The ongoing supply-chain crisis has helped push inflation to its highest levels in decades, elevating the cost of goods and confounding central bankers. Now, as Russia’s invasion of Ukraine intensifies, that inflationary pressure is being further amplified by an equal (if not greater) force: oil.

The price of West Texas Intermediate, the U.S. oil benchmark, has surged to over US$100 a barrel, a prospect that seemed impossible just a few years ago. Soaring oil markets are sure to kick inflation into overdrive and come as the Bank of Canada is set to announce its interest-rate decision Wednesday, complicating an already cloudy monetary policy environment.

Here’s a rundown of what’s happening in oil markets and why it matters.

Why are oil prices so high? In short: supply is lagging demand. It would be easy to draw a straight line between high oil prices and the war on Ukraine. And the conflict will cause supply constraints that fuel higher prices (supply, rather than demand, also caused the 2014 oil-price collapse, when an oversupply of crude oil sent prices plummeting).

However, the recent supply shortage is as much structural as geopolitical. Prices surpassed US$90 well before Russian artillery breached Ukraine’s borders, mostly due to “chronic” under-investment in new production, particularly among OPEC producers. At the same time, the gradual unwinding of pandemic restrictions is spurring demand. That means high prices could stick around for a while, barring a broader economic slowdown.

Can oil markets be tamed? The International Energy Agency held an emergency meeting Tuesday, where its 31 member countries agreed to release 60 million barrels worth of stockpiles in an effort to cool prices. That is likely to have limited impact, given that the world consumes an average of 100 million barrels of the stuff every day.

What about Russian exports? Western nations face pressure to ban Russian oil imports, which would only further constrain supply and push prices higher. In 2020, Russia produced about 10 million barrels of oil per day, 31 per cent of which it sold to China. Europe bought 48 per cent of Russia’s oil exports that year, of which Germany alone accounted for 11 per cent. Prime Minister Justin Trudeau banned Russian oil imports in a symbolic move Monday, where he acknowledged that Canada imports “very little” of the commodity.

What it means for inflation: Oil has a mighty influence in propelling inflationary pressures in Canada. Central banks, including Canada’s, have already indicated their intention to raise interest rates in light of the highest inflation in decades. That will have reverberations throughout the economy, raising the cost of capital and impacting everyone from manufacturers to venture capital funds. As Bank of Canada governor Tiff Macklem announces his decision, you can expect soaring commodities markets to join supply-chain slowdowns among his top concerns.