The surge in oil prices Iran war will hit Canadians “across our economy,” experts say.
“Rising energy costs won't just be felt at the pump. They will bring an additional layer of costs and complexity across our economy, impacting everything from jet fuel to trucking and shipping costs,” Bryan Detchou, senior director at the Canadian Chamber of Commerce, said in a statement.
“Rural communities, where diesel is sometimes essential, may feel this situation particularly difficult. Rising transportation costs will drive up prices for groceries and everyday goods like plastics, food, fertilizer, clothing, electronics, furniture and building materials.”
Iran effectively closed the Strait of Hormuz by threatening to attack virtually any ship passing through the vital chokepoint of the Persian Gulf, home to about 20 percent of the world's oil supply.
Oil tankers and cargo ships have been avoiding the narrow waterway for about a week, meaning oil and other raw materials are at risk of shortages.
Additionally, Iran attacks targets in the Gulf region and beyond, including the oil and gas infrastructure of neighboring countries like Qatar.
“Everything we do relies on oil, either as a byproduct or directly as a source of energy, even to power our computer, for example,” said Andre Cire, 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 is connected to oil. »
The price of oil has reached almost $120 per barrel over the weekend before dropping back below $100 Monday evening. That's up from about $64 paid days before the United States and Israel launched the first wave of strikes against Iran on February 28.
When the price of oil rises, so do the costs of gas and other fuels.
Higher oil prices = higher fuel costs
When a business faces higher costs for its operations and supplies, including fuel, it will typically charge its customers more or absorb these increases with less profit.
Gas prices have already skyrocketed since the start of the war, with the national price of natural gas sitting at C$1.54 for regular gas early Monday, an increase of more than 20 cents over the past week, according to the CAA. Diesel fuel, primarily used for commercial vehicles and transportation, is typically even more expensive.
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“Any kind of transportation system in Canada as well, because the price of oil 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 it's just going to cost more to ship it,” Cire said.
Global News sent inquiries to Canadian National Railway (CN Rail) and Canadian Pacific Railway Kansas City (CPKC, formerly Canadian Pacific Railway), as well as the Canadian Trucking Alliance, to see if they expect rising oil prices to translate into higher transportation costs.
None responded by post.
The cost of air travel and freight transportation will also become higher for consumers and businesses as air carriers face higher fuel costs.
“It's a no-brainer: There will be an immediate increase in the cost of jet fuel. That will either be absorbed by the airlines, passed on to the consumer, or a combination of both,” said Martin Firestone, president of Travel Secure Inc.
“The next problem will be a real fuel shortage and the cancellation of flights because we don't have fuel. That will be a very significant problem if and when we get to that point.”
Customers who have already booked their flights will see the price of their tickets frozen, but new bookings could become more expensive. At the same time, volatility could increase for air travelers as higher fuel costs and a potential shortage force some carriers to adjust their schedules.
WestJet told Global News the war in Iran is already making flights more expensive, but would not comment on possible fuel shortages impacting schedules.
“Fuel is the single largest production cost for an airline. The recent sharp increase due to the situation in Iran has already made operational flights more expensive, on this basis it is likely that further price adjustments may be necessary,” a WestJet spokesperson said in a statement.
“We will continue to monitor the situation and respond accordingly, while remaining committed to providing affordable airfare to our customers.”
Air Canada also responded to Global News on Monday.
“We cannot speculate (and are not legally permitted to comment) on future prices, but our prices vary based on a number of factors, including of course the price of jet fuel,” an Air Canada spokesperson said in a statement, and that customers receive the full applicable price and its breakdown before purchasing a flight.
“The full applicable price and breakdown is provided to customers before they purchase their flights.”
Porter Airlines told Global News in a statement that “it is too early to predict how this might impact ticket prices, but we are monitoring the situation closely.”
A similar request sent to Air Transat has not yet received a response.
Expensive oil, expensive plastic
Oil can also be refined into byproducts called petrochemicals, which are used to make various plastics, rubber, synthetic fibers and industrial solvents.
This is why plastic prices often increase with the price of oil.
“Oil is really an essential component of any type of plastic, but also electronics and many other types of manufactured products. There is no other sustainable way, that I know of, to produce plastic, and plastic is in everything, in our phones, in everything,” Cire said.
“We (Canada) have a lot of refining capacity, we're very strong in that area, but we don't have the capacity to produce all the plastic we need. So packaging, anything that indirectly depends on oil, is also going to increase.”
How the Canadian economy could benefit
Canada stands to benefit from the risks the Iran war poses to global oil markets due to the higher cost of oil and expected rise in demand, experts say.
Since oil prices are set globally, higher prices translate into an immediate increase in revenue for Canadian oil companies like Suncor Energy, Canadian Natural Resources and Cenovus Energy, as well as governments due to taxes collected.
The Alberta government suggested rising oil prices due to war in Iran could help reduce its deficit due to higher revenues, and Saskatchewan said it also expects to see more money generated.
“Think about the West – Alberta, Saskatchewan – they benefit a lot from higher crude oil prices, from contracts, from the revenue you get from taxes,” Cire said.
“Canada is a big contradiction, there are a lot of paradoxes here, because in a way we get a lot of benefits from the increase in oil prices..”
Then there is the demand side.
If blocking the Strait of Hormuz cuts 20 percent of global supplies, then Canada could be considered as a source to offset this decline.
These benefits can only be truly visible if the war continues over the long term.
“Canada is a net producer and exporter of oil and gas, and it will be even more so next year. So the longer this (Iran war) lasts, the better off we'll be,” says John Kirton, professor emeritus of political science at the University of Toronto.
“I think the broader negative effect is that every single product we buy uses petrochemicals as an input, like plastics. Many consumer goods, toys, will be worst off if this continues. But there are, of course, many sectors that will benefit given the better position that Canada is in.”
