Monetary Policy Report—October 2026—In focus
Elevated refinery margins have pushed up fuel prices further than the rise in crude oil prices alone would suggest, adding to cost and price pressures. Margins are expected to decline gradually.
Damage to refineries, export disruptions and limited spare refining capacity have reduced the global supply of refined fuel products. As a result, refinery margins and fuel prices have risen.
Margins are assumed to remain around current levels until the end of 2026 and then decline gradually. How quickly they normalize will depend on the extent and duration of the disruptions, the pace of repairs and global demand for refined fuels.
Damage to refineries has pushed refinery margins higher
Fuel prices are influenced by both crude oil prices and refinery margins.
Crude oil prices have risen above US$100 per barrel. But fuel prices have risen by more than can be explained by this increase. This is because refinery margins have also gone up.
The increase in refinery margins largely reflects export disruptions in the Middle East and damage to refining capacity from attacks in Russia. The resulting decrease in supply has been difficult to offset because there is little spare refining capacity in the rest of the world.
Diesel has been particularly affected because Russia and the Middle East are major suppliers and inventories were already low. In addition, demand for diesel is relatively insensitive to price given diesel’s essential role in freight transportation and industries such as agriculture and mining. Reduced supplies of suitable crude oil have also constrained production at some refineries, putting further pressure on margins.
As a result of these disruptions, refinery margins pushed up fuel prices by the equivalent of roughly US$40 per barrel of crude oil in September (Chart 25). In Canada, gasoline refinery margins now account for close to 40% of the pre‑tax pump price, compared with around 30% in recent years.
Higher margins affect inflation through several channels
Like higher crude oil prices, rising refinery margins raise inflation immediately because higher wholesale prices are quickly reflected at the pump.
The indirect effects emerge more gradually. Higher diesel prices raise freight and operating costs in fuel‑intensive sectors such as food processing, agriculture, mining and construction. Higher jet fuel prices increase air transportation costs. The longer fuel prices remain elevated, the more likely businesses are to pass these costs on to consumers (see In focus: Using Prima to trace how an energy shock affects inflation).
Canada benefits less from high refinery margins than from high crude oil prices because refined products account for a much smaller share of the country’s net energy exports than crude oil.
Refinery margins will likely decline gradually
Elevated refinery margins are likely to persist. Damaged facilities can take up to 12 months to return to normal operations, and limited spare capacity will make absorbing further disruptions difficult. How long the shock lasts will also depend on inventories and the ability of trade flows to redirect refined products to affected markets.
The base‑case projection assumes that refinery margins remain close to current levels until the end of 2026 and then decline gradually over the projection horizon, in line with market expectations (Chart 26).
If disruptions to refining and export capacity broaden or last longer than anticipated, refinery margins could remain elevated for longer. However, faster repairs, a resumption of exports or weaker demand could narrow refinery margins sooner.