Conflict with Iran

Highlights

• Iran’s economy relies heavily on oil extraction, with output of roughly 3.5 million barrels per day (mbd). However, ongoing hostilities are significantly limiting its production and export capacity.
• The global oil market remains resilient, supported by a 4.4 mbd surplus and ample unused OPEC+ capacity that could readily replace Iranian supply.
• Regional tensions—particularly around the Strait of Hormuz, through which 20% of global oil transits—pose a risk of severe disruptions, though market reactions have been muted so far.
• The most likely scenario points to moderate supply disruptions over roughly two months, with West Texas Intermediate (WTI) prices expected to range between US$70 and US$80 per barrel in the second quarter on average. A risk of more severe disruptions persists, which could temporarily push crude prices above US$100 per barrel.
• For Canada, higher oil prices generally lead to stronger real GDP growth and inflation at the national level. Alberta’s economy and government finances are particularly sensitive to changes in oil prices. The same is true to a lesser extent for Saskatchewan and Newfoundland and Labrador. In contrast, non-energy-producing provinces like Quebec and Ontario should see higher inflation but without the boost to growth.
• Despite geopolitical risks, both the oil market and the world economy are showing strong adaptability, which generally limits lasting impacts on prices and growth. However, a broader escalation of the conflict could restrain spending and investment—effects that would be amplified if financial conditions were to tighten significantly, as evidenced by Monday’s European stock market declines and global rise in bond yields.