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| Colin Dacre, Castanet |
We are facing years of high oil prices.
Oil purchased from abroad is going to be more expensive. Oil drilled at home is going to be more expensive because the market price is higher. (Natural gas prices are better insulated because as it stands Canada has no export capability.)
How long will this last? Caludio Galimberti, Rystad Energy chief economist, said the rule of thumb is that recovery will take as long as the duration of the outage. Delays are caused by repositioning ships, the trickiness of restarting supply chains when storage tanks are overflowing, the difficulty of restarting crude oil pumping, and rebuilding pipelines and facilities bombed by Iran in Qatar, Saudi Arabia, Kuwait and the United Arab Emirates. The four percent of world oil formerly provided by Iran may take decades.
Oil producers outside the Persian Gulf will eventually respond to higher prices, but they can’t do it immediately. Shale oil is the most nimble -- opening new wells takes between a year and 18 months. New conventional oil would take between five to eight years. Producers are making windfall profits on the price of oil today but they are not making any moves to increase the oil supply. When they do, it will anchor the price of oil higher than it was before the war, as companies recoup investments in new wells. Prices will stay higher, longer, as countries either start or refill strategic reserves, now that China has demonstrated their value.
It is not all good news for climate change. At least eight nations in Asia, as well as Germany and Italy, are turning back to coal to produce electricity. Higher prices support oil sands in Alberta, which have a carbon footprint 10% higher than conventional oil in North America and twice the carbon footprint of Persian Gulf oil. (If you’ve been pointing a finger at Alberta, remember that British Columbia is the largest Canadian exporter of coal to Asia.)
High prices in any commodity can cause demand destruction -- people use less of the commodity permanently because of a temporary spike. Demand destruction can happen because of behavior substitution -- people choosing to vacation close to home, rather than flying overseas due to high airfares. It can happen through industrial restructuring, where businesses learn to do things more efficiently or reach for alternative energy sources. And at its worst, high prices can cause economic contraction, i.e. a recession, leading to lower oil consumption for years.
No sane government, certainly not former prime minister Justin Trudeau’s, would have introduced a carbon tax at the scale and the suddenness of the Iran war oil shock. When current Prime Minister Mark Carney discontinued the carbon tax, it was set at 17.61 cents per litre. Federal gas taxes, now suspended, were 10 cents per litre. So far gas has gone up by 40 cents per litre. No one is willing to predict how high it might go.
Keep in mind that an oil shock doesn’t just alter the cost of driving your car to work and taking an airline flight. Oil and natural gas are used to create fertilizers. The oil shock is going to create famine in parts of the world, caused by higher costs getting food to market, shortages of fertilizer, and less food available for purchase as farmers plant fewer acres in response to high prices.
Oil prices rise and fall but global warming is a far bigger and more permanent threat. It’s a threat to everyone on earth (think global storming) but especially the people with the fewest resources. If we take advantage of demand destruction caused by the U.S. war on Iran, we could have a critical impact on global warming. Up till now Canada has done abysmally. Pulling from the Project Drawdown playbook (read more here) the clear winner is electrification of transportation. Canada needs inexpensive small EVs.
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| Original photos from manufacturer, composite from ChatGPT |
North American car manufactures prefer to sell large trucks and SUVs because they have a higher profit margin but most of our trips to the grocery store don’t require a larges pickup truck. And, sadly, North American EV manufacturers have chosen to concentrate on producing expensive electric SUVs and full-size pickups rather than reasonably priced sedans. Do we have to be a large pickup country? Canadian farmers, who might be expected to be holdouts for big trucks, are voting with their feet. For years they have been importing Japanese Kei (“mini”) trucks because they go everywhere and use less gas (six litres/100 km compared to 35 litres/100 km). Carney, focused on protecting Canada from the U.S., has jettisoned many of Trudeau climate policies. However, Canada could more than recoup lost ground by leveraging oil shock demand reduction into permanent reductions in carbon emissions. Let’s seize the moment and move Canada out of last place.
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