Strait of Hormuz Disruption Pushes Oil Past $105 and Tests Canadian Economy

The war between the United States, Israel, and Iran continues to rattle global energy markets, and Canada is feeling both sides of the resulting price shock. Brent crude oil, the international benchmark, traded above $105 a barrel at the end of last week, while West Texas Intermediate, the more relevant pricing benchmark for most Canadian producers, was around $94. Both prices are sharply higher than the levels that prevailed before the conflict began on February 28, and both reflect the continuing constraints on shipping through the Strait of Hormuz.

For a country that exports roughly four million barrels of oil per day, the higher prices translate into significantly higher resource revenues for governments and producers. For Canadian consumers, however, the same shock means higher gasoline prices, higher heating costs, and a measurable lift to inflation that complicates the Bank of Canada's interest-rate decisions.

What is happening at the Strait

The Strait of Hormuz, the narrow waterway between Iran and Oman, is the most strategically important chokepoint in the global oil trade. In normal times, roughly 20 per cent of global oil supply transits the strait, along with significant volumes of liquefied natural gas. Iran's capacity to disrupt traffic through the strait has long been treated as a worst-case risk in global energy planning. With the war and the partial closure of shipping, that worst-case risk has materially crystallised.

The International Energy Agency has characterised the disruption as the largest supply event in the history of the global oil market. Tankers continue to transit the strait under varying conditions, and direct attacks on shipping have been intermittent rather than continuous, but insurance costs, reroute decisions, and refinery scheduling all reflect the elevated risk environment.

A conditional ceasefire was declared on April 8, and U.S. special envoy Steve Witkoff and Jared Kushner travelled to Pakistan in recent days for direct talks with Iranian counterparts. The diplomatic effort has produced moments of optimism but no durable resolution, and oil markets continue to price in elevated risk.

The Canadian production picture

Canada is one of the world's largest oil producers, with the bulk of national output coming from the Alberta oil sands. Production is dominated by a relatively small number of major producers, but the broader supply chain extends across thousands of supplier and service companies, mostly concentrated in Alberta but with significant presences in British Columbia, Saskatchewan, and elsewhere.

Higher prices significantly improve the cash flow of Canadian producers. Royalty revenues to the Alberta provincial government rise substantially when oil prices climb, and corporate income tax receipts at both the provincial and federal levels follow. Some of those windfall gains are flowing into shareholder returns; some are flowing into reinvestment, including in new production capacity and in emissions-reduction projects. The pace of those investment decisions varies by company.

The pipeline question

One of the most consequential dimensions of the current energy environment is the Canadian pipeline system. The Trans Mountain Pipeline expansion, which entered commercial service in 2024, has substantially increased Canada's capacity to ship oil to tidewater on the Pacific coast and from there to international markets. With the Strait of Hormuz disrupted and global supply chains under strain, that capacity has become more valuable than it has been at any point since the project was first conceived.

Other pipeline questions remain open. Several proposed projects, including capacity additions and new routes, have been under various stages of regulatory and environmental review for years. The Carney government's planned major-projects framework, expected to advance now that the Liberals hold a majority in the Commons, will affect how those projects are evaluated. Indigenous consultation requirements, environmental assessment timelines, and provincial jurisdictional questions remain central considerations.

Consumer impact

For Canadian consumers, the most immediate effect of higher oil prices is at the gas pump. Retail gasoline prices have moved higher in recent weeks, and the increase is visible across most major Canadian markets. Diesel prices, which affect freight and shipping costs, have also risen.

Heating-fuel costs have also climbed, although the immediate seasonal effect is muted because spring and summer are lower-consumption periods for heating. The longer-term concern is that elevated energy prices, if sustained into the autumn and winter, could meaningfully raise household heating costs in the next heating season.

Statistics Canada's most recent inflation reading, for March, showed inflation at 2.4 per cent, up from 1.8 per cent in February. Energy prices were a meaningful contributor to the increase, and the April figure, which will be released in mid-May, is likely to reflect further energy-driven pressure.

The Bank of Canada's challenge

The interaction between an oil-price shock and the Bank of Canada's monetary-policy decisions is complicated. Higher headline inflation argues against further rate cuts. The negative effects of higher energy prices on consumer purchasing power, however, slow growth and could push the bank toward easing.

Governor Tiff Macklem and the bank will release the next interest-rate decision and the Monetary Policy Report on Wednesday, April 29. Market pricing suggests roughly a 93 per cent probability that the bank will hold the policy rate at 2.25 per cent, where it has sat since October 2025. The MPR is expected to include extended discussion of how the bank is interpreting both the trade-policy uncertainty and the energy-price shock.

Provincial revenue effects

Alberta's provincial budget is the most affected by oil-price movements. Royalty revenues are sensitive to both price and production volumes, and sustained higher prices translate into materially larger fiscal cushion for the Smith government. The province has historically used windfall revenues to top up the Alberta Heritage Savings Trust Fund, to retire debt, or to fund tax cuts.

Saskatchewan and Newfoundland and Labrador, both of which have significant oil and gas production, also benefit. Federal corporate income tax receipts from energy-sector profits are similarly higher.

Other provinces, however, see net negatives. Ontario, Quebec, and the Atlantic provinces are net energy consumers, and higher fuel and heating costs translate into higher prices for households and businesses without offsetting royalty revenues.

The CUSMA trade dimension

The energy shock interacts with the broader Canada-U.S. trade negotiations in important ways. Canadian energy exports to the United States remain largely tariff-exempt under CUSMA, although the broader environment of trade-policy uncertainty continues to weigh on cross-border investment decisions. The Carney government has been emphasising that a stable energy export relationship with the United States is one of the foundational elements of the broader trade negotiation.

Mexico's energy producers, similarly, are benefiting from higher prices. Coordination between Canada, Mexico, and the United States on energy security has been a recurring topic in both bilateral and trilateral meetings.

Climate and emissions implications

The higher oil prices and the resulting boost to Canadian production have complicated implications for climate policy. Higher production extends the operating life of higher-emitting facilities and increases the urgency of emissions-reduction investments. Several of the largest Canadian producers have substantial commitments to emissions-reduction technology, including the Pathways Alliance carbon-capture project in the Alberta oil sands.

Federal climate policy continues to apply, including the industrial-emissions pricing system. The Carney government's broader climate agenda has continued to evolve since the consumer carbon price was removed earlier in this Parliament, and the interaction between energy revenues and climate-policy commitments remains a central political question.

What's next

The diplomatic process around the Iran war continues, and the trajectory of oil prices over the next several months will depend in large part on whether a more durable agreement can be reached. The Bank of Canada decision on Wednesday will be the next major Canadian data point. The Statistics Canada inflation release for April, expected on May 19, will give a clearer picture of how the energy shock is affecting consumer prices.

For Canadian energy producers, governments, and consumers, the next several weeks will be a period in which sustained policy decisions interact with continuing market volatility. The longer the disruption persists, the more meaningful the structural questions become about pipeline capacity, refining infrastructure, and the energy mix. None of those questions can be resolved in the short run, but the answers Canadians and their governments give to them will shape the country's economic trajectory for years.