As the world acts to stabilize oil prices, Canada sees a potential windfall

The International vim government agency in agreement(p) on midweek to release 400 million barrels of oil from its strategic reserves in order to tamp down surging prices caused by the closure of the Strait of Hormuz and other disruptions to the oil industry in the Persian Gulf.

That's more than twice the amount the IEA released to calm markets following Russia's full-scale invasion of Ukraine in 2022.

"The oil market challenges we are facing are unprecedented in scale, therefore I am very glad that IEA member countries have responded with an emergency collective action of unprecedented size," said IEA director Fatih Birol.

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As a producer country, Canada is not required to hold a strategic reserve in storage tanks in the same way that importer countries are, so the Canadian release will come mostly in the form of increased production achieved through measures such as delaying scheduled maintenance and increasing pipeline flows.

The release, said Tyler Meredith, lead economic adviser to the prime minister from 2015 to 2022, "is really just to buy time" while the global oil supply remains constrained for "probably the most of the next year."

That means higher prices, which experts say will have a large effect on bottom lines for Canadian governments, corporations and individuals.

The release represents about a third of the oil stored by IEA's 32 member governments. But it's also less than four days of global consumption, and no one knows how many more days the Strait of Hormuz will remain closed.

For every day that it does, the world loses about 15 to 20 million barrels of production, says analyst Rory Johnston of Commodity Context.

That loss, primarily to Asian markets, "is kind of an air pocket" in global oil supply that will soon hit shore.

"When that air pocket lands, that's when inventories are going to start drawing really aggressively. And that's when the physical market will force some kind of higher price," he said.

How high that price could go depends almost entirely on outcomes in the Persian Gulf that remain wildly unpredictable.

Monday may have been the most volatile day in the history of oil trading. But few experts are confident how long that record could stand.

Brent crude, the world's benchmark barrel, surged 30 per cent to just under $120 US, then dropped by an even larger amount in response to U.S. President Donald Trump's confusing claims that the war was "very complete" and "going to be finished pretty quickly."

Analysts are still trying to square those claims with statements Trump made last Thursday in which he said the war would only end with Iran's "unconditional surrender" and other statements hinting at further escalation.

But futures traders, who initially applied the nickname "TACO" to Trump last year (Trump Always Chickens Out) because of his flip-flopping on tariffs, seemed to decide that another such moment had arrived, says energy analyst Joe Calnan of the Canadian Global Affairs Institute.

"The way that the Trump administration is talking seemed to be changing, and that had people expecting it to come to a conclusion in some way or another," Calnan said.

But Calnan doesn't see a rational basis for that optimism.

"The U.S. Is still doing strikes, Israel still doing strikes, Iran is still doing strikes. Ships still aren't going through the strait," he said.

He said that with the availability of cheap drones and more precise missiles, attacking oil tankers also appears easier now than during the Iran-Iraq war of the 1980s — pointing to attacks by the Houthis in the Red Sea.

Three ships that apparently took Trump's advice to "show some guts" and try to run the Strait of Hormuz were struck by hostile fire on Tuesday, including a Thai bulk carrier that had to be abandoned. Three crew members are missing.

"There's always that possibility we could see a rapid change in the nature of the Iranian regime. But until then, we have to assume status quo," Calnan said. "I don't see a way that this resolves anytime soon."

That's important because analysts agree that the market effect of the war is largely a function of time.

Johnston said the drop in the price of oil following Trump's comments on Monday was a habitual reflex, rather than a rational response.

"The problem with this crisis is it's too big to solve. There are no offsets large enough," he said. 

"Tankers are not moving. And as long as that remains true, nothing has fundamentally changed."

Even if the strait were to reopen today, say the experts, some price increase is already built into the system and could be expected to persist for a few months, which would potentially benefit oil-producing countries, including Canada.

On Wednesday, the U.S. Energy Information Administration raised its forecast for the spot price of Brent crude from under $58 US a barrel to almost $79 US.

If that $20 average increase comes true, experts say, it will be a windfall for Canada.

"We are a massive net exporter of oil and products," said Johnston. "Western Canada is going to benefit. You're going to see a boost in royalty revenues."

"In the case of Alberta," said Meredith, "$90 a barrel over the course of the year would be sufficient to wipe out, and probably turn into a surplus, what was going to be a $10-billion deficit."

While he says Alberta, Saskatchewan and Newfoundland would be the big winners, the federal government's bottom line will also likely be helped by the secondary effects of increased GDP and greater corporate and individual tax revenues.

Meredith says every $10 increase in the price of a barrel of oil translates into about $2 billion of additional revenue for the federal government — "a pretty substantial benefit."

But there are caveats.

The windfall would not fall evenly on a country where the oil is concentrated in three provinces.

Calnan said there could be "negative impacts on the provinces that are more sensitive to energy prices."

But the bigger concern by far is that the price of oil would rise too much, passing $100 a barrel and heading for $200. 

"If you needed to rip 20 million barrels a day of demand, or even 15 or 10, from the global demand side, that's going to cause a consumption contraction that's going to hurt everything else along the way," said Johnston.

The only time the world has seen such a contraction, he said, was in the first months of the COVID-19 pandemic when planes stopped flying and commuters stopped commuting worldwide.

"This will manifest for us as soaring prices at the pump, recessionary conditions and a sapping of consumer disposable income," he said, while poorer nations dependent on imports will experience real shortages.

Canada's oil windfall would be swamped by other trading losses — such as stress in supply chains and aviation, and central banks raising interest rates to rein in inflation, said Meredith.

"A significant amount of our overall GDP, much more significant than just our oil and commodity sector, depends on the ability to export not only to the United States but to a number of other countries," he said.

"And so as those countries face significant economic contraction and the destruction of demand, it means that we are eventually — maybe not immediately — but eventually going to get pulled into a global economic recession."

The analysts say the IEA's decision is a positive sign that countries are co-operating, rather than hoarding, in the face of those dangers. 

On Wednesday, French President Emmanuel Macron floated the idea of a multinational force to protect shipping through the strait. But Johnston is skeptical that protective measures alone can fix the situation. 

"All this talk about escorts, everything else like this is just papering around the edges," he said. 

"Even if we achieve 50 per cent of flow, this is still an existential crisis … it's still a shock that the market couldn't solve. 

"The war has to end and flow through the strait has to resume. There is no other option."

Senior Reporter

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