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Deloitte analysis | Energy will continue to fuel inflation



Energy was top of mind for decision makers in 2022 and will remain so, according to Deloitte Canada.

The cost of energy will continue to fuel inflation in the coming months, due to geopolitical tensions and companies’ efforts to reduce their carbon emissions, Deloitte Canada predicts in an analysis of the current energy environment released Monday.

Opposing winds

Volatility is here to stay in the crude oil market as the war in Ukraine, recession risks and the reopening of the economy in China, the world’s largest consumer, exert opposing pressures on prices, according to Deloitte. Next: the impact of the US$60 per barrel cap on Russian oil imposed by the European Union, the G7 countries and Australia. Russia, the world’s second-largest oil exporter, has said it will not sell oil to countries that meet the cap and will cut production, which risks disrupting the market and pushing up the price of crude .

Cheap Canadian oil

Canada, the world’s fourth-largest oil producer, did not benefit as much as others from the surge in crude prices that followed Russia’s invasion of Ukraine. Canadian crude always sells for less than US oil (WTI) or Brent because it is heavy oil that only has one market, the United States. However, the usual range of US$13 to US$15 lower than WTI per barrel widened considerably to over US$25 per barrel by the end of the year. The decision of the United States to draw 180 million barrels of crude from its reserves to put them on the market and limit the increase in prices at the pump for the Americans had the effect of reducing the demand for Canadian oil.

“Refiners have moved away from Canadian crude oil as the energy costs to refine heavy oil are higher than those to refine light oil,” said analyst Andrew Botterill, national leader, oil, gas and chemicals at Deloitte Canada. Although the use of the Strategic Petroleum Reserve is a temporary measure, the gap between the price of Canadian crude and that of US crude could persist and even increase due to the leak that forced the shutdown of the Keystone pipeline.

Natural gas: uncertainty reigns

Natural gas is more easily exported and its price is now more dependent on global supply and demand. North American gas consumers realized this in 2022, as demand for gas from European countries to replace Russian gas more than doubled the price on this side of the Atlantic. The price of gas rose from US$4 per million BTU at the start of the year to US$10 per million BTU in the summer, before stabilizing around US$5-7 per million BTU at the end of the year. end of the year. However, recalls Deloitte, these high prices did not lead to an increase in production, as one might have expected, in Canada as in the United States.

“We expect natural gas producers to continue to adjust their production to demand and exercise caution with respect to new developments,” explains the Deloitte Canada analyst. Prices could remain high as an increase in supply seems unlikely given producers will continue to align production with demand and be cautious about additional development,” notes Deloitte.

A costly energy transition

The cost of energy has fueled inflation in 2022 in most countries around the world, and the pace and speed of the energy transition will continue to add to inflationary pressures, Deloitte predicts. For companies, “existing alternatives are less efficient than the sources they replace”, because renewable energy sources such as solar and wind have lower energy densities and have need more raw materials to produce the same amount of energy. “It costs more to produce the same amount of energy from less dense sources,” the analysis points out, so the transition to renewable energy sources could further increase inflationary pressures.

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