Bob Yawger: Bob Yawger is a commodity specialist with Mizuho Americas joins us again. And Rory Johnston is an oil market researcher and founder of the Commodity Context newsletter. And Heather Exner Pacheedaht is the director of energy, Natural resources and environment at the Macdonald-laurier Institute. Great to have you all on the program.

Rory, I'm going to start with you. The petrodollar system began in the 1970s. This is where, you know, Middle Eastern oil producers sell their products in US dollars. They spend those earnings, of course, on US assets like treasuries. It helps Americans fund America, fund its spending. Also, some exchange for security as well in the Middle East. Help us understand what is the future now of the petrodollar system.

Well, part of the challenge is that those Gulf producers aren't currently making any money, so there's not many Petro dollars to recycle into that system. So that is obviously a massive drain of liquidity from the financial system globally, and obviously transfers directly into the US dollar. But again, I think this situation remains untenable to last. I think something is going to have to move because these are we're currently at existential levels of kind of despair of the of the Gulf producers between Iraq, Kuwait, Saudi Arabia and the UAE, to name to name but a few. We've already had, you know, we have 20 million barrels a day lost through the strait. And just to put that in perspective, I think it's important to kind of understand how big a number that is. That was roughly the peak of global demand loss during the peak of Covid in March and April of 2020. So when not a plane was in the sky, we were all locked in our homes. That's the current level. If the strait remains closed, that we are going to need to see some degree of demand destruction to kind of close that gap. So imagine trying to replicate the mobility issues of Covid, but without a pandemic and without lockdowns, what price would you require to get there? So I think back to this question about the GCC producers, the Gulf producers, you've already seen more than 9 million barrels a day of production shut in. That's not just blocked, that's production. These wells aren't producing anymore. This is going to take weeks, months to get back up and running. There's not a lot of money coming in.

All right, Heather, Rory's painted a picture there. What is the future now for the petrodollar system as you see it?

Yeah. Well, just to reiterate, you know, Rory's alarmism and Rory is usually pretty balanced guy, but things are bad. I was just with some Australian miners yesterday. Some of the lithium mines, they're down to five days of storage. They're going to have to shut in their mine. So the idea that oh, just move to electricity, you know, just move to renewables, the availability of oil and all the things it produces greases the wheel of every other facet of our economy. And so there's no doubt that we will have a hangover, you know, however this ends and whenever it ends, and I agree with Rory politically, it's untenable. And so people are looking for exit ramps right now,

Bob. I think I agree with them to a certain degree. Those those dollars are locked in right now. And I would tend to think that it's going to be the case for a good two weeks, two months, or up to Memorial Day weekend is where I'm looking for kind of to wrap this up at the Trump administration cannot afford to take this into summer driving season. So I'm looking forward to end about there. But there's a lot of oil out there. On the other hand, the global economy would be able to survive. Prior to this, the International Energy Agency was estimating there was about 3.8 million barrels of surplus every single day. So there's a lot of oil out there, but it is definitely a problem.

All right. I want to pull in a chart. This looks at Canadian oil prices from 2014 to 2026. But I want to keep our focus onto the right hand side of this chart here. Prices of Canadian oil rose around the same time that the war began in the Middle East. A huge spike right there, but they are still well short of all time highs, which was of course, in 2022. Rory is Canada in for an oil and natural gas windfall because we, you know, we're reliable, some would say secure democratic supplier of those resources. Is this an opportunity here?

I think in the initial term, absolutely. I think what we're already seeing with Brent prices, you know, we're currently at about $110 a barrel. WCS differentials are the discount borne by Western Canadian Select barrels, our main heavy sour export. They have actually been under pressure earlier this year following the kidnapping and kind of regime change in Venezuela following the kidnapping of Nicolas Maduro, the re-entry of those Venezuelan heavy sour barrels similar to our own, was weighing on Gulf Coast discounts. But basically what's happened through the Iran war already is. In two weeks, that discount has been entirely erased again. And the reason for this is that the majority of barrels coming out of the Middle East, coming out of the Strait of Hormuz, are medium to heavy sour barrels. So we are benefiting as Canadian exporters, both on the kind of overall price level as well as a better differential or discount. The challenge is, is I think the longer this goes on, I'm pretty alarmed, as Heather was saying, I'm very alarmed. And I don't think this is just recessionary. I think this is discretionary. If this continues for as long as it could. And I think that's why I can't I can't see this lasting. But even in a scenario of higher oil prices, Canada will hurt from the economic pain globally if this does spread into a global economic catastrophe, which is which is where it's looking like it's going right now.

Heather, when we talk about countries that are hurting right now because of this situation, we can look to countries in Asia, China, India, Sri Lanka, other nations. But I want to focus a little bit on Canada's sort of new forged relationships with China. For example, I am curious, what does this supply disruption in the Middle East mean for these relationships for Canada, say, amongst China and other Asian countries?

Yeah. So Rory's right that this is hurting everyone. Canadian consumers will not benefit from this. But if any country is looking like it may be a winner, you know, in the medium and long term out of this, I think it's Canada. Russia might have some claim to that as well. But the reason for that is that we are an enormous oil and gas exporter. We are able to export off the West Coast now to some extent. We're looking to export more oil off the East Coast, and we ship through the Gulf of Mexico. So we have quite a lot of diversity where we can ship things through. Obviously, Carney has been very focused on improving those Asian alliances. He's been to Japan, India and China. Obviously, energy led those discussions. Uranium was also on the agenda, but it was very much oil, natural gas and LPG. And if you're one of those buyers and you're already thinking about Canada, well, we are. We just keep our brand keeps getting better and better. The premium that you might assign to that reliability, to that Canadian optionality is probably getting better. And I would say that helps. For example, as we're expanding Trans Mountain to get buyers in Asia to take off excess production that we could send through there, I think it probably helps get the final investment decision on LNG Canada, too, and LNG. And, and just overall, I think people may, you know, if you can have optionality and Canada is an option now, I think that would be attractive to just about everyone.

Bob. Heather says, you know, Canada is a potential winner here, but I want to talk about infrastructure. Does Canada have the ability to ramp up oil and gas production quickly? I know we talked about, you know, pipelines as well. Whether we have enough of that or not. Can we do this?

No, no. The US will be the best customer. And as we're almost all the barrels will go, that's where the pipelines go at this point. They go into the mid continent and the they the refineries, US refineries in Mid-Continent soak up that crude oil and it's reliable. It moves every day perfectly. What Canada needs is another, larger pipeline to the West Coast, where they can export barrels to basically to China. But there'll also be barrels that would go to Japan and South Korea also. Now barrels actually go to a large degree to California and the West Coast also. But they need a bigger pipe, build a bigger pipe and the producer will add more barrels. They will increase production. It's as simple as that. But financing that pipe is no easy task. And building the pipe would be an architectural wonder of the world. It's not easy. It's pretty long ways. And you got the Rocky Mountains in the way too. But it can be done. But it costs a lot of money and you need that kind of commitment.

Heather, I'll get you. Get you in on a response to Bob there.

Well, I mean, Bob's absolutely right. So we have the expansion of Trans Mountain. The obvious customers for those are in Asia. That's likely to happen. That would probably be about 360,000 barrels. So that's what we're focused on now. LNG is a bit of a different story than oil. We all want that Northwest Coast oil pipeline. But to Bob's point, it's easier to go to the United States. And also we've attached a $20 billion carbon capture project to a new Northwest Coast oil pipeline, which on top of the financing and the engineering difficulties, makes that more of a long shot. And so you have seen that what is actually happening in real time is producers are looking to send more south. Enbridge is expanding its main line, optimizing it. And now we're having the revival of Keystone XL. And so the, you know, oil is going in the shortest route and the smoothest route it can find. And most of that happens to be the United States.

Rory, Canada produces about 6 million barrels of oil a day and has a dozen refineries across the country. What is preventing this country from being self-sufficient when it when it comes to using our own oil and gas products, like making gasoline or diesel?

Yeah. So Canada, actually, I wrote a I wrote a report with Heather at the Macdonald-laurier Institute specifically on this question of Canadian refining sufficiency. And as a country overall, we actually roughly refine as much fuels as we consume. The challenge is, is that, for instance, some of our, our refineries on the East Coast can't get access to the crude oil produced, you know, in Western Canada. This is where we initially had arguments for things like the Energy East pipeline that would connect the two sides of the country. We saw this with the TC energy main line connecting in gas. You know, a very, very long time ago. Now this is what you would need as well. The challenge is economics. It's always going to be cheaper to Heather's point to go south, it's always going to be cheaper. And I think when people bemoan the over dependence on the US market, they kind of say it's a government failure. I would argue the opposite. I would say that this is what the private sector is going to do if left to its own devices. If we do want the optionality, if we want the energy security in Eastern Canada, and we want the optionality of westward exports, you know, for instance, servicing the Indian market directly, which currently we can only service through Re-exports to the US Gulf Coast, that's going to require this much more expensive northwest Coast oil pipeline that I fundamentally believe will not be built if left only to the private sector. It will need government money. And that's a strategic element that only government can incorporate. The private sector can't value that.

Bob, I'm hoping you can help pull the curtain a little bit. I'm curious, what do you think Canadian oil executives are talking about right now in boardrooms, as they are watching sort of the chaos in the Middle East right now.

They're most concerned about the differential between WCS and WTI. They want to see that spread narrow and the Canadian barrel become more attractive. That's how they will maximise the their production going forward from here. So that did narrow after the Venezuelan situation. Venezuelan situation was very negative. Canada, that was worst possible scenario. And then the president talked it up as if it was a solution to all these heavy barrels. And that was that actually drilled the market down to an artificially low level. In other words, the Canadians were getting kind of ripped off a little bit. The price was too cheap. Nobody's going to take those Venezuelan barrels instead of Canadian barrels. The US refiner wants Canadian barrels. It's it's politically stable there on time. There's no chance of force majeure. It's a dream market. But it's for the Canadians defence. It's not a -$16 market. They deserve better than that. Somewhere around -11 -13. And that's what the producer right now is looking at. And he wants to see the market settle into that range.

Rory, I am curious. I want to get back to the Middle East. Do you think we have enough information to gauge what is really happening with oil supply right now? Is there something that perhaps we are missing?

I think part of the challenge, I think some of the disconnect, because I think the futures markets, as an example here have been very, very volatile and arguably have lagged where many analysts like myself think that the price of oil should be given the level of alarm that I think is justified. But what we've seen over the past couple of weeks is that the jawboning or kind of talking down of the conditions in the oil market by the white House, by Trump, by the Treasury secretary, energy secretary, right. These have all kind of taken the wind out of these out of these positions. We saw this in remarkable fashion two Mondays ago when we saw $35 barrel spread intraday for these prices. Many traders got blown out. And I think there's a wariness to get too long ahead of physical markets here. But I'm just looking at my screen right now. Cash crude right now off the coast of Dubai, based on the Omani Gulf, is currently trading at $170 a barrel. That's the type of prices that we are going to see coming towards us, and it's like a shock wave rippling out. It's going to take time and we're seeing it hit Brent before we're seeing it hit WTI, all of these things. But eventually these are fungible barrels to a degree. The market will become more uniform. We're still in just the very, very early stages of this shock.

Heather you get the last word here. If Canada does become a more attractive source of oil and gas, does that mean we will see more foreign or domestic investment to follow?

Well, absolutely. And I'll say, you know, one thing, since the beginning of the year, oil sands producers, their stock prices have far exceeded, you know, the S&P 500. But even the average, the average of energy producers. And so oil sands Canadian oil is looking very attractive. People are betting that it's going to have a good couple of years. And I think now is the time. You know, we're still negotiating that MOU. There's still some of our own house to get an order in Canada. What will be the industrial carbon price? A lot of uncertainty on our own side to, you know, to be topped off with what's happening in global markets. I hope we get our act together very quickly so that producers can start making those investment decisions. Pipeline companies can make their investment decisions, and we can plot out what is it that Canada can be doing in the short and medium and then hopefully long term as well.

All right. We are going to have to leave it there. I'm probably not going to have all of that information on my computer like Rory does or Bob does all the time. But it's a story that we, of course, are going to continue to follow. Bob, Rory, Heather, really appreciate your insights. Thank you.