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Could soaring gas prices be costing you less than you think?

Even when adjusted for inflation, the cost of a litre of gas is higher than ever before, but today's drastically more fuel efficient vehicles may actually be getting you farther down the road
2022-05-10 gas algonquin MH
Timmins gas prices have spiked to 210.9 per litre.

Gas prices are reaching nominal record-highs, with prices averaging about $2.10 in Timmins and $1.99 a litre in Toronto earlier this week.

Industry analysts are also predicting further countrywide price surges this coming Victoria Day weekend, possibly by 10 to 15 cents per litre on average.

But some experts point out that even while Canadians are paying more dollars per litre than ever before, they might not actually be spending as much on gas as they used to in previous record-highs.

Moshe Lander, Concordia University senior lecturer and economist, said merely looking at the price per litre of gas can be misleading.

"Cars now are way more fuel-efficient than they were years ago," Lander said in a phone interview. "So what does it take to fill up a tank of gas? In dollar terms, it's probably more now and the tanks are probably bigger now, but that gas also lasts longer now."

According to data from the U.S. Environmental Protection Agency, the fuel efficiency of new cars has increased 32 per cent since 2004.

An automotive trends report published last year by the EPA shows a fuel economy increase of half a mile per gallon, bringing average fuel economy to a record high of 25.4 mpg in model year 2020. That's up a whopping 6.1 mpg from 2004, which means a litre (or gallon) can go much farther than it would have in 2005 or 2008 — the last time gas prices reached similar highs.

"Rather than talking about dollars per litre, talk about the number of dollars of gasoline per kilometre," said Lander.

How much more expensive is a litre of gasoline right now? About four cents, according to one expert.

Today's price increases may seem shocking after a decade of relative stability, but Canada's fuel costs have fluctuated wildly before, most notably around the time of Hurricane Katrina, in 2005, when prices jumped about 20 cents a litre in Ontario and Eastern Canada. 

Many in Canada will remember September of 2005, when gas prices soared as high as $1.39 a litre — the equivalent of $1.95 when you adjust for inflation. That same month, two stations in Stratford opened the day charging a shocking $2.24 a litre — the equivalent of $3.14 in today's dollars — although their prices dropped later that day to under $1 a litre, the Globe and Mail reported at the time.

Meanwhile, the average price across Canada in July 2008 was $1.37 a litre, according to Statistics Canada, reaching an average of $1.50 in Yellowknife, N.L. and $1.36 in Thunder Bay, Ont.

Carbon tax has driven Canadian prices above US prices

While both Canada and the US are seeing nominal record gas prices, only Canadian prices are at real record highs when adjusted for inflation.

The US is at a nominal record because prices have never been $4.37 per gallon before, but if inflation is taken into account, this is actually not the highest it's been, said Patrick De Haan, head petroleum analyst at Gas Buddy.

Prices were much higher in the US in 2008, with the real-term equivalent of $5.36 a gallon, De Haan added.

In Canada, however, prices are not only at their nominal highest level but also the inflation-adjusted high by four cents a litre, he said.

Despite similar wholesale prices for fuel in both countries, De Haan noted that Canada has seen an extra tax on gas that has increased over time, whereas much of the US has not.

"Much of the US has no carbon taxation. The difference here is that in Canada, over the last several years, the carbon tax has been a new factor that has actively pushed gas prices up," he said.

Lander said prices Canadians see at the pump include "a tremendous amount of taxes," adding that taxes have changed as the country's environmental priorities changed.

"If you take out the taxes and just look at the pure gasoline costs, this is not the most expensive, even after accounting for inflation," the economist pointed out.

Jean-Paul Lam, former assistant chief economist and principal researcher at the Bank of Canada, said numerous factors drive up gas prices but the war in Ukraine has been the most crucial factor behind the recent surge.

"It’s always good to look at inflation-adjusted prices as you want to know how prices are evolving after stripping away the effects of inflation," said Lam, who is now an economics professor at the University of Waterloo.

De Haan said the high gas prices are not having the same impact on consumers in the US as they are in Canada. "In Canada, it's much more miserable because prices are now at inflation-adjusted highs."