The conflict in the Persian Gulf has caused the greatest disruption in world oil supply in history. Canadians have felt immediate consequences from this oil shock, through much higher prices for gasoline and other petroleum products. But that is just the beginning of the impact on the Canadian economy. Spillover price effects on other goods and services, which use petroleum products in their own production, are already being experienced, and those effects will get larger in coming weeks. The Bank of Canada is ready to increase interest rates as soon as broader inflation becomes visible. That in turn will slow economic growth and job creation, already hampered by the side-effects of President Donald Trump’s erratic trade war. Even if the U.S. and Iran implement a peace agreement and the Strait of Hormuz reopened immediately, these repercussions would last for months—due to delays in transcontinental oil shipping, damage to export infrastructure in the Persian Gulf, and depleted global oil inventories. If the closure of the Strait persists, the damage will get much worse.
This report reviews the impacts on Canadians of this latest global oil price shock, informed by previous research into the effects on Canada of the previous (but less severe) shock following the Russian invasion of Ukraine in 2022. The analysis considers three possible scenarios: one in which the Strait is immediately reopened, one in which it remains closed for another three months, and one in which it remains closed for another six months.