Gas prices may not return to pre-Iran war levels anytime soon, experts say – National
A peace deal has been reached between the United States and Iran, but getting oil to flow in the region and helping gas prices return to pre-war levels could be a major challenge.
That’s because the physical and economic damage means consumers will need to adjust to a “new normal,” according to at least one expert, where gasoline prices remain high for the foreseeable future.
“There is hope that we may actually have an end to this conflict, and we may get some oil flowing,” said international business professor David Detomasi at Queen’s University’s Smith School of Business.
“We took comfort in the fact that the shock was rare and that we could deal with it if it happened. Now it happens all the time – this is the new normal.”
The conflict has not only damaged the region, but has left a huge bottleneck in the Persian Gulf region, and it will take time before the oil and energy markets recover after several months of choking the supply of oil, natural gas, fertilizers and other products.
“Let’s go back to $1.30, $1.35 [per litre of regular gasoline] on average in Canada, just because the need to make up all that deficit is going to take a very long time,” said fuel price analyst Dan McTeague of Canadians for Affordable Energy.
Here’s what you need to know.
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American President Donald Trump announced on Sunday on the social media site, Truth Social, that a peace agreement with Iran has been reached. That was confirmed by the prime minister of Pakistan.
Trump, in his social media posts, also said that electricity prices will “drop like a rock” once the Strait of Hormuz is reopened.
Before Sunday’s announcement, Trump had repeatedly said that a ceasefire was close, only to see war begin.
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So what makes this time different?
Detomasi says that it is due to the “intentional inclusion” of other groups, instead of Trump who says that an agreement has been reached. This includes Pakistan confirming the declaration, which acted as a mediator between Iran and the US during the negotiations.
Having both sides agree is an important sign of hope that the deal can stick, but for oil and energy markets to see true liberalization, the Strait of Hormuz needs to be fully reopened to traffic again.
“The first thing we will need to see is the actual movement of ships in the middle of the ocean,” said economist Marc Ercolao of TD Economics.
“That’s what’s been holding back global oil supply. That’s been materially strengthened by the energy markets in the past little while, and it seems like, at least on the Iranian side, there’s some going forward that this is going to happen.”
While reopening the strait will undoubtedly get oil flowing again in the Persian Gulf region, it may not be as simple as turning on the faucet.
“Even if you open the strait, that does not mean that oil can flow freely if you are tied up by not being able to reach the port in the first place.” There were other institutions on the other side of the Strait of Hormuz that were also damaged,” said economics professor Moses Lander from Concordia University.
“There would have to be some kind of agreement here that not only are you opening the Strait of Hormuz, but that you are going to allow parts and materials to be able to rebuild. That may take another few months.”
The peace agreement is scheduled to be signed in Switzerland on Friday.
However, if the Strait of Hormuz were to be fully opened to shipping once the deal is signed, how long will it take for gas pump prices to drop to the levels seen before the Iran war started in February?
“The pump prices, the gas prices, usually change within days to weeks because the prices are a reflection of what is happening in the wholesale markets. So on the margins, we should expect some relief in the next few weeks, for sure,” said Ercolao.
“However, the whole energy market adjustment process will take months. It will be balanced. It will be slow. We will not see a big drop in prices.”
Where are fuel prices headed
Crude oil price movements are one of the key factors that determine what consumers pay at the gas pump – including in Canada.
If there is less oil available worldwide to meet the expected demand for things like gasoline and jet fuel, prices will generally rise. They may also decrease if the demand for those products falls or if there is an oversupply of oil, or both.
Expectations of a ceasefire and the reopening of the strait suggest that a major increase in global oil supply is on the way, which should translate into some relief at the gas pumps this week.
As of publication, US oil (West Texas Intermediate) was priced at around US$80 a barrel. That’s down from a recent peak during the conflict of about $113 in May, and is still above $65 days before the start of the war.
The national average for regular gasoline in Canada is currently less than $1.66 a litre, according to the CAA. That’s down from $1.90 a month ago, and $1.35 a year ago, while some consumers were paying more than $2 a gallon at local gas stations.
McTeague says Canadians can expect gas prices to drop about 10-15 cents a liter in the coming days and weeks, meaning they may not drop much below the $1.50 national average anytime soon.
Crude ships run at the speed of a small bicycle. And so for the country to take delivery, maybe two or three months, not to mention the damage, the physical damage that has been done to a lot of the oil fields in the Persian Gulf, and some of those old oil fields that have also been disrupted,” said McTeague.
“It will take a long time for things to return to normal – that means higher prices for a longer period of time.”
How long until gas prices return to pre-war levels?
If the peace deal with Iran becomes a permanent and long-term deal, it could take months, or even next year before prices return to the levels seen before the conflict began – if at all.
Lander says it could take three to four months before oil prices return to the $60 a barrel range, and that’s only if the deal holds and all facilities are repaired and shipments return to levels seen before the war began.
Others think it will take even longer.
“At least six months, at least, but because of that [oil] the flow does not mean that the gas will return to the same level because there will be more.”
This means that it may be the end of the year before prices return close to pre-war levels again, but there may be other shocks to the oil markets such as geopolitical issues that will delay the normalization process.
“The agreement will have to continue indefinitely for the next one to two years. The process of adapting to the energy markets will take time,” said Ercolao.
“We may not return to pre-war levels but we will return to manageable energy levels by 2027.”
