By most accounts, Donald Trump’s “excursion” into Iran is turning into a monumentally expensive disaster, both for his country and the broader global economy. His administration’s failure to anticipate the obvious consequences of its actions, which now include Iran’s weaponization of the Strait of Hormuz, will cost America dearly. But we shouldn’t get too high on our proverbial horse here in Canada. After all, we seem determined to make our own strategic blunder. 

The lesson most countries are speed-learning right now is that depending on fossil fuel imports is far more expensive and potentially destabilizing than they’d been led to believe. The Philippines has already declared a national energy emergency, Slovenia and Sri Lanka have imposed fuel rationing measures, and South Korea is encouraging voluntary fuel conservation. The list of countries and range of measures will grow over the next few weeks, as the full impact of the Strait of Hormuz’s ongoing closure on oil markets becomes clear. As the Trump administration is discovering, that could include oil prices spiking above $200 per barrel. 

Financial markets haven’t come close to pricing that in yet, which means they’re effectively betting on a quick resolution to the conflict. But consumers around the world aren’t waiting to find out if they’re right. Electric vehicle dealerships across Europe and Asia have reported huge spikes in their March sales figures, while a pair of German companies that sell heat pumps told Bloomberg they’ve already seen a major surge in interest. Then there’s Octopus Energy, the UK’s biggest energy supplier, which said that inquiries about home solar systems were 27 per cent higher than in the week the war began. 

“Higher oil prices always help the transition to electric vehicles,” Albert Park, chief economist of the Asian Development Bank, told Bloomberg. “It creates economic incentives to accelerate the green transition.” Those incentives aren’t about to go away, either. In a research note on the conflict, JP Morgan’s chairman of market and investment strategy, Michael Cembelast, sees echoes of the world’s last great energy crisis. “The only outcomes that seem certain: like the 1970’s, there will be a global push for greater energy efficiency and less reliance on geopolitically risky fossil fuel imports; and that Iran’s gov’t will continue to have enormous tolerance for economic misery.”

This is an important point. For all the talk about Trump chickening out, as has become his trademark, he doesn’t have the cards here. While Iran had threatened to use its so-called “energy weapon” and close the Strait of Hormuz in the past, it never actually knew if it could pull it off. Now it does — and it has every incentive in the world to do it again and again and again. Who needs a nuclear weapon for deterrence when you can crash global financial markets at the push of a button? 

Jason Bordoff, the founding director of the Center on Global Energy Policy at Columbia University and a former Obama administration official, explained this new geopolitical math in a recent interview with the New York Times’ Ezra Klein. “The thing about the energy weapon is it is quite asymmetric,” he said. “You don’t need a massive military and battleships to wield it. You can do it in a much more targeted, lower-cost way. And I think that is a lesson that Iran is learning from this, and I fear other countries might learn, as well.”

That risk will be priced into global oil markets going forward, both in the form of higher prices and greater uncertainty. “The damage has already been done,” Enervus vice-president Al Salazar told the Calgary Herald’s Chris Varcoe. “Once the flow problem has been solved, we have a low stock problem that suggests we should be at least in $100 oil again.” That, in turn, will only accelerate efforts by importing countries to decouple their economies from more expensive oil and gas imports. BloombergNEF was already forecasting as much as 5.25 million barrels per day of global oil demand destruction coming from the switch to electric vehicles by 2030. If you’re the betting type, you should take the over on that. 

None of this appears to have broken through in the conversations our politicians are having right now. Alberta Premier Danielle Smith is still pressing ahead with her pipeline dreams for the West Coast and federal energy minister Tim Hodgson seems more than happy to come along for the ride. They both cheered and championed a new study by ATB Financial and Studio.Energy that suggested a new 1.5 million barrel per day West Coast oil pipeline would create more than 100,000 new jobs and add 1.1 per cent to Canada’s real GDP by 2035. 

I hate to be a buzzkill — actually, I don’t — but it’s worth grounding that study in a few basic facts. First, the impact to GDP is almost entirely a function of the massive spending it would involve — an estimated $41 billion on the pipeline and more than $100 billion on the oil needed to fill it. I would gently suggest that we could achieve similar modeled impacts on employment and GDP if that money was spent on something else — the development of clean energy capacity, perhaps. 

I’m going to be a lot less gentle about the magical thinking required here. The study only looks out to 2035, which is pretty convenient for a bunch of different reasons. First, it’s not even remotely clear that we would need a new pipeline before then, given the commitments already made to expand the Trans Mountain pipeline and Enbridge’s mainline. As former Kinder Morgan Canada CEO Ian Anderson explained on a recent podcast, those projects (which will add upwards of 600,000 barrels per day of capacity) would meet supply growth needs out to 2035. And that’s before accounting for the renewed interest in finishing the work on Keystone XL, which would add another 510,000 barrels per day.

Any new West Coast pipeline, then, would be a bet on long-term oil demand past 2035. I have no doubt that this is a bet Smith and Hodgson are more than happy to make — perhaps even with taxpayer dollars. But I have all sorts of doubts that it’s one the oil companies involved would actually be interested in. In order to add that much oil to the market that quickly, they would need to commission a bunch of projects with marginal economics — ones that require $70 per barrel or higher to break even. By the time they actually come online, simply breaking even might be the best they could hope for. 

It’s worth remembering that it was just over a decade ago, when it seemed like oil prices were destined to stay above $100 per barrel and those oil companies were commissioning the last of their most expensive oil sands projects, that OPEC last decided to crash the market. A mere 1.5 million barrel per day oversupply in a market where 94 million barrels per day were being consumed smashed prices down below $30 per barrel and held them below $60 per barrel for years. The aforementioned 5.25 million barrels of predicted demand destruction due to EVs — never mind the impact of significantly higher oil prices —has the same effect as 5.25 million barrels of new production: it crushes prices. In that sort of price environment, any new projects sanctioned today in order to satisfy the premier’s pipeline dreams would be underwater in short order. 

I would invite the senior executives at these companies to imagine what OPEC countries like Saudi Arabia will do with their ultra-low cost supply (which can often be extracted for less than $10 per barrel) once it becomes clear that global demand is indeed in terminal decline. Will they continue to withhold barrels, as they have in the past, in order to keep prices higher? Or will they produce as many as possible in a race to get them out of the ground before the demand declines even further? 

These are all questions that deserve a hearing as Canada’s leaders discuss the prospect of new pipelines and potentially more publicly funded support for them. Instead, they’re being buried — deliberately — under a mountain of wishcasting, hopium and willful blindness. If politicians, like generals, have a tendency to fight the last war, as former US ambassador John Bolton once said, ours seem particularly determined to lose the next one in the process.  

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