Canadians have been battered by fuel surcharges and the ripple effects of rising oil prices – from the pump to grocery aisles – after the start of the war in Iran.Fred Lum/The Globe and Mail
Consumers and businesses are likely to see imminent price cuts for gasoline after the United States and Iran reached a ceasefire deal this week, but other forms of cost relief could take weeks or months to materialize – and all of it hinges on a lasting truce between the warring factions.
Benchmark crude prices tumbled in the wake of the deal announcement, with West Texas Intermediate falling from around US$115 a barrel to about US$95. It takes only days for gasoline to move in response, so provided that oil prices don’t flare up again on renewed tensions, Canadian gas prices are expected to fall around 11 cents to an average of roughly $1.75 a litre by Friday, En-Pro chief petroleum analyst Roger McKnight said.
But he cautioned that reopening refineries and oil rigs – not to mention repairing damaged infrastructure – could take months or years, keeping pressure on energy supply chains. And despite the tumble in crude prices on Wednesday, energy costs remain substantially higher than before the conflict.
The price of oil is just one component of the pump price, which also includes taxes, refining and retailing costs. That means the pass-through from oil price moves to gasoline prices is only partial. Research from the Dallas branch of the U.S. Federal Reserve found that around half of the change in the price of oil filters through to a move in gasoline prices, with most of the change happening over 20 days.
Oil prices tumble but remain above prewar levels after U.S.-Iran ceasefire
Canadians have been battered by fuel surcharges and the ripple effects of rising oil prices – from the pump to grocery aisles – after the start of the war in Iran. But just hours after a deal between the United States and Israel was poised to open a pathway to a two-week ceasefire, Iran and Gulf Arab countries reported new attacks early Wednesday morning.
Aviation fuel supply has effectively stopped flowing to many regions after the last shipment from the Strait of Hormuz – where 20 per cent of the world’s oil supply passes through – left in late February.
John Gradek, an aviation management lecturer at McGill University, predicted a wait of about seven weeks for any dips in the price of aviation fuel to translate into lower airfare. Easing fuel strain in Vietnam, Cambodia, Indonesia and other Asian countries that rely solely on imported jet fuel from the Middle East will take longer still.
“If you got Canadians flying between Toronto or Vancouver and Bangkok or Manila on Air Canada, those flights are at risk,” he said. “We got fuel in Canada to get you there, but [they] can’t get you home – there’s no fuel available in those cities.”
“There’s nothing on the water delivering aviation fuel to countries across Southeast Asia,” Mr. Gradek said. “The pipeline is dried up.”
Fuel costs amount to about 30 per cent of airlines’ operating expenses. In late February, the cost of fuelling a Boeing 787-9 flight from Vancouver to Hong Kong was around $71,485; by mid-March, it cost $110,171, according to Wayne Smith, a hospitality and tourism professor at Toronto Metropolitan University.
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Even so, lower airfares are not a guarantee with lower fuel costs, as unleashed demand puts strain on already reduced capacity.
“Domestic airfares increased an average of 15 per cent already overall,” Mr. Gradek said. “Nothing’s going to change for a while.”
On the shipping side, freight operators and insurance companies are unwilling to resume normal operations without clear guarantees of safety.
“From a supply chain perspective, until there’s certainty and we can see that the large oil tankers, cargo ships that deliver fertilizer, all that can move, we’re not going to see prices – gasoline prices, diesel prices and fuel surcharges – go back to where they were before,” said Fraser Johnson, an operations management professor at Western University’s Ivey School of Business.
In the grocery aisles, costs can be sticky. “Food prices go up much faster than they go down,” said food economics professor Michael von Massow at the University of Guelph.
He estimated that for every 5-per-cent bump to transportation costs, there’s a roughly 0.5-per-cent increase in food prices. It still costs about 40 per cent more to fill up a diesel truck transporting fresh fruit, vegetables and meats to Canadian grocers since the war began.
Prices for grain on futures markets might start to decline in the shorter term if the pressures on oil and fertilizer costs ease, said Jennifer Clapp, a professor in global food security and sustainability at the University of Waterloo. But, she added, “looking at prices today on markets for wheat, corn and soy, they fell a tiny bit – less than half a per cent, compared to prices for energy, which fell by 8 to 14 per cent.”
The largest corporations in concentrated parts of the food supply chain, such as retail, grain trade and fertilizer, will be incentivized to keep prices higher for a while, she said, “to cover their costs from the elevated prices caused by the war.”
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A sustained ceasefire, if reached, should take some pressure off the Bank of Canada to increase interest rates to prevent the oil price shock from feeding into a broader inflationary process.
That said, financial markets on Wednesday were still pricing in one-and-a-half quarter-point rate hikes from the Bank of Canada in the back half of the year – compared with earlier predictions of rate cuts in 2026 prior to the start of the war.
“One thing that’s super important to remember is that [oil prices are] still significantly higher than back in January or February, so there’s still going to be a big push on inflation, regardless of what’s happening today,” said Olivier Gervais, director of modelling and forecasting at Bank of Nova Scotia, and former director of Canadian economic projections at the Bank of Canada.
Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, said the trajectory of monetary policy will depend on where oil prices go from here. Right now, oil futures markets are expecting around US$75 for a barrel of West Texas Intermediate by the end of 2026. But if prices remain close to current levels through the year, the inflationary shock will be hard to ignore, he said.
“If we are in the US$90 to US$100 range, then we’re talking about the Bank of Canada hiking,” Mr. Tal said.
With a report from The Canadian Press