Rising diesel prices mean potential impact on COVID- and inflation-battered budgets

If you drive, it hasn’t been hard to notice climbing gas prices in the past several months, and more recently, the Russian invasion of Ukraine has affected the global supply of crude oil.

But if you’ve been at the pumps lately, you might have also noticed that diesel prices have soared, which experts said could have a ripple effect on our economy.

CityNews visited several east-end Toronto gas stations to look at diesel prices on Monday and Tuesday and found rates as high as $2.459 and $2.399 a litre.

“For small businesses or those who demand on a lot of movement of goods, the higher prices are going to be tougher for them to take,” Richard Masson, an executive fellow at the University of Calgary school of public policy, told CityNews.

He said that combined with the general higher inflation we’ve seen, the transportation sector and those who rely on it feel the pinch.

“It’s always a problem when people are facing higher prices that they can’t pass on and certainly coming out of COVID, there [are] a lot more companies who are in a weaker position, they racked up bank debt, they don’t have as much capacity to absorb these things, so it’s one of the challenges,” Masson said.

“On the positive side, there’s been a lot of demand, so it’s possible that they’re selling more products and may be able to raise prices a little to offset. But the economy is in a disruptive time right now, and so it’s going for people to navigate their way through.”

Dr. Feyza Sahinyazan, an assistant professor at Simon Fraser University’s Beedie School of Business, echoed that concern.

“For the small businesses, common sense might have suggested that all businesses regardless of sector or size whether transportation prices increase observe similar cost increases. However, for smaller businesses, the situation is usually more adverse since they have access to a smaller pool of transporters and/or suppliers,” she said.

“They do not observe the economies of scale for the size of the business that they’re offering to their suppliers or their transporters. Also, smaller businesses are reluctant to pass the prices toward their customers.”

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When asked if she’s concerned about what elevated fuel prices will do for small- and medium-sized business, Sahinyazan said after a year-and-a-half of a supply chain issues (blocked ports, B.C. floods to name a few) that the whole chain is much more “fragile” than we’ve been thinking about. However, she said multiple bounce-backs during the pandemic gives her confidence businesses will be able to navigate the current diesel market.

According to En-Pro’s chief petroleum analyst Roger McKnight, he said diesel is something that needs to be paid attention to.

“It is diesel that is the workhorse and the indicator of the health of the economy. It wasn’t long ago that diesel was the fuel of choice when you considered its cost and low maintenance outlay versus gasoline power,” McKnight wrote in a weekly energy report at the end of April.

He said the average national diesel price a year ago was $1.23 a litre, but it has now jumped to $2.06. During the same period, regular gasoline jumped to an average national price of $1.80 a litre from $1.29. McKnight also noted diesel has a higher average price than premium gas.

“What does this spread mean to the average consumer? The consumer is the piper who pays,” he said, noting transport companies or organizations that rely on diesel either have to increase credit limits or pay straight out of pocket.

“If you are wondering why that cauliflower cost you $6.99 the other day, that’s your answer.”

It’s not just the private sector that is feeling the impact. Governments that operate public transit systems or use heavy machinery such as snowplows will need to see fuel budgets boosted.

Joseph Reid, the general manager of transportation and operation services for the City of Belleville and a volunteer with the Ontario Good Roads Association, said most of the fuel his municipality buys is diesel. He said they’ve had to increase their 2022 budget in response to the hikes.

“When there [are] fluctuations in fuel prices, we as a municipality do feel the brunt of it,” he told CityNews.

“We’re trying to reduce what we can … using energy-efficient vehicles and fleet, minimizing idle time and so forth, but again we have to provide the core services to our community.”

However, he said a locked-in, multi-year contract along with hedging is partially helping to offset the current high prices.

Closer to the Greater Toronto Area, GO Transit, UP Express and the TTC all have major diesel fleets.

According to a statement from a spokesperson for Metrolinx, the Ontario government organization that oversees GO and UP, the agency expects to use 83 million litres of diesel for rail and bus services. The majority (78 per cent) is for rail, and a locomotive can burn nine to 15 litres of diesel fuel a mile, depending on the train size.

The spokesperson said hedging helps “reduce risk” and noted fuel makes up 10 per cent of the overall budget.

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In a statement, a TTC spokesperson told CityNews the transit agency is forecast to spend $82 million on fuel this year.

“Given extreme market volatility, the ultimate impact on the 2022 budget cannot be confirmed at this time. Impacts will be reported through updates to our board,” he wrote.

“Reduced year-over-year consumption and hedging a portion of our diesel requirements will help offset the higher price.”

There are no indications yet that the higher prices will ultimately impact what riders pay when boarding.

Meanwhile, there’s no sign of relief on the way soon, but hopes remain the situation will improve.

“Refineries are designed to produce a range of refined products, so gasoline, diesel and jet fuel are the three main ones. You can swing a little bit of jet fuel into the diesel pool,” Masson said.

“Nowadays, air traffic is picking up again, so we need to be able to produce enough jet fuel to meet the needs of the jets, and so it’s a challenge. Refineries have to try to guess what demand will be for those three products. There’s a little bit of ability to change them, but it’s not very easy, and it’s not something they can respond to overnight.”

He went on to say refineries are also in the process of switching to summer quality fuels from winter quality, which adds complexity.

“Refining is not a simple business. Trying to meet the demand that changes quite often is a real challenge, but hopefully, we can have more supply on the market here to help keep prices reasonable,” Masson said.