Reaching New Heights: The Global Surge of Fuel Prices
It’s a familiar sound. The quiet sigh that inevitably rises as the car approaches the gas station, driving past painfully high prices for another week in a row. In recent months, the cost of fuel and oil have significantly risen to record-breaking heights. The staggering increase in the price of fuel—driven by several interconnected factors—has the potential to rewire economic, political, and social relations around the world.
Exhibit 1: World Liquid Fuels Production, Consumption, and Crude Oil Prices (Q1 2010 - Q4 2016)
High energy costs are affecting the economy with a cascading effect; feeding inflation, slowing economic growth and hampering efforts to combat ruinous climate change. According to the CAA, the average price for gas in Ontario in May averaged $198.5 per litre up from April’s average of $179.1 and the previous year’s average of $126.0 per litre.
As oil is a global commodity, price is determined primarily by supply and demand. Supply and demand are catalysts for oil price movements, and even the smallest shift can result in insurmountable price fluctuations (see Exhibit One).
The Consequences of Russia’s Actions
The invasion of Ukraine by Russia has greatly impacted global oil supply, consequently playing a major role in the climbing fuel prices. As Russia is the largest exporter of oil and gas to global markets, the retaliatory oil sanctions imposed on the country have caused gas and oil prices to rise sharply. In Europe, an over-dependence on Russian oil and natural gas has made the continent particularly vulnerable to high prices and shortages.
Roughly half of Russia’s oil exports went to Europe before the country invaded Ukraine in February, involving almost $10 billion in transactions a month. As a result of the invasion and European efforts to move away from dependence on Russian oil and gas, the impact of this unprecedented volatility on European and Asian gas markets is heightened (see Exhibit Two).
Lasting Effects of the Pandemic
While Russia’s invasion of Ukraine plays a key role in the surging fuel prices, it also exacerbated the inflated prices that the world was already facing post-pandemic. Throughout the past two years, individuals were no longer travelling and airports closed down, resulting in a surplus in energy supply and a deficit in demand.
The plunge in fuel demand during the pandemic required producers to decrease their investments in drilling and refining capacity, thus the oil and gas sector now finds itself ill-equipped to meet the demand of a society that is in the process of economic recovery.
In March 2020, the cost of a barrel of oil fell below zero, as the storage tanks were full from the lack of consumer fuel demand. However, demand increased as the world began to emerge from the pandemic. Economies have reopened, manufacturing has revived, and individuals are travelling again. This led to a surge in demand and an increasingly tight oil market.
A Greener Planet
Oil exploration budgets have been significantly cut in recent years due to climate change efforts, which consequently contributes to a tighter supply of global oil. The decreased investment is attributed to the price of crude oil, which fell dramatically after 2014, as well as to the social and political movement to limit the use of fossil fuels.
The focus of the global energy industry has shifted to the carbon contents of fossil-based energy sources, as the spotlight centers on carbon emission reductions. An energy transition has begun, away from hydrocarbons and towards renewable sources—drastically decreasing the demand for crude oil and fuel.
What’s Next?
Canadian consumers can expect fuel prices at the pump to remain high into next year, as disruptions to Russian oil supplies are prominent and refineries work to adapt to demand shifts. If gasoline nears $5 a gallon, economists say the elevated prices will inevitably cause a recession.
A less painful alternative to a recession would be consumers tiring of the high prices and moderately pulling back on their spending on gas and other products, consequently driving down demand for fuel. Unlike 2008—when gasoline soared, and the economy fell into a recession—consumers are in a much stronger financial standing to recover from the crisis.
The Future
The recent surge in gas prices has made it unclear what the future will hold, and how it will have a lasting impact on the global economy. Russia’s enforced economic sanctions, combined with the lasting effects of the pandemic and carbon emission reductions have resulted in a significant fuel pricing surge. However, rising wages and a strong job market are working as insulation against higher prices, which allows individuals to remain stable should a recession arrive.