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Russia’s invasion of Ukraine and the virtual halt in tanker traffic through the Strait of Hormuz to keep crude prices elevated
Canadians hoping for relief at the gas pumps likely will not get it soon, as global supply shortages continue to drive up prices and counteract Ottawa’s fuel-tax breaks.
Damage to worldwide refining capacity has caused gains in fuel prices, said Bank of Canada Governor Tiff Macklem at a Halifax Partnership event on Sept. 21. Current gas prices reflect a crude-oil price that’s “almost US$40 higher than where it has been,” Mr. Macklem said, referring to the cost per barrel.
Russia’s invasion of Ukraine and the virtual halt in tanker traffic through the Strait of Hormuz due to the war in Iran have kept crude prices elevated, and a threat from U.S. President Donald Trump’s to ban on U.S. diesel exports only added to concerns that fuel prices could remain inflated for an extended period. Brent has gone up about 39 per cent since late February, when the U.S. and Israel launched their attacks on Iran, which responded by choking off oil and gas shipments from Persian Gulf states through the Strait of Hormuz.
On Friday, G7 countries announced plans to immediately release 100 million barrels of oil, beginning with diesel, in an effort to ease fuel costs. Upon the announcement, the price of global benchmark Brent crude fell slightly but had recovered to about US$102 a barrel Friday afternoon. Mr. Trump also appeared to back away from his threat to ban diesel exports.
At the pumps on Friday, the average price of unleaded gas across Canada was $1.81 per litre, according to Kalibrate Technologies, Ltd., with prices ranging from $1.557 a litre in Alberta to $2.156 a litre in Newfoundland, on average according to GasBuddy. Canada has more than enough crude oil supply and refining capacity to meet its own needs, but Rory Johnston, founder of Toronto-based research firm Commodity Context, said the country is still subject to the global market.
In September, Prime Minister Mark Carney announced an extension to the removal of the federal fuel excise tax on gas through Jan. 31, with 50 per cent off the tax through March 31. The removal cuts 10 cents per litre off the retail price. Alberta, meanwhile, has paused a 13-cents-per-litre gas tax until the end of the year.
These moves ease some of the pain, but they do not have any impact on the global wholesale market that is driving prices higher. Jim Mitchell, director of oil trading analytics at research house Wood Mackenzie, said the price of crude oil, which makes up 50 to 60 per cent of the retail gas price, is only half the problem and that a shortage of global refinery capacity is also an issue.
Some of this is related to Ukraine’s frequent drone strikes on Russia’s oil refineries, which are causing disruptions to European oil markets. As a result, Russian refinery output in June reached its lowest level in more than 20 years, according to the International Energy Agency.
“This country that was exporting somewhere in the neighborhood of two million barrels a day of refined product, in late August and early September they were actually importing about 100,000 a day,” Mr. Mitchell said. “That’s a 900,000 barrel a day change for diesel … that’s going to impact Europe.
” Meanwhile, Persian Gulf refineries are producing about a million barrels less of diesel a day than before the war in Iran erupted, and the only gains in supply have come from the U.S., Mr. Johnston said. He warned that if Mr. Trump proceeds with a ban on exports of fuel to drive domestic prices down, it could cause global prices to surge by as much as 100 per cent.
Despite other markets, such as China and Japan, having the refining capacity to help level out the markets, both are struggling to acquire enough crude oil and deal with a jump in shipping costs.
“Japan was getting 80 per cent of its crude oil from the Middle East, and specifically Saudi Arabia and Kuwait. So if those two countries can’t get oil out, that’s a problem,” Mr. Mitchell said. Even if the conflicts in Europe and the Middle East ended immediately, it would still take at least a year for global refining capacity to return to normal levels, Mr. Mitchell said.
“It’s going to be a while before Russia can repair all of their refinery units. There’s a lot of them have been bombed and damaged, and they’re repairing as fast as they can,” he said. Mr. Mitchell also said refineries that continue to operate are doing so at such high rates that maintenance and breakdowns are having a bigger impact on prices than usual.
According to Mr. Johnston, there’s nothing more the Prime Minister can do to drive down gas prices “unless we want to follow Trump’s pattern and restrict our own trade, which would have a lot of bad consequences. ”
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