This article originally appeared in The Hub.
By Trevor Tombe, March 20, 2026
A widening conflict involving Iran, the United States, and Israel has led to a near-total halt of shipping through the Strait of Hormuz, a passage that handles a considerable share of global oil and gas supplies. If disruptions persist, this could represent one of the largest supply interruptions in recorded history.
We are already seeing the effects. Oil prices are up roughly 50 percent. Natural gas markets are also tightening, since liquefied natural gas exports move through the Strait as well, pushing prices higher, particularly in Europe. The region is also a major supplier of fertilizers, adding pressure to agricultural inputs. Meanwhile, shipping container costs are rising sharply in major ports around the world, as are insurance costs.
The potential implications for economies and households are obviously significant. But putting some numbers on the scale of the challenge may be valuable.
Canada is better positioned than in past shocks
Canada is somewhat better positioned to absorb an energy shock today than in the past. In the early 1970s, the amount of energy required to produce each dollar of GDP was roughly double what it is today. Our economy is simply far less energy-intensive than it once was.
Even so, oil and gas remain central to Canada’s economy, accounting for roughly two-thirds of total energy consumption. And gasoline alone still represents about 3 percent of household spending, right in the middle of the 2.5–4 percent range observed since at least the mid-1950s.
But the impact of higher oil prices extends far beyond what Canadians pay at the pump. Energy is embedded throughout the economy, affecting transportation, manufacturing, agriculture, and many other sectors.
To estimate those broader effects, I rely on a model of Canada’s economy that traces relationships across several hundred distinct product categories covering nearly the entire structure of production and consumer spending. This allows me to capture both the direct effects of higher fuel costs and the indirect effects that ripple through supply chains.
Total costs to consumers
If oil prices remain roughly 50 percent above last year’s levels, the direct effect on households would be immediate. Higher gasoline and fuel costs alone would raise consumer prices by about 0.6 percent. Within two weeks of the conflict starting, average gas prices rose nearly 35 cents a litre on average across the country. Over a year, that’s about a $500 for the average household in added costs.
And what about all the indirect supply chain implications? Transportation, manufacturing, and agriculture all rely heavily on fuel, meaning higher energy costs gradually push up the price of many goods and services.
Food is particularly exposed. Agriculture is among the most energy-intensive non-energy sectors of the economy, and higher fuel costs raise the cost of producing and transporting food. Over time, a sustained 50 percent increase in crude oil prices would raise grocery prices by roughly 1 percent, I estimate, adding about $75 per year for the typical household. Including the effect on restaurant prices brings the total food-related increase to roughly $100 annually.
Other sectors are affected as well. Air travel alone could add roughly $50 per year to the spending of the average household, with smaller but widespread increases appearing across many other goods and services.
Taken together, a sustained 50 percent rise in oil prices could push overall inflation a little more than one percentage point higher. And if fertilizer prices rise by a similar amount, as early indications suggest, the total effect on inflation could reach about 1.2 percentage points, meaning inflation would well exceed 3 percent overall.
In this scenario, Canadian food prices alone could increase by roughly 1.6 percent. That translates to about $120 more per year for groceries, which rises to roughly $150 once higher restaurant prices are included and to $175 with alcohol.
For the typical household, the overall cost increase would be nearly $1,000 per year.
Across the economy, the total effect amounts to roughly a $17-billion hit to Canadian consumers from this shock.
How large the impact ultimately becomes depends on how far oil prices rise and how long they remain elevated.
If crude prices were to climb to around $200 per barrel and stay there for a sustained period, the effects would be far larger. Inflation could exceed 6 percent, the typical household could face roughly $3,600 in additional annual costs, and the total hit to Canadian consumers could reach about $60 billion.
Higher oil prices also bring economic gains
But Canada is not only a consumer of oil. It is also a major producer. With over 1.9 billion barrels of annual production, higher prices generate enormous gains in income for producers, workers, investors, and governments. At prices near $200 per barrel, those gains would be roughly four to five times larger than the added costs faced by consumers.
That tension sits at the centre of every oil shock in Canada. Higher prices strain household budgets, but they also increase national income in a country that is one of the world’s largest energy producers.
What matters, then, is not whether higher oil prices are “good” or “bad” for Canada, but how their effects are distributed and over what time horizon. The same shock that raises national income can simultaneously erode purchasing power for millions of households.
The estimates here help anchor that distinction. They show that even in a country that benefits from higher energy prices overall, the first-order effect is an increase in the cost of living—one that is measurable, material, and, for many, difficult to avoid.
Trevor Tombe is a professor of economics at the University of Calgary, the Director of Fiscal and Economic Policy at The School of Public Policy, a Senior Fellow at the Macdonald-Laurier Institute, and a Fellow at the Public Policy Forum.
