Source: The Conversation – Canada – By Subhadip Ghosh, Associate Professor, School of Business, MacEwan University
Since American and Israeli missiles began striking Iran, global oil prices have jumped sharply. The conflict has resulted in the disruption of tanker traffic through the Strait of Hormuz, which carries about one-fifth of the world’s oil shipments.
For Canadians, the effects have been immediate, with higher prices at the gas pump.
A familiar refrain has already surfaced in Canadian political commentary: higher oil prices are good for Canada. That intuition is understandable, given that Canada is the world’s fourth-largest oil producer, with oil and gas being Canada’s highest export earner.
But that claim misses two key points. First, while Canada as a whole might gain from higher oil prices as a net energy exporter, those gains are unevenly distributed across sectors and provinces. Second, the mechanism that softened that pain — a stronger Canadian dollar — has weakened.
Together, these two facts clarify why rising oil prices are hitting Canadians harder than they did in previous decades.
Not all Canadians benefit
Oil and gas are undeniably important to Canada. Oil and gas extraction alone has averaged about five per cent of national GDP since 2000, and the sector supported approximately 446,600 direct and indirect jobs in 2023.
The importance of oil also varies dramatically across provinces. In Alberta and Saskatchewan, for example, oil and gas production accounts for roughly 22 per cent and 16 per cent of provincial GDPs, respectively.
By contrast, in Ontario and Québec — home to about 60 per cent of Canadians — the sector contributes only a small fraction of provincial output.
When crude prices rise, Alberta and Saskatchewan collect more royalties, and energy company revenues climb. For that slice of Canada, conflict in the Persian Gulf can bring economic benefits.
Yet windfall gains are also constrained by infrastructure. Pipeline capacity and production limits mean Canadian producers cannot expand quickly when global prices surge.
The completion of the Trans Mountain Expansion Project in 2024 increased access to Pacific markets, but production cannot be scaled overnight and bottlenecks still blunt the swift supply response needed to realize a windfall gain.
For most Canadians, the picture is simpler and less pleasant. Higher oil prices means higher costs not only at the pump, but also gradually in grocery stores and heating bills, and reduced purchasing power.
A sustained $10 increase in oil typically raises Canadian inflation by roughly 0.3 to 0.4 percentage points over the following year.
How oil shocks spread
Economists typically analyze oil shocks through four transmission channels: terms of trade, income, costs and monetary policy.
The first is the terms-of-trade channel. Because Canada exports more energy than it imports, higher oil prices mean the country earns more for its exports relative to what it pays for imports. That improves Canada’s purchasing power in global markets.
The second is the income channel, which determines who receives those gains: higher oil prices raise producers’ revenues and governments’ royalties, concentrating much of the windfall in oil-producing regions and among shareholders.
The third is the cost channel: oil is a key input into transportation, manufacturing and agriculture, so higher energy prices ripple through supply chains and into household budgets.
The fourth is the monetary policy channel, which often shapes the broader economy. Central banks like the Bank of Canada aim to keep inflation near a stable target. If rising oil prices keep inflation elevated for long enough, policymakers may delay interest rate cuts or keep borrowing costs higher.
Higher interest rates help contain inflation but slow spending and investment across the economy. In short, the same oil shock that boosts Canada’s energy sector can, via inflation and interest rates, slow other parts of the economy.
A weaker currency cushion
Perhaps the most consequential shift over the past decade is the changing relationship between oil prices and the Canadian dollar.
As noted by the Bank of Canada, for most of the 2000s and early 2010s, the Canadian dollar behaved like a petrocurrency. When oil prices rose, the loonie often strengthened as well.
A stronger currency made imported goods cheaper and helped offset some of the inflationary pressure from higher gasoline and energy prices. The exchange rate acted as a natural shock absorber.
That cushion has weakened substantially. Research by Alberta Central, CIBC Capital Markets and several economists all point out that the relationship between oil prices and the Canadian dollar weakened in the mid-2010s and continues to remain weak.
(Author provided), CC BY
One reason is that investment in Canada’s oil and gas extraction fell 55 per cent from 2014 to 2019, then dropped a further 36 per cent in 2020. This decline reduced the foreign investment flows that once pushed the Canadian dollar higher when oil prices rose.
Second, energy companies are now more likely to return profits to shareholders through dividends and buybacks than to launch new projects. However, many of those shareholders are foreign investors, and even domestic holders, such as pension funds, distribute returns across global portfolios.
As such, the reinvestment of oil windfalls back into the Canadian economy has declined significantly compared to the investment-led boom years of the 2000s. Other factors, like the rise of U.S. shale, have also weakened the oil-currency link.
The practical consequence is that when oil spikes today, Canadians absorb more of the inflationary impact and receive less of the offsetting currency benefit they did a decade ago. For Canada, war-driven oil price spikes are therefore less a national windfall than a redistribution across sectors, provinces and from consumers to energy producers.
With the Canadian dollar no longer rising alongside oil as it once did, price spikes now translate more directly into higher living costs for Canadians.
The author would like to thank Vinh Nguyen, a research assistant and undergraduate student at MacEwan University’s School of Business, for her contribution to this article.
Subhadip Ghosh does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
– ref. Middle East conflict is pushing oil prices higher — and most Canadians will feel the costs – https://theconversation.com/middle-east-conflict-is-pushing-oil-prices-higher-and-most-canadians-will-feel-the-costs-277811