to seven days’ worth) than refineries in Eastern Canada (about 15-20 days). That means that Vancouver drivers will actually see their prices change more quickly in response to a drop or rise in crude oil prices than drivers out East.

Will gas prices stay low?

I expect we will see a more significant drop in gasoline prices by October or November, as retail prices catch up to the drop in crude oil prices as well as full refining capacity. However, it’s very difficult to predict where crude oil prices are headed. We have seen oil prices drop from over $100 in 2014 to less than $40/barrel in mid-August. Slackening demand for energy in Asia combined with increased output in the United States, Saudi Arabia defending its market share and the possible end of the Iranian oil embargo will continue to keep prices low for some time. Eventually, supply will adjust and prices will climb again. Forward prices point to a slow rise towards the $60/barrel level during 2016. Unforeseen events can change market dynamics rapidly, however, and commodity prices such as oil often react more strongly to news than other prices in the economy. Expect the oil price roller coaster to continue.

Antweiler is part of Sauder's Strategy and Business Economics Division, and regularly writes about a wide range of economic issues on his blog, while also running the Sauder Prediction Markets.

Top image source: Flickr