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Why Canadian gas prices are higher than ever (it's not all Ukraine)

The world economy is just now waking up from two years of COVID lockdowns and oil demand is really, really high

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If you’re one of the 27 million Canadians who possess a driver’s licence, you may have noticed that gasoline is more expensive than at any other time since motorized transport was first popularized in North America. Gas prices in Toronto are set to surge to a never-before-seen 167.9 cents. While in Victoria, a litre of gasoline already costs a near-unbelievable 194.9 cents.

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Below, a quick explanation of how this all came to pass (and why it’s not the gas stations’ fault). Special thanks to Rory Johnston, author of the free newsletter Commodity Context, who helped break down many of the technical details of the Canadian oil sector.

The Ukraine war has sent the oil world into a bidding frenzy

It’s not Russia’s invasion of Ukraine that sent oil prices into a tizzy, per se, but the avalanche of sanctions that the world community threw at the country in response.

So far, oil and gas is one of the only Russian commodities that the international community hasn’t

sanctioned. Although Canada banned Russian oil imports on Monday  much of Western Europe is so dependent on Russian petroleum that they can’t turn off the taps without sending their own economies into a tailspin.

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However, Russia’s increasingly financial isolation from the rest of the world is causing Western energy firms to voluntarily pull out of the Russian market: Shell, BP, and Exxon-Mobil, among others, are all announcing plans to hightail it out of Siberia. So even if virtually no governments are sanctioning Russian oil directly, the net effect is that it’s getting harder and harder for Russia to sell its petroleum abroad. As of this writing, Russia can’t find buyers for more than 70 per cent of its oil — even when they discount it to near-ridiculous rates.

Under normal circumstances, Russia is one of the world’s largest oil producers. By removing much of that Russian oil from the world market overnight, refineries and other oil buyers are now forced to scramble for whatever’s left — which means higher prices.

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The world economy is reopening, and it’s thirsty…

Of course, Canadian gas prices were already sky-high before a single shot was fired in Ukraine. On the eve of the invasion, Toronto-area gas prices were already hitting historic highs above $1.60 per litre.

The main reason is that the world economy is just now waking up from two years of COVID lockdowns, and is burning way more oil as a consequence. For a local example, just look at this week’s new guidance ordering much of the Canadian civil service back to the office. Fewer civil servants working from home means more of them are going to be commuting, which means they’ll be buying more gas to run their cars.

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The oil-guzzling cruise industry is making a comeback. So are the airlines. Around the world, millions of internal combustion and jet engines are being fired up for the first times in months, and all of them are desperate for fuel. Oil demand is really, really high , in other words.


… while oil production remains in a COVID-induced coma

The cruise industry and the civil service might be returning to normal, but not so much with the energy sector. After whole oilfields were placed into mothballs during the pandemic, it’s proving exceptionally difficult to get them up and running again.

In past years, this would have been the time that U.S. shale oil production would have come to the world’s rescue. Shale oil refers to the oceans of previously inaccessible U.S. petroleum reserves, which the Americans recently figured out how to extract via fracking. The technology is the singular reason that the United States was able to become the world’s largest producer of oil in the years before the COVID-19 pandemic.

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But the shale sector absolutely lost its shorts in the first years of 2020, so investors are particularly hesitant about ramping up production this time around. The OPEC nations are slowly ramping up production, but not nearly enough to bring prices back to normal levels (which is the point; they are a cartel, after all).

Canadian oil production can’t turn on a dime, either. Extracting oil from sand in the middle of northern Alberta is expensive and takes a long time to get going. So while Alberta is poised to make an absolute ton of money from peaking oil prices, it’s not like they can produce more oil by just sticking a bunch of pumpjacks in the ground.

Gas prices are way higher in B.C. because of pipelines (or a lack thereof)

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All of the factors described above are due to international forces beyond our control. Regardless of what Canada says or does on energy policy, our gasoline is guaranteed to skyrocket in price any time a major oil producer like Russia gets crowbar-ed out of the world market.

But that still doesn’t explain why the situation is so much worse in B.C., where gas prices are as much as 20 cents higher than the already-high gas prices everywhere else.

In that case, British Columbians are paying extra simply because it’s really, really difficult to sell gas to them.

Cities like Toronto and Montreal are both plugged into a North American latticework of pipelines joining together dozens of refineries everywhere from Chicago to the Gulf Coast. But on the southwest coast of B.C., there’s only a single overstretched refinery in Burnaby, a tiny 1960s-era pipeline to Alberta and whatever gasoline can be barged in from Washington State.

By design, coastal B.C. is an enclave that has largely isolated itself from the typical infrastructure used to fill up service stations with gas — and this means that whatever gas they do get comes at a premium.