Trump’s comments ease oil prices, for now

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Nearly 2,000 people have been killed in the war in the Middle East and it continues to send economic shockwaves around the world.

At one point yesterday, oil prices surged to their highest level since the pandemic, over $119 US dollars a barrel.

G7 Finance Ministers met to consider dipping into strategic crude oil reserves as a way to help bring those prices down,

but their meeting ended without any firm action.

Here's what US President Donald Trump had to say about oil prices at a news conference yesterday.

I will not allow a terrorist regime to hold the world hostage and attempt to stop the globe's oil supply,

and if Iran does anything to do that, they'll get hit at a much, much harder level.

Here in Canada, people are already seeing higher prices at the gas pump,

and conservative leader Pierre Pauliev says those higher oil and gas prices open a door.

Our allies are desperate for energy that does not come from the Middle East or Russia.

High oil and gas prices present an enormous opportunity for Canada,

which has the fourth biggest supply of oil in the world,

and enough natural gas to single-handedly power the entire globe for 200 years.

Heather Exner-Perot is Director of Energy, Natural Resources and Environment at the MacDonald-Laurie Institute,

also a Special Advisor to the Business Council of Canada.

She is in Ottawa, Heather Good Morning.

It was difficult to keep track of where things were going yesterday.

Oil prices, as I mentioned, hit this high and then dipped again when Donald Trump seemed to suggest a potential end to the war.

What do you make of all of this volatility?

Yeah, well, that was a wild day in the markets for sure.

It does go show, you know, how some of this is a bit of panic, and some of it is a bit of fear.

But obviously, some of it is just this supply has been disrupted absolutely,

and I think probably it will head up higher today.

There's only so much Donald Trump can say if those vessels aren't moving through the Strait of Hormuz,

the supply is still dramatically disrupted, and I think you'll see markets respond in the opposite way today.

On average, gas prices are up somewhere between 12 to 15 percent across this country.

Can you explain for somebody who has gone by a gas station or stopped to fill up their tank?

How what is happening in the Middle East is already translating to higher prices at the pump?

Yeah, and oil is a particular commodity where the global price goes, gets felt at the gas pump within days, which is unusual.

But it's a very fluid market, and barrels are just getting called to refineries,

wherever they could go in the initial days and hours after the air and crisis.

Basically, the Strait of Hormuz carries about 20 percent of global oil and gas supply.

Nothing is moving through there because it's very dangerous in that zone,

ensures will not ensure vessels to go through there.

And so you're actually seeing supply getting disrupted.

And so as a result, barrels are getting called for higher prices.

They'll go wherever they can go, and immediately that has an effect on your gas price,

as crude oil, the price of crude oil is obviously the biggest factor in how much you pay at the pump.

But we have plenty of oil here, right? I mean, it's not as though the supply is being constrained in this country.

So why would the prices go up is dramatically seem like it happened almost immediately?

Yeah, no, not at all. And I have to say that we're in a lack of position that almost certainly not face shortages.

There's a couple of countries right now where shortages will be a bigger issue,

absolutely on natural gas. You're already starting to see that.

Some companies are declaring forced measure already, even on the natural gas side,

that have to use that product. But for us, it is that we do export it to other markets.

So either refineries in the United States will call for,

we'll be calling for those barrels refineries in the Gulf of Mexico,

whereas some Canadian barrels make their way and also obviously trends mountain.

So anywhere that can get, can attract those barrels,

will pay that higher price. And if you want to have those refineries have it here in Canada,

then they have to pay that higher price as well.

It's just a supply and demand thing.

And so we end up getting hit because of global forces,

not because specifically something that's happening here in Canada.

No, no, it's just that the price of oil is that much.

And people want to pay that much for barrel.

And so if you want your refineries to have that barrel, they have to pay that price as well.

There are strategic reserves.

What do you make of the fact that the G7 finance ministers did not dip into those oil reserves

at the very least right now to try to to ease that pressure?

Well, I was surprised, you know, the headline number was, you know,

oil is above $100.

And I think psychologically that threshold has an impact and markets start to panic.

And you see stock exchanges drop.

And I think for consumers, they start to get very concerned.

And Donald Trump said maybe if you were sharing words, you know,

that maybe this war won't last much longer and the markets dipped right back.

And so it was, it was interesting.

So they weren't going to release any of the reserves.

And yet the oil price collapsed anyways.

But again, we'll see what happens.

There really is supply that has been knocked off.

It's not, it's not just a headline thing.

There's less supply in the world.

And people were going to want those barrels.

So I think we'll see some more volatility today.

And I think it's over $100 for an extended period that they would release some of those reserves.

You talked about the words coming out of Donald Trump's mouth,

and whether that would or would not impact the price of oil.

He also talked at his news conference yesterday about easing oil sanctions on some countries.

He did not specifically name Russia.

But a lot of people think he's talking about Russia.

What impact would that have?

Yeah, it is a bit of a release valve.

And I understand they've already, you know, kind of said to India,

go ahead and take those Russian barrels for 30 days.

They've been sanctioned.

So no one's been able to access them legally.

But now India has been taking them.

They've been taking some Russian barrels before anyways.

So you appreciate that even though that's not really an American interest

or not really the thing we want to do.

Having oil below $100 is very important to pretty much every economy in the world.

And so willing to turn to blind eye to that.

But just kind of goes to show there's nothing, nothing like cheap oil,

you know, that kind of dominates, you know, where the puck goes in this world

that people will do just about anything to allow it to flow.

Is there anything that our government, our federal government could do

to ease the pain for consumers?

We're going to talk more about this coming up in a few moments.

But again, when the price of gas that you put in your car or truck

goes up upwards of 15%, people feel that immediately.

So is there anything the federal government could do to ease that pain?

Yeah, I think it would have to be sustained for a little bit longer.

This is a shock.

And if those vessels do start to move through the straight,

the price will go down.

I don't think, you know, it'll take a little bit to unwind everything.

Supply has been taking off the market.

But the obvious thing is, is fuel taxes.

So that your price of crude oil is the biggest cost of gasoline.

But the kind of the next one is the amount of fuel taxes that you pay.

And we've seen this before, after Russian invaded Ukraine,

where there was a call for some relief.

There because, you know, some provinces reduced their fuel tax.

Those calls reduced the GST.

So there's a few things that the government can do.

And I would say kind of a $2 or a liter is a psychological barrier where,

where, you know, the people get very antsy and governments are pressured

to do something.

But I would expect that we're a few weeks out for something like that.

Do you think we could get to $2 or a liter?

I mean, where I am in Toronto, what I saw yesterday was about $1.56 or 57.

If you're in Vancouver or on PEI,

you're getting closer to that $2.

Could we hit that $2 or a liter threshold, do you think?

Well, absolutely.

I think, you know, one analysis that every day that this goes by,

you know, you add to oil prices, about $2 or $3 a barrel.

So if this goes on for, let's say, two more weeks, I would expect that.

And you have to appreciate why is this going on?

The United States is seeking regime change.

And the pressure on them is to do so before oil gets really over $110 a barrel on an on a sustained basis.

There are enormous human costs to this war.

But you also have people like Pierre Paulier.

And I'm not saying that the two are opposed in whatever way.

But Pierre Paulier, we heard at the beginning of our conversation,

say that what is happening with the price of oil could present an opportunity for Canada?

The Federal Energy Minister Tim Hodgson has said something similar,

and just in that his phone has been ringing off the hook with other countries

who are calling up Canada asking about oil and gas.

Is there an opportunity for this country in this moment?

Again, understanding that we're talking about a war here.

I mean, the opportunity is to reduce volatility in the future, you know,

so that would have good consequences for everyone.

You know, the thing is a lot of that Middle Eastern oil goes to Asia.

It has to go through these conflict zones.

If you're getting it from Canada off the West Coast, even the LNG,

it's a straight shot over the North Pacific.

It does not go through a hot zone.

Very reliable.

And obviously for Asian buyers, that's looking attractive right now.

That's actually worth a premium because the cost of the supply shock on them is very high.

So I think obviously they would like to have more diversity in their supply.

They wouldn't just want to rely on the Middle East and Russia.

Canada must be on top of the list of countries that you like to get that oil from.

And so there is pressure and I would say a window of opportunity

as we're trying to get a final investment decision on the few LNG facilities,

trying to think of that Northwest Coast oil pipeline.

That probably there's some Asian buyers that are thinking, yes, we're in.

We would like to, you know, get these long term contracts and reduce our exposure in the future.

This is the second commodity shock in five years.

You can expect there'll be another one or two this decade.

Do you think just finally that changes the national conversation around oil and gas

and getting it to market in this country?

This has been a very difficult conversation, a pretty prickly conversation

in many parts of the country for a long time.

I would say since the Trump tariffs, I mean most public opinion polls for over a year

have been 70% in support of an oil pipeline or more.

So that has largely happened.

I think the Trump tariffs, the Venezuela crisis also opened some eyes

to the idea of wanting to make sure Canada shares has its market share.

And now this.

So the amount of energy literacy, I think the average Canadian has gotten on oil markets

in the last 60 months is tremendous.

And you do start to say that, yeah, you know, it'd probably be better if Canada

provided more of that supply or the Democratic nation with the largest reserves in the world.

Heather, good to speak with you about this.

Thank you very much.

Great to be here.

Heather, Exner Piro is director of Energy, Natural Resources and Environment

at the McDonald, Laurier Institute.

She was in Ottawa.

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As oil prices have fluctuated wildly, stock markets are also on a bit of a roller coaster.

And to talk about where the economic effects of this war could be felt were joined

by Neil Shearing, group chief economist at Capital Economics.

He is in London, Neil, hello to you.

Hello.

The stock markets were also down.

And then up yesterday, after Donald Trump used about a possible end to this war.

And then after the markets closed, he said that the US had not, in his words, won enough.

And so we'll see what happens with the markets today.

But how do you understand the volatility here?

Well, your right, in a sense, is just markets are simply moving now on the words,

particularly President Trump, but also the signals coming out of the Gulf.

Markets up today on that news and hopes overnight that the conflict could be coming to an end.

Or at least the US might be seeking an off-run.

I think that's the critical issue here for markets is the administration in Washington trying to seek an off-run.

Can they find one?

And oil, as we speak, kind of down at $90 a barrel on the credit crude measure on hopes that they will.

So there's been a lot of focus for obvious reasons on oil and gas.

But as I said, the economic impact of this war could be felt in many other areas.

Let's talk about other exports that are being disrupted right now. Start with fertilizer.

Well, you're right that clearly energy is the most important part here.

So quarter of the world's global oil flows through the straits of our moose on the seabound seaborn oil.

A quarter of the world's seaborn natural gas goes through the straits of our moose.

So clearly it's energy that's the most important transmission mechanism.

But it's not the only channel fertilizers one, as you say.

A lot of the critical minerals that they're involved in the production of fertilizer come from Gulf countries

and are shipped through the straits of our moose.

And also helium.

This is a fact that completely unaware of until a week ago, 40% of the world's helium comes from Qatar.

That's a critical input into semiconductors.

The semiconductors, of course, are used across global supply chains in consumer electronics.

So the most important channel is energy, but it's by no means the only channel.

And as long as the straits, the longer the strait of the moose remains effectively closed,

the greater the amount of disruption we're going to see.

So you have fertilizer which impacts the price of food everywhere and helium,

which impacts the price of superconductors, which are in everything essentially.

So we feel like both of those things are about to get more expensive.

Exactly. I mean, a lot of this will depend upon the duration of the conflict

and in particular, the duration for which shipments through the strait are effectively shut off.

Because global supply chains, one thing we've learned over the past 12, 80 months is that they're incredibly flexible and adaptive.

So if this is a short-lived shock, it will be severe, but manageable.

If the strait remains closed for matters of months, then the problems start to mount up,

and it will take time for those cost increases and scarcity of goods and price rises as a result

to pass through supply chains, but they'll pass through.

Which I think is another reason to the point that your previous guest was suggesting is another reason

to think the administration is going to try to find an off ramp here.

It's not just maritime trade in what goes through the strait of foreign moose.

We know that the Gulf states are also a key hub for air cargo.

So what would the impact of that be?

This is correct. So I think we typically think of goods coming in and out of the Gulf on big oil tankers,

don't we? Go through the strait of a moose.

But a lot of the world's airborne cargo, now particularly cargo from Asia to Europe and Europe back to Asia,

transits through the big air hubs in the Gulf, Dubai, Abu Dhabi, Qatar.

And these are not just in cargo planes.

Very often it's the case that goods are shipped in the holds of a commercial passenger plane.

So for as long as the passenger traffic between the Gulf and the rest of the world is disrupted,

because much harder for firms to transport in the holds of these commercial passenger planes.

And therefore we start to see disruption coming through supply chains in that way too.

Now, what type of goods are those? They have to be kind of light, light weight,

and therefore easy to ship via air. So we're thinking of things like consumer electronics iPhones and the like.

I mean, it's also the issue of air travel itself.

And not just what's being shipped, but the fact that air travel could become more expensive in the days, weeks and months ahead.

Air travel. So, so air travel turned from the region itself is incredibly disrupted.

And of course that has long stand, that will have long standing implications for the region's tourism industry.

But globally you're right that there will be an impact.

If this conflict is sustained, there will be an impact on the cost of air travel,

because fuel energy, global oil, global gas prices, critical component of jet fuel prices.

And we'll start to see for as long as the longer that these increases in prices are sustaining global markets,

that will start to feed through into jet fuel prices, that will start to feed through into passenger air ticket prices.

What does this mean for the broader economy? People have talked about the vibes when it comes to the economy,

how people feel about an economy, and that that impacts, for example, what they spend.

There's a passage from the New York Times this morning saying fuel prices soar.

They make groceries and other shipped goods more expensive.

Consumers and businesses stung by rising costs choose to spend less the economy contracts.

How much do vibes have to do with this?

That if we think we're going to be paying more for gas or for air travel in the months to come,

we're going to spend less now and that that impacts the economy down the road.

Well, I think vibes is another way of putting framing consumer confidence,

and confidence does matter in an economy.

Now, in North America, certainly compared to Europe and Asia,

economies are a bit more insulated from what's happening in global energy markets in particular.

The US now has small net energy exporter and Canada, of course, a substantial net energy exporter.

And what higher global energy prices, both for oil and natural gas do,

is transfer income from energy consumers to energy producers.

At an aggregate level, Canada and the US should be better off.

But of course, there are an enormous distributional changes as a result of these shifts in prices.

And one consequence of this is that it's the oil companies and potentially employees

and invests in those oil companies that are better off.

But there will be some costs facing Canadians in the shops and Americans in the shops too,

because those costs will go up, because input costs will go up,

because global energy prices have gone up.

So to the extent that it matters for consumer confidence or vibes,

it's because we're going to see a further squeeze,

the longer this goes on, we see a further squeeze in the cost of living

and really comes through higher prices.

And that contributes to a long-standing pressure on cost of living globally.

As I say, more acute in Europe in Asia than it has been in North America,

but still an issue in North America.

We're almost out of time.

What does that mean in terms of how central banks respond, particularly when it comes to interest rates?

Well, I think what it probably does for most central banks at this stage

is make them a bit more cautious about cutting interest rates.

And still at the back end of policy easing cycles,

so perhaps it makes it harder for them to cut interest rates.

We're probably not yet at the stage where they start to hike interest rates

in response to higher prices and inflation.

So yeah, fewer rate cuts, but not yet rate hikes.

In your sense, I mean, again, it's unclear what exactly the plan is coming out of the White House.

But your sense is that those in the White House will be paying close attention to this

and that they are looking for an offering because of the possible economic carnage

that could come down the road.

That's my sense, yes.

And in particular, the distributional consequences of that carnage

been but borne mainly by households.

And of course, what's an election year?

So I think there'll be a sense in which they'll try to find some conclusion

to this relatively quickly get energy prices back down and limit the damage to household finances.

That's my sense.

It could be wrong with force.

We'll see where it goes.

Neil, thank you very much.

Thank you for having me.

Neil's sharing is Group Chief Economist at Capital Economics.

He was in London.

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