Canadian Analysis

Ultimately, the economic impact of oil price changes depends crucially on what’s driving them. As in June 2025, price volatility driven by geopolitical events are unlikely to be viewed as structural enough to reverse the decade-long decline in Canadian oil and gas investment.

Without an investment response, the near-term impact on gross domestic product will likely be more neutral. The size and duration of the oil price surge will matter in determining a policy response from the Bank of Canada. We expect a muted response from the BoC without more clarity on future developments.

Canada and U.S. to see net-neutral GDP impact with varying regional effects

When oil prices rise, consumers face higher prices at the pump almost instantly. As more dollars are allocated toward energy purchases, the buying power for other goods and services decline – and the longer prices remain high, the greater those challenges become.  Heightened economic uncertainty may also reduce households’ willingness to spend, further dampening demand. 

Higher energy costs curtail household spending, but other areas of the economy tied directly to energy production benefit. Corporate profits and government natural resource royalties rise alongside oil prices, and this is true for Canada and the U.S. as oil exporters.

In Canada, the sector is smaller than a decade ago, but still accounts for 6.6% of gross domestic product and 15% of total goods exports in 2025.

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Despite economic benefits from higher oil prices, a flood of new investment in Canadian oil and gas remains unlikely. Large oilsands projects—the kind that dominated decades ago—require high costs and lengthy construction timelines, making them viable only at structurally elevated price levels. And transportation capacity out of the landlocked Canadian oil sands is still limited. 

In the U.S., vulnerability to oil price shocks have diminished dramatically in recent decades with production ramping up following the shale revolution—from 5.4 million barrels a day in 2004 to 13.5 million barrels a day in 2025, according to U.S. Energy Information Administration estimates. The U.S. has swung from being a net importer of energy products to a net exporter over the last decade.

While the overall impact on economic growth may be neutral, regional effects will likely vary considerably. Benefits of higher oil prices will be concentrated in producing regions, while costs of higher gasoline prices will affect consumers nationwide.

Inflationary impacts outside direct energy costs take time to materialize

Outside of the direct effect on fuel prices, rising energy prices increase packaging expenses, and fertilizer prices among other critical business inputs across different sectors. However, these pressures take time to materialize. Oil prices must remain elevated for months rather than days or weeks to cascade through supply chains and influence business pricing decisions.

Indeed, historical patterns suggest caution when forecasting with the persistence of geopolitically driven price increases. Conflicts can trigger dramatic spikes that often moderate just as quickly when alternative energy supply sources emerge, or conditions de-escalate.

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In a scenario where the West Texas Intermediate benchmark price remains at $100 a barrel, it could raise headline Consumer Price Index by three quarters of a percentage point from our February forecast (before the recent conflict emerged) to a peak around 3% in Canada, and 3.5% in the U.S. this year.

These estimates don’t account for disinflationary pressures from reduced household demand for non-energy goods and services, which may result in a more muted inflation impact.

Higher oil prices unlikely to trigger investment or central bank response

The BoC has responded to oil price changes in the past with rate adjustments. It cut the overnight rate by 50 basis points when prices collapsed in 2015. However, the shock at the time was fundamentally different from now. The 2015 decline was driven by a surge in U.S. production capacity widely viewed as structural and permanent.

Current oil supply disruptions and rising oil prices, by contrast, are unlikely to be viewed as the same. There is the risk the conflict persists, and oil prices remain elevated for longer. That, however, is still unlikely to be viewed as stable or persistent enough to warrant a reversal in large-scale business investment mostly dormant in the Canadian oil sands since collapsing a decade ago.

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Oil and gas investment in 2025 accounted for less than half of what it was in 2014 as a share of Canada’s GDP. The remaining investment in the sector is now largely devoted to maintaining existing production capacity, making it insensitive to oil price fluctuations.

Earlier this month, BoC Deputy Governor Sharon Kozicki reinforced in a speech that monetary policy response to supply shocks depend crucially on their size and duration. Short-lived supply shocks with limited economic implications typically invite a “look-through” response from the central bank.

If the supply shock persists long enough to warrant a policy response, the direction could also vary depending on the output-inflation trade-off. Higher energy prices mechanically raise headline inflation, but lower household purchasing power—potentially weakening demand for non-energy goods and services and widening the economy-wide output gap.

The recent run-up in oil prices has been sizable, but it’s too early for the BoC to respond without greater clarity on future developments. Our forecast remains for the central bank to hold interest rates steady through 2026.

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About the authors:

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.

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.

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