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Revved Up: Gas Prices Rise as Canada Slowly Recovers from COVID-19

Revved Up: Gas Prices Rise as Canada Slowly Recovers from COVID-19

Written by

Samuel Kanda

Samuel Kanda
Industry Research Analyst Published 19 Jul 2021 Read time: 3

Published on

19 Jul 2021

Read time

3 minutes

Amid the height of the COVID-19 (coronavirus) pandemic in 2020, demand for gas dwindled as travel decreased across the board due to joblessness claims, work-from-home policies and stay-at-home orders. As a result, gas prices declined. However, the crude oil market will likely experience significant challenges as demand for gas returns to growth in 2021, resulting in substantial rises in Canadian gas prices.

Reverse course

Although the adverse effects of the coronavirus pandemic are still prevalent, many countries have begun widespread vaccination efforts, enabling economies to begin recovering. Since Canada has one of the highest vaccination rates in the world, and has also begun to loosen up its restrictions, demand for a “return to normalcy” from Canadian citizens is expected to increase dramatically. As more people begin returning to daily routines and many others begin recovering from the financial hardships endured during the pandemic, pent-up demand is expected to be a major driver in higher gasoline prices. In addition to pent-up domestic demand, other international drivers are also expected to play a key role in higher gasoline prices for Canadians.

Gasoline price drivers:

  • Pent-up domestic demand
  • Decreased oil production in the United States
  • OPEC oil output disagreements
  • Technological developments
  • Political relations and tensions
  • Taxes and regulatory changes

Like a good neighbor

Although Canada is one of the largest exporters of oil in the world, it still mostly relies on trade with the United States, mainly due to the United States-Mexico-Canada trade agreement (USMCA), which eliminates most trade tariffs between the neighboring countries. According to IBISWorld’s Oil Drilling & Gas Extraction industry in Canada report, Canada currently exports an estimated 97.0% of its oil production to the United States and imports an estimated 78.0% from the United States.

Since Canada heavily relies on US oil imports, which satisfies more than 75.0% of domestic demand, a decrease in US oil production is expected to further contract domestic oil supply. Subsequently, as demand for fuel continues to rise, Canadian gas prices are also projected to rise as supply remains scarce.

OPEC disagreements

Another crucial driver for oil prices is the deals made by the Organization of the Petroleum Exporting Countries (OPEC).  OPEC’s main purpose is to standardize petroleum policies among all member countries and to secure fair and stable prices for petroleum producers around the world. During the peak of the pandemic, OPEC and other major nations that export petroleum products agreed to cut crude oil production to help keep prices in equilibrium after a massive decline in demand. However, as economic conditions begin to improve and demand for oil beings to drive upward, OPEC and its allies may slowly resume production to satisfy demand.

Without increased oil production, demand would have continued to drive prices higher as supply would have remained stagnant. However, as OPEC reached an agreement on July 18, 2021, large oil producers are slated to raise production by 400,000 barrels per day each month until 2022. Although this increase is expected to temper oil prices slightly across Canada, overall gas prices will still likely rise as demand is forecast to grow at a faster rate than supply. However, the economic outlook is still largely uncertain as the world is still battling the pandemic amid a surge in infections due to the Delta variant.

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