Gas prices set to spike as U.S.-Iran conflict hits oil markets

Your wallet’s about to feel the heat from halfway around the world.

Oil prices are jumping after tensions between the U.S. And Iran escalated over the weekend, and that means Canadian drivers are looking at higher gas prices in the coming days.

We’re talking real money here, not pocket change.

The Numbers You Need to Know

Crude oil shot up more than 8% in early trading Monday morning, with West Texas Intermediate hitting $87.42 per barrel before settling back to $84.15 by market close. That’s still a massive move in the oil market.

When crude jumps like that, gas stations don’t wait around to pass those costs along.

Ottawa gas prices are expected to spike by 10-15 cents per litre over the next week, according to industry analysts. If you’re in Toronto or Vancouver, you’re looking at similar increases. Montreal could see even steeper jumps of 12-17 cents per litre due to its heavier reliance on imported oil.

The timing couldn’t be worse. Gas prices had already climbed 6.2% since January 1st, with the national average sitting at $1.47 per litre as of Friday.

Add another 10-15 cents, and you’re pushing $1.60 or higher across most of Canada.

Here’s the thing: Canada produces plenty of oil, but our gas prices still follow global markets. It doesn’t matter if the oil in your tank came from Alberta or Saudi Arabia. The price is set by what traders are willing to pay on the international market.

Why Iran Matters to Your Gas Tank

Iran sits on the Strait of Hormuz, which is basically the world’s most important oil chokepoint. About 21% of global petroleum liquids pass through that narrow waterway every single day. That’s roughly 21 million barrels daily, worth about $1.8 billion at current prices.

When tensions flare up in that region, oil markets get nervous fast. Really nervous. Traders start pricing in the risk that oil shipments could get disrupted, even if nothing actually happens.

The strait is only 21 miles wide at its narrowest point. Iran has threatened to close it before during previous conflicts, and even the possibility sends shockwaves through global energy markets. In 2019, when Iran shot down a U.S.

Drone over the region, oil prices jumped 4% in a single day.

Look, we’ve seen this movie before. Every time there’s conflict in the Middle East, gas prices jump. Sometimes it’s justified, sometimes it’s just market psychology. But your credit card bill doesn’t care about the difference.

“The Strait of Hormuz is the world’s most critical energy chokepoint. Any disruption there immediately impacts global oil prices, regardless of where your oil actually comes from,” said Michael Peterson, senior energy analyst at GasBuddy Canada.

What’s Actually Happening Over There

The latest escalation started Saturday night when Iranian-backed militia groups launched coordinated attacks on three U.S. Military installations across Iraq and Syria.

The strikes killed three American servicemembers and wounded at least 34 others, marking the deadliest attack on U.S. Forces in the region since October 7th.

The U.S. Response was swift and significant, with President Biden authorizing retaliatory strikes on Sunday evening. American forces hit seven facilities across Iraq and Syria used by Iranian Revolutionary Guard Corps and affiliated militia groups.

Wall Street markets opened down sharply Monday morning, with the Dow dropping 340 points in early trading before recovering some ground. But oil prices stayed elevated throughout the day, which tells you everything about where traders think this is heading.

The bigger picture: this isn’t just a one-day story. Iran has been increasing its regional activities for months, and the U.S. Has been pushing back harder. Since October, there have been more than 165 attacks on U.S. Forces in Iraq and Syria. That’s a recipe for sustained market volatility.

Iran’s oil production has climbed to 3.3 million barrels per day as of December 2023, up from 2.8 million barrels daily in early 2023. While much of this oil faces international sanctions, disruptions to regional shipping lanes could affect far more than just Iranian crude.

The Ripple Effect on Global Markets

It’s not just about Iranian oil. The Persian Gulf region produces about 28% of global crude oil and holds nearly 48% of the world’s proven oil reserves.

Saudi Arabia, the UAE, Kuwait, and Iraq all ship their oil through the same waters that Iran could potentially threaten.

Brent crude futures for March delivery jumped to $89.12 per barrel, the highest level since late November (yes, really). Trading volumes were 40% higher than the 30-day average, showing just how much attention this situation is getting from institutional investors.

The situation is complicated by global oil inventory levels, which are currently running about 2.8% below the five-year average. When supplies are already tight, any potential disruption gets priced in more aggressively by markets.

“We’re seeing classic risk premium pricing right now. Even if physical oil flows aren’t disrupted, the mere possibility is enough to drive prices higher. And unfortunately, Canadian consumers feel that impact within days,” explained Sarah Thompson, petroleum analyst at the Canadian Energy Research Institute.

How This Hits Canadian Drivers

Gas prices in Canada were already sitting around $1.45 per litre in most major cities before this weekend’s events. Add another 10-15 cents, and you’re looking at $1.60 or higher across the country.

For context, that’s about $12-15 more to fill up a typical sedan with a 60-litre tank. If you’re driving an SUV or pickup truck with an 80-litre tank, you’re looking at $20+ extra per fill-up.

Honestly, it adds up fast.

A family that fills up twice a week is looking at an extra $50-60 per month in gas costs. For households already stretched by inflation, that’s groceries money, utility payments, or savings that just disappeared.

Fair point.

The Canadian Automobile Association estimates that higher gas prices will cost the average Canadian household an additional $780 annually if prices stay elevated through 2024. That’s based on typical driving patterns of about 20,000 kilometers per year.

Worth noting: diesel prices are jumping even more dramatically, up 12% since Friday. Diesel hit $1.62 per litre in Toronto by Monday afternoon. That means higher costs for trucking companies, which eventually shows up in the price of everything that gets delivered by truck.

Which is pretty much everything.

Transport Canada data shows that 90% of consumer goods in Canada travel by truck at some point. Higher diesel costs typically translate to increased shipping fees within 2-3 weeks, affecting everything from food prices to retail goods.

What This Means for Canadian Families

The timing of this price spike hits Canadian households during an already expensive time of year. Heating bills are at their peak, credit card statements from holiday spending are arriving, and many families are dealing with back-to-school expenses.

Statistics Canada data shows that transportation costs, primarily gasoline, account for about 20% of the average household budget. A 15-cent per litre increase translates to roughly a 10% jump in transportation expenses for most families.

Low-income households get hit hardest because they typically drive older, less fuel-efficient vehicles and can’t easily switch to alternatives like transit or electric vehicles (no, seriously). They also spend a higher percentage of their income on transportation costs.

Rural Canadians face an even bigger impact. With limited public transit options and longer commuting distances, they can’t easily reduce their gas consumption. A farming family in Saskatchewan or a fishing family in Nova Scotia doesn’t have the luxury of working from home or taking the subway.

The Bank of Canada has been watching energy prices closely as it considers future interest rate decisions. Higher gas prices feed directly into inflation calculations, potentially complicating the central bank’s efforts to bring inflation back to its 2% target.

What About Canada’s Own Oil?

You might be wondering why we can’t just use Canadian oil to avoid these price swings. Fair question, but the answer is complicated by economics and geography.

Canada produces about 5.5 million barrels of oil per day, making us the world’s fourth-largest producer. Alberta’s oil sands alone produce 3.2 million barrels daily. But oil is a global commodity, traded on international markets with prices set by global supply and demand.

Even if every drop of gas in your tank came from Alberta, the price is still set by global markets. Canadian oil companies aren’t going to sell their product for less than they can get on the world market.

They’re businesses, not charities.

Plus, a lot of Eastern Canada actually imports oil from overseas because it’s cheaper to ship from international sources than to move it across the country.

Quebec imports about 40% of its oil, mostly from the United States, Algeria, and Norway. The Maritimes import nearly 75% of their oil requirements.

Brutal.

The Irving Oil refinery in Saint John, New Brunswick, processes about 320,000 barrels per day, but most of that crude comes from international suppliers. Similarly, refineries in Montreal process a mix of Canadian and imported crude based on whatever’s most economical at the time.

And then there’s this: when global oil prices spike, Canadian oil producers make more money. Alberta’s provincial budget gets a $630 million boost for every $1 increase in oil prices above their forecasted $74 per barrel. That’s good for the provincial economy and federal transfer payments, but it doesn’t help you at the gas pump.

Historical Context and Patterns

This isn’t the first time Middle East tensions have hit Canadian gas prices. During the 2019 attacks on Saudi oil facilities, Canadian gas prices jumped 8-12 cents per litre overnight. The 2020 U.S.-Iran crisis that killed Iranian General Qasem Soleimani sent gas prices up 11 cents per litre before tensions cooled.

Going back further, the 1979 Iranian Revolution doubled oil prices within months. The 1990 Gulf War sent prices from $17 to $36 per barrel in just five months. The 2003 Iraq invasion created months of price volatility.

What’s different this time is the global economic context. Inflation is already a concern, interest rates are elevated, and consumers are more sensitive to price increases than they were during previous Middle East crises.

The Federal Reserve and Bank of Canada are both in delicate positions.

They’ve been fighting inflation for two years, and energy price spikes could undo some of their progress. Higher gas prices also act like a tax on consumers, reducing spending power just when the economy needs it most.

What Happens Next

Nobody knows how long this conflict will last or how far it will escalate. But oil markets are already pricing in weeks or months of uncertainty, not days. Futures contracts for June delivery are trading nearly $3 higher than they were last week, suggesting traders expect elevated prices through at least the spring.

If the situation calms down quickly, gas prices could drop back just as fast as they went up. During the 2020 Iran crisis, prices fell back to previous levels within three weeks once tensions cooled. But if this escalates into a broader regional conflict, we could be looking at sustained higher prices for months.

Here’s where it gets interesting: summer driving season starts in a few months.

Refineries typically switch to more expensive summer gasoline blends in March, which usually adds 10-15 cents per litre anyway. Higher crude prices on top of seasonal increases could push gas prices above $1.70 per litre in some markets.

The Federal Reserve in the U.S. Is scheduled to meet in March and May to consider interest rate changes.

Higher energy prices complicate their decision-making and could delay any rate cuts they were considering. Same goes for the Bank of Canada, which meets again in April.

Iran has significant use in this situation. Beyond the Strait of Hormuz, they’ve got proxy forces across the region who could escalate tensions further.

They’re also sitting on the world’s second-largest natural gas reserves and fourth-largest oil reserves.

What You Can Do About It

Look, you can’t control geopolitics or oil markets. But you can control how much gas you use and when you buy it.

If you’ve got a long commute, now might be the time to dust off that transit card or explore carpooling options. Toronto’s TTC monthly pass costs $156, which is less than the extra you’d spend on gas if prices stay elevated. Vancouver’s TransLink monthly pass runs $181 for zones 1-3.

For longer trips, consider whether you really need to drive. Flying might actually be cheaper for some routes, especially if gas prices stay elevated for weeks. A drive from Toronto to Montreal costs about $180 in gas at current prices, while flights can be found for $150-200.

And if you’ve been thinking about a more fuel-efficient car, this could be the push you needed.

The math on hybrids and EVs gets a lot more compelling when gas is expensive. A Toyota Prius uses about half the gas of a typical SUV, which could save $1,500+ annually at current prices.

For immediate relief, consider adjusting your driving habits. Combining errands into single trips, maintaining proper tire pressure, and avoiding aggressive acceleration can improve fuel economy by 10-15%. That might not sound like much, but it adds up to real savings.

The bottom line: this isn’t just a one-week story. Global tensions have a way of sticking around, and oil markets have long memories. The Iran-U.S. Situation has been building for years, and it’s not likely to resolve quickly. Plan accordingly.