Why Canada Doesn't Regulate Crude Oil and Fuel Prices

Summary

After a brief period of regulation, Canada today is committed to a market-based approach to determine prices for crude oil and fuels such as gasoline. While some provinces have opted to regulate gasoline and other fuel prices, this approach has not resulted in lowered prices for consumers in these jurisdictions. Provincial price regulations are generally introduced to provide more stable prices.

While today Canada relies upon competitive markets to determine the price you pay for fuels such as gasoline, it wasn’t always that way. From the 1970s to the early 80s, Canadian consumer prices for gasoline and other fuels were subject to government price controls. A significant agreement reached in 1985 removed those controls to ensure that sufficient supplies of petroleum products were available at the most competitive price.

1974-1985: Canada does regulate crude oil

During this period, federal legislation and agreements with the oil-producing provinces placed crude oil prices under government regulation. The regulation required a complex system of oil export controls, export taxes and oil import subsidies for Canadian refineries. As a result, there was less incentive for business investment in new crude oil supplies and for consumers and businesses to consume fuels more efficiently.

1985: The Western Accord removes crude price controls

Under the terms of the Western Accord of 1985, the governments of Canada, Alberta, Saskatchewan and British Columbia agreed to remove crude oil price controls. Deregulation has increased the flow of investment in Canada’s petroleum industry, aiding its development.

Canada is now committed to a market-based approach to oil and fuel prices. This means that the government relies upon competitive markets to determine prices. Prices set in free and competitive markets:

• Give more accurate information to producers regarding their investment decisions
• Inform consumers about the value of the fuels they use and whether they need to adjust fuel consumption

Overall, the market-based approach helps ensure that the amount of fuel available and the amount needed by consumers and business are balanced at a competitive price.

International agreements such as the North American Free Trade Agreement (NAFTA) require that Canadian producers offer their crude oil to our trading partners on the same terms they are offered to Canadian refiners. Canadian producers are free to sell their oil on the world market and are not required to accept a lower price from Canadian or NAFTA refiners.

Federal versus provincial regulation

With the exception of a national emergency, the Government of Canada has no jurisdiction over the direct regulation of retail fuel prices. Under the Canadian Constitution, the provinces have that authority. Some provinces choose not to exercise their regulatory authority, relying instead on market forces. Others, including Prince Edward Island, Newfoundland and Labrador, Nova Scotia, New Brunswick and Quebec, regulate prices in some way.

Most evidence suggests that eliminating competition through regulation, while making prices more stable, does not lead to lower fuel prices for consumers.

Provinces that regulate fuel prices

Prince Edward Island

The Island Regulatory and Appeals Commission supervises wholesalers and retailers regarding pricing of automotive fuels and home heating oil and propane. The Commission decides when and how often prices may change. It also determines the minimum and maximum difference between the wholesale and retail price. Retailers applying for price increases must show that the proposed price is fair and reasonable.

Newfoundland and Labrador

The Petroleum Pricing Office regulates fuel prices, under the Petroleum Products Act. The Office sets the maximum retail prices to be charged for gasoline, diesel and furnace oil, including all applicable taxes. Retailers may price at or below the listed prices, but may not exceed them. Prices are set every two weeks or as required to adjust for market developments.

Québec

Every three years the Régie de l’énergie determines the minimum retail margin for gasoline and diesel that is required to cover a retailer’s operating costs. They decide if this margin should be included in the total cost used to determine the minimum retail price. The minimum price is calculated based on the wholesale price, plus the transportation costs, applicable taxes and the retail margin. Retail prices must be maintained above this minimum level.

Nova Scotia

Gasoline and diesel prices in this province have been regulated since July 1, 2006. Service Nova Scotia and Municipal Relations, under the Petroleum Product Pricing Act, sets the minimum and maximum prices for various zones in the province. Prices are based on a benchmark price to which are added wholesale and retail margins, as well as transportation allowances and applicable taxes. Prices change every two weeks or as required to adjust for market developments.

New Brunswick

Price regulation of automotive fuels and heating fuels (furnace oil and propane) was introduced on July 1, 2006 under the Petroleum Products Pricing Act. Under the Regulation, the Public Utilities Board sets a maximum price based on a benchmark price to which are added wholesaler and retailer margins as well as all applicable taxes and distribution costs. The Board sets a maximum price for the whole province allowing for additional distribution or delivery charges to various parts of the province. There are no minimum prices set for retailers. Prices are adjusted every two weeks or as required in the event of dramatic changes to the benchmark prices.