Oil Shocks Keep Coming, but No Two Are Alike

In December’s Economic and Financial Outlook, titled More of the Same in 2026, we maintained that the global economy would spend the year grappling with forces that were already in motion. Three months in, we stand behind this assertion. But Q1 also introduced a new inflection point: two US military interventions in rapid succession, first in Venezuela and then in Iran. We may have feared that such events were possible, but we would never have officially predicted them.

But these new shocks aren’t exactly “shocking.” The tensions in key oil‑rich regions are longstanding, and we understand how these conflicts can impact energy prices. It may feel natural to compare recent events with Russia’s invasion of Ukraine in 2022, but that comparison rapidly reaches its limits once we take the two economic climates into account.

Back in 2022, the economy was brimming with pent‑up, post‑pandemic demand. The labour market was tight, and businesses were easily able to pass along additional costs. When the energy shock hit this economy, filled with surplus demand, it helped kick off an inflationary spiral.

But today’s world is markedly different. Before these military interventions, the oil market was more than abundantly supplied and prices were constrained. Labour markets have been softening in most advanced economies, unemployment rates have begun to climb and economic growth has begun to show signs of slowing. The surplus demand that helped amplify prices in 2022 no longer exists.

This change in context means that the current shocks are having a different macroeconomic impact. Higher energy prices haven’t sent inflation spiralling; instead, they’re acting as a negative shock to income and weighing on global demand when it has already been weakened. This means that the biggest risk here will be the combination of tepid growth and stubborn inflation, not a rush of widespread inflation. It should be noted, however, that rising natural gas prices could put upward pressure on fertilizer costs and ultimately on food prices in the long term. This happened with Ukraine back in 2022 and could happen again now.

These events, against the generally stagflationary backdrop, will make conducting monetary policy a more delicate task. Both the Federal Reserve and the Bank of Canada are facing an uncomfortable choice: they can either support economic activity and risk driving inflation higher, or they can fight inflation and risk a more substantial slowdown. Let’s examine the factors that will help central banks make their final decisions.

For Canada, the situation requires a clear reading of everything in play. As a net exporter of oil, the country is benefiting from higher energy prices in the short term. But while the terms of trade are improving overall, gains are partial and not equally distributed. And this very targeted bright spot exists within a larger landscape that is gloomier as a whole. Year to date, the country has shed around 100,000 jobs. Many real estate markets remain bogged down. Public finances have deteriorated, both at the federal level and in many provinces. Exports to the United States have softened due to the ongoing trade tensions, and while exports to other countries have grown, they’re still far from being a viable replacement for our largest trading partner. What’s more, the Canada‑United States‑Mexico Agreement (CUSMA) is up for review. The outcome of this review is still uncertain—and this uncertainty is already generating additional real costs for Canadian businesses. Altogether, risks seem tilted firmly to the downside in the short term.

In the medium term, though, there are glimmers of hope. The country’s efforts to diversify trade relations and strengthen it defence capabilities are part of a necessary strategic repositioning that will eventually bear fruit. At the same time, Canada is more explicitly open to doing business, and its appeal as a destination for foreign investment is growing. But all of these developments do take time. They won’t move the needle on current economic constraints.

The biggest lesson we’ve learned in 2026 so far may be this: Economic shocks can’t be analyzed outside of the environment in which they occur. And the environment we’re in now is quite different from the one that prevailed up until recently. The adjustments we’ve made to our projections reflect this shift, while acknowledging that the economy remains in flux, as does the geopolitical framework underpinning it.