Heather Exner-Pirot: Canada’s self-imposed high gas prices

Countries don’t typically get report cards, but there are hard facts that can be collated, assessed and compared. Enter Benchmark Canada, a new project from the Macdonald-Laurier Institute that brings together more than 40 different metrics that measure this nation’s performance. This fall, the National Post is examining many of those findings.

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It is a painful experience to gas up these days. Many Canadians have been wondering why we face the same high prices as the rest of the world when we have huge oil reserves and are a net exporter of crude oil and fuels. Some of the cost is due to disruptions to global gasoline and diesel supplies from conflicts in the Middle East and Russia. But part of it is self-imposed through clean fuel regulations. While everyone is paying more at the pump in 2026, Canada does have options to make gas cheaper going forward.

The short answer to why gas costs more is because we are facing an unprecedented energy supply shock, more serious than the 1970s OPEC oil embargo, the 1979 Iranian Revolution or the 2022 Russian invasion of Ukraine. The Strait of Hormuz, the world’s biggest oil choke point, has been disrupted since late February due to the war involving Iran and the United States, and Saudi Arabia’s alternative export route through the Red Sea has been hindered by attacks from the Yemen-based Houthis.

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Although crude exports have meaningfully recovered, supply is still below demand, shipping costs have skyrocketed and refined product exports from the Middle East have risen much more slowly. On top of that, Ukraine has been relentlessly and successfully attacking Russian refineries. While Russia normally exports as much as half of its fuel oil output, production constraints have led it to go so far as to ban diesel exports. Diesel prices around the world have hit record highs and shortages are likely persist into 2027.

Why do these conflicts affect Canadian fuel prices? Canada is not only a large exporter of crude oil, it is a net exporter of finished petroleum products such as diesel and gasoline. However, the fuel market is global. Diesel prices in Canada are determined by the value of diesel in the North American and global markets, not Canada’s domestic balance of production and consumption. Canadian and American refiners respond to international shortages by moving more diesel into markets where it is more scarce, and thus can fetch higher prices.

This normal market response has provoked accusations from the B.C. and federal NDP that refiners are exploiting overseas conflicts and war profiteering. There have even been calls for capping diesel prices and windfall profit taxes. This is not a phenomenon exclusive to the left. U.S. President Donald Trump, being particularly sensitive to the impact of high diesel prices on the upcoming midterm elections, has also floated the idea of an export ban on diesel.

Yet such ideas would exacerbate the current crisis, as they would restrict markets rather than increasing supply, and discourage more North American refining. At a time when the world needs more diesel, the priority should be maximizing Canadian refinery throughput and keeping trade flowing, not restricting access to the supplies that remain.

Canada can do little in the short term to alleviate the global energy crisis, but provincial and federal governments have other tools to lower prices at the pump, as up to 40 per cent of the cost of a litre of gas comes from taxes.

The low hanging fruit has been addressed by the federal government: in addition to removing the consumer carbon tax in 2025, Prime Minister Mark Carney suspended the federal fuel excise tax in April, saving Canadians 10 cents/litre on gasoline and four cents/litre on diesel. Alberta and Prince Edward Island have also suspended provincial fuel taxes.

But there is another lever to pull: the clean fuel regulations. Enacted in 2023, the clean fuel regulations (CFR) are designed to progressively reduce the greenhouse gas emissions associated with gasoline and diesel sold in Canada.

Rather than imposing a fixed charge per litre, they require suppliers to reduce the life-cycle carbon intensity of the fuels they sell through a complicated combination of tradable credit markets, life-cycle emissions accounting and different compliance pathways. Blending in lower-carbon fuels such as ethanol and biodiesel is one of the principal pathways.

Although the CFR is not as transparent as an excise tax, we know how much it costs consumers because Atlantic-Canadian fuel prices are regulated, and most provincial regulators explicitly allow suppliers to recover compliance costs in gasoline and diesel prices.

In July, the Nova Scotia regulator assessed the CFR compliance costs at 13.57 cents a litre for diesel and 12.24 cents a litre for gasoline. To add insult to injury, HST is charged on top of these costs. The Parliamentary Budget Officer estimated in 2023 that the cost of the CFR would rise to 17 cents per litre of gasoline and 16 cents per litre of diesel by 2030, and lower Canada’s GDP by 0.3 per cent.

There is an even more insidious aspect to the CFR. To meet their carbon intensity targets, many Canadian refiners blend biofuels into their petroleum products. But Canada is not self-sufficient in their production. More than half of Canada’s biofuels are imported, predominantly from the United States.

Somehow, in the middle of a trade war and an energy crisis, it has gone unnoticed that Canada — the aspiring energy superpower — has artificially made itself dependent on the United States for fuel. The vulnerability was brutally exposed with U.S. President Donald Trump’s diesel export ban threat, when refiners were scrambling to find out if renewable diesel bound for Canada would be caught in the net.

It is a favourite line of the Carney government that, amidst geopolitical rupture and trade disruption, “Canada is focused on what we can control.” The CFR is at the top of the list of self-harming, expensive and distortive policies that Canada controls, and has every interest in rolling back.

National Post

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