Goodreid Blog
The U.S.–Iran conflict has paralyzed the Strait of Hormuz and idled roughly 20% of global oil and LNG supply, driving prices to levels last seen during Russia's invasion of Ukraine. While inflationary risks loom for U.S. and Canadian consumers, the disruption reinforces North America's position as a critical and stable energy provider.
The eruption of military conflict between the United States and Iran over the past week has triggered a violent repricing of global energy assets. Brent and West Texas Intermediate (WTI) benchmarks spiked yesterday above $115 per barrel, up from $65 only 10 days ago, where prices had remained for most of the past year. While the conflict poses an inflationary threat to U.S. and Canadian consumers, it reinforces North America’s position as a critical and stable energy provider.
Below we explore the potential North American production response, the potential impact on consumers and the broader economy, and highlight the reliable nature of our energy industry.
The conflict has effectively paralyzed oil tanker passage through the Strait of Hormuz, a chokepoint that handles roughly 20% of global oil and LNG supply. Following drone strikes near the waterway, major maritime insurers cancelled coverage for the Persian Gulf effective March 5. Without insurance, global tanker shipping companies suspended all transits. As of March 9, more than 150 tankers are idling in open waters, unable to move. Since oil storage capacity at the scale necessary to accommodate large Middle Eastern producers is extremely limited, producers are forced to quickly curtail production if tankers cannot move through the strait. For example, Iraq has shut in 3 million barrels per day (Mmb/d) of production, while Saudi Arabia and Kuwait have shut in an additional 4 Mmb/d. Iranian exports have also halted. In a global market of roughly 105 Mmb/d, this represents a significant supply disruption. On the LNG side, Qatar has shut in its facilities, which account for roughly 20% of the world’s LNG exports. These disruptions have pushed oil prices to levels not seen since the 2022 Russian invasion of Ukraine, while European gas prices have risen more than 60% in the past 10 days.
Both the United States and Canada are major oil-producing nations. The United States is the world’s largest oil producer at more than 20 Mmb/d, while Canada ranks fourth at approximately 6 Mmb/d. The United States exports about half of its oil production, though its large domestic economy consumes substantial volumes internally. Canada exports roughly 80% of its oil production, with more than 90% of those exports flowing to the United States for refining. Canadian offshore export capacity remains limited, with the recently expanded Trans Mountain (TMX) pipeline serving as the primary outlet to Pacific markets.
Within the United States, production is dominated by shale oil, which can be brought online relatively quickly—often within four to six months. This allows producers to respond rapidly to higher prices by increasing drilling activity. However, shale wells decline rapidly, often losing 60–80% of production within the first year, meaning continuous drilling is required to sustain or grow output. In contrast, Canadian oil sands production consists of long-lead-time assets, measured in years, but with very low decline rates once production begins. Given these differences, the United States is in a stronger position to quickly increase oil output if prices remain elevated. On the LNG side, the United States is already the world’s largest exporter and is seeing rising demand from Europe and Asia as buyers seek relatively cheaper North American gas to replace Middle Eastern volumes currently offline. Canada, by contrast, has been slow to develop LNG export capacity, despite vast natural gas resources and a geographic advantage for Asian markets, with roughly half the shipping time compared to the U.S. Gulf Coast. While additional projects are planned, Canada’s current LNG export capacity is only about one-eighth that of the United States.
The current oil price shock comes at a sensitive time for the economies of both the United States and Canada. Lower oil prices played a significant role in bringing inflation back down toward both central banks’ 2% targets. Gasoline prices, one of the most visible indicators of inflation to consumers, have risen more than 25% over the past month. Higher gasoline prices can negatively affect consumer confidence. If sustained, elevated oil prices will also feed into broader inflation by increasing transportation, shipping, and agricultural input costs, ultimately pushing grocery and merchandise prices higher. A renewed rise in inflation could also affect U.S. monetary policy, as the Federal Reserve had been expected to continue cutting interest rates this year. Higher inflation would likely delay further rate reductions. In Canada, higher oil prices also create a significant fiscal windfall for Alberta, as oil producers pay royalties that increase progressively as oil prices rise.
Periods of geopolitical turmoil often highlight the importance of stable and dependable energy suppliers. Both Canada and the United States produce substantial volumes of oil and natural gas with relatively low emissions intensity, strong environmental standards, and stable democratic institutions. These advantages are sometimes taken for granted but become particularly important during periods of heightened global volatility. There is little doubt that allied nations in Europe and Asia are actively engaging with both countries in an effort to diversify energy imports away from the Middle East. Expanding export capacity for both oil and LNG would help ensure that global markets have access to more stable and reliable sources of energy supply.
