MarketsFarm — The decision by the U.S. to halt the import of Russian petroleum products due to the country’s invasion of Ukraine created sticker shock at the pumps in North America — but an end to that invasion would not necessarily mean an end to high fuel prices.
On March 15, the average price of regular gasoline in Canada reached a multi-year peak of 183.4 cents per litre before easing off at 174.1 cents one week later, according to Natural Resources Canada. Also on March 15, the average price of diesel reached 200.6 cents before declining to 188.4.
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The nearby West Texas Intermediate (WTI) crude oil contract touched US$126.52 per barrel on March 7. However, COVID-19 lockdowns in China and an increase in U.S. inventories brought the price down to as low as US$92.20/barrel on March 15. Since then, it has risen to around US$110.
Shon Hiatt, associate professor of management and organization at the Marshall Business School of the University of Southern California, believes that as soon as the war ends, fuel prices may return to some sense of normalcy.
“China is going to get out of this COVID lockdown. This is just a temporary aspect and then they are going to ramp back up because there is just huge demand for products and goods,” Hiatt said.
“I think eventually this war will be over as soon as Russia takes over Ukraine, which is likely to happen. I don’t think (Russia) will stop until it’s done. When that happens, we will return to the markets we had before.
“The question is: will prices return to what they were in 2019 or even last year? They will not.”
For one reason, he said, Saudi Arabia needs oil to be priced at least US$85/barrel to fully fund government spending and the country’s outsized influence in OPEC+ would make sure the price stays high through supply controls.
The second reason is climate change policies, implemented by U.S. President Joe Biden, limiting growth in the country’s fossil fuel sector.
Hiatt also suggested Canada will be a factor.
“Canada has the potential to produce more oil. The problem is they are constrained on exports,” he explained, citing the failed Keystone XL pipeline which would have been in operation this June.
“(It) would have allowed another 800,000 barrels of oil to go on the global marketplace. Unfortunately, that’s not going to happen. Canada’s maxed out at 4.6 million barrels and it’s really infrastructure that preventing them from getting any more oil out of the ground.”
Hiatt expects gasoline prices to come down, but while he believes high commodity prices can help offset fuel costs for farmers, Hiatt maintains that diesel fuel will be priced highly throughout 2022.
“We’re not going to see prices like they were before. This entire year is going to be a high-priced fuel year,” he said, adding that fertilizer prices will also be high due to sanctions against producers in Russia and neighbouring Belarus.
Even without Russia’s invasion of Ukraine, however, Hiatt already expected WTI crude oil to exceed US$100/barrel this year.
“I still think that’s a possibility as the economy continues to expand and place constraints on (oil) supply on the market. (Prices will be) no less than the February prices prior to the invasion for this year,” he said.
— Adam Peleshaty reports for MarketsFarm from Stonewall, Man.
