The energy fallout of the U.S. and Israel-Iran war is a reminder that life is often unfair.
The United States, which started the war with a surprise attack on Iran in the middle of negotiations, could escape largely unscathed in terms of its energy supply — even as its international reputation takes a hit and U.S. inflation spikes as a result of oil prices.
But U.S. allies in Asia and Europe, who were neither consulted nor warned about the U.S.-Israeli attack, are facing sustained shortages.
For Canada the outcome — if it holds — represents a soft landing from a potentially disastrous situation, with a considerable silver lining for Canada’s oil and gas industry.
“It’ll be easier for the Canadian government to argue for greater investment from Asian countries in Canadian energy,” said Joe Calnan of the Canadian Global Affairs Institute.
The crisis may have been just severe enough to raise the value of Canada’s biggest export — crude petroleum — without sending it so high that it crashes the global economy. That outcome would more than wipe out any gains made by Canadian oil and gas.
Of course, the final outcome is not yet known. It depends on a ceasefire that both sides in this war continue to dispute, and that may or may not really represent the end of the missile and drone war in the Persian Gulf.
The biggest losers
Those countries most dependent on imported fuels are the ones that will see the most severe impacts to their bottom lines.
“Buyers of Arabian product going to the Asian and European markets are the most influenced,” said Jonah Resnick, a geoscientist and senior research analyst at energy consultancy Wood Mackenzie.
“That’s where the price impacts will be most sustained.”
Wood Mackenzie estimates that the biggest loser in Asia will be South Korea, while Italy will be hit the hardest in Europe. The cost increases they face are painful but manageable under a scenario in which the political situation calms and fuel prices fall in the second half of the year.
Iranian state media says the country has again closed the Strait of Hormuz, this time over Israel’s continued attacks on Lebanon. The U.S. and Israel say Lebanon is not part of the ceasefire agreement — and the White House claims the Strait remains open.
But in a scenario in which fuel costs remain high all year, South Korea would be facing a 74 per cent increase in the cost of a kilowatt-hour of electricity, while Italy would face an 80 per cent jump.
Countries such as Japan (41 per cent increase) and the U.K. (27 per cent increase) would also face considerable pain.
In Ireland, transport was already partly paralyzed by blockades of ports and highways set up in protest at fuel prices.
The frustration of the leaders of affected countries with the U.S. and Israeli governments that started the war was evident this week.
The U.K.’s Keir Starmer, who rarely criticizes U.S. President Donald Trump directly, told Britain’s ITV he was “fed up with the fact that families across the country see their bills go up and down on energy, businesses’ bills go up and down on energy because of the actions of Putin or Trump.”
Starmer’s linkage of Trump and Putin was seen in the U.K. as an unusually sharp jab at the U.S. administration.
In South Korea, President Lee Jae Myung last week shared on his X account a 2024 video showing Israeli soldiers throwing a Palestinian, who appeared to be dead or unconscious, from a rooftop in the occupied West Bank.
“Humanitarian law must be observed under any circumstances,” he wrote.
The Israeli Foreign Ministry responded testily to Lee’s tweet, saying it was an old incident that had already been investigated.
Turning the taps back on is not so simple
Those leaders know a swift drop in prices is not on the cards. Even if the current ceasefire holds, and ships start to move through the Strait of Hormuz again, producers in the region face major challenges to get production back to where it was before the war.
“Shutting in” and then restarting an oil well is not like turning a tap on and off. Once the flow of oil halts, water can enter the well, emulsifying oil and causing cement or wax plugs to form, or causing corrosion of equipment. The reservoir can lose pressure.
The longer a well is shut-in, the greater the risk to the reservoir. Fortunately, says Resnick, the light sweet crude of the Gulf is usually the least complicated to restore.
Restarting gas production may be more complicated, as has become clear at Ras Laffan in Qatar, the world’s largest gas field and source of about one-fifth of the world’s natural gas.
Ras Laffan production will return in stages, says Resnick, starting with the less damaged north field in about a month.
Qatar’s loss, Canada’s gain?
But QatarEnergy CEO Saad al-Kaabi estimated that complete repairs would take three to five years, partly because only a handful of companies can produce the specialized equipment needed. Ras Laffan will not return to prewar production levels until that work is done.
Calnan estimates the amount of LNG available globally could drop by three to four per cent during that period.
“LNG contracts are typically priced for very long-term markets,” said Resnick. “So obviously the risk to supplies is a pretty big issue. Sources that have very low geopolitical risk are definitely going to become one of the things buyers are looking for.”
Qatar is looking at a sustained loss of about 12.8 million tonnes per annum (mtpa) of gas, just months after the LNG 1 project in Kitimat, B.C., came online with a projected output of 14 mtpa.
The next two years in Canada should see a further 5.4 mtpa come online with the inauguration of the Woodfibre and Cedar LNG operations at Kitimat and Squamish, B.C. All of those projects can offer LNG shipment direct across the Pacific to Asian customers with no concerns about interruptions caused by gas trains or compressor stations being hit by missiles or drones.
LNG Canada Phase 1, said Resnick, is starting to reach full capacity.
“The investment thesis for LNG Canada Phase 2 would be almost a doubling of that project,” he said. “This would definitely push that forward.”
Tolls, missiles and mines
Eventually, the oil and gas wells of the Gulf will return to normal — but passage through the strait may not.
Iran has demanded payment in cryptocurrency equivalent to $1 US per barrel of oil, a price low enough that shippers are likely to find it worthwhile to pay — as long as they can be confident that they’re really buying safety.
There are currently 14 loaded LNG tankers waiting at the top of the Persian Gulf for a green light to transit. Countries that depend on that gas, such as Pakistan and South Korea, have already imposed rationing measures to cope with the shortfalls.
They might be willing to pay the tolls that Iran is now demanding, but it isn’t that simple, says Calnan.
“It’s actually very opaque exactly how Iran is running the whole scheme,” he said.
“It’s definitely not of the same quality as other places where you have tolling such as the Suez Canal. It’s backed up by the explicit threat of violence.”
A more piratical future
Moreover, the Trump administration has sworn not to allow Iran to collect tolls at all. That dispute, as well as a dispute over whether the ceasefire covers Lebanon, could yet derail the whole arrangement.
Even if that doesn’t lead to a shooting war, and Iran is able to impose a toll, U.S. opposition will remain a factor in the minds of those seeking to buy oil and gas in the Gulf.
“In a situation where Iran is under sanctions,” said Calnan, “if you do transactions with the regime, you could run afoul of U.S. secondary sanctions … it’s all just a real mess.”
On day 3 of a shaky ceasefire, Tehran pledged to take further control of the Strait of Hormuz after allowing a trickle of ships through. Meanwhile, U.S. President Donald Trump said U.S. forces will remain until a peace deal is finalized, warning Iran to meet his demands.
The British government announced that it will hold meetings with allies this week to work out a plan to reopen the strait. Starmer ended a three-day visit to the region with a stop in Qatar, where he said “there can’t be tolling or restrictions” on marine traffic in the strait.
But the Gulf states are clearly concerned that no one has yet come up with a way to prevent that, said Calnan.
Doubts about the future movement of ships in the strait only add to the attraction of Canada as a supplier. But Calnan says no one should celebrate the potential loss of a once-free international shipping channel.
“The traditional responsibility of a world hegemon is to make sure that international shipping routes are respected to enable international commerce,” he said.
“This is just a case in point about what happens when you have a more chaotic and not very rules-bound international order.”
