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Gas prices are seen at a Toronto gas station on Thursday.Frank Gunn/The Canadian Press
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
If any Canadians think the Mideast war has opened new opportunities for the country’s energy sector, they should be careful what they wish for. Because the longer this war continues, the more it’s looking like an act of economic self-harm by the United States, in which Canada will be collateral damage.
After war broke out, there was the usual speculation in the twittersphere that as in Venezuela, this conflict is all about oil and that the United States will come out on top. Not only will the rising prices of oil and gas create a windfall for U.S. exporters, but the war has cut supplies to its chief rival China. And if U.S. producers stand to gain, Canada, with a proportionately bigger energy sector, also stands to reap windfall benefits, both from rising prices and the search for new suppliers by countries that currently rely on Mideast oil.
For now, most energy companies are watching and waiting. In the war’s opening days, traders were pricing in a short-lived spike in the price of oil followed by a return to normality once the war ended. But with each passing day that the war grinds on, a return to lower prices seems more distant. Besides, when the war ends, it’s possible that a permanent risk premium keeps oil prices from falling back to where they were. Thomas Juneau, a Middle East scholar at the University of Ottawa, suggests that even after the war ends, the region will likely remain unstable.
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Yet even if oil prices remain elevated and importers around the world are scrambling for new, safer suppliers, few benefits will accrue to the U.S. or Canadian economies. Oil and gas account for about 1 per cent of American GDP, and some 7 per cent in Canada; any gains that will arise in those relatively small sectors will be more than offset by the inflationary effects in the rest of the economy.
It’s looking increasingly likely that U.S. inflation, which never returned to the Federal Reserve’s 2-per-cent target, is now on the upswing again. The most recent reports on Personal Consumption Expenditure – long seen as the Fed’s favourite measure of inflation – and the Producer Price Index both came in hotter than expected. Then this week the Institute for Supply Management’s report on manufacturing revealed that producers are reporting paying much higher prices for inputs, owing largely to the impact of tariffs.
What this suggests is that higher prices are coming to supermarkets and retail stores. Any rise in gas prices will fuel that fire. If those price increases persist, the Federal Reserve will find it hard to cut interest rates – already, we have seen bond yields resume rising. And if interest rates remain elevated, not only will that slow economic activity but it will inhibit the recovery in the housing sectors, in both the U.S. and Canada.
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Those higher interest rates, in turn, have driven up the value of the U.S. dollar, which has dragged the loonie up with it. If the Canadian and American currencies remain strong, therefore, manufacturers, already struggling with Mr. Trump’s trade war on both sides of the border, will find things get even harder since foreigners will have to pay more to buy their products.
Compounding matters is that the American economy is relatively energy-intensive – which is to say, a lot of energy goes into each dollar of output. Canada’s economy is worse yet, in large part because the transportation system remains carbon-intensive. When energy gets more expensive, so does everything else, making Canadian manufacturers less competitive.
In other words, at the very time Canada is searching for new markets and trying to develop new products to sell, it will become harder to do so. Any wins in the energy sector will be offset by losses elsewhere in the economy.
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Moreover, it’s not obvious what wins there are will prove durable. Among the countries hardest hit by this energy shock are countries in the developing world which rely on imported oil and gas. During past oil crises, such countries had no alternative but to absorb the losses and look elsewhere.
But now, there are options, namely cheap renewable energy technology from China. Developing countries are in the vanguard of the energy transition, and a persistent shock will incentivize them to speed it up. Indeed, China’s relative resilience amid this current supply cutoff speaks to the success of its strategy of reducing import dependence by localizing power production. So what the Canadian oil patch gains today, it may yet lose tomorrow.
In truth, what Canadians really should hope for is a quick end to this fighting and a return to stability. Each day this war continues, that prospect looks increasingly remote, while the country’s economic challenges grow.
