Rising tensions in the Middle East are beginning to ripple through global energy markets, with new projections suggesting that the impact could significantly raise inflation in Canada over the coming year.
A recent report by Goldman Sachs warns that disruptions to oil supply particularly through the strategically vital Strait of Hormuz could push Canadian inflation up by between 1 and 2.3 percentage points, depending on how long the crisis persists.
In a baseline scenario, where the key shipping route remains closed for six weeks, inflation in Canada is expected to rise by nearly one percentage point. Under this scenario, Brent crude prices could surge to around US$115 per barrel in April before easing to US$80 by year-end. However, a more severe outcome where the strait remains closed for 10 weeks and longer-term economic damage sets in could drive inflation up by as much as 2.3 percentage points. In that case, oil prices could spike to US$160 per barrel, surpassing the historic peak recorded in 2008.
Since the onset of the Iran conflict, shipping activity through the Strait of Hormuz has been severely restricted, tightening global supply. As a result, Brent crude has hovered just below US$100 per barrel in recent days, while U.S. benchmark West Texas Intermediate has remained near US$90.
Economists caution that while higher oil prices are likely to push inflation upward and slow economic growth globally, the situation may not escalate to the extreme inflationary pressures seen during the COVID-19 pandemic. Canada experienced a sharp inflation surge during that period, peaking at 8.1 percent in June 2022, before aggressive interest rate hikes and supply chain adjustments brought it under control.
The report also highlights a mixed economic impact. Globally, every 10 percent rise in oil prices is expected to reduce GDP by just over 0.1 percent, reflecting increased costs and reduced productivity. However, Canada may see a modest economic benefit due to its position as a major oil exporter, with GDP potentially rising by nearly 0.2 percentage points.
Recent data from Statistics Canada shows that inflation had been easing prior to the current crisis, dropping from 2.3 percent in January to 1.8 percent in February. Still, the Bank of Canada has already signaled that higher gasoline prices could reverse that trend in the coming months.
The central bank now faces a difficult balancing act. Governor Tiff Macklem recently acknowledged the “dilemma” of monetary policy: raising interest rates could help control inflation but risk weakening the economy, while lowering rates could stimulate growth at the cost of higher inflation. With inflation currently near the bank’s 2 percent target, officials believe the risks remain manageable for now.
In an effort to stabilize global energy markets, member countries of the International Energy Agency have agreed to release 400 million barrels of oil from emergency reserves. Canada has committed to contributing 24 million barrels. However, analysts at Oxford Economics note that Canada lacks its own strategic oil reserve, meaning it could take up to 100 days for the country’s energy sector to fulfill its pledge.
As the geopolitical situation continues to evolve, policymakers and markets alike remain on edge, closely watching how prolonged disruptions could reshape both global energy prices and domestic economic stability.
