Oil Prices Boom as new Gulf war rages; Gasoline costs set to explode: Why conflict in the Middle East increases the price you pay at the pump

Since the last issue of the Progress, global oil prices have increased dramatically. On Wednesday March 4th, the price of Western Canadian Select (WCS) – the name of the crude oil product from Alberta – was around $63 USD. As of Monday the 9th, it is $82.

This staggering week, of course, is the result of active warfare between Iran, Israel, and their respective allies, causing great danger to shipping companies operating in the region, and great risk to their insurers.

Throughout history, the control of transportation arteries have been ruthlessly fought over by great powers, and those who happen to be caught in the middle. In the ancient world, the Mediterranean port cities of Carthage, Athens and Alexandria were each brought under the rule of the Roman republic/empire, as they slowly monopolized the trade of grain, wine, spice and gold, goods that depended on these ports to get to market. In the medieval world, several prolonged conflicts were waged over strategic waterways, such as between England and France for the strait of Dover, and the Byzantine and Ottoman Empire for the Bosphorus. Early Canadian history, too, is marked by conflict over the St. Lawrence river and its tributaries, culminating in the 7 Years War and the Battle of the Plains of Abraham.

Today, the commodity that defines the modern world – Oil – relies on maritime shipping routes that pass primarily through three geographic arteries: the Strait of Hormuz, the Strait of Malacca, and the Suez Canal. Two of these arteries are primarily managed by a single sovereign nation state (Malacca within Singapore, Suez within Egypt), and have been governed in a relatively cooperative manner under international law over the last few decades. On the contrary, Hormuz sits at the centre of a war that has the potential to engulf the globe. On its western coast, there is Saudi Arabia, the UAE, and Bahrain, Gulf states that are loosely aligned with America and Israel. To the east, Iran sits alone. A microcosm of the conflict is seen in the fight for its name – Arabian vs Persian Gulf.

As war rages over control of the straight, oil tankers remain stuck in ports, and storage facilities are backlogged with pipeline shipments. Eventually, production grinds to a halt. Suddenly, approximately 20% of world production is taken off the market. This is the reason for impending gasoline price hikes – even in oil rich countries like Canada.

In Atikokan, gasoline is transported to town from Thunder Bay gasoline terminals owned by companies such as Suncor and Greenery. Gasoline in these terminals, in turn, is primarily sourced from western Canadian refineries. Despite there being absolutely no bottleneck or blockade in this supply chain, the price of fuel in Atikokan (and everywhere else) is set to explode due to the new Gulf war. Commodity prices are set on global benchmarks, despite existing in starkly distinct political contexts.

This system of global price standardization can only be maintained in a world of open shipping lanes, and inter-connected economies. The price of Western Canadian Select (WCS) rises with Dubia because Alberta could theoretically ship more of its oil and gas to Europe or Asia if Canadian consumers refused to pay what these regions would be willing to. If trade routes to these regions were to become strained, however, this possibility would collapse, cutting potential demand for WCS dramatically.

Such a sustained fracture in global trade has not occurred since the second world war, when America took over the duty of managing sea route disputes (i.e. ‘the global policeman’). There have been scares, such as during the 1973 oil embargo, but these were quickly resolved between disputing parties. In Canada, the embargo sparked a political battle that would last into the 1980s, centered around control over the management of Alberta’s oil and gas production, distribution and pricing, between the Liberal government of Pierre Elliot Trudeau and the Provincial Conservative government of Peter Lougheed. The difference in principle and sentiment that underlaid the argument of both leaders still remain unresolved to this day.

If the system of global price benchmarks remain, while at the same time the Strait of Hormuz remains unsafe for oil tankers, Atikokanites should expect to pay significantly higher gasoline costs, and consequently pay more for food, lumber, industrial machinery, and essentially every consumer good known to modern man. Perhaps the collective global frustration of those at the pump will be enough to make peace in the middle east; or, maybe 2026 will be the year the world system officially fractures. Albertans hostile to Eastern Canadian consumers may not like the consequences of the latter hypothetical.