A user of our website asked us a very interesting question. Does the CAD/USD exchange rate affect fuel prices in Canada given that Canada is a net oil exporter. Here is our answer.

In theory, even though Canada is a net exporter of oil, its refineries and refined product importers still pay in USD as oil is traded in USD everywhere, irrespective of where it comes from. From that perspective, when the CAD depreciates, we should observe an increase in fuel prices.

However, as a net oil exporter, an increase in the price of oil leads to appreciation of the CAD. Then, the more expensive oil (traded in USD) pushes prices up, while the more expensive CAD pushes them down. The net effect may be small or nil. In other words, if the CAD/USD fluctuations are primarily driven by oil price fluctuations, then the exchange rate would not have an impact on fuel prices. But it is unlikely that oil prices are the main factor driving the CAD/USD exchange rate.

What does the data tell us? Looking at the data, the CAD/USD exchange rate does impact fuel prices in Canada but more consistently for diesel prices and not so much for gasoline prices. Basically, when the Canadian dollar depreciates, the diesel price in Canada increases - moderately, not as much as in, say, Europe but the effect is there. This impact is evident when one looks at the recent history or at longer series. For gasoline, the effect is kind of there but not consistently.

So, being a net oil exporter does seem to dampen the overall exchange rate impact to some extent. The stronger effect on diesel fuel compared to gasoline is consistent with our overall finding that gasoline prices in Canada are less sensitive to oil price and exchange rate changes. That is probably due to a slightly stricter price regulation for gasoline compared to diesel fuel in some provinces.

Check out the latest energy prices for Canada.