By Michael O’Neill

Climate activists may dream of a carbon-free future, but soaring oil prices are reminding everyone that we still live in a fossil-fuel world.

That reality has arrived with a vengeance after the latest escalation in the Iran conflict effectively shut down the Strait of Hormuz, the narrow waterway through which roughly a fifth of the world’s seaborne crude normally flows. Even the hint of disruption sends oil traders into a frenzy. A meaningful interruption does something worse. It exposes how much the world relies on fossil fuels.

That explains the spike in West Texas oil prices, which soared from $67.03/barrel on Friday to $120.03/b on Monday after the US and Israel spent the start of the month bombing Iran. The attacks decimated Iran’s leadership, which was a key objective, but they also put a serious hurt on global financial markets.

The Law of Unintended Consequences

The US and Israel may have succeeded in killing Supreme Leader Ali Khamenei, but they did not eliminate the Iranian Revolutionary Guard Corps. They are kind of a government unto themselves, hardline guardians of the Islamic Revolution, and they appear to have no intention of bowing to the military might of Uncle Sam and Israel.

The proof is in the pudding, well actually the Strait of Hormuz. This 167-kilometre waterway separates Iran from Oman and the United Arab Emirates and at its narrowest point is just 39 kilometres wide. Therein lies the problem. If that choke point is blocked, none of the roughly 138 ships that transit the strait each day can pass. About 100 of those vessels are oil tankers carrying close to 20 million barrels of crude to global markets.

No tankers means less oil and higher prices. That is inflationary and likely what spooked Trump, leading to remarks on Monday saying, “I think the war is very complete, pretty much. They’ve got no navy, no communications and no air force.”

That was music to the ears of oil traders and WTI dropped to $81.31/barrel before climbing to $86.96/b on Wednesday. The gains are because the US claimed to sink 14 mine-laying ships belonging to Iran’s non-existent navy. Not many vessels may be eager to sail through a minefield.

Problem Solvers

G-7 leaders fear the consequences of a prolonged US and Iran conflict, as it could reignite inflation and disrupt global supply chains the way the Covid pandemic did. And many countries are still recovering.

Those fears spurred today’s decision by the Paris-based International Energy Agency (IEA). They are releasing 400 million barrels from European reserves to mitigate the impact of high oil prices on Europeans and reduce the risk of kicking off another inflation spiral.

Canada’s Energy Reset

Canada remains one of the world’s largest oil exporters. The problem is almost all of it goes to the US, which under the Trump administration is a hostile trading partner. Finding alternative export destinations is the easy part, but getting the crude to port is extremely difficult. The British Columbia government under Premier David Eby is against new pipelines due to environmental risks, and the federal Oil Tanker Moratorium Act bans tankers from BC’s northern coastline.

Quebec does not want any pipelines in their province. They fancy themselves as a “green energy producer” because they control electricity generated in Labrador, which is Newfoundland’s territory, not Quebec.

The Times, They are a Changing

Prime Minister Mark Carney’s recent actions suggest that he is not as dedicated an environmentalist as his original billing. He authored a book discussing climate change, championed climate-related financial disclosures and launched the Glasgow Financial Alliance for Net Zero.

Then he became Prime Minister.

Reality has a way of interfering with ideology. Faced with slowing growth, geopolitical turmoil, Trump’s hostile trade attitude toward Canada and an oil shock that threatens Canada’s economy as much as it benefits it, Carney has pivoted toward what he calls “pragmatic” energy policy.

The consumer carbon tax is gone, industrial incentives have replaced it, and Ottawa is suddenly talking about conventional energy projects.

Canadians are still on the hook for a decade of anti-fossil fuel government policies that blocked energy infrastructure and chased foreign investors away. Carney’s apparent willingness to exploit the country’s oil riches is helping cushion the Canadian dollar against losses stemming from the oil crisis.

It’s Only a Cushion, Not a shield

The Canadian dollar is vulnerable to the outlook for US interest rates. The February US nonfarm payrolls report was far weaker than expected, but January’s data was surprisingly strong. American employment is in a state of flux, but the Fed appears to be more concerned with the inflation outlook. Sharply higher oil prices and the impact from Trump’s tariffs risk higher costs that will drive CPI further from its 2.0% target, which opens the door to a rate increase. All of the above suggests USDCAD is likely to trade in a 1.3450–1.3750 range for the near term.

The energy transition may be the future, but today, we are still living in a fossil-fuel world.