With oil and gasoline prices already soaring over the U.S.-Israel war on Iran, experts are warning the longer the conflict lasts the greater the risk of inflation seeping into the entire Canadian economy.
Since the initial Feb. 28 attack on Iran, the price of West Texas Intermediate oil has shot from $67.02 (U.S.) a barrel to $88.51, a rise of more than 32 per cent.
Brent Crude has risen from $72.48 to 91.25, an increase of 26 per cent. At gas pumps in the GTA, the average price of filling up your tank has gone from $1.262 a litre to $1.459, according to gasbuddy.com
It’s a welcome boost to the bottom line for Canadian oil and gas companies, said Pedro Antunes, chief economist at Signal 49 Research. The rest of us? Not so much.
“For Canada an oil price shock like this is positive for energy producers but a negative for the rest of the country,” said Antunes.
While people filling up at the pumps will notice the increase right away, oil and gas inflation will eventually spread throughout the economy if the war continues into the medium to long-term, Antunes said.
“Everything that we do requires energy,” said Antunes. “And a lot of what we consume requires plastics, which are made with petroleum products.”
Supply chain guru Fraser Johnson said that even goods shipped via ocean freighter end up in a truck at some point.
“Trucks touch just about everything consumers end up buying,” said Johnson, a professor at Western University’s Ivey Business School. “About 70 per cent of freight in Canada is handled by truck.”
While producers shipping those goods might not want to pass along those increased costs to their customers, there’s a limit to how long they can simply eat the expenses, said Johnson.
“There’s going to be a lag effect,” said Johnson. “They’re going to try to get a measure of how long it’s going to last, because no-one wants to blow a customer relationship over something that’s only going to last a few weeks.”
Still, with most shipping contracts having fuel surcharges already built in, the longer it goes, the likelier companies are to pass the costs along.
“It would probably be a couple of months before we start to see price increases show up on the shelves,” said Johnson.
But for perishables like fruit and vegetables, the price increases will likely show up quicker, Fraser added.
“We’re not going to see it this afternoon, but it’s a much shorter supply chain for produce.”
Air travel will also be getting more expensive, particularly for overseas flights, said John Gradek, head of the aviation management program at McGill University.
“We’ll see fuel surcharges on airplane tickets within the next few weeks,” Gradek predicted.
Even in countries and on air routes nowhere near the Middle East, the price of jet fuel has already risen substantially, Gradek said.
“You’re going to be paying world prices for JP1 at Pearson,” said Gradek, referring to the benchmark jet propellant 1 fuel. “So those fuel surcharges are going to happen in Canada, too. The question is how much and how long?”
Gradek says the surcharge is likely to be $200 to $300 for overseas flights. And don’t count on cheaper flights once the fuel surcharge is no longer there when fuel prices come down, Gradek warned.
“Once the fuel surcharge comes off, you don’t usually see prices going all the way back down,” Gradek said. “Airlines like to hang on to some of that extra revenue if they can.”
A report from the economics department at Scotiabank said that a permanent increase in the price of oil by $10 a barrel would boost Canada’s Gross Domestic Product by a third of a percentage point this year, and half a percentage point in 2027 on top of what it would have otherwise been.
But it wouldn’t feel like the boom times for everybody despite potential job increases, Scotiabank said in assessing that scenario.
“Energy sector profits and investments rise, supporting employment and eventually household spending,” Scotiabank reported. “These gains are partly offset by a squeeze on real disposable income; higher gasoline prices act as a regressive tax, reducing discretionary purchasing power.”
The bank added that inflation would also make it harder for the Bank of Canada to cut interest rates — and could even prompt a rate hike.
While a Canadian economy struggling from Donald Trump’s trade war could otherwise make it tempting for the bank to cut rates, they’re unlikely to do that if inflation rises, said a report from BMO’s economics department.
“This is not to suggest that we expect a hike as a result of the conflict,” BMO said, “but it drives home the point that further rate relief is less likely, even if the economy is struggling with trade uncertainty.”
