Canadian consumers are set to pay higher prices for gasoline at pumps across the country because the Iran conflict sends global oil markets right into a frenzy.
The worth of crude oil is ready globally and based on a wide selection of things.
But three days into the war — with U.S. President Donald Trump saying the conflict could last for a month or longer — markets are already responding.
“Retail [gas] prices are starting to reply — exactly as expected once wholesale markets adjusted. Most drivers should prepare for gradual increases this week,” Patrick De Haan, a petroleum analyst at Gas Buddy, said on Monday in a written report.
Here’s how oil markets are reacting.
Why the worth of oil is spiking
Prices consumers pay at pumps are mostly determined based on oil prices and other aspects.
Rising tensions within the Middle East, and more specifically with the Iran conflict, could mean less oil might be available if the situation escalates and results in a chronic war.
A drop in global oil supplies normally results in higher oil prices, which could also result in dearer gasoline for consumers.
The Middle East region produces roughly a 3rd of the world’s oil supply, based on the U.S. Energy Information Administration.
The worth for a barrel of crude oil topped $73 within the early morning on Monday, up from lower than $64 on Feb. 26. As of publication, crude oil was hovering around $71 per barrel.
A “fear premium” is pushing up oil prices straight away, says Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank, suggesting oil markets are concerned concerning the near-term outlook.
“Heightened geopolitical risk within the Middle East has materially increased the probability of a broader regional conflict. Ongoing military operations in Iran have introduced significant uncertainty for global energy markets, elevating the danger of future supply disruptions,” Holt said in a written statement.
“While the initial market response reflects a ‘fear premium,’ the persistence and magnitude of the worth surge will ultimately rely upon whether physical supply is impaired.”
A couple of fifth of the world’s oil supply passes through the Strait of Hormuz, a significant shipping route only a number of kilometres wide that connects the Persian Gulf to the Arabian Sea and global shipping routes.
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However the Strait of Hormuz is effectively closed to shipping traffic as Iran threatens approaching vessels. On Monday, Reuters cited Iranian state media as reporting that a senior Iranian military commander was threatening to set on fire any ship attempting to go through the strait.
There are only a few alternative routes to get oil into and out of the region.
“With 20 per cent of the world’s oil moving through the Strait of Hormuz, Iran is unlikely to roll over and so it’s likely that ships won’t give you the chance to maneuver through there, whether or not they’re getting bombed or whether it’s simply because insurance costs have gone up a lot that they will’t afford to pay it,” says Richard Masson, former CEO of the Alberta Petroleum Marketing Commission.
“So I expect that oil prices are going to watch for a time frame here.”
Infographic with a map of refineries and the pipeline network in Iran as of June 2023, based on the US Department of Energy. (Graphic by Pauline PAILLASSA and Julie PEREIRA / AFP via Getty Images).
(Pauline PAILLASSA and Julie PEREIRA / AFP via Getty Images)
Iran has also been launching attacks on oil and natural gas facilities within the region in retaliation for attacks by the USA and Israel.
Qatar’s energy regulator said Monday it was suspending production of liquefied natural gas.
For now, oil and gas supplies have yet to see significant impacts, but that would change quickly because the conflict continues.
“Oil markets were over supplied going into the attacks on Iran. It’s not like a production disruption to an already tighter market as in past cases,” Holt said in a separate statement Monday.
Which means within the short term, there may be likely enough oil to go around — if a bit dearer.
But when the war persists, and the Strait of Hormuz continues to be dangerous for shipping corporations, then oil supplies could see a major drop.
“If it seems that the market is considering, ‘Well, it will just be a number of days,’ then not such an enormous deal because inventories were adequate,” Masson said.
“But when it seems that that is weeks, then we’re going to see people start to essentially scramble to search out supplies and costs will proceed to go up.”
De Haan added: “Oil hates turmoil. Oil prices don’t just like the unknown. Unfortunately, that’s where we’re, and that’s why there’s been an amazing amount of volatility.”
“The market is attempting to sort this out and attempting to provide you with probabilities, but it surely’s very difficult given how the situation is lively,” he said.
How high gas prices could go
This conflict happens to be around the identical time gasoline prices were already going to see an increase due to seasonal changes, which implies the Iran situation adds an additional layer to why prices are going up.
“The Iran situation is adding volatility and risk premium, but it surely’s landing on top of an already firming market,” De Haan said within the report.
“Those forces were already pushing wholesale gasoline higher. The geopolitical premium simply accelerates the move.”
De Haan says gasoline producers were already about to transition to dearer summer fuel blends and the upcoming refinery maintenance season can even limit output.
Warmer months also mean higher demand for gas as drivers take more road trips, he adds.
This implies even without the Iran conflict, gas prices for consumers would have began climbing, but now Canadians could wind up paying loads more to replenish.
As things currently stand, prices as gas pumps will start rising between seven and 13 cents per litre over the following week or so, while diesel prices will rise 12-18 cents per litre, De Haan says.
Canada’s national average gas price currently sits at about $1.32 per litre, based on CAA, which is up from about $1.25 a month ago.
“Expect to pay a little bit bit more within the weeks ahead. There could also be some volatility. There’s really nothing you may do aside from shopping around while you do must fill your tank,” De Haan said.
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