Add the effects of the 1973 oil crisis, resulting from the Yom Kippur War, to those of the 1979 crisis triggered by the Iranian Islamic Revolution. Then add the consequences on natural gas distribution from the invasion of Ukraine by Russia in 2022. This will give you an idea of the magnitude of the energy crisis we are facing with the Israeli-American attack on Iran and the response of the Iranian regime.
It is with this simple comparison that one of the top figures in the energy field, Fatih Birol, director of the International Energy Agency (IEA), presents the current crisis. An interesting perspective from the leader of an autonomous organization created in the aftermath of the 1973 oil shock to ensure the energy security of its member countries, including Canada. Last Monday, at the National Press Club of Australia in Canberra, Fatih Birol also added that “facing the greatest energy crisis in history, no country will escape the economic consequences caused by the war in Libya.”
According to Fatih Birol, world leaders have not fully grasped the likely collateral damage of this war on a global scale. Today, it is not just the global distribution of oil and gas that is affected but also the entire supply chains and services in the world that require energy to drive the economy. And this is only the beginning of the consequences on the global economy if the war continues. The IEA has already started recommending energy-saving measures to its members, such as increasing remote work, lowering speed limits on highways, or reducing civilian air transport in general.
Yvan Cliche, a fellow and energy specialist at the Centre for International Studies and Research at the University of Montreal (CERIUM), admits that his environment has been “stunned” since the start of this war, which many experts believed was almost impossible given the price to be paid by the world’s economies.
“The financial market doesn’t seem to be reacting much to the price increases because everyone thinks it can’t last long. That would really be shooting oneself in the foot. Oil prices could be much higher,” says Yvan Cliche. Some analysts are talking about $200 per barrel, he says, compared to around $70-80 per barrel before the crisis and around $100 currently.
For this reason, some analysts believe that the worst is yet to come, especially if the war were to continue. In the 1970s, the price of oil eventually quadrupled.
Jean-Thomas Bernard, assistant professor in the Department of Economics at the University of Ottawa, had just started at the time of the oil crises in the 1970s and remembers well the effect of rising oil prices at the time. “It can certainly be of this magnitude again this time. Almost all modes of transport still rely almost exclusively on oil. Aviation, maritime and truck transport, construction equipment on mining sites, etc.”
He remains optimistic, nonetheless. Prices had dropped quickly back then, he recalls. With global economic integration and trade liberalization, more prevalent today, things will likely go more smoothly this time around.
Two things will facilitate a return to normalcy, according to the professor. First, today’s vehicles have much better gas mileage than in 1970. Less fuel is needed to travel further. Second, states are likely to be much less interventionist than before, he believes. The Canadian energy policy had involved subsidizing oil consumption to keep prices low while favoring Canadian oil consumption, which led to a “huge deficit that the country took years to pay off.”
Despite his optimism, Jean-Thomas Bernard sees a shadow looming over the economy: “The oil crises led to stagflation in the 1980s [in Canada and several other major economies]. Inflation and unemployment rose at the same time (while economic growth was weak or in recession). Many countries were not prepared for the new reality and still had old equipment that primarily used oil, even as prices rose. These industries were becoming less and less profitable. It was disastrous,” the professor remembers.
Stagflation, a word that brings back bad memories for Yvan Cliche from CERIUM, who graduated at that time. Unable to find a job, he was forced to take contract work, like many workers at the time. It was a difficult time of precarity as inflation and interest rates were high.
The longer the current crisis lasts, the closer we get to the catastrophic scenario of stagflation. But the crisis has already reached such a magnitude that even if it were to end tomorrow, it would still have significant effects on the world economies.
Short-term, “energy prices are expected to rise since the market will assign a risk premium to oil and gas from that region. Prices will necessarily be higher than if we had not had the crisis,” says Yvan Cliche. “Even if the conflict ends, people will want a guarantee that things have returned to normal, with no risk of a new conflict breaking out, and insurers will probably ask for premiums until the situation or confidence level is restored.”
Long-term, much like the crises of the 1970s led to titanic changes globally (France and Japan transitioning to nuclear energy, creation of the IEA, electrification of heating in Quebec, for example), the current crisis is also expected to bring about modifications to prioritize each country’s national supply security and limit their energy vulnerabilities.
“In essence, we’re talking about the energy trilemma: supply security, price, and environmental dimension. The triangle will shift, with the priority no longer being the environment, but supply security,” explains Yvan Cliche. “Countries will start wanting to use their local resources, accelerating the energy transition to renewable energies (solar and wind). Not because it’s virtuous or for climate change, but because it’s impossible to embargo the sun and wind.”
Countries’ reactions to reduce energy and political risks in their supply chain and the resulting investments could lead us to the same stagflation problems as in the 1980s. This will be especially true for economies that are not at all prepared for such an energy transition.
This is why some Asian countries (India, South Korea, the Philippines, Vietnam, Thailand, for example) have chosen to return to coal (a local resource for many) to offset their losses. Just like Germany did at the start of the Russian invasion in Ukraine. But this is also why others are simply trying to negotiate directly with Iran (which claims to let “non-hostile ships” pass through the Strait of Hormuz) to open the passage to their boats, reminding the Iranian regime that this is not their war. This includes countries like Japan, China, India, Pakistan, and Malaysia.
Iran had warned from the start of the conflict that it would seek to make the price of this Israeli-American attack be paid in other ways, as it was not in a position to respond tit-for-tat against military powers. A strategy of “survival through chaos” to put pressure on its aggressors through their allies. Clearly, this strategy is slowly bearing fruit given the effects on the global economy.
