As oil and gas prices rise amid Iran conflict, what comes next?

Canadian consumers are set to pay higher prices for gasoline at pumps across the country as the Iran conflict sends global oil markets into a frenzy.

The price of crude oil is set globally and based on a wide range of factors.

But three days into the war — with U.S. President Donald Trump saying the conflict could last for a month or longer — markets are already responding.

“Retail [gas] prices are beginning to respond — exactly as expected once wholesale markets adjusted. Most drivers should prepare for gradual increases this week,” Patrick De Haan, a petroleum analyst at Gas Buddy, said on Monday in a written report.

Here’s how oil markets are reacting.

Prices consumers pay at pumps are mostly determined based on oil prices and other factors.

Rising tensions in the Middle East, and more specifically with the Iran conflict, could mean less oil will be available if the situation escalates and leads to a prolonged war.

A drop in global oil supplies usually leads to higher oil prices, which could also lead to more expensive gasoline for consumers.

The Middle East region produces roughly a third of the world’s oil supply, according to the U.S. Energy Information Administration.

The price for a barrel of crude oil topped $73 in the early morning on Monday, up from less than $64 on Feb. 26. As of publication, crude oil was hovering around $71 per barrel.

A “fear premium” is pushing up oil prices right now, says Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank, suggesting oil markets are concerned about the near-term outlook.

“Heightened geopolitical risk in the Middle East has materially increased the probability of a broader regional conflict. Ongoing military operations in Iran have introduced significant uncertainty for global energy markets, elevating the risk of future supply disruptions,” Holt said in a written statement.

“While the initial market reaction reflects a ‘fear premium,’ the persistence and magnitude of the price surge will ultimately depend on whether physical supply is impaired.”

About a fifth of the world’s oil supply passes through the Strait of Hormuz, a vital shipping route only a few kilometres wide that connects the Persian Gulf to the Arabian Sea and global shipping routes.

But the Strait of Hormuz is effectively closed to shipping traffic as Iran threatens approaching vessels. On Monday, Reuters cited Iranian state media as reporting that a senior Iranian military commander was threatening to set on fire any ship trying to pass through the strait.

There are very few alternative routes to get oil into and out of the region.

“With 20 per cent of the world’s oil moving through the Strait of Hormuz, Iran is unlikely to roll over and so it’s likely that ships won’t be able to move through there, whether they’re getting bombed or whether it’s just because insurance costs have gone up so much that they can’t afford to pay it,” says Richard Masson, former CEO of the Alberta Petroleum Marketing Commission.

“So I expect that oil prices are going to stay up for a period of time here.”

Iran has also been launching attacks on oil and natural gas facilities in the region in retaliation for attacks by the United States and Israel.

Qatar’s energy regulator said Monday it was suspending production of liquefied natural gas.

For now, oil and gas supplies have yet to see significant impacts, but that could change quickly as the conflict continues.

“Oil markets were over supplied going into the attacks on Iran. It’s not like a production disruption to an already tighter market as in past cases,” Holt said in a separate statement Monday.

This means that in the short term, there is likely enough oil to go around — if a bit more expensive.

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But if the war persists, and the Strait of Hormuz continues to be risky for shipping companies, then oil supplies could see a significant drop.

“If it turns out that the market is thinking, ‘Well, this will just be a few days,’ then not such a big deal because inventories were adequate,” Masson said.

“But if it turns out that this is weeks, then we’re going to see people start to really scramble to find supplies and prices will continue to go up.”

De Haan added: “Oil hates turmoil. Oil prices do not like the unknown. Unfortunately, that’s where we are, and that’s why there’s been a tremendous amount of volatility.”

“The market is trying to sort this out and trying to come up with probabilities, but it’s very difficult given how the situation is active,” he said.

This conflict happens to be around the same time gasoline prices were already going to see a rise because of seasonal changes, which means the Iran situation adds an extra layer to why prices are going up.

“The Iran situation is adding volatility and risk premium, but it’s landing on top of an already firming market,” De Haan said in the report.

“Those forces were already pushing wholesale gasoline higher. The geopolitical premium simply accelerates the move.”

De Haan says gasoline producers were already about to transition to more expensive summer fuel blends and the upcoming refinery maintenance season will also limit output.

Warmer months also mean higher demand for gas as drivers take more road trips, he adds.

This means even without the Iran conflict, gas prices for consumers would have started climbing, but now Canadians could wind up paying a lot more to fill up.

As things currently stand, prices as gas pumps will start rising between seven and 13 cents per litre over the next week or so, while diesel prices will rise 12-18 cents per litre, De Haan says.

Canada’s national average gas price currently sits at about $1.32 per litre, according to CAA, which is up from about $1.25 a month ago.

“Expect to pay a little bit more in the weeks ahead. There may be some volatility. There’s really nothing you can do other than shopping around when you do need to fill your tank,” De Haan said.

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