Record high diesel prices could fuel inflation

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dated: 2022-11-20 04:44:49 .

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Jordan Hazelwood, left, and Lyndsie McCann fill up their semi truck at the Road King Truck Stop in Calgary on Monday, Nov. 14, 2022. Diesel prices are at record highs across the country. Photo by Gavin Young/Postmedia

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Albertans should brace themselves for another wave of inflation in the coming months as diesel fuel hits record lows.

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Vijay Muralidharan, owner and director of R Cube Economic Consulting, said he had been warning about dwindling diesel reserves for six months but had largely been ignored. Now his worries are coming true.

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“I’ve seen inventories continue to fall over the summer — usually summer inventories build but don’t fall,” said the Calgary-based oil and gas analyst. “I knew this was coming. The problem is that we should have been proactive in waste control.”

He said diesel reserves in Canada have never been so low. It’s a perfect storm of bad circumstances.

Post-pandemic demand for gasoline has surged as North Americans have greatly increased their travel. To accommodate this, refineries that could switch from diesel production to gasoline production did so. Meanwhile, Russia invaded Ukraine and many countries stopped buying Russian fuel, which also led to a shortage of natural gas supplies in Europe and a spike in prices. This led to a higher demand for diesel fuel for heating.

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At the same time, Latin America was having a winter and its demand for diesel fuel for fuel and heating was increasing, depleting North American supplies.

Muralidharan said the impact has been mitigated recently due to lower demand in China due to the COVID shutdown. This has triggered some global supply, but this will disappear when China reopens.

In recent years, more refineries with diesel fuel capacity have been closed than commissioned, resulting in reduced production levels. Long an expensive affair funded by taxpayers, the Sturgeon Refinery outside Edmonton is one of only a handful built in North America in the last 20 years. That eclipsed the pre-pandemic closings of two refineries in the Philadelphia area and one in Newfoundland and Labrador.

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Demand in Canada, meanwhile, has returned to pre-pandemic levels and is expected to increase in the winter months as the trucking industry and parts of Atlantic Canada still use diesel for heating. However, the inventory is not there to support the increased demand in the long term.

Refineries have returned to diesel production, but Muralidharan, who has studied energy markets for the past 20 years, said it was probably too late.

Another indicator to watch is how long the gas supply will last after refineries switch back to diesel.

What is most visible to the average consumer is the price at the pump, where diesel and regular gasoline usually differ by a few cents. Diesel is now about 46 cents a liter more expensive in Calgary, according to fuel tracking site GasWizzard.ca.

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Dan McTeague, president of Canadians for Affordable Energy, said diesel has been hit even harder by the federal carbon tax than gasoline, at almost three cents a liter more. On April 1, the CO2 tax on diesel fuel increases from 14 to 17 cents per liter.

He said the fuel has changed in recent years to become more environmentally friendly and remains the go-to fuel.

“Diesel is Rodney Dangerfield’s fuel, it doesn’t get any respect but it’s bloody important – not much gets done without it,” McTeague said.

He said the price of diesel has doubled in the last one year.

Atlantic Canada will be hit harder than Western Canada due to its dependence on diesel for heating. On Thursday, diesel was more expensive by a dollar per liter in St. John’s, Nfld. than in Calgary.

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There is a possibility that it could hurt the city’s profits as well. The City of Calgary uses 25 million liters of diesel fuel per year, 60 percent of which is for public transportation – Transit currently operates 840 diesel buses. A city spokesman could not disclose how much they spend on diesel because it is provided through a confidential bidding process, but is still based on wholesale terminal prices and has the same price fluctuations.

Meanwhile, the Calgary Board of Education offset the increase in fuel costs with a partial refund of transportation fees.

According to Muralidharan, although Canada produces more diesel than it needs, it is an export market that is struggling to keep up. He does not support government intervening through rationing or other steps that restrict the flow of Canadian diesel to other jurisdictions.

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Regardless, Albertans will end up paying the global price for the commodity, regardless of whether it’s refined here.

If you don’t drive a diesel pickup, you’ll end up short on your wallet shopping or buying Christmas presents.

“The change in energy prices has been so great that even the service sector has had to pass it on because it still contributes heavily to its own costs,” said Charles St-Arnaud, Alberta Central’s chief economist.

In the longer term, this will continue to fuel inflation, which will require further increases in the overnight target interest rates from the Bank of Canada.

Interest rates have already been raised by 350 basis points to 3.75 percent since March. Persistently high inflation — 6.9 percent nationwide and 6.8 percent in Alberta — has many economists predicting a recession in the first two quarters of 2023.

Muralidharan said diesel inflation will push Canada even closer to recession and the central bank’s response will determine how bad it gets.

“This will result in a huge slowdown next year. It has to be because I have never seen interest rates go up so fast in my life,” he said. “You will see a recession coming, how severe or mild it will be will depend on how current economic activity responds to rising inflation.”

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Source: calgarysun.com

Record high diesel prices could fuel inflation

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Source https://canadatoday.news/ca/record-high-diesel-prices-could-push-up-inflation-155034/

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