Diesel Pushes Inflation Far Beyond Oil as Scotiabank Warns This Is No Ordinary Energy Shock

The Iran war has pushed up oil prices, as expected. What is not typical, economists say, is the behaviour of diesel, whose price has climbed far beyond what a move in crude would normally imply.

"This is no longer just an oil shock," said Olivier Gervais, director of modelling and forecasting at Scotiabank Economics, in a report this week.

Diesel has broken away from crude

Historically, refined products like diesel move with crude oil, but usually by less, Gervais said. This episode looks quite different and adds a "distinct and broader layer" of inflation pressure.

Refined product prices have been pushed higher than oil this year for two reasons. Transporting products through the Middle East has become difficult, and the Ukraine conflict has shut down some of Russia's refining capacity.

"These two events combined led to a crunch in the supply of diesel in the global market and sent prices higher," said Gervais.

To measure the impact, Scotiabank isolated the diesel price movements that could not be explained by crude oil and tracked their effect through consumer and producer prices.

"We find clear evidence that the inflationary effects extend beyond energy in both Canada and the United States," said Gervais.

The numbers

The economists calculate that a temporary increase of about 15 per cent in the diesel spread, close to what is being seen now, would raise consumer price index inflation by 0.6 percentage points in Canada and by 0.8 points in the United States.

This pass-through is not limited to headline inflation. It shows up in underlying measures as well.

"When diesel prices rise independently of crude oil, the impact does not stop at the pump; it leads to broader price pressures later on," said Gervais.

The pass-through is gradual and persistent, the report said. Diesel is critical to trucking, agriculture, construction and manufacturing, so higher fuel costs spread through freight, production and distribution networks before reaching consumers.

Transportation prices are the first to rise. Food, shelter and other categories follow a year to 18 months later as higher costs work their way through the supply chain.

Truckers are already passing it on

A separate study by Oxford Economics found evidence that United States trucking companies are already passing part of the fuel shock onto customers.

Major crude producers with domestic refineries are not shielded either, because oil and refined products trade in global markets that set the prices.

"Even large producers such as the U.S. and Canada remain exposed to higher global crude and diesel prices despite having greater domestic supply security than major importers," said Oxford.

For Nigerian businesses, the read-across is direct. Diesel powers generators, trucks and factory lines, so a global diesel crunch feeds straight into operating costs and, eventually, into what consumers pay.