CALGARY - Motorists expecting the pump price of gasoline to drop as suddenly as the headline cost of crude oil are likely riding for a disappointment, according to one industry expert.
Many consumers misunderstand the relationship between the price of crude and the retail level of gasoline, says Calgary energy industry consultant Michael Ervin.
Crude oil, the main ingredient in gasoline, continued its slide Thursday, dipping below US$108 per barrel. That is a steep drop from its all-time high of US$147.27 per barrel on July 11.
However, the oil price quoted in daily media reports does not refer to its value at that particular moment, but rather a contract for crude that will be delivered the following month.
"Right off the bat it would be pretty misleading to expect today's pump price to be responding to an October crude oil price," Ervin said in an interview Thursday.
"It is linking two events that should not be linked."
One of the biggest myths is that gasoline prices move up or down by at least as much as crude does, Ervin said.
For instance, a year ago crude oil was quoted at the US$75 a barrel level, and the national average gasoline price compiled by MJ Ervin and Associates was C$1.034 per litre.
When oil hit US$147, up 96 per cent from early September 2007, gasoline was at C$1.40, an increase of 35 per cent. This week's average pump price is C$1.32, slightly higher than a month ago despite crude's pullback.
"It illustrates that there is a very indistinct relationship on the way up," Ervin said, "and it's a very indistinct relationship on the way down."
Peter Tertzakian, chief energy economist for ARC Financial, said gas prices will come down over the next few months, but how long they stay down depends on the health of the economy.
An economic downturn has caused consumers to trim their consumption for now, but that change in behaviour will likely not be enough to suppress prices for long, he said following a panel discussion on oil prices hosted by the University of Calgary.
"With the price of oil coming down and the price of gasoline coming down, we'll see if people get back into their bad habits. I would argue they will," he said.
"Some people may have made permanent changes, but from a broad societal perspective, not enough to make a difference . . . I think you're going to need to see oil and gasoline and energy prices higher for longer."
Ervin also suggested gasoline prices would abate this fall, but largely for reasons other than moves in crude oil.
"In the fall, demand for gasoline starts to diminish and as a result we usually see an easing of the gasoline price even if the crude price doesn't go down," he said.
"That's been characteristic of the gasoline market for about as many years as we've tracked the price."
Eventually, refiners which have bought crude at lower prices will see their costs go down, which will take some more of the edge off gasoline prices, Ervin said.
Oil economist Philip Verleger of the University of Calgary said gas prices will drop tremendously this fall - to as low as 80 cents per litre - because the U.S. government will have reversed some of the policy mistakes that had led to this year's runup in crude oil.
One mistake was filling up the country's emergency fuel reserves with high-quality light sweet crude from Nigeria, instead of with heavy crude from Canada and elsewhere.
That meant less of the light sweet oil was available on the market, where it is in very high demand.
The U.S. and European governments have been pushing stricter sulphur limits on diesel, another fuel derived from crude oil. Not only does a barrel of Nigerian crude have a fraction of the sulphur contained in heavy oil, but it can produce a greater amount of the fuel.
"At a time when demand is building, when you really need the sweet crude, they took sweet crude off the market," Verleger told the panel.
Now that the U.S. has halted topping up its petroleum reserve, the price of oil will soon fall and gasoline will eventually follow suit, he said.
"We had no business going to $150 and I think we've come back down," Verleger said.
"Fundamentally we have just gone through a needless cycle which has led to a lot of destruction of capital... All of this really occurred because we really weren't minding the store and thinking about how petroleum markets worked for the last six months."
