Sage Roundtable: Is Canada Seizing the Iran Moment to Promote Investment, Productivity and Income?
Edward Greenspon: Hello to you all. Today we’re talking about how Canadian government policies can respond to this spring’s Iran shock in ways that can permanently increase domestic investment and the incomes of Canadians.
David, will you get the ball rolling?
David Dodge: We in Canada have not encouraged investment and have very much concentrated on redistribution. So as the world changed in 2025 and continued to change, we found ourselves in a position where we really had to find a way to increase investment – and then another supply shock came along with the Iran crisis.
This one has an impact on global trade, but also on oil prices directly. We have had supply shocks in the past, the most recent being the pandemic. And we had a tremendous set of supply shocks in the 1970s in terms of oil prices, which we did not deal with very well. So here we are today. We’ve got another supply shock, and we have to think what that might imply for policy. We know that the one thing governments federal and provincial have to do, somehow, is to raise the share of national income that’s going to investment. And that implies some reduction of consumption.
The oil price going up has impact across the world in terms of increased uncertainty and likely lower growth, but also it clearly tells us that we’re going to need a structural shift in the sources from which oil is going to come. Even more importantly, it’s another reminder to much of the world that we really do need to find alternative sources of energy., So the question is, what that all could imply for Canada.
Well, I think the first thing that any shock like this implies is that we better adjust to the change, not resist it, not compensate for it, but adjust. I think that is the prime lesson of all of our policy failures in the 1970s and from the supply shock from the pandemic – that we can’t trust the supply chains we used to trust, and that this one is an ongoing physical limitation. Okay, so what? What might we do then?
Well, the first thing we shouldn’t do is to try and offset it. We should use the price signal to do what it’s supposed to do, and tell us as consumers to cut down on the amount of that product we use, oil. And it should tell us as energy producers to find ways of production that are less reliant on energy coming from oil. So we should have let the price impact come through to consumers.
The worst thing in the world the government could have done was what it did do, to try to offset that through reducing the excise tax on fuel. That was pointing us exactly in the wrong direction, because we know that over time we are going to have to find a way to save more oil, or consume less. And that’s the message of the price effect.
The second thing about the price effect, of course, is that as it flows through it provides additional revenue to governments and to businesses, in particular our oil and gas businesses, and perhaps our fertilizer businesses and others being impacted by the oil prices. That additional revenue is the incentive to improve investment.
So in a sense the policy ought to encourage adjustment on both the consumer and the producer side. It provides additional revenues to make structural investments for governments, going forward, that can improve the global supply chain, our access to global markets for oil, So that’s kind of what tells you what you should do and that is to improve investment in the Canadian economy. We ought to take advantage of the oil shock, the price shock to facilitate exactly that structural shift, which we need. That’s purely on the economic side. I’ll leave it to others to talk about the political implications of what the Iran situation means for our policies beyond the economy.
Edward Greenspon: Thank you for that opening. I have one historical question: You said we don’t want to repeat the mistakes made in the 1970s. I just want to understand what mistakes you’re referring to that we don’t want to repeat. It will help me not repeat them if I know what they are.
David Dodge: What we tried to do in a number of ways in the ‘70s was to cushion the shock, rather than to let it flow through so that people adjusted. And that turned out to be a big problem, because in cushioning it, all we got in fact over time was more inflation that came out of the policies that tried to compensate consumers. And even more importantly, of course, we did not allow the price shock to flow through into increased production by Canadian producers. We failed to adjust, and it took 10 years until finally, in 1981 the government said, “okay, we’ve got to adjust”. And we had a very hard period of time because we had not adjusted promptly. We had interest rates that went through the roof. So we finally got the adjustment only 10 years later, rather than doing what the Japanese did. Japan was the one major Western country that didn’t try to provide cushioning and allowed the impact to flow through, and to their great advantage.
Miville Tremblay: I agree with your overall reasoning, David. The oil embargo imposed by both Iran and the U.S. is clearly a supply shock. Whether this will become structural remains to be seen. It’s likely to last months, and even if it were to be resolved soon, the consequences will still have to unfold over months. What is unknown is how long and whether prices will remain as high as they are currently, or if they go back down to $50 a barrel, or something in between.
So it seems to me that structurally people will want to rely less on that region overall to reduce their risk. And that raises the question in Canada of what the industry will be willing to do in terms of investment, and with what horizon.
My view of the recent years is that the oil industry tried to diversify into renewables, and the U.S. companies have shown that they could obtain a much better stock market valuation than European oil companies that tried diversification. That’s because diversification into renewables was not as profitable as pumping oil from wells,. So the question then is, will the oil companies remain disciplined in the sense that “we won’t invest, we will milk the cow as long as we can and make the profit.” In that case the diversification will have to be done by shareholders who will take their cash and invest in something else, and renewables in particular. So will the incentives put in place by the government be enough? A huge capital investment would be required for expanding the oil sands plants. And will they want to finance a pipeline that will need 50 years to be profitable? I just don’t know.
David Dodge: There’s uncertainty as to how long this Iran thing is going to last, but it certainly indicates a structural shift in sourcing oil, and that will definitely persist. It seems to me that the particular cause of this problem, the blocking of the Strait of Hormuz, is going to provide over time a better opening for us to supply oil to the world out of Canada. So that’s a long-term positive, and it also provides the cash in the short run. There’s a degree of uncertainty, of course. The additional investment in production, and in particular in pipelines, may not come forward. But I think the structural shift of the closing of the Strait means that the opportunities to be a supplier to the world are likely to continue.
But you raised a bigger point: if in fact the breakdown of oil supplies in the world means that the world as a whole tends to move towards alternative sources of energy – in the right direction from a climate- change point of view – then this is actually a pretty good thing, and it ought to be helpful in providing better comfort for outfits that invest in alternative sources of energy. And for them to continue to make those investments is a long-run positive for the world, absolutely.
The fact that oil-supply sources from the Middle East now look riskier is also an opening for Canada to capitalize on our own resources in a way that we were doing, and making investments, prior to 2014. From roughly the start of the century until about 2014 the oil situation actually induced a lot of additional investment in Canada, and that was very beneficial. But it sort of stopped after 2014, when we had a sudden price break. So this re-emphasizes that at a global scale we are still more reliant on fossil fuel as a source of energy than we would, from a climate point of view, like to be. As a producing country, we ought not to overlook the opportunity that provides for us.
Don Wright: I take a contrary view to the notion that there’s going to be a large shift to renewables. Certainly, that’s the default instinct of people, but it overlooks the fact that it’s very difficult to have an electrical system that has wind and solar as the predominant sources, because of the reliability issue. In jurisdictions that have tried to do that, most prominently in Europe, they have seen unbelievable increases in their electricity prices, and that has caused their competitiveness to go way down.
So yes you’ll see more investment in renewables, but those sources don’t provide a solution to the base-load problem. Unfortunately we are already seeing, particularly in Asia, a shift back to coal.
And then nuclear is reemerging. We are seeing a bit of a renaissance of nuclear, and that’s being reflected in Canada’s energy policy. For me, all of this this is probably on balance a plus for the oil sector, if we can get egress, because I think the long run demand for oil is not going to go away all that quickly.
With natural gas, I’m not sure. I’ve been a big proponent of LNG, and we certainly should complete the projects we have in place right now. But if as I suspect Asia is shifting back to coal, there may not be the market for the LNG that we think there’s going to be.
In that case we need to turn to doing something with the natural gas in Canada, as opposed to just shipping out in raw form. Most obviously we could produce electricity with it. The strategy document the feds announced last week more of a role for natural gas, which is a real difference from what we saw under the Trudeau government. We should also probably be looking at producing more fertilizers and other industrial products with our natural gas.
Dan Ciuriak: I’m not an oil and gas guy, but I see that there are lots and lots of structural issues in the shock that’s emerging. For example, the biggest shock that seems to be looming is in diesel; the futures on diesel have increased way more than the futures on gasoline. Diesel is what drives transportation, for example, right?
Also Canada has the structural issue that we extract the oil in the west and ship it south. We don’t have the east-west pipeline, so for some parts of Canada we’re importing, and from some parts of Canada we’re exporting. We do have the TMX to the Pacific, and that’s, been a boost, but anything structural that would change Canada’s relationships with the world in oil would take many years, and the Strait of Hormuz thing is pretty clearly a short-term thing. It will go away within a year or two, and the kind of investment that would be required to change the structure of Canada’s energy supply in its orientation would take many more years. So private capital would be looking at this and asking, “do I commit significant amounts of money in a context of enormous uncertainty about the future timeline for oil prices?”. I think they would not, so I don’t think we’ll get the investment that David hopes for.
The second issue on my mind is that demand elasticities for energy are very low, so the adjustment does not happen very quickly. People who are committed to internal-combustion engine transportation are committed. They need to get to work or wherever. They will continue to buy. There’s no adjustment in the short run.
The adjustment that we saw in response to the late 1970s oil shock was the downsizing of the auto fleet. We went from big SUVs down to much more compact vehicles until the energy-price situation reversed. And then you had the rebound in SUVs, but that takes a very long time.
So, let’s say we expect a short-run impact, that will be borne as an income distribution impact on those who are price inelastic and need to buy gas at the pump and don’t have the income. That will cause a lot of hardship in Canada so should you then proceed as Mark Carney has done to alleviate that in the very short term? And in the longer term do you put in place structural measures to change Canada’s energy structure with a long-term view? That’s probably going to take a lot of government investment. I don’t think the private sector will do that for us.
So those are my main concerns: that there’s a structural factor that is going to hit us, and we don’t have the means to adjust to that, because we don’t control the structural levers, and secondly, on the demand side, that there is not much adjustment that can come, at least in the very short run.
David Dodge: Well, yeah, adjustment is difficult, it’s painful, that’s why people don’t adjust, right?
But we are going to have to adjust over time, and if you think of what Mark announced Thursday to move on the electricity side, yeah, we are in the process of adjustment, and that’s going to take a pile of investment. If we can take public royalties on the oil-price increase, as well as the private side moving – because a number of the private electricity operators are willing to move there as well – that could help.
The adjustment is painful, but if we try again, as we did in the past to fill it in with government spending, then we simply add to that problem, which doesn’t help growth in the long run. And we know that if it turns out to be a relatively short period and then the government has to claw back – well, we had a terrible time doing that after the after the pandemic; governments were just very slow. Having created a whole lot of extra demand, they were unwilling to take it out again and didn’t take it out over time. That’s the reason for part of the inflation problem that we have now.
The price system is there and has a purpose, and we should let it do its job, and we shouldn’t try to cushion. Cushioning is a big problem in the end, because it simply stops up the adjustment we need to make.
Edward Greenspon: The government seems to be trying to walk and chew gum at the same time. I mean they’re trying to put in policies that blunt the effects on a consumer, such as the excise tax suspension. But at the same time we have an MOU proceeding with Alberta, and we have long-term policies to try to increase supply from Canada and take advantage of this in an investment way. So is one antithetical to the other? Can’t these coexist as policies?
David Dodge: They can, but to the extent that you try to compensate fiscally, you somehow have to get it back in the end. If you think of it as stabilization problem, a pure Keynesian problem, it’s not quite because it’s supply rather than a demand side.
But if we pump a lot of extra resources out there at a point in time, we will have to find a way to get them back. That’s the struggle we have been having in 2023, 2024 and 2025.We’ve not been willing to get it back fiscally, and we’ve allowed the debt to grow. We have not run a primary surplus afterwards in order to claw that back, and so we end permanently with debt-service charges eating an ever-larger portion of government revenues.
It would be better to let it flow through, and you can explain to the public: “Yes, we’ve got a problem, folks. We’ve got a problem with this sharp rise in prices, and in the long run, the only way we can tackle that problem is, to adjust to it, and it’s tough.”
So it’s not easy, but cushioning doesn’t help you in the end. That was the lesson in the 1970s. It was only when we stopped cushioning in 1980-81, that we began to get the adjustment that we needed, both on the industrial side, because industry had not adjusted as rapidly as it should have to the increased input costs by changing their production, and similarly on the consumption side where we had not adjusted rapidly enough.
Edward Greenspon: The next two people to speak appreciate the economics of this, but both have also had to run for office. So I’ll be interested to hear from Martin and Cathy.
Martin Coiteux: David, you’re against cushioning this particular shock or supply shocks in general. You’re saying that if it’s permanent, we would have to adjust, so it’s there’s no point in cushioning to avoid adjustment. So the optimal response would be to allow economic actors, investors in particular, to adjust if the price shock is permanent. But if I understand you well, even if it’s temporary, you are against cushioning the shock on the fiscal side at least, right? Because you say, well, whenever we cushion those kinds of shock, as we did in the pandemic, we create problems in the long term. We cushioned a lot, we increased the debt, and we created problems in the long term. So even if the shock is temporary, we should avoid cushioning, you suggest.
What about the monetary side, which we haven’t discussed so far? During the pandemic we cushioned also on the monetary side, and the interpretation of most people nowadays, even at the central bank, is that it was a mistake. We cushioned too much on the monetary side as well, because inflation was not that temporary after all, even if the shock itself was temporary.
The notion of whether a shock is temporary or permanent is very elastic, right? So, on the monetary side, what should we do in a situation like the one we are in right now? Just let the shocks go through? We’re not increasing rates, we’re not lowering rates, we’re not doing any quantitative easing. Should we raise rates? What’s your view on this?
David Dodge: The bank has a hard choice. We’re stuck between rock and a hard place, you’re absolutely right. Canada is sitting at the lower end of the normal range in terms of interest rates, so you could say that just by staying where we are we’re doing a fair bit of cushioning. You need to preserve faith that monetary policy is not going to create ongoing inflation expectations, and so one could argue that you could raise it a little bit.
The United States is kind of at the top end of what we might consider normal interest rates. There the argument has been, “oh, we should reduce it, because we’re now expecting huge productivity gains and so need lower interest rates.” But really, you should leave it alone in the U.S. But in Canada, because we’re kind of already at the lower end, you might think about raising rates a little bit.
But remember that in the pandemic, there were two problems, and they got conflated. The initial hit was going to be a collapse of the financial system, and so the bank did its right thing as lender of last resort in that period, in the spring of 2020. The bank did exactly what it’s supposed to do, just to ensure that we didn’t have a financial system collapse.
The more problematic thing was to continue that expansion of liquidity for a much longer period, the so-called quantitative easing. The more problematic part was not the initial cushioning, not the initial dealing with the financial crisis that would have occurred. Where the debate occurs is over how long that continued, and I think generally it’s concluded that the Americans and ourselves were too slow.
So we did the right thing in the spring of 2020, but in the winter of 2021 we were far too slow in beginning to back off. If we had pulled the plug at that earlier point, then in fact we probably could have got through quite well. But it’s very hard politically to pull the plug, even though if you follow the data we had recovered almost fully by the second quarter of 2021. But it’s very hard to let go of things. So you had better not be supplying quite so much cushion at the start if you’re not going to be able to get rid of it very quickly.
Cathy Bennett: David, the current cushion is the reduction in the gas excise tax. So I would assume that when gas prices come down, governments will do what they should do, go in and take that back, right?
David Dodge: There was one other element, though, Cathy, on the price side. We had this idea of a GST rebate, to offset increases in the GST rate, and then we re-labeled it, and gave away a whole pile of money by re-phrasing it with some fancy name to further increase demand at a time when we had inflation. So we’ve got the food price issue, the gasoline price issue, exactly like we had in 1972. This reminds me of sitting in the Department of Finance in 1972 and what we had to deal with.
Cathy Bennett: What I was trying to get to is that currently we haven’t seen wages recover, relative to inflation. I’m not the economist here but when we say “share of wallet”, what the feds and some provinces have done to remove some of the gas tax, is not keeping up. I don’t think people in their communities are raging about the Strait being closed. I think they’re raging about the fact that their share of wallet has had shock after shock after shock in the last three years or five years, and wages haven’t moved up.
So we have to look at expressing a stronger accountability message to those of us who get elected to say race for the revenue, to increase wages or per capita GDP. So there’s an essential need for governments, plural, provincially and federally, to execute on revenue, the fastest revenue. And when I say fast, I’m not talking 10 years, I’m talking what can they do in the next one to four years.
As an example, do we look at floating LNG platforms off Newfoundland, for example, or do we look at how do we expand other places on the revenue side based on this crisis?
What I worry about, David, is not so much the cushioning, but rather the status quo of execution that we have had historically in Canada, not to get aggressive about our revenue, because the revenue that actually needs to feed the health-care system and the education system, and that’s going to keep people from raging around their share of wallet, that is solely, in my opinion, up to the governments of the day.
So, when I see Prime Minister Carney and the premier of Alberta coming together and having unusual conversations that they’ve never had before, I’m screaming, “yes, right on”. It’s important for governments to be very assertive and aggressive now with what they can do, because there is an opportunity as the marketplace changes around where oil is going to be purchased or where energy is going to be purchased or where clean energy is going to be used and purchased, we’ve got a moment in time. The entrepreneur in me says we want to make sure the bar is raised really high for these folks that have positions of leadership across the country to execute.
Don Wright: I just wanted to double underline with exclamation points the point that Cathy just made. That is so right on in my opinion. We need to have governments that determine where the revenue is to be had and go after it aggressively.
And I have a question for Dan. He said that it’s unlikely that the private sector would be willing to build an oil pipeline to the West Coast, and I think that’s probably right with all of the uncertainty in place. But I wonder if that very uncertainty doesn’t tilt Ottawa’s calculation in favor of finding some way to make the pipeline happen for two geopolitical reasons.
One is that we do need to diversify away from the American market for our oil as part of our larger conversations with them, and the other is this: I wonder whether countries like Japan and South Korea might be interested in participating in a pipeline, so that they can deal with their energy security issue. I think one of the lessons of the Iran situation is, if you’re Japan or South Korea, you are really at the extreme end of risky energy, and maybe they might be persuaded to enter into some long-term arrangements with Canada to deal with that.
Dan Ciuriak: Don, what drives my thinking is the timing consistency between the investment decisions for the private sector, the consumption adjustments in the consumer sector, and the enormous structural complexity or complications of actually changing the way energy moves around the country and around the world. So you’re pointing to really important things, Don. I mean, the country being hit hardest by the Hormuz closure is India. They’re talking about rationing, cutting in half their energy consumption, cutting in half their fertilizer. So, yeah, having stronger linkages from Canada, which is a major supplier of energy is, I think, a good thing in the long run.
It would be good from an economic security perspective for the East Asians to actually participate in developing those pipelines, and it would be good for us as a nation, although I think it’s perhaps problematic in terms of federal-provincial relations to actually have that pipeline east-west, so that we also can supply our eastern parts of our economy in the event of a future breakdown. I think the Hormuz thing itself will be temporary, which is a problem in terms of triggering the investments required. I think this is more of a wake-up call on the economic-security side. That should then cause governments to de-risk the project by making a commitment, and if they make the commitment, then private sector capital will come in, because you’ve removed that sort of boost to the hurdle rate of uncertainty.
We’d be saying that this isn’t because of Hormuz. Hormuz was just a wake-up call. We’re doing this in order to change permanently the structure of energy supply, such that Canada is in a position to supply both Eastern Canada and the Asia Pacific in some future event which acts like Hormuz to make energy unavailable in major places. That’s the way I would look at it. I think we need to have this timing consistency front and center in our considerations as to how government responds.
Miville Tremblay: I’m skeptical about oil companies’ desire to invest It would be wise, as just mentioned, that Asian countries invest in our pipeline to secure their own access to oil in the long term, and I think some federal government money to de-risk the project could help. But I think it should be modest here, because really the oil companies are making tons of money, and it would be difficult, at least in the east of the country, for the federal government to pay for the whole pipeline like we did the last time around. But there is also another geopolitical reason, which is to keep Alberta quiet, considering the debate there about losing the referendum, or winning, depending on how you define winning and losing for Alberta.
Edward Greenspon: Well, you mean Canada winning.
David, if you want to come in at the end and sum up, and maybe just put this into a quick policy recommendation for the government. Is it moving in the right direction now, or what it would take to move in the right direction?
David Dodge: Well, I think the government hasn’t yet got a plan to tie all the pieces together, which is unfortunate. Each little bit is being done kind of as a one-off. We had electricity. We have the discussion in Alberta. We have announcements about doing something in Northern Ontario. We have all these pieces that are coming one at a time, and you don’t see the big plan.
But the big plan, I think, in the back of Mark’s mind is that we need to increase both public and private investment. We have to take opportunities where we can, and part of the public investment is to facilitate those opportunities that are there, we’ve done that in the past, and it’s not improper for the government to borrow to do that. But in the end, in aggregate, if we’re going to raise the share of investment and raise the share of savings to finance that investment, we have to make hard decisions. We’re going to have to back off a bit on the redistributive efforts that we’ve made in the past, both the big long-term redistributive efforts, and the shorter-term ones, where we try to protect people from changes that are going on.
We’re going to have to back off on that in order to provide the government some more room, and the government will need some tax revenues as well, and that implies that we’re going to have to, in the end, tax consumption if we’re going to continue to provide the level of service which we have promised people, which we are economically unable to provide at the moment.
So it’s a big broad-plan issue, and it’s a very hard sell, a terribly hard sell. We think that there are benefits in the future from making investments in raising our productivity and thereby raising our wages. But those investments, those benefits in the future are not certain, and so we’re having a difficult time making the difficult decision today to restrict our current consumption. Some people are already not very happy with the level needed to free the resources and provide the incentives, to reach the potential gains that are out there.
That’s essentially where we are, and we haven’t got the overall plan that I think allows the ordinary Canadian to see kind of where we’re going and what it entails, and why it’s worth paying a price today for a better future, or at least for a shot at a better future.
Edward Greenspon: Okay, that’s a great Sage discussion. Thank you very much.
