Why is gas so much more expensive on P.E.I. than in Nova Scotia?

Prince Edward Islanders driving to Nova Scotia last weekend may have been surprised to see that gas was about 18 cents a litre cheaper in Halifax than it was on the Island.

The difference narrowed earlier this week, when the Island Regulatory and Appeals Commission (IRAC) dropped the P.E.I. price in an unscheduled change, making the difference about 13 cents.

The price of gas was back up again in both provinces Friday morning, but the price at the pump on P.E.I. was still about eight cents per litre more expensive than in Halifax.

It wasn't too long ago that prices in Halifax and P.E.I. tended to be similar — and even occasionally lower on the Island — but those days are over under current conditions, said IRAC director Allison MacEwen.

"It would be naive to think we could ever have as good a pricing as Nova Scotia," said MacEwen.

"The volumes are larger, so the cost per unit is lower."

Fixed and variable price components

That's the general explanation. Getting into the specifics of the differences, and how they've changed in recent years, is a bit more complicated.

In both provinces the price is broken into components. Some remain unchanged over long periods of time while others are variable in the weekly price reviews — and in the unscheduled changes by IRAC on P.E.I. and Nova Scotia Utility and Review Board.

Let's look at the variable price components first.

Easiest to understand is HST. It is 15 per cent, and goes up or down as other price components change.

Both regulators list a base price that is the largest component, but they are significantly different in their source. In Nova Scotia it is called benchmark, and on P.E.I. it is called rack.

The benchmark price is an international standard, based on the price of gasoline as it is shipped out of the harbour in New York City. This is a relevant price for Nova Scotia, which receives its gas from large refineries in the Gulf of Mexico.

P.E.I., however, receives its gas from the Irving refinery in Saint John. The rack price is what mid-level wholesalers pay for the product as they pump the gas into their trucks out of the large tanks on the Charlottetown waterfront.

IRAC used the benchmark price for determining the cost of gasoline until about 20 years ago, but market supplies changed in the last decades of the 20th century. Two refineries in Halifax closed, and Nova Scotia moved to Gulf for its supply while P.E.I. stuck with Irving.

"The rack became much more relevant to those mid-level wholesalers," said MacEwen.

"It's seen to be more relevant than New York harbour."

At the time, New York harbour prices were typically three to five cents lower than rack prices. Over the years, economies of scale have increased that gap. In the last year the difference has averaged around eight to nine cents.

"We monitor New York harbour to make sure it doesn't go too far off from rack," said MacEwen.

In the last week, that difference has been larger. On Friday morning, for instance, it was a little more than 10 cents.

A change in fixed prices

Fixed costs for gasoline include provincial and federal taxes, and profit margins for wholesalers and retailers.

Outside of the federal excise tax these are set differently, but the overall effect of the fixed prices is remarkably similar. The total for P.E.I. is 42.75 cents per litre, and for Nova Scotia it is 40.52 cents — a difference of just a little more than two cents.

For P.E.I., however, there was a change recently in one of these fixed prices: the carbon levy. In May, the carbon levy rose 5.1 cents to 11.05 cents.

Because Nova Scotia is using a cap-and-trade system to reduce greenhouse gas emissions (essentially setting the quantity of emissions reductions and letting the market determine the price), its carbon levy is much lower at just two cents.

This recent increase in fixed prices on P.E.I. has contributed to price differentials in the last few months.

There has been talk of Nova Scotia increasing its carbon levies on fossil fuels. If this happens, it could lead to prices in the two provinces moving closer together again.