Speculation and Greed Explain the Price of Gasoline, not Supply and Demand

For beleaguered consumers, it’s déjà vu all over again. War breaks out on the other side of the world. Within 24 hours, gasoline prices take off – rising up to 50 cents a litre on average across Canada since the war started. Natural gas and heating oil prices will follow, along with costs for anything that uses petroleum intensively (like transportation services, food, and construction).

It’ll get worse when the Bank of Canada jumps into the fray with higher interest rates to counteract renewed inflation. Then the victims of oil-fired inflation will be punished again.

We’ve seen this movie before. Sadly, we haven’t learned its lessons.

In February 2022, Russia invaded Ukraine – a country that does not produce significant amounts of oil. World oil prices soared 65% in weeks, propelled unduly by speculative bets placed on financialized futures markets.

Prices subsided by the end of the year, after it became clear world oil supply was unaffected by that war (which still drags on). But the damage was done. The 2022 oil spike was the biggest single cause of the resulting inflation that caused such turmoil around the world.

In Canada, that surge in oil prices directly accounted for 43% of post-pandemic inflation, which peaked at 8% four months later. The indirect costs were even bigger: including price hikes on energy-intensive products, subsequent higher interest rates, and job losses as high rates chilled the aggregate economy. I have estimated that the cumulative toll for Canadian consumers from the 2022 oil price surge exceeded $200 billion over three years – a staggering $12,000 per household.

Now prices are soaring again, following U.S.-Israeli attacks and Iranian counter-attacks. Before banging their heads against the nearest brick wall over the prospect of a painful sequel, consumers should pause to ask two fundamental questions. Why must we pay so much more for oil and gas produced, processed, and consumed right here in Canada, with no connection to the Middle East whatsoever? And who benefits from this outcome?

The gasoline stored in pumps right now sells for much more than before the war started. But it was refined weeks ago, from oil extracted months ago. Canada produces far more oil than it consumes; three-quarters of our production is exported. Of the modest volumes imported into eastern Canada, almost none comes through the Persian Gulf.

So there’s no energy ‘supply shock’ in Canada. The cost of producing and refining gasoline hasn’t changed at all. Yet Canadian consumers are already being soaked. And the worst is yet to come.

Petroleum companies profit immensely from this gap between soaring revenues and steady costs. That produced historic petroleum profits after the Ukraine invasion – almost $1 trillion worldwide in 2022 alone. In Canada, after-tax petroleum profits (upstream and downstream) totaled $154 billion from 2022 through 2024, when the inflationary burst finally subsided. That propelled after-tax corporate profits to 21% of Canadian GDP in 2022 (the highest share in history), even as Canadians struggled with affordability.

This new war has roiled real oil supplies (not just futures markets), so the price shock will likely be worse and longer lasting. But it’s not inevitable that we should tolerate the resulting economy-wide inflation and higher interest rates here at home.

Regulation could curtail the speed and extent to which foreign shocks are reflected in domestic prices. Energy prices could be tied to the actual cost of production (like we already do with electricity). And accelerating the transition to hydro, wind, solar, and geothermal (none of which traverse the Straits of Hormuz!) would further protect us.

Of course, petroleum lobbyists complain that insulating Canadian oil prices from global chaos will cause price ‘distortions’. But it’s hard to imagine anything more distortionary than inflicting another pointless cycle of inflation followed by contraction on an entire national economy – one that is blessed with far more energy than it needs.

The oil industry’s preferred solution to everything – build more export pipelines – would clearly make affordability even worse. New LNG projects, in particular, will amplify upward pressure on domestic gas prices, something the Alberta government’s recent provincial budget explicitly celebrated.

Perhaps Canada can’t do much about interminable conflict in the Middle East. But we can certainly do more to protect our own economy from its fallout.