What will higher oil prices do to Canada’s economy?

A recent surge in oil prices tied to geopolitical tensions in the Middle East is unlikely to have a major near-term impact on Canada’s economy, according to Claire Fan, Senior Economist with RBC.

In a March 10 report, Fan said the economic effect of higher oil prices depends largely on what is driving them. Volatility caused by geopolitical events, she noted, is unlikely to be viewed as structural enough to revive large-scale investment in Canada’s oil and gas sector.

“Ultimately, the economic impact of oil price changes depends crucially on what’s driving them,” Fan said.

“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,” Fan said, adding that RBC expects the central bank to hold interest rates steady through 2026.

Without a meaningful investment response, the overall impact on gross domestic product is likely to be broadly neutral. Higher gasoline prices reduce household purchasing power and spending, but those effects are partly offset by stronger profits and royalties in the energy sector.

Canada’s oil and gas industry still accounts for about 6.6% of GDP and roughly 15% of total goods exports in 2025, meaning higher oil prices bring both benefits and costs to the economy.

Fan said a new wave of oil sands investment remains unlikely. Large projects require long construction timelines and structurally high prices, while transportation capacity from Canada’s landlocked oil sands remains constrained. Oil and gas investment in 2025 represents less than half the share of GDP it did in 2014.

Higher oil prices could push inflation modestly higher if they persist. Fan estimated that if West Texas Intermediate crude were to remain around US$100 per barrel, it could lift Canada’s consumer price index to roughly 3% this year.

Even so, the Bank of Canada is unlikely to respond immediately.

“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,” Fan said, adding that RBC expects the central bank to hold interest rates steady through 2026.

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