En-Pro's Roger McKnight says Canada could soon see diesel supply rationed
Canada is facing diesel supply constraints and experts believe prices will remain elevated as inventories near decade lows.
Roger McKnight, chief petroleum analyst at En-Pro International, said that diesel prices are now significantly elevated as supplies are limited. Diesel prices have nearly doubled year-over-year due to a global shortage in refinery capacity, according to a statement from Natural Resources Canada Monday.
“Supply is very tight, especially in the U.S. northeast, and that's sort of dominoing right across the country,” McKnight said in an interview on Nov. 4.
He said the typical wholesale price at this time of year hovers around five cents higher than gasoline, as “heating oil season” begins and demand for gasoline wanes. However, McKnight said the current average spread between diesel and gasoline prices nationally is around 59 cents.
“We're on the verge of getting into allocation territory here whereby it's such short supply, we're going to have to pick and choose who gets it,” McKnight said.
Other experts disagree that Canada is on the verge of allocation. Werner Antweiler, an economics professor at the University of British Columbia, said rationing generally only occurs after a market failure.
“Rationing is only a last resort [if] we are really in complete dire straits and the market actually has failed, but at this point, there's no reason to think the market is going to fail,” Antweiler said in a phone interview on Nov. 4.
Antweiler thinks there is no current need for the government to intervene and that it should let the market “sort it out.”
However, Antweiler said higher prices are likely to continue as diesel supplies near decade lows.
Several factors are contributing to diminished supplies, according to Antweiler, including increased diesel demand for heating during the winter season, the willingness of European buyers to pay a premium during an energy crisis and limited refinery capacity.
Two factors make it difficult to predict what diesel supplies might look like in the coming months, according to Carol Montreuil, the vice-president of Eastern Canada and economics at the Canadian Fuels Association. These factors include the energy supply in Europe and how an economic downturn in Canada could impact demand.
Despite those two variables, Montreuil said rationing for diesel in Canada is not imminent.
When rationing has occurred historically in Canada, Montreuil said it “tends to be a matter of days or weeks before the situation is resolved.”
If rationing were to occur, diesel allocation would be based on a classification number given by the Energy Supplies Allocation Board, according to McKnight, where each type of trade gets assigned a number.
“For instance hospitals, ambulances and police. Any medical-related or food-related industry will get a high priority,” he said.
McKnight said there are 30 different categories and those in the top five are likely to avoid disruptions, “but if you're in the lower 25, not so good.”
Diesel shortages could have knock-on inflationary effects, according to McKnight.
“Diesel prices are very inflationary and I saw a wholesale jump overnight of 10 cents a litre for diesel. That's astronomical and it's going to be a serious inflationary problem,” McKnight said. On Nov. 4.
“I don't think it's [going to be] solved unless we cut back on supply.”