Iranian oil blockade would hurt Canada, too

“Oil crisis is now the biggest danger facing world’s economic growth.”

Canada might be a big oil exporter, but a new analysis says our economy would still be hit hard if Iran drives up oil prices by carrying out its threat to cut off oil shipments from the Persian Gulf.

Such a blockade would bring a doubling of oil prices and a steep drop in global economic growth, estimate economists from IHS Global Insight, a big international economics consultancy. They laid out this scenario in a conference call for clients yesterday.

In fact, said IHS Global Insight’s chief economist, Nariman Behravesh, the risk of an oil crisis is now the biggest danger facing the world’s economic growth, replacing the now-diminished concern about a European financial collapse. As IHS oil analyst James Burkhard quipped, “Oil is the new Greece.”

Canada would be partly sheltered because this country’s oil exports would become more profitable if prices rose, but we’d still see economic growth drop by a painful 0.7 per cent in the year following such a crisis, Behravesh estimated.

To put this into context, if it happened today, it would cut Canadian growth by about one-third, bringing the likelihood of higher unemployment and stagnating wages.

But it’s more likely that any such crisis would happen later, perhaps early in 2013, as Iran comes closer to nuclear-weapons capability, said IHS risk specialist Farid Abolfathi.

The estimated blow to Canada’s growth is only slightly lower than the 0.9 per cent seen for the U.S., Japan and China.

The worst damage, though, would hit the region that can least afford it – Europe – where there’s a new recession under way and where growth could fall by 1.4 per cent.

Canada’s own vulnerability is a reminder that if oil prices shoot high enough to crush growth among our key trading partners, we face serious collateral damage.

Not only would sales of our products in the U.S. be hurt, but the export prices we get for commodities like potash and industrial metals could drop as global demand fell.

Within Canada, high oil prices are poison for the two biggest provinces, manufacturing-intensive Ontario and Quebec. They sap consumer spending power and raise the cost of doing business. As well, Ontario’s auto manufacturers would feel a drop in demand for cars across North America.

Indeed, even in Alberta, high global oil prices don’t bring the benefits they used to. Because of bottlenecks in North America’s pipeline system, Canadian oil can’t easily get to refineries that need it most. Therefore it sells at a big discount to Brent, the key crude-oil grade on international markets.

IHS estimates that Brent will probably hover close to $120 a barrel this year and next, which poses no risk to growth since it’s actually low- er than Wednesday’s price of just over $124.

But if there’s a blockade of the Strait of Hormuz, oil would shoot up to about $240 for a few months. That crisisinduced spike would dissipate within an estimated six months.

There are, however, some glimmers of good news in this grim warning.

For example, another oil crisis could be a “tipping point” for consumer attitudes, permanently boosting the market for electric vehicles and highly fuel-efficient ones like diesels, said Nigel Griffiths, the chief automotive economist at IHS.

This might produce the kinds of scale economies that would bring down the price of fuel-conserving vehicles more quickly. And of course, it could diminish the pace of global warming.

But probably the best news about such an oil crisis is that it’s still not the most likely scenario.

Abolfathi said his best estimate is that there’s just a one-in-five chance that Iran will disrupt tanker traffic in the next 12 months, although those odds could rise over time.

He thinks the most likely triggers would be either an Israeli attack or a severe cut in Iran’s oil exports because of international sanctions – but notes that even these would not be certain to set off such a shipping disruption. Iran’s leaders could choose to respond in some other way.

Why does he assume Iranian restraint? Mostly because Iran’s leaders are rational, and any cutoff of shipping from the Persian Gulf would necessarily end all Iranian oil exports.