The potential closure of the Strait of Hormuz, a critical waterway for oil and natural gas trade, has already driven crude oil prices above $100 USD per barrel. However, the economic fallout from the conflict involving Israel, the United States and Iran extends beyond fuel costs.
Even as the Strait of Hormuz – a roughly 50-kilometer maritime passage – is best known for its importance to the oil and gas industries – nearly 20% of the world’s oil and 20% of liquefied natural gas transits the waterway annually – other products also travel through it, connecting the Persian Gulf to the Gulf of Oman.
In addition to crude oil, countries in the region export numerous related products, including fertilizers and plastics, according to Miloud Chennoufi, a professor of international relations at the Canadian Forces College in Toronto. They also import consumer goods, relying on trade with Europe and the rest of Asia for these items.
Gulf countries like the United Arab Emirates, Qatar, and Kuwait are experiencing significant economic repercussions from the disruption of their primary – and for some, only – commercial maritime route. Because countries that export to the region are also affected, the ripple effect of the blockade on the global economy will ultimately be felt in Canada – particularly through inflation, Chennoufi noted.
Florian Mayneris, a professor in the Department of Economics at the Université du Québec à Montréal, offered a more nuanced perspective, stating, “The trade that takes place through the Strait of Hormuz is essentially regional.” He added, “For the rest of the world, including Canada, the biggest issue is really oil and gas.”
Chennoufi clarified that this is why the effects of the crisis on consumer product prices in Canada are not as immediate as those on oil prices.
Oil as a Barometer of Inflation
Yvan Cliche, an energy specialist at the Centre d’études et de recherches internationales at the Université de Montréal, pointed out that the repercussions of the crisis will not be limited to gasoline prices. “The world consumes around 105 million barrels of oil per day. And even though its proportion in the global energy mix has decreased, oil remains active in a strategic sector: transportation and mobility.”
“anything that impacts the oil supply obviously translates into higher costs for all aspects of land, air, and sea mobility,” he summarized. A rise in oil prices typically leads to inflationary pressures, similar to what occurred following the Russian invasion of Ukraine in 2022.
So far, the impact of the increase in oil prices – which has risen by approximately $30 USD since the start of the conflict in the Middle East – has been partially offset by existing surpluses in the market and “the barrels of oil made available by the International Energy Agency,” Cliche noted.
However, as long as the Strait of Hormuz remains closed, “we are in a situation that is structurally built for an upward movement in oil prices – and therefore prices in general,” he said.
Mayneris believes that if the situation persists, “there will be a form of regulation” of oil prices, as several producing countries do not rely on the Strait and “at some point, they will be able to compensate.” “But that wouldn’t prevent prices from possibly remaining at levels higher than those experienced last year.”
