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Why gas prices are falling across Canada

Gas prices
A look at what's behind the decrease in gas prices and whether they'll continue to fall. AP Photo/Steven Senne, File

TORONTO – Though far more dramatic, the eight Shell gas stations across Alberta that lowered costs to 1984 gas prices Wednesday aren’t the only ones charging less.

There was a two-cent per litre decrease in Toronto Thursday, and Dan McTeague of Tomorrowsgaspricetoday.com predicts another two-cent decrease Friday, followed by another penny lower on Saturday.

Why the decline, and will gas prices continue to fall?

McTeague says we’ve seen a “fundamental correction in the price of fuel mostly because of pent up inventories.”

“Several refineries in the United States and most importantly three or four eastern Canadian refineries – that is refineries that sell into the Toronto market all the way out to the Canadian Atlantic coast—were down for maintenance or for unscheduled or unplanned repairs,” he said. “In the case of Irving, half of its output was affected.”

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Another factor is the weakening of the Canadian dollar.

“Even though crude had gone down, the value of the Canadian dollar had weakened so much so that the initial drops in crude were not reflected at the pumps,” he said.

We’re also moving into “winter gas” versus “summer gas” which is easier to produce, he says. During the summer, more expensive additives are used in gasoline to prevent volatility in the warm weather; but those aren’t needed as autumn gets colder.

Gas prices
Analysts are divided on whether gas prices will continue to fall in Canada. AP Photo/Rogelio V. Solis

Ethanol prices also play a part: McTeague says they have dropped about 20 to 30 per cent in the past six months. He notes refiners use ethanol to meet mandates for “cleaner, greener gas” and also because it can be used as a cheap filler to substitute octane.

“So you have really what ought to have been drops in prices a lot earlier now all coalescing because all those elements seem to be coming together: Canadian dollar’s strengthened by about two cents; winter gas is now coming back online…the maintenance issues are being resolved,” he said. “As a result of that, the prices are now plummeting—or going back to where they ought to have been some time ago.”

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Roger McKnight, chief petroleum analyst at En-Pro International, suggests prices have gone down because the cost of crude is “dropping like a stone,” but doesn’t believe it can last much longer.

“The public may see crude prices dropping, but when the Canadian dollar drops as well—because we’re a petro dollar—you don’t see as much decrease as you think you should,” said McKnight.

“It’s really lack of demand basically in the U.S. because of a better fuel economy, a lack of demand in Asia and China because of a slowing down in their situation; so we have basically an oversupply situation that can be corrected overnight.”

But McTeague argues when it comes to crude oil, the world is moving from scarcity to abundance.

“The changes we are now witnessing at the pumps is a sure sign of things to come,” he said, pointing out weak demand as well as new technology for extracting crude aren’t short-term fads. “The financial speculators who drove these prices up in 2007 and 2008 are having to throw in the towel. Last week they cut in half their net long positions.

“Lower prices, short of a geopolitical event, are going to be the norm for the balance of the year and well into the next.”