Falling oil prices notwithstanding, Canadians still taxed heavily at the pump

The Canadian dollar has now sunk to less than 70 cents U.S., after reaching parity as recently as 2012. Part of the reason for the decline in the dollar has been overproduction in the commodities sector, which has led to falling prices, hitting the resource-based Canadian economy particularly hard. Commodity production was likely spurred by artificially low interest rates and, when the anticipated in China, India, and elsewhere did not materialize, the bottom fell out of the market.

The eventual slowing of the Canadian economy, which fell briefly into recession last year, has caused capital to leave the country in pursuit of greater returns elsewhere.

One commodity of particular interest to Canadians is oil. Canada is one of the largest oil producers in the world but has faced intense global competition, especially south of the border, where hydraulic fracturing technologies have allowed entrepreneurs to tap into large sources of shale oil. All of this production has put downward pressure on prices, with the price of oil recently falling to US$30—its lowest level in 15 years, after adjusting for inflation. For producers from the Canadian oilsands, the price of heavy oil fell to less than US$10. Though these prices are more in line with historical averages, the speculation on the part of oil producers has produced mal-investment—a misallocation of resources, where there is a chronic disconnect between supply and demand—and returns have dried up.

But while the fall in oil prices may be bad for business, it’s good for consumers who will benefit from lower energy and gasoline prices. The price of gasoline in Canada is about 97 cents a litre, down from an average of $1.28 just two years ago. In British Columbia, the price is about $1.06 a litre, while in Vancouver it's $1.16 a litre. All told, these lower gasoline prices may mean annual consumer savings of up to $12 billion.

Due to the falling Canadian dollar, it’s expected that imports and goods traded on world markets, such as oil, will become relatively more expensive. Yet after adjusting for currency differences, the average price for gasoline in the U.S. is still a lot cheaper, about 75 cents a litre.

What might be a reason for this difference? Taxes.

Canadians pay about twice the amount of tax on gasoline compared to Americans. On average, Canadians pay about 39 cents a litre in taxes. In other words, 40 per cent of the price that consumers pay at the pump is simply taxes. The tax burden is even more acute in B.C. where consumers are hit with a "carbon tax" of 7 cents per litre of gasoline while consumers in Vancouver face another 17 cent per litre "transit tax" on top of that. By contrast, Americans pay on average just 18 cents a litre in taxes.

If Canadians were getting a lot for their tax dollar, then perhaps all of this wouldn't be so troublesome. But as the Fraser Institute has showed, fuel taxes can be an inefficient means of raising funds for road improvements, and cost overruns of government projects are common. Instead, a wiser approach would be to use public-private partnerships to build toll roads, which can better raise revenues according to intensity of use—all the while keeping government accountable to taxpayers.

Falling oil prices should give Canadians relief from a falling dollar. Yet the current tax regime in Canada means consumers will continue to face artificially high gas prices for the foreseeable future.