From Tehran to Toronto: How the Iran war influences Canada’s energy prices

Frequency podcast network. Stories that matter, podcast that resonate.

How about that weather or the traffic? Or did you see the price of the pumps?

They're the tried and true small talk topics that unite us as Canadians.

But these days, gas prices are more than just a water cooler chat you can't avoid.

As the ongoing conflict in the Middle East now in its fourth week

keeps the straight-of-war moves effectively closed, pushing oil prices higher

and leaving households to foot the bill. But why is a war halfway around the world

costing Canada more? A country that produces most of its own oil domestically.

I'm Karen C. Olin and today on the big story, I'm speaking with Heather Exner-Piro.

She's the director of Energy and Natural Resources and Environment at the MacDonald-Lorea Institute.

We'll talk about why you're paying more for gas and whether a reprieve is on the way

after President Donald Trump teased the possibility of resolving the war.

Heather, firstly, I've been following your insights on Ex.

So it's so great to be speaking with you today. Thanks so much for making the time.

Yeah, happy to be here.

Let's start with the basics. For those of us, namely me,

who don't really have a strong understanding of how the oil market works.

Just explain for us how much oil does Canada produce?

My understanding is that it's far more than we consume.

And how much of our production is exported?

Yeah, great question. And it's trickier than you think.

So you can think about crude oil or oil, including natural gas liquids and LNG.

So that's why you might see some variants from different numbers.

But I'll say ballpark also sometimes you might hear oil sounds production or Alberta production.

But I'll say ballpark is about five and a half million barrels a day.

And we use maybe a million, you know, give or take ourselves in Canada.

So we're exporting about four and a half million barrels a day.

And that makes us the world's third largest exporter, which most people don't know.

We're only behind Saudi Arabia and Russia, but because almost all of it goes to the United States.

It doesn't really flow into global markets, I'll say.

And so you were really a regional, a super regional producer, not a huge global producer.

And I'm assuming because of a lack of pipeline infrastructure, like we would need to be importing small volumes for Eastern Canada.

Yeah, that's right. So, so it is, we do import.

So our balance of trade of refined products is pretty even with the United States actually.

They need our crude oil, they're a net crude importer.

Even though they're a huge producer, the world's biggest producer of oil.

They still consume more than they produce.

They're a net exporter of of LNG of natural gas and of natural gas liquids, but a net in poor crude oil.

So they really need that Canadian heavy barrel. They're refineries needed.

But on a refined basis, we send them some refined. They send us some refined.

Mostly what it came down to was that it was easier to build an oil pipeline underneath the great lakes than over top of the great lakes.

It's Canadian shield. And that's not ideal for pipeline construction.

And so we do send some underneath most of all oil goes to the Midwest anyways.

And then some of that will pop back up into Toronto.

And then of course on the Atlantic side, they import through St. John to the urban refinery and import some into Montreal as well.

And those tend to need actually lighter oils. Those refiners were built for lighter oils.

And so not a great match with Western Canadian heavies anyways.

Okay. And so but what we would mostly be importing would come from the United States.

Yeah, it used to come more from the Middle East.

And then of course the United States has its shell revolution so that hydraulic fracturing horizontal drilling,

which is what made it, you know, increases production so much become a huge producer.

It mostly produces through shoot through shale is a lighter crude.

And so actually Atlantic canna start importing more from the United States than from the Middle East, which overall I think is a good thing.

If we can turn to the Middle East now, just again, explain for us what is the straight up or moves.

And you know, are of the oil that we do import most of it as you've just laid out comes from the US.

But you know, do are we dependent at all on the straight.

So so we won't be getting a lot of our oil in Canada, even tatlantic canna, which are small amounts from the straight.

But it doesn't matter because the market is so liquid.

I think it's named after oil, you know, to have liquidity.

But so the straight up farm moves is, you know, the biggest producing region in the world.

So you got Iran, Iraq, Saudi Arabia, UAE, Qatar on the natural gas side.

So just phenomenal amounts about 20 million barrels get smooth through there.

Overall, in the whole world, you got about 105 million barrels, if you're including NGLs.

And so it's a very significant amount.

And so when those aren't coming out and right now you're down about 15 million barrels a day.

So a little bit has been diverted, but a lot has just been shut in and it's just not going to come out.

So we're running, we're, you know, we're so like we're spending on the credit card of, you know, all the savings we had.

We're now drawing that down.

And places are trying are asking for more.

So the barrels that we would have set to the United States and maybe go to rex, we're double the golf.

Call for those barrels for more to come.

And so if we want to compete our refineries in Canada and the United States,

want to compete for those barrels, they just have to pay a little bit less.

Now we're still paying, you know, the difference of what we call West Texas intermediate,

which is kind of the benchmark Texas price is so much lower than Brent and other crudes that you get in Asia.

And so we are benefiting in North America.

We are somewhat insulated.

We're paying far lower prices, experiencing far less of a shock.

But at the same time, whatever barrels could leave North America and go to other parts of the world where they are having scarcity

is increasing our costs and pulling those barrels away.

Yeah, could you help connect the dots a bit, you know, based on how oil prices are determined or gas prices?

Like why are we paying so much more for oil and gas that is largely produced, processed and consumed right here in Canada?

Yeah, so like I said, and like you said, most of what we produce is exported.

So it is actually sold in global markets.

And if you know, if a barrel is $60 in Canada, but you can get $100 for it at the Gulf of Mexico,

then obviously those barrels want to race as much as they can to the Gulf of Mexico.

And so if you're a refinery in Canada or the Midwest,

you're going to pay a little bit more to keep those barrels at your refinery instead of going, you know,

trying to go to Trans Mountain or trying to go to the Gulf.

So that's part of it.

And also refineries think about how, you know, what they sell, they have to replace that barrel.

So they're thinking about how much is it going to cost me to replace the barrel that I'm selling as gasoline?

And finally, the price of crude oil is what we pay attention to.

And is, you know, is it $100 or isn't it?

The refining margin is what's driving a lot of the costs right now.

But it's not the producer of the upstream, most of which is what we do in Canada.

But it's the refiner who's able to capture a bigger margin off of off of the kind of supply and demand issues that we're having today.

And so that you call a crack spread that's very gets very technical.

But that is driving more of the cost that we're seeing in Canada, the United States right now.

And that's why diesel in particular is is is is taking a very big jump right now.

So sorry if this question is just explain it in layman's terms.

I suppose like theoretically the war shouldn't have altered Canada's cost of producing and refining gasoline.

So it's not about it's not about the cost of producing it's it's the cost of who's willing to buy it.

And so if someone is willing to pay like in Asia, you know, $150.

Okay, any barrel that can escape Canada and go get that $150 is going to want to escape Canada.

Now, not all of our five and a half million barrels can escape Canada.

And that's why it's not a hundred and seventy or a hundred and fifty dollars here.

But it is driving up the prices for everybody.

And if you say, well, we shouldn't have to do that in Canada.

What you what you were actually be saying is we should put export restrictions on in Canada.

That would be what you would have to do to keep the price lower here.

And we're in this together.

We're a member of the International Energy Agency.

What they're asking is Canada, you're a member.

You're the biggest exporter in the in the whole association.

Please export more.

Not put on restrictions to save your price.

So if we paid less, if we put on restrictions, that would just mean that the barrels that are trying to get to these other places where they're freezing real scarcity and shortages would not be able to get to them.

And what about like the gas that is stored domestically in the pumps right now?

Like, why is it selling for more than before the war if it's from, you know, oil that was extracted months ago?

Yeah, good question.

So oil is very expensive to store.

And so we don't tend to store a lot of it.

You know, if you could only store three or four or five or six days worth, you would.

And Canada doesn't tend to store a lot because we just keep producing, you know, five and a half million barrels a day.

And it gets, it gets refilled.

So there, there wasn't, there wasn't a lot of gasoline sitting around.

They have us produce for cheap.

It was, it was used.

And now again to replace those barrels for that those refinements are having to use.

Well, they're having to replace it at a much higher cost.

And so it's just that there wasn't a lot of inventory in Canada that sits around.

It moves very quickly.

People use that all up.

We haven't really had demand destruction in Canada.

So we're using roughly as much as we were using before.

And so that's why, you know, it's just it very quickly that cycle moves around.

Whereas something like wheat or fertilizer.

And we know that's going to face price increases in six months down the road.

It's going to be more expensive.

That takes longer.

It's a slower cycle.

But at the same time, if the straight-up hormones opens up,

you will see your gas go down probably the next day.

You know what I mean?

So it goes up quickly.

It comes down almost as quickly.

Probably take a little bit of extra time to bring it down.

But you, you do get that relief very quickly with gas as well as, as well as the pain.

Whereas everything else, you kind of are getting like an incremental, you know,

baked in, going to take months to unwind.

Would it be fair to say, though, that like oil companies would be massively profiting from,

from these inflated prices?

Oh, I mean, absolutely.

So it is a windfall.

They're getting more for their product.

The, you know, there's a demand in a supply mismatch and they're getting more.

And that's pretty much how markets work.

And people may lament, you know, these billionaires are getting rich.

It's not exactly like that because, first of all, governments are reaping also the benefit.

They tax at a percentage.

And so if it's presented over $80 barrel or a $60 barrel, obviously the tax is increasing.

Alberta's royalties is increasing.

B.C.'s royalties are increasing.

This is Gatchewan Newfoundland's royalties increasing.

So that is how the public gets their piece of the windfall action.

It's built in because we get more royalties and taxes.

Now, for everyone else, these are mostly publicly traded companies.

So it's not, you know, one or two billionaires that own SunCore or Sinovus.

I own some of it.

You own some of it.

If you have a pension, you own some of it.

Hopefully your pension is exposed to energy.

Has a big exposure energy.

Your pension will do well.

But that's how the average person can capture.

You know, some of this windfall is, you know, own some stocks in these companies.

Or hope that your pension plan is.

But what I'm saying is that all the shareholders will benefit.

All the governments will benefit.

In Canada, it's roughly a net positive.

Our GDP will actually go up a little bit because of all this.

Because we are a huge exporter.

Because our supply hasn't been disrupted.

But obviously for the average Canadian, they're just gassing up and feeling the pain

and going to feel some inflation in the coming months as well.

Yeah, I do want to ask you about how that may complicate the situation.

But I just wonder first, because BC premier David E.B.

Last week, I said something to the effect of, you know, Canadians are being gouged

at the pump by oil companies for the events in the Middle East.

And I just wonder what you make of that argument.

Well, if Canadians want lower gas taxes and especially in V.C.,

they should look at how much the government charges on fuel taxes.

And then all kinds of environmental policies that go on top of it.

The United States is not paying the same as Canada is right now.

And that's obviously because in Canada, we charge very high fuel taxes.

And actually, BC will get a higher take because the fuel tax is also,

well, it's based on a scent basis.

But they're likely to get some more revenues out of that as well.

A B.C. sells natural gas.

The royalties from natural gas will increase from this.

So BC wants to give that back to people or lower fuel taxes.

That's usually what governments in exporting countries do.

Is they'll lower the fuel tax or the GST or the PST or whatever they happen to have

to ease the squeeze on their consumers.

Not to belabor the point, but are Canadians right in feeling like they're being gouged?

Well, this is a supply and demand.

You know, so again, who's gouging you?

There's a customer willing to pay more.

And so you say, well, Australia is winning, is Australia gouging us?

Like they're running out of diesel in Australia.

They desperately need up a price incentive to get as much oil to Australia

and refine products as possible.

So I guess you could say that's gouging or it's the market trying to fill all the spaces

where there's the most shortage and the most scarcity.

And the incentive is, well, we should produce more oil and gas,

or we should produce more oil and gas from places that don't have to go to the straight of our mousse.

That's the medium term correction to this is to say we need more supply

that isn't coming from that particular area of the world.

And so I would say if Canadians want to limit the impact of the next shock,

then we should want to have more global market share,

and we should want to be able to provide that supply that isn't coming from a hot spot,

a geopolitical hot zone, a choke point, almost uniquely.

We don't have to go through choke points in Canada,

especially going off the Pacific coast.

You mentioned earlier, or alluded to how the price of oil has, you know,

it reignited fears of an inflation around the world.

The Bank of Canada, the governor, Tiff McLean,

he said this month that the bank would look through the oil price shock in the near term.

So long as it didn't bleed into, you know, a broader set of prices.

And I wonder from your perspective, how real that possibility is?

Well, I would say the markets are already pricing in.

Last I checked three rate hikes, you know, of 25 basis points for the rest of the year.

So the market definitely thinks higher.

We will have higher energy prices for the rest of the year.

Why?

We were expecting to pay $60, $65 a barrel.

That was the assumption.

And now we expect to pay, you know, when people are buying front contracts for November,

for December, they're in the $80.

So it's built in that we will pay more for oil, for gas for the rest of the year.

And so that increases the cost of everything,

because almost everything either has oil and gas as a feedstock,

if it's a product, if it's a material,

or it uses diesel or jet fuel or gasoline to move the product around.

So, or if it's, you know, fertilizer that increases the cost of food,

the diesel that the farmers use.

There's almost nothing that we use or eat or touch that hasn't had oil somewhere

somewhere in the back of its life cycle.

And therefore, these increased prices will increase just about everything.

I've called an omnichrist for the economy,

because everything will be a bit more expensive.

Now, when the Bank of Canada made their decision,

I think, you know, there's, you know, still an optimistic take that, you know,

you know, Trump will talk and this will, you know, disappear overnight

and we'll kind of get back to regular things.

But already, there's been a lot of damage to energy infrastructures

in the Middle East and there's been a lot of delays in fertilizer delivery.

There's been a drawdown of supply of the storage that people did have.

So, there's almost, there will be a long tail to this.

Now, we saw what happened when Russian video Ukraine

and we had an energy crisis at that time and that turned into a food crisis for a year.

And that, that is what triggered that inflationary crisis that, you know,

that everyone felt the effects of it in 2022, 2023 and brought down some governments.

And so whether it's going to be that bad or not, some of that was, you know,

monetary policy from COVID, you know, coming, you know, ready to roost,

I guess we'll see, but absolutely, I would expect that they'll be inflation.

And that puts the Bank of Canada in a tough spot,

what we saw in the 70s is you had inflation, but economic stagnation.

And that became the word, stagnation.

Which is a nightmare scenario where your economy is not running hot,

but inflation is.

And so do you prioritize lowering unemployment, keeping mortgage prices down,

or do you prioritize limiting inflation so people can afford groceries

and affordability as an issue?

It is not a good choice in that situation.

And so hopefully Canada's economy, again, uniquely may benefit from a hot commodity cycle

and give it the opportunity to raise rates, unfortunately,

but with a hot economy behind it.

I do want to ask you about when Russia invaded Ukraine back in 2022,

because prices seemed to subside as you mentioned after about a year.

But after it really became clear that, you know, the world oil supply wasn't affected.

But this is a totally different situation now.

And I just wondered, like, what is going to be the breaking point?

Yeah, so that's a great point.

So last year during Russia, I think oil price peaks around 122 barrels,

or 122 dollars, sorry, somewhere give or take a few dollars,

somewhere in those 120s.

And that was mostly on the fear of a big oil supply disruption.

What actually happened was natural gas was disrupted,

because Europe cut off natural gas pipeline,

and then started to draw LNG from wherever it could.

So there was a natural gas energy crisis,

actually preceded Russian, Vietnamese, Ukraine,

which is why he chose the timing he did.

Natural gas was already getting expensive, made more of a crisis in Europe.

And that just made, you know, then they're drawing natural gas from wherever they could from around the world.

They're, you know, increasing other sources of energy

and making their manufacturing more expensive.

Yet, yet, that starts to ripple throughout the rest of the world economy,

because Europe is so important.

Now we're seeing, you know, all of that, you know, multiple,

because this is an actual physical supply disruption,

and it's enormous.

It's an enormous physical supply disruption.

It's the worst supply disruption in oil the world has ever seen.

And it's, and it's still disrupted, you know,

the markets are pretty sanguine, actually,

but that oil is not coming.

So if the Strait of Hormuz is not open today,

that is 15 million barrels that is drawn down from the world that we will never see again.

It will never, it can't come back.

It is shut in.

And so, you know, if we have, you know,

the IA members have 400 million barrels,

or you know, however you want to count that they will release,

again, you are drawing down your savings very quickly.

And that number of 400 million barrels and people will debate what, you know,

what is the actual number,

you cannot draw your tanks down to nothing, you know,

that damages the infrastructure.

You cannot move oil perfectly in every corner that needs to go to,

so some places will experience spikes.

And it's, you know, it is already very ugly.

And every day that this goes on probably, you know,

generates, you know, weeks of impacts going forward at some level.

So people in the know seem to be, you know, panicking.

Like the more you know, the more you're panicking, kind of a thing.

And it is very much the thinking that Trump or the United States is keeping WTI,

Western Texas, intermediate barrel at about $100,

that they are injecting, you know, money into the markets or buying or shorting,

whatever they're doing to not exceed that threshold at which there's a psychological barrier

and there's a real impact on, on demand in the United States.

And we'll see how long they can do that.

You know, this is a physical supply disruption.

There's only so much Trump can say,

oh, we're meeting with Iran.

Everything's going to be great to soften the blow as long as that straight is still closed.

Yeah, I wanted to ask you about that because President Trump very recently postponed his threat

to strike Iranian power plants in retribution for closing the Strait of Hormuz.

Iran, we know, has dismissed that ultimatum.

But, you know, if his extended deadline comes to pass, like in the next few days,

what do you anticipate will happen, like if he does follow through on his threat?

So the word that's been thrown on his jaw boning, you know, also we're talking it through.

And it's everyone has observed that, you know, Friday after markets closed,

you make the threats, we're going to destroy all your power plants, we're going to hit, you know,

hit Carg Island Monday morning, a couple hours before markets open.

Oh, we've had great talks with the Iranians and I don't expect this to last long at all.

So there is absolutely attempts to manipulate oil markets and keep the markets calm.

And in some ways it's genius because it is absolutely buying the United States time,

political time with their own domestic population to achieve their military mission,

which is still regime change.

But that is looking harder.

So now the Iranians have started charging $2 million to allow vessel to go through.

So now they're, you know, they weren't doing that before.

Some of the, you know, they're capturing even more money from the street,

from who's are allowing their own oil to be sold.

The United States is now taking off sanctions as allowing Iranian oil to be sold.

Iran doesn't look like it's, you know, got the weak cards right now.

Anyway, so we'll see what happens.

But it is true that it's at some point the United States will say, okay, this war is over.

And it's a question of how much time can they buy politically to achieve?

And how much pain is Trump, political pain is Trump willing to suffer to achieve this military goal?

And am I to infer that until, you know, Trump backs away and, you know, says this is over

that we still haven't reached the peak yet where oil prices are concerned?

Because I mean, you hear that $200 barrel number being thrown around quite a bit by analysts,

which not too long ago would have been considered pretty far-fetched.

And, you know, I'm just wondering, like, how much higher can the prices go?

So, you know, if this goes on for a couple of weeks, that almost seems inevitable.

Right now, like, there was a glut, you know, there was excess production and excess.

And there's high levels of storage and there was a lot of oil on water.

That means they're sitting in tankers and vessels on water.

That was the case. That's why oil was $6 a barrel.

Because it was pretty, you know, there was a pretty good supply.

And we've been drawing that down.

Now, there was something to draw down is the whole point.

So, that most places aren't phishing shortages.

Some are, some are phishing shortages.

Like, it's serious in a lot of parts of the world, but most parts of the world aren't.

And certainly North America is not.

And so, but every day we're drawing down 15 million barrels.

Again, you're going through your savings account pretty quickly.

And at some point where that scarcity is wider spread, then it becomes hunger games.

You know what I mean?

And you're already seeing it.

You're already seeing hoarding.

You're already seeing coercion.

You're already seeing profiteering.

It's, you know, you know, there's a great line of people haven't heard of it.

We're nine meals away from anarchy.

And it's, it's the idea that like, you're hungry for three days and you'll start to do anything to not be hungry.

Doesn't take you very long to move into a situation where maybe violence or crime, you know,

if you had to feed your family after three days.

So the, so it's, if you don't have oil, your country doesn't have oil, your business doesn't have oil.

People will, will start to do nefarious things, I'll say.

And it will get pretty ugly and the price will go up.

And so I, so I hope the Trump administration has an idea of when that's going to happen.

And does something before that?

We're not at that point yet.

Um, and let's hope very much that we don't get to that point.

Okay, Heather, I will leave it on that note.

Really appreciate you helping us break this down today.

Thank you so much.

Thanks for having me.

And that was the big story.

We'd love to hear your thoughts on this conversation.

Send us an email at hello at thebigstorypodcast.ca.

Reach us on Instagram at Frequency Pods or on Blue Sky at the Big Story.

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You can listen to the big story every day on the Seeker app or wherever you get your podcasts.

I'm Karen C. Olin.

Thanks so much for listening.