Former Bank of Canada governor Stephen Poloz has a neat way of describing how higher oil prices affect Canada. 

Imagine sticking your head in an oven. That’s Alberta, Saskatchewan and Newfoundland and Labrador, where windfall profits from their oil and gas fields have the effect of turning up the economic heat. 

Now, picture your feet in a freezer. That’s everywhere else. 

The federal government might eventually redistribute the better-than-expected income tax revenue that it collects from the oil and gas-rich provinces during boom times. In the meantime, elevated energy costs destroy demand by absorbing a greater share of disposable income and narrowing profit margins. When that happens in Ontario, which accounts for almost 40 per cent of Canada’s gross domestic product, the entire country feels the chill. 

Boom times in Alberta generally outweigh the negative effects of higher oil prices. The oilpatch becomes a mecca for unemployed workers from Central and Eastern Canada. Factories and wholesalers look west to get a piece of the action. Bay Streeters book flights to Calgary to help CEOs decide what to do with the rush of extra cash. 

The Bank of Canada’s monthly energy cost index rose 34.6 per cent in March, the most on record, excluding May 2020, when global commodity prices rebounded from the crash caused by the COVID-19 pandemic. From a certain distance, that might look like a reason to get excited. Canada’s economy, under siege from U.S. tariffs and weakened by miserable productivity growth, might benefit from a good old fashioned oil boom. Except there’s little reason to expect one, even if elevated prices hold at current levels for a while. That’s because Poloz’s oven doesn’t heat up like it used to. 

Both the Finance Department and the Bank of Canada updated their economic outlooks this week. Each devised scenarios of what an extended period of high oil prices would mean for economic growth. The results were surprising. Their imagined worlds of structurally higher energy costs look a lot like the ones they constructed for their more realistic base case scenarios. 

“The net impact on growth [from higher oil prices] is expected to be small,” the central bank concluded. Finance’s “higher investment” scenario assumes “policy efforts to accelerate major projects and catalyze new private investment” get a boost from a global search for stable sources of oil and gas. Inflation-adjusted economic growth would be 1.9 per cent in 2027, the same as the baseline forecast. Finance emphasized that “rules of thumb” about how oil prices affect economic growth and tax revenue “simplify complex relationships” and that estimates based on “historical relationships and model-based analysis… may vary with the broader economic context.”  

Poloz’s freezer still works fine. Higher energy costs do more than hurt consumption. They also stoke inflation expectations, which can lead to more inflation. The Bank of Canada is categorical that it won’t let that happen, which is why governor Tiff Macklem made a point of insisting that he wouldn’t hesitate to raise interest rates, even if households were hurting from higher living costs. “There may be a need for consecutive increases in the policy rate,” he said. 

An important piece of context when considering a shock like this one is why prices surged. That spike during the pandemic was the result of pent-up demand after most of the world locked down to prevent the spread of the virus. Increased demand for fuel implies increased demand for other goods and services because the global economy is heating up. Factories worry less about rising input costs when the order books are filling up, and households are less sensitive to higher interest rates when the employment rate is high. 

What we’re confronting now isn’t that kind of shock. Oil prices have skyrocketed because the U.S. war on Iran is choking an important source of supply. Demand hasn’t changed from pre-war levels; if anything, the global economy is now weaker because of what higher input costs are doing to energy importers in Asia and Europe. 

Canada exports more energy than it imports, so it is shielded from the worst of it. But there is no tailwind for non-energy exporters to catch. The only benefits outside the oil-producing provinces will come from whatever the federal government decides to do with its revenue windfall. 

The spring economic update and the Bank of Canada’s latest monetary policy report showed that some of the country’s best economic minds recognize that Canada’s oil industry has fundamentally changed. The central bank’s base case forecast of 1.2 per cent growth in 2026 and 1.6 per cent in 2027 is based in part on the assumption that investment and employment in the oil sector will be “less responsive” to higher prices because the biggest producers now put a “greater emphasis on dividend payments” and “improved capital efficiency,” rather than greenfield expansion.  

Executives in the oilpatch don’t really hide from what motivates them now. Suncor Energy CEO Rich Kruger said on the ARC Energy Research Institute’s podcast last month that investor sentiment flipped to “return of capital” from a willingness to underwrite growth about a decade ago, as the conventional wisdom was that demand for oil had peaked. 

The Iran war could prompt a recasting of that story. “We may get back into a period of time where rewarding growth is what investors want,” Kruger said. Currency traders seem doubtful. The Canadian dollar has barely moved despite the outsized jump in oil prices. The Bank of Canada assumes that’s in part because traders expect the gains will lead to “larger dividend payments to foreign shareholders and a smaller rise in foreign direct investment” than in previous oil price surges.    

We’re a net energy exporter, but one that fails to capture all the benefits.  

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.