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Conflict in the Middle East has made oil prices fluctuate wildly in recent days, raising concerns about what this means for Canada’s oil exporting economy.
However, the net increase in global benchmark prices has been relatively contained. Even peak levels hit after initial attacks remained below the 2025 highs in mid-January, and prices are back to levels little changed from two weeks ago as of June 24.
The economic impact of changes in oil prices depends on what’s driving them. For example, price volatility driven by geopolitical events are unlikely to be viewed as persistent enough to change business investment plans compared to structural shifts in global oil supply and demand that led to a collapse in investment in the Canadian oil and gas sector a decade ago.
Still, further escalation could push prices higher and create more uncertainty for Canada’s already complex economic picture. With this in mind, we look at how fluctuations in oil prices could impact Canada’s economy and why the risks may have changed from the past.
Higher consumer prices but more revenue for oil producing regions
In the near term, higher oil prices likely have a neutral effect on Canada’s gross domestic product. They raise costs for households, but also boost revenue flowing into the oil and gas sector, raising corporate profits and provincial government royalties.
Consumers face higher prices at the pumps almost instantly when oil prices rise. As an essential purchase, these increased costs cut into household purchasing power, and if large enough, may reduce demand for other goods and services.
But with Canada being a major oil exporter, higher oil prices mean higher revenue from oil and gas production. The oil and gas sector is a smaller share of the economy than it was before the price and investment collapse in 2015. But it still accounts directly for almost 7% of the Canadian economy.
The catch is that the benefits from increased corporate profits and higher natural resource royalties to provincial governments are typically concentrated in oil producing regions, while the cost of higher gasoline prices affect all consumers.
Limited impact on investment that hasn’t recovered since 2015
Importantly, higher oil prices driven by geopolitical instability will not lead to a resurgence in investment spending in the sector. Any spikes in prices due to geopolitical instability will not be seen as durable enough to warrant the kind of large capital-intensive investments that have mostly been dormant over the last decade in the Canadian oil sands.
Of course, volatility and uncertainty can also be negative for investment, but oil and gas investment in Canada has not recovered from a collapse in prices in 2015. Investment in the sector fell from 3.9% of GDP in 2014 to under 2% in 2019, and was 1.5% in 2024. With little greenfield construction in the oil sands, spending has been focused on optimizing production and maintenance, and this type of investment is less sensitive to changes in the price of oil.
Inflation impact is moderate outside of energy products
The impact of oil prices on broader inflation outside of the direct impact on products like gasoline and fuel prices depends on how long the price shock lasts.
Higher energy costs increase transportation expenses, which can cascade to raise merchandise prices. However, these pressures take time to work through supply chains, typically requiring months of elevated prices, rather than days or weeks, before creating significant broader inflation.
Historical patterns suggest caution when forecasting with the persistence of geopolitically driven price increases. Conflicts can trigger dramatic spikes, but these surges often moderate quickly as markets adjust or alternative supply sources emerge. Oil price changes also have much less impact, because Canada’s services sector accounts for most consumer spending.
We estimate that if oil prices were to rise to about $75 per barrel for the rest of 2025, year-over-year consumer price index growth would end 2025 about 0.4 percentage points higher than our current 1.9% forecast. It’s meaningful, but within the range of what is considered normal volatility in consumer prices. For comparison, a 0.4 percentage point price increase is less than one standard deviation of changes in monthly headline inflation in Canada over the past two decades.
Less U.S. vulnerability to oil price shock means less risk to Canadian exports
Canada’s economy is still closely linked to the United States. A prime example is tariffs from the U.S. administration are expected to reduce U.S. demand for foreign goods, which will negatively impact Canadian production this year.
But the vulnerability of the U.S. economy to an oil price shock has shifted dramatically in recent decades. U.S. oil production surged from 5.4 million barrels a day in 2004 to 13.3 million in 2024—adding about 1.7 times the total Canadian annual oil production (4.6 million) last year. This shift has made America energy self-sufficient and less vulnerable to global oil price shocks.
The U.S. is now a significant net exporter of energy (oil and natural gas) products outside of North America, and, like Canada, experiences both consumer pain, but producer gains when oil prices rise. This will limit negative spillover effects on Canadian exports.
The Bank of Canada is unlikely to react
The Bank of Canada sets interest rates for the entire economy, so needs to take into account both the impact of oil prices on consumer prices, and the more targeted impact on corporate and government revenues in oil producing regions.
The BoC has responded to oil price shocks before—cutting interest rates by 50 basis points in 2015 during that earlier price collapse—but today’s situation is significantly different. The shock in 2015 was more pronounced (oil prices dropped about 50% throughout 2014) and capital expenditures in the oil and gas sector were a much larger share of the economy than today.
That period was also driven by structural market changes. A huge surge in U.S. oil production outpaced demand growth globally, and that proved to be much more persistent than the ebb and flow of geopolitical risks.
About the Authors
Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.
Claire Fan is a senior economist at RBC. She focuses on macroeconomic analysis and is responsible for projecting key indicators including GDP, employment and inflation for Canada and the US.
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