Oil price spikes will hit Canadians ‘throughout our economy,’ experts say – National
“The spike in energy costs won’t just be felt at the pump. It will be an added layer of costs and complexity throughout our economy, impacting everything from jet fuel to trucking and shipping costs,” Bryan Detchou, a senior director at the Canadian Chamber of Commerce, said in a statement.
“Rural communities, where diesel is at times essential, may feel this particularly hard. Rising transportation costs will drive up prices on groceries and everyday goods like plastics, food, fertilizer, clothing, electronics, furniture, and home building materials.”
Iran has effectively closed the Strait of Hormuz by threatening to attack virtually any vessel passing through the vital choke point in the Persian Gulf, which sees about 20 per cent of the world’s oil supply.
Oil tankers and cargo ships have been avoiding the narrow waterway for roughly a week, which means oil and other commodities are at risk of running low.
Plus, Iran has been attacking targets in the Gulf region and beyond, including oil and gas infrastructure in neighbouring countries like Qatar.
“Everything that we do relies on oil either as a byproduct or directly as an energy source for us, even to turn our computer on, for instance,” said Andre Cire, an associate professor of operations management and supply chain analytics at the University of Toronto’s Rotman School of Management.
“So, all of society is physically connected to oil, to energy — everything’s connected to oil.”
The price of oil hit nearly US$120 per barrel over the weekend before settling back below $100 late Monday. That’s up from about $64 in the days before the U.S. and Israel launched the first wave of strikes on Iran on Feb. 28.
When the price of oil goes up, typically gas and other fuel costs rise too.
Higher oil prices = higher fuel costs
When a business faces higher costs for its operations and supplies, including fuel, it will usually either charge its customers more or absorb those increases by taking less of a profit.
Gas prices have already skyrocketed since the war began, with the national gas price sitting at C$1.54 for regular grade as of early Monday — up more than 20 cents in the past week, according to CAA. Diesel fuel, which is used mostly for commercial vehicles and transportation, is usually even more expensive.
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“Any type of transportation system in Canada as well, because the oil price is going to go up. When you order your product on Amazon, your Prime delivery, one day, unfortunately, that’s probably going to go up in the long run because to ship it is going to be just more expensive,” Cire said.
Global News sent requests to both Canadian National Railway (CN Rail) and Canadian Pacific Kansas City Railway (CPKC, formerly Canadian Pacific Railway), as well as the Canadian Trucking Alliance, to see if they expect higher oil prices to translate into higher freight costs.
None responded by publication.
The cost of travelling and moving goods by air is also going to get more expensive for consumers and businesses as air carriers face with higher fuel costs.
“This is a no-brainer — there will be an immediate increase in the cost of jet fuel. That will either be eaten by the airlines or passed on to the consumer or a combination thereof,” said Martin Firestone, president at Travel Secure Inc.
“The next problem will be an actual fuel shortage, and cancellation of flights because we don’t have fuel. That will be a major, major issue if and when it gets to that point.”
Customers who have already booked their flights will have those ticket prices locked in, but new bookings could get more expensive. At the same time, there could be heightened volatility for air travellers because higher fuel costs and a potential shortage mean some carriers may need to adjust schedules.
WestJet tells Global News the Iran war is already making flights more expensive, but would not comment on potential fuel shortages impacting scheduling.
“Fuel is the largest input cost for an airline. The recent sharp increase due to the situation in Iran has already made operating flights more expensive, based on this, it’s likely further pricing adjustments may be needed,” said a spokesperson for WestJet in a statement.
“We will continue to monitor the situation and respond accordingly, while remaining committed to delivering affordable airfare for our guests.”
Air Canada also responded to Global News Monday.
“We cannot speculate (nor are we legally allowed to comment) about future prices, but our prices vary according to a number of factors, including of course the price of jet fuel,” said an Air Canada spokesperson in a statement, and that customers are presented with the full applicable price and its breakdown prior to purchasing a flight.
“The full applicable price and its breakdown are provided to customers prior to them purchasing their flights.”
Porter Airlines told Global News in a statement that “it’s too early to forecast how this may influence ticket prices, but we are monitoring the situation closely.”
A similar request sent to Air Transat has yet to receive a response.
Costly oil, costly plastic
Oil can also be refined into byproducts known as petrochemicals, and these are used to make various plastics, rubber, synthetic fibres and industrial solvents.
This is why plastic prices often rise with the price of oil.
“Oil is really a critical component in any type of plastic, but also in electronics and many other types of manufacturing goods. There is no other sustainable way, as far as I know, to produce plastic, and plastic is in everything, in our phones, everything,” Cire said.
“We [Canada] do have a lot refining capacity, we are very strong in that, but we don’t have the capability of producing all the plastic that we need. So packaging, everything that relies on oil indirectly, also is going to go up.”
How Canada’s economy could benefit
Canada stands to benefit from the Iran war’s risk to global oil markets because of the higher cost of oil and the expected rise in demand, experts say.
Since oil prices are set globally, higher prices translate to immediate increased revenues for Canadian oil companies like Suncor Energy, Canadian Natural Resources and Cenovus Energy, and for governments because of the taxes collected.
The Alberta government suggested higher oil prices from the Iran war could help put a dent in its deficit because of the higher revenues, and Saskatchewan said it also stands to see more money generated.
“Think about the West — Alberta, Saskatchewan — they are benefiting a lot from the increase in oil crude prices, in the contracts, in the revenue that you’re getting from taxes,” Cire said.
“Canada is a big contradiction, a lot of paradoxes happening here, because in a way, we get a lot of benefits from the increase in oil.”
Then there’s the demand side.
If the Strait of Hormuz being blocked cuts off 20 per cent of the global supply, then Canada could be seen as a source to help offset that drop.
Those benefits may only really be seen if the war stretches on for the long term.
“Canada is a net oil and gas surplus producer and exporter and it will be for the next year even more. So the longer this [the Iran war] goes on, the better we will be,” says John Kirton, professor emeritus of political science at the University of Toronto.
“I think the broader effect on the negative side is that every one of the products we buy that uses as an input petrochemicals, such as plastics. Many consumer goods, toys, they’ll fare the worst if this goes on. But there are, of course, many sectors that will benefit given the better position Canada is in.”
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