The price of Brent crude oil saw a tumultuous Thursday, surging to a wartime high of more than $126 (U.S.) a barrel, then dropping $13 seven hours later.
The cost of oil and gasoline has seen wild swings since war broke out between the United States and Iran at the end of February, reaching near-record highs that experts warn will trickle into the cost of living for all Canadians.
“It’s as simple as supply and demand,” said Moshe Lander, an economist at Concordia University. “When you take that huge amount of supply offline, then the price goes up.”
The price of Brent crude oil per barrel has surged by almost 55 per cent since the war began, while West Texas Intermediate (WTI) crude oil nearly doubled when it hit its wartime peak of almost $113 (U.S.) a barrel on April 7. The price of both remains volatile as talks stall between American and Iranian negotiators.
The U.S. and Iran have been enforcing competing blockades on the crucial Strait of Hormuz, through which roughly 20 per cent of the world’s oil supply travels. The oil markets’ fluctuations have been closely tied to peace talks between the two warring nations and reactive to comments made by its leaders.
“Every time the U.S. President speaks, every time the Iranian President speaks, if the news looks like it’s good for the Strait of Hormuz opening, the price of oil comes down. If it’s bad, the price goes up,” Lander said. “When both sides are skeptical, it drives the price up.”
Since people still need to get to work or have their goods delivered regardless of how expensive gas and diesel becomes, demand for oil isn’t very sensitive to price changes, said Avery Shenfeld, chief economist at CIBC Capital Markets.
“It takes a very sharp price hike to curtail demand sufficiently to adjust to any significant hit to oil supply,” he said.
Shenfeld explained when the global oil supply is cut off due to a war — like the ongoing conflict between the U.S. and Iran — the world oil price has to climb sharply enough to reduce demand to the level that matches the available supply. Because Canada exports much of its oil and producers won’t sell it to Canadian refiners for less than what they could get elsewhere, its economy isn’t insulated from global oil market developments.
That dynamic is already playing out globally. Even countries like Canada and the United States, which produce large amounts of oil, are not shielded from rising prices, said Fraser Johnson, a professor at Western University’s Ivey Business School.
“Refineries around the world are bidding up the price of oil,” he said. “Because oil is a global commodity, that means that we’re paying a greater amount of money for the oil, even though it’s produced here in North America.”
While consumers often feel the impact first at the pump, Johnson said higher oil prices will ripple far beyond gasoline, with nearly every product depending on fuel at some point in the supply chain.
“Everything that we touch is transported at some point,” Johnson said. “What we’re going to see is higher costs for food, higher costs for other products.”
On Thursday, fuel analyst Dan McTeague predicted gas prices in the Greater Toronto Area could jump by eight cents overnight as the war stretches into its third month.
Even if the war were to end soon, relief at the pump may not come quickly. Restarting oil production and reconfiguring global supply chains could take months, Johnson added, meaning elevated prices may persist well beyond the conflict itself.
“Prices go up like a rocket and they fall like a feather.”
