An 'out of stock' notice is taped on the diesel dispenser at a gas station in the Philippines last month.Eloisa Lopez/Reuters
The conflict in Iran is shaking up the structure of oil and gas markets, as countries that face a severe supply crunch look for stable supplies and try to increase their energy independence.
Despite the precarious ceasefire in the conflict brokered this week, the effect of the war on global markets shows no signs of letting up. The Strait of Hormuz, a vital shipping route for a fifth of the world’s oil, essentially remains closed and Iranian attacks on energy infrastructure continue.
The shuttering of the strait has countries that rely on Middle Eastern crude – particularly those in Asia – grappling with increasing paucity of oil and gas.
Pakistan and the Philippines have moved to a four-day work week for public officials, Bangladesh has closed universities, and various countries have mandated remote work for public servants and limited air conditioning in public buildings as a result of the energy shortage. Airlines across Asia are trimming flight schedules because they don’t have jet fuel.
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Many countries now realize just how exposed they are to an energy shock, said Andrew Botterill, the global financial advisory leader for energy, resources and industrials at Deloitte.
In many cases, their supplies either have little flexibility, or fuel alternatives have become wildly expensive, he said in an interview. That has governments worldwide taking a serious look at energy security.
“We need to have some energy independence conversations – or energy flexibility or energy source conversations – on who are the partners that we want to be most attached to, or what kind of flexibility do we need to be able to handle some of these bumps along the road?” he said.
The current upheaval of global energy markets is more than just a blip, said Ed Crooks, the vice-chair of Americas at Wood Mackenzie.
“There will be a fundamental reassessment of energy security following this, just as there was after Russia’s invasion of Ukraine in 2022,” Mr. Crooks said in an interview.
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The Iran conflict has caused an even larger shock than Ukraine, he said, so “it’s reasonable to expect more fundamental reappraisals.”
Mr. Crooks pointed to the oil crises of 1973 and 1980, which led to the exploration and development of new production in Alaska, the North Sea and Canada’s oil sands, and significant investment in wind and solar power.
While memories are short and governments tend to do what’s easy and low cost – and much of the world’s cheapest oil and gas comes from the Gulf region – the current shock is significant enough to have governments focus on energy security, resilience and independence, he said.
The resulting opportunities for Canadian fossil fuel companies are significant.
The fact that the market is unlikely to go back to business as usual – even when peace prevails – has highlighted the need for diversified and flexible portfolios, said Mr. Botterill at Deloitte.
A gas station in Tacloban City in the Philippines is closed because of a fuel shortage on March 30.MARLON TANO/AFP/Getty Images
He expects super major oil companies will look to diversify the markets where they invest, for example, to avoid being beholden to individual countries, regions and supply chains.
With Canadian firms already looking to increase production, that push toward portfolio diversification will likely add “a little wind in their sails to say, ‘Maybe more investment in Canada’” is a good choice, Mr. Botterill said.
While the human cost of the war is significant, the sky-high oil prices have boosted the balance sheets of Canadian oil companies.
Firms already had historically strong balance sheets when the United States and Israel began bombing Iran, but cash flows since then have been significant, said Menno Hulshof, the managing director of institutional equity research at TD Securities.
“What that ultimately means for a lot of different companies is that they’re going to get to their net debt targets a lot faster than we would have thought six weeks ago,” he said.
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Still, the cash windfall is unlikely to trigger significant growth.
“Companies are always – and should be – very reluctant to layer on additional growth capital on geopolitical events where we don’t have visibility on what the outcome is ultimately going to look like,” Mr. Hulshof said.
The fact that countries will be searching for more stable oil supplies means “Canada is selling ice cold water in a hot desert,” said Adam Waterous, chief executive of Waterous Energy Fund.
“We’ve got safe, secure, reliable, free-world oil. We’ve got it, and we’re going to be able to sell it to the highest bidder,” Mr. Waterous said in an interview.
That gives Canada a significant advantage as it heads into renegotiations on a North American free-trade agreement with the U.S. and Mexico, he said.
The U.S. produces roughly 13 million barrels a day of crude oil, but consumes around 20 million. About 70 per cent of that shortfall is supplied by Canada.
U.S. President Donald Trump has been consistent since his first presidential bid in 2015 that he wants only one thing from Canada, and that’s crude, Mr. Waterous said.
“We’ve just became the prettiest girl at the dance. Not only does he want our oil, but so does almost every oil-consuming nation on the planet.”
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Another change resulting from the war is the potential global move toward electrification.
Mr. Crooks with Wood Mackenzie said the current crisis presents a compelling case for oil-importing countries to substitute electricity for fossil fuels as much as possible.
That could include boosting electric-vehicle sales and buying solar panels; basically, “doing whatever you can to electrify your economy, because it makes you that much more resilient to this kind of shock,” he said.
It would, however, require governments to bite the bullet and enact policy that accelerates the shift to an economy powered by electrons, instead of the current dependence on imported oil and gas molecules.
“Even if governments were to commit to such a strategy, change on the ground can’t happen overnight,” noted a recent analysis from Wood Mackenzie. The shift would likely take hold only after 2030, as electrification accelerates, coal-fired power plants retire and renewables expand.
Under such a scenario, import-dependent countries would halve imports of oil and gas by 2050. Global oil demand would fall to 95 million barrels a day by 2040, and global gas demand by roughly 10 per cent by 2050.
But “energy independence won’t come cheap,” the report said, requiring huge investments to build out domestic, electricity-based energy systems.
“Even so, with electorates feeling the pressure from soaring prices, the crisis presents an opportunity for certain import-dependent economies to strike while the iron is hot.”
The U.S. Energy Information Administration’s April short-term forecast, published this week, said fuel prices will continue to rise until the strait reopens and shipments restart.
The EIA reckons that Iraq, Saudi Arabia, Kuwait, United Arab Emirates, Qatar and Bahrain collectively shut in 7.5 million barrels a day of oil production in March – a number it expects to rise to 9.1 million barrels a day in April.
Assuming the conflict doesn’t persist past April and traffic through the strait gradually resumes, it forecasts that production cuts will fall to 6.7 million barrels a day in May and return close to preconflict levels in late 2026.