Where Does Your Gasoline Dollar Go?

There are three major components to gasoline pricing: crude costs, marketing and refining margins and taxes. And they vary according to world demand for, and supply, of oil; North American demand for, and supply of, gasoline; and where you live in Canada.

In 2009, when Canadian Par crude oil averaged $65.19 per barrel, crude costs accounted for 43.7 per cent of the cost of gasoline, taxes accounted for 33.2 per cent and refining and marketing accounted for 23 per cent. As oil prices rose in 2010, crude costs accounted for 47.3 per cent of the cost of gasoline, taxes for 33 per cent and refining and marketing 19.7 per cent. Thus far in 2011, Canadian Par prices have averaged $95.40 per barrel, and crude costs have risen to 49 per cent of the cost of gasoline, taxes for 30.8 per cent and marketing and refining 20.2 per cent.

The reason taxes have fallen as a percentage is that most of the tax is a fixed amount per litre. For example, the federal excise tax in gasoline is a flat 10 cents per litre, no matter the total pump price. The same is true for some provincial taxes.

Most of the regional differences in price are due to taxes varying from province to province and at time from city to city. In Edmonton, as in all of Alberta, there is no provincial sales tax. In cities such as Montreal, Vancouver and Victoria, there are municipal taxes and in Vancouver, there is a carbon tax.

More Speculation on Gasoline Prices

You know gasoline prices must be getting out of hand when the federal government promises to “look into it”. But don’t hold your breath. The government has investigated collusion in gasoline pricing six times since 1990 and has found no evidence to support it.

But it’s not only that gasoline prices are high, it’s that over the past week prices have fluctuated as much as 4.5 cents over night. And to many people, that just doesn’t make sense.

We all understand that gasoline prices are heavily influenced by crude oil prices, as shown in the graph below. And we’ve all been told that oil prices are at near record levels because of political instability in the Middle East and North Africa.

 

We’ve also been told that recent flooding on the Mississippi River in Tennessee has caused refineries in that area to shut down, causing gasoline shortages.

But a closer examination of the unrest in the Middle East and North Africa reveals that the countries where the protests are occurring export about 1.9 million barrels of oil per day, or about 11 per cent of the region’s total, an amount that Saudi Arabia can more than accommodate merely by opening the taps a quarter of a turn.

And according to Reuters, there are concerns that refineries may have to shut down, but as of Thursday, May 12, none have done so.

One has to wonder what is really behind the price increases. And one has to really wonder hard about paying $1.32 per litre Monday and $1.36 per litre Tuesday when Tuesday’s gas was in the service station’s storage tank on Monday with Monday’s gas.

The government’s investigation will probably take several months. Meanwhile, there’s plenty of time for speculation.

Natural Gas is More Energetic

Now and then we come across the term “barrel of oil equivalent” or BOE. It is a unit of energy equal to 5.8 million British thermal units, or the amount of energy released by burning a barrel of crude oil. It’s used to compare the relative values of different fuels, most often crude oil and natural gas. One BOE is roughly equal to 6,000 cubic feet of natural gas.

In other words, the energy content of a barrel of oil is 6,000 times greater than that of a cubic foot of natural gas. But it doesn’t really tell us which has the higher absolute energy content. We’re comparing apples and oranges on a couple of levels – liquid versus gas, barrels versus cubic feet, and while it’s easy to convert barrels to cubic feet (multiply by 5.615) it’s more difficult to work with the phase change.

Fortunately, we have a device known as the bomb calorimeter that measures the heat of combustion of a reaction, and thereby, the heat or energy content.

And rather than having 6,000 times less energy than crude oil, natural gas actually has about 1.15 times more energy than crude oil.

Natural gas has a heating value of 52.2 megajoules per kilogram, compared to 45.5 megajoules per kilogram for crude oil. And when we process the gas and refine the oil, the difference is even greater – 55.5 megajoules per kilogram for methane compared to 47.0 for gasoline and 44.8 for diesel.

So, kilogram for kilogram, natural gas packs more energy than crude oil.

Heating Values of Common Fuels

Fuel	Higher Heating Value (MJ/kg)	Lower Heating Value (MJ/kg)	HHV as a % of Methane HHV
Methane	55.5	50.0	100.0
Natural Gas	52.2	47.1	94.1
Motor Gasoline	46.5	43.4	83.8
Low-sulphur Diesel	45.6	42.6	82.2
Crude Oil	45.5	42.7	82.0
Bituminous Coal (wet)	27.3	26.1	49.2
Wood (dry)	20.6	19.6	37.1
Lignite	15.0		27.0
Peat (dry)	15.0		27.0

The Butterfly Effect and World Oil Prices

The butterfly effect is an aspect of Chaos Theory that suggests the flap of a butterfly’s wings in one part of the world could result in a tornado in another part of the world. This could explain why Canadian gasoline prices are rising in response to the unrest in North Africa and the Middles East when we’re a net exporter of oil.

Prices for benchmark crudes, West Texas Intermediate (WTI), North Sea Brent Blend (Brent) and the OPEC Basket (OPEC) generally act in concert, with WTI trading at a $1.50 to $2.50 premium to Brent. However, since late last year, it has been trading at a discount. And since the beginning of 2011, the differential between Brent and WTI has grown to more than $14.50 US.

This makes sense. In fact it’s a wonder the differential isn’t bigger.

The gap began to widen mid-January with the unrest in Tunisia. Tunisia isn’t a large exporter of oil, and most of its exports go to Europe. As that supply was threatened, European oil prices rose. Then, at the end of January, came the ouster of Hosni Mubarak in Egypt. Again not a big exporter, and most of its oil goes to Europe. But the big worry was that the turmoil would interrupt oil traffic through the Suez Canal. Again, this would affect Europe more than North America because most oil imported by the U.S. from the Middle East arrives via supertanker around the Cape of Good Hope.

To this point, Brent prices were rising. WTI prices were steady to slightly lower because of unusually large product inventories in North America. The gap continued to widen. And it makes sense. Europe was being impacted more than North America by the events in North Africa.

That began to change in mid-February with the political revolt in Libya. The Brent to WTI differential remained, but the difference was that WTI prices had begun to increase as well.

Libya produces about 1.6 million barrels of oil per day, and if that were interrupted, OPEC members could easily make up the short fall. So it’s not really a question of oil. The primary fear is that the turmoil in Tunisia, Egypt and Libya could easily spread to other major oil exporters, such as Bahrain, Algeria, Kuwait and the United Arab Emirates, causing much tighter supply in both Europe and North America.

Consequently, since February 15, WTI prices have risen $17.10 US to $101.91. Canadian oil prices have risen in tandem with WTI and Canadian gasoline prices have risen more than six cents per litre.

So, going back to Chaos Theory, the wing-beat of our butterfly is the worry that more unrest in the Middle East might occur and if it does, it might cause oil shortages in countries that import most of their oil. The tornado is gasoline prices in Canada, a net exporter of oil, rising.

Activate

Energy really does drive Canada, which is why, starting this week, we’re making a few friends who know energy better than anyone else: The Energy BOT Squad. With ten BOTs, each powered by one of the main energy sources in Canada — oil, natural gas, nuclear, coal, hydro, wind, biofuels, fuel cells, solar and geothermal — Energy Drives Canada 2011 will be our most energetic look across the country yet.

Every week a new Energy BOT will explain their energy source, from where it’s found and produced to where and how it’s used. They’ll even have something to say about how their source affects the environment, and quick references to help you learn more from resources across the country.

And these BOTs aren’t just concerned with Canadian energy either: they want to talk about how the country’s energy fits into a global mix of energy sources. After all, energy isn’t just essential to the lives of Canadians, Canadian energy is essential to lives around the world.

So join us on an energetic look across the country and see how energy really does drive Canada. The BOTs are activating… now.

Trying To See Through An Oil Spill

Image: New York Times

In the aftermath of the explosion that destroyed BP’s Deepwater Horizon rig on April 30, oil hasn’t been the only thing leaking out — the disaster continues to draw headlines every day in major newspapers around the world.

In Canada, feedback has ranged from calls to restrict further offshore drilling, which have so far been rebuffed, to attempts to capitalize on the environmental fallout by calling attention to Alberta’s oil sands and the relative benefits in light of open sea leaks. Any organization with a stake in petroleum can be expected to make their point on an issue as large as the spill literally is.

As the weeks go on — and, at present, all indications are that the leak will continue for weeks to come — Flow will be aggregating some of the most pressing questions on the disaster.

In the meantime, PBS has released a widget that calculates the total amount of crude oil based on a range that runs from the lowest published estimate (210,000 gallons a day) to the worst-case scenario. While it’s hard to contextualize the size of the spill — though the New York Times provides a time-lapsed map of the area — the widget provides a sense both of its possible scale, and of the differences that different estimates make when the scale of the disaster is already so huge.

For Monday, May 10, here is a quick rundown of some of the most interesting articles published on the BP Deepwater Horizon spill.

• The increasing dependence on deep-sea robots (Scientific American)
• A slideshow of the US Coast Guard’s response to the fire (Scientific American)
• Changing the design of the containment dome (The Globe and Mail)

Something old, something new and something green

What is the future going to look like?

It’s not a new question, but it’s one we’re still constantly trying to answer. And when it comes to energy, it’s a question that seems to have a few contradictory answers.

On one hand, we already know that Canada’s future is going to be different than its present: with the advent of alternative energy technologies and an increasing emphasis on energy efficiency, Canadians are demanding a bigger say in the energy they use. A national Canadian Centre for Energy Information survey conducted this year found that a full 59 per cent of respondents felt disconnected from decision-making on energy policies. But on the other hand, there are strong economic incentives to continue using the same profitable sources we’ve always used, especially when demand for those sources is growing globally. So, what’s a Canadian to do?

Flow doesn’t have a crystal ball (just a pic), but we’re always doing our best to keep an eye out to the future. So, here are a few thoughts on Canada’s energy future: the new, the old and the green.

Something Old

At the moment, Canada’s primary energy production is dominated by crude oil and natural gas. Together, these two sources make up almost 75 per cent of our total energy exports, exports that totalled $126 billion in 2008. Given the current patterns of global energy consumption, those exports isn’t likely to become any less important to the country.

Global demand for both oil and natural gas is continuing to rise, driven by demand in Asia and the Middle East, particularly China. According to the International Energy Agency (IEA), demand in the transportation sector alone is expected to climb 41 per cent by 2030. And with most of that demand occurring in the developing world, Canada’s strength as an exporter is likely to continue, especially with oil reserves actually continuing to grow.

In fact, despite the fact that oil is a non-renewable resource, developments in areas like Alberta’s oil sands — the second largest oil reserve in the world — have hiked the planet’s total proved reserves to 1,258 billion barrels. If demand continues to increase, there will continue to be reserves to meet this demand into the near future.

One of the places where industry will be discussing that near future will be the CERI 2010 Oil Conference, a three-day event running between April 18 and 20. With session titles like “Conventional Oil: Last Rights or New Breath?” it’s clear that the industry recognizes that changes are coming, but with demand continuing, there’s strong reason to believe that the future won’t necessarily be unrecognizable.

Still, while oil and natural gas have long been mainstays of the Canadian energy mix, an increasing emphasis on the environmental impact of their use has fuelled the development of alternative energy sources.  The field of alternative energy includes sources as varied as biomass and waste products, but two of the leading areas in the field of alternative energy continue to be solar and wind.

Something New

Solar and wind energy are two of the most common examples of energy technologies that are changing the Canadian energy mix, and are likely to continue to change it into our future. Solar power is already becoming increasingly common in Canadian homes and once-distant wind turbine might end up finding their way into our cities.

For now, solar energy is primarily used in two ways in Canadian homes, either passively and actively. Examples of active use include photovoltaic (PV) cells that generate electricity or through solar heating panels that transmit the sun’s heat through a heat-transfer liquid. Passive uses of solar energy include architectural changes that allow homes to absorb ambient heat and redirect it in much the same way that a heating duct redirects a furnace’s.

At a federal level, solar development is supported through Natural Resource Canada’s CanmetENERGY, whose solar projects include research into low energy solar homes and developing codes, certification, and installation standards for PV systems and components. The agency has even developed a useful map of PV potential across the country demonstrating Canada’s solar potential.

Given that potential, it’s not surprising that organizations like The Canadian Solar Industries Association (CanSIA) are trying to get professionals networking. In May, CanSIA will host its first-ever regional conference. Running for two days, May 25 and 26, the conference’s topics include “The economics of solar – can it make sense?”, “Sharing the Western Landscape…where do renewables and solar fit in?” and a “Solar Showcase” featuring private and public industry figures.

Wind, meanwhile, continues to be largely a commercial, rather than a residential sector. Though there are wind turbines small enough to be used residentially, they aren’t nearly as common as their larger, commercial brothers.

For now, wind represents only 0.3 per cent of the country’s total electricity mix, but given global trends it’s not difficult to imagine that number growing. In fact, in the last 10 years, wind power use globally has increased annually by 30 per cent. The applications for Canada, where rural communities sometimes require their own power, are considerable. Operations adding diesel or hydro to intermittent wind, for example, could provide the same amount of energy with fewer emissions and other negative environmental impacts. Expect issues like these to be discussed at The Canadian Wind Energy Association’s upcoming Wind Energy Forum, running from April 13 to 14 in Toronto.

Something Green

Whether they’re fossil fuels or renewable energy sources, one of our strongest motivations for changing the way we use energy continues to be our concern over greenhouse gas emissions. Even if our mix continues to include fuels that produce these emissions, the way we use our energy is becoming just as important as the types of energy sources we use. Canada’s energy future, then, is likely to include changes in that use, both by consumers and businesses.

For those industries already producing fossil fuels, the emphasis will now be on “cleaner” versions. From carbon capture and storage technology that will trap much of the carbon dioxide ultimately released into the atmosphere, to fundamental changes in the way that oil and natural gas are extracted. At least one of the many public acknowledgements of this move toward cleaner fossil fuels can be seen in the U.S.- Canada Clean Energy Dialogue, a resolution between the two countries aimed at reducing the intensity of the energy industry’s emissions.

Consumers, meanwhile, in addition to being able to purchase home-based energy systems that can sell power back to the grid, as Ontarians can do under the province’s Feed-In Tariff program, are using less energy. And provincial governments are doing what they can to ensure that this conservation becomes a large part of the country’s energy future.

Provincial governments have already nodded to the importance of reducing their citizens’ energy use, creating agencies like Quebec’s Agence de l’efficacité énergétique and Prince Edward Island’s Office of Energy Efficiency to centrally manage provincial energy efficiency initiatives. Together with more rigorous building codes and incentive programs that encourage everything from low flow toilets to more efficient appliances, the hope is that future energy use will not only be defined by resources like oil and natural gas, wind and solar, but by the consumers who ultimately use them.

The case for a world energy market

Canada’s federal government has stated clearly that developing a Canada/U.S. partnership on energy and the environment is a priority. This idea finds support across the spectrum of opinion in Canada, creating common ground between environmental and energy interests. But what’s in it for the new U.S. administration?

Assuring the U.S. of our reliability as a supplier of energy is good. But this isn’t new and could easily be construed as an attempt by Canada to lock in its market access for natural gas, oil, electricity, and uranium – commodities for which we are already the number one supplier to the U.S. Signalling our willingness to partner on environmental management is also positive, but from a U.S. perspective it adds complexity to an extremely difficult domestic challenge.

Rather than focussing on our bilateral relationship, Canada’s strongest leverage on U.S. policy may in fact come from contributing to a broader international agenda where Canada and U.S. interests converge. Prime Minister Mulroney succeeded well with Presidents Reagan and George H. W. Bush by following such a course. More recently, our military mission in Afghanistan has gained us far more credit in Washington than any other Canadian initiative in the past decade.

Energy creates such multilateral opportunities. Canada can partner with the U.S. in promoting a stable world energy trade, investment and carbon management system that builds on energy markets rather than getting in their way.

The mantra in the U.S. is energy independence. It is a powerful sound byte yet impossible to achieve. North America will be dependent on imported oil as far into the future as we can see. Although the continent is virtually self-sufficient in natural gas, we also have access to world gas markets through liquefied natural gas (LNG) re-gasification capacity equivalent to over 15% of our domestic use. Even ethanol might be better sourced in places like Brazil if the objective were to find the most economic and environmentally preferable supplies. With our effectively functioning markets and flexible pipeline and storage systems, Canada and the U.S. can fulfil their energy needs strategically from either domestic sources or world markets. And of course we will be increasingly tied into a world carbon management system.

Clearly, Canada and the U.S. have a substantial and growing interest in a well-functioning world energy market. There is potential for cooperation in several areas, including energy markets, the yet-to-be defined carbon market, investment rules, northern development and technology. Canada has a great deal to contribute to the conversation if we decide to step up.

Canada has earned its place at this table. We have learned the hard lessons of the National Energy Program – how bad policy can wreak havoc on energy markets and sow interregional discord. We went through the tough political fight over energy in the free trade agreement. Many voices claimed in 1988 that the FTA energy chapter was a sellout of our sovereignty and our energy security. Twenty years on we have enjoyed unprecedented wealth creation and energy stability for producers and customers based on open markets complemented by North American trade and investment rules. We are a free market champion with the scars to prove it.

Meanwhile much of the world has lost faith in markets. The reaction to the recent financial meltdown (markets don’t work, let’s regulate) is piled on top of a longer trend away from open energy markets in non-OECD countries. Price management, state control of investment and energy assets and geopolitical market manipulation have become prevalent. Soon we may add ill-conceived carbon management systems to this witch’s brew.

The recurring natural gas price dispute between Russia and Ukraine, and its impact on European energy security, is a window on a world without solid trade and investment agreements. At a time when we can least afford such instability, the threat of this contagion of national self-interest is clear.

The United States and Canada have a fundamental interest in building a stable world energy market, not Fortress North America. President Obama’s visit to Canada is an ideal opportunity to begin forging an integrated approach that shapes international energy trade and investment rules, and develops mechanisms for cooperation on energy and carbon management that are necessary for those markets to work.

Pierre Alvarez, Chair, Canadian Centre for Energy Information,
Michael Cleland, President & CEO, Canadian Gas Association
Roger Gibbins, President, Canada West Foundation.

This is the first commentary in a three part series on national energy security. The series is based on a paper prepared for the recent North Pacific Energy Security Conference.

 

Recently, the Globe and Mail published an article by Canadian Centre for Energy Information Chair, Pierre Alvarez. The piece is based on a White Paper Mr. Alvarez wrote with Michael Cleland, President of the Canadian Gas Association and Roger Gibbins, President of Canada West Foundation. Another article by the same authors was published in the Edmonton Journal on the day President Obama visited Canada.

Cross Border Relations: U.S. and Canada – Energy Siblings?

Did you hear?  There’s a new President of the United States.

Lost in the initial – and furious – cycle of analysis of Barack Obama’s election was his impact on Canada-U.S. relations.  Early indications are that Obama’s presidency may mark a fundamental shift in how the U.S. deals and, particularly, trades with their northern neighbour.  Nowhere is this relationship more crucial than energy.

It’s impossible to understate the importance of the relationship to both countries.  Few nations are as inextricably linked and interdependent as are the “brothers from a common mother.”  Canada is – by far – the largest supplier of oil, natural gas, uranium and electricity to the United States.

A full three-quarters of everything Canada exports goes to the U.S. Canada has always sold itself to the U.S. as a safe energy investment – no coups, no civil wars, no transoceanic shipping.  A “Made in the USA” green shift cannot help but mean less energy shipped south – and fewer dollars coming back.

Just how much energy does Canada send south?  A lot.  In 2007, $ 41.6 billion worth of crude oil was transported to the U.S., along with $ 31.4 billion worth of natural gas, and $ 3.1 billion worth of electricity.  In 2006, Canada exported more than $91 billion in energy to the world, mostly the U.S.  Energy exports aren’t just important, but a pillar of the Canadian economy.

Canada Energy Sources to U.S.: As energy system

In many respects, Canada and the U.S. form a single energy market.  What makes Canada and the U.S. so energy-interconnected?  In a word, geography.

The vast majority of Canada’s population, and thus its energy infrastructure, is spread out on a relatively thin line along the U.S. northern border.  In many respects, it makes much more sense to speak of a series of regional transnational energy grids than two countries.  With a few exceptions, notably Newfoundland, Canadian provinces export far more energy to nearby U.S. states than to other provinces.

Take electricity.  Canada and the U.S. share an integrated electricity grid and supply almost all of each other’s electricity imports. Canada is a major supplier of electricity to New England, New York, the Upper Midwest, the Pacific Northwest and California, the majority of it clean hydroelectricity.

The two countries are becoming more interconnected, not less.  The aptly-named Montana Alberta Tie Ltd. is planning to construct transmission lines that will connect the electricity markets of Alberta and Montana.  This is notable as the first-ever merchant power transmission line between the two jurisdictions.

The $3.1 billion in electricity Canada exports to south is increasingly clean. Canada’s federal government is committed to deriving 90 per cent of Canada’s electricity from non-emitting sources by 2020.  Thus, the shared North American electricity grid will trend greenwards, to coin a phrase, regardless of U.S. policy.

Both countries are investing time and resources into wind power – already the  fastest-growing renewable energy source in the world.

Recently, Canada exceeded 2,000 megawatts of installed wind energy capacity.  Partially in response, the U.S. Department of Energy reported that wind could provide 20 per cent of the U.S.’s electricity by 2030.

Equally significant is hydropower. Using 90 per cent of hydropower, British Columbia provided $7.7 million worth of electricity to Idaho in 2007. New England, New York, the Upper Midwest, the Pacific Northwest and California, are also continuing to proactively manage their air emissions by receiving a large portion of electricity, specifically hydropower, from Canada.

Natural gas is no different.  The two countries rank first and second in worldwide natural gas production, and Canada supplies the U.S. with 82 per cent of its natural gas imports. The American appetite for natural gas, which burns much cleaner than conventional oil, is on the rise.  The only thing holding back increased trade is infrastructure, especially in the east.  Canada is developing Arctic pipelines and LNG terminals to provide more, as most Canadian natural gas exports enter the U.S. through pipelines in Idaho, Montana, North Dakota, and Minnesota.

Perhaps most encouragingly, the two countries also cooperate extensively in research and development.  Canadian companies and researchers work closely with American counterparts to develop the next generation of energy sources, such as hydrogen, solar and bioenergy, and on large-scale projects such as CO2 storage.

Two countries so inextricably linked in energy policy, production, trade, and use, are mutually dependent, for better or worse.  While presidential policies – or prime ministerial policies, for that matter – can have a significant economic impact, in the long run, the North American energy market isn’t going anywhere.

Just like the old saying goes, you can’t choose your family.  Both Canada and the U.S. are lucky to have each other as siblings.