High oil, gasoline and diesel prices are key drivers of inflation, since almost everything we consume moves by ship, rail and truck.
High natural gas prices will also drive inflation for food, since nitrogen fertilizers are made from natural gas.
A global mismatch in oil production and demand started pushing oil prices up roughly one year into the COVID-19 pandemic, as economies recovered and demand outstripped supply. The war in Ukraine has compounded the problem.
Scotiabank (TSX:BNS) expects oil prices will remain in the US$100 per barrel range for another 12 to 18 months, before falling to $90 per barrel by the end of 2023. But it’s not just high oil prices that are responsible for higher diesel prices. In 2020, the International Maritime Organization (IMO) enforced new regulations on sulphur emissions in shipping, leading many cargo and container ships to switch from cheap bunker fuel to low-sulphur diesel. This has increased the demand for diesel globally and pushed up prices.
Higher fossil fuel costs have multiple effects on inflation, directly and indirectly:
• It costs more to drive. Gasoline prices in Canada were up 32 per cent in February compared with February 2021. This hits consumers in the pocketbooks, but also increases costs for businesses that use gasoline cars and trucks
• Diesel prices are up 57 per cent compared with April 2021. When gasoline prices were at $2 per litre in Vancouver last week, diesel was at $2.20 per litre. For truckers, fuel represents 30 per cent of operating costs, so increased fuel costs get passed onto consumers in higher food prices. Canadian food prices are up 7.4 per cent year over year.
• Higher food production costs. Nitrogen fertilizer, which is made from potash and natural gas, is now in short supply. Higher fertilizer prices will increase food production costs globally. Between higher diesel prices and the nitrogen fertilizer shortage, one analyst estimates food prices in Canada could increase by 30 per cent to 35 per cent
• Home heating bills are up. North American natural gas prices have more than doubled in one year, leading to recent rate hikes for homeowners and business that heat their homes and offices with natural gas. FortisBC customers in the Lower Mainland have had two nine per cent hikes for natural gas since October.