Quick Takes:
- Prolonged oil shortages in the 1970s let inflation increase and forced the Bank of Canada to push rates toward twenty percent.
- The swift price spike of the 1990 Gulf War faded within months and the Bank moved from double digit interest rates to mid single digits as recession pressures took hold.
- If the Iran Israel tension proves brief and core prices stay calm the Bank is likely to pause its easing schedule rather than hike and will resume cuts once crude stabilizes.
Energy crises rarely begin in Ottawa, yet their aftershocks shape every decision at the Bank of Canada. Since the 1973 oil embargo, each major conflict in the Middle East has lifted crude prices, nudged Canadian inflation off target, and forced policymakers to balance price stability with growth. This article starts with the 1973 embargo and the 1990 Gulf War, then we look through the twenty-first-century shocks that occurred under Canada’s formal inflation target. For every episode we measure the jump in oil prices, the reaction of consumer prices, and the adjustments in policy and market interest rates. We close by applying the same lens to the current tension between Iran and Israel, asking what a move in Brent toward triple digits would mean for Canadian rates and whether a quick de-escalation could reopen the door to easing. History offers no script, but it does provide clear markers that help us chart the likely course for 2025.
1973 Oil Crisis and 1970s Stagflation
Conflict and Oil Shock: The 1973 Yom Kippur War triggered an Arab oil embargo. OPEC cut output and blocked exports to nations backing Israel, pushing crude from about US$3 to US$12 in months. Arab producers cut output about 5-10 percent and shipments to embargoed countries. A second shock followed in 1979–80 as the Iranian Revolution and the Iran–Iraq War lifted prices from US$14 to about US$35.
Inflation Impact: Energy costs drove Canadian CPI to an average above 7 percent in the decade and a peak near 13 percent in 1974 while growth stalled. Early rate cuts by several central banks worsened the surge.
Interest Rate Response: Once inflation proved sticky, the Bank of Canada and the Federal Reserve tightened forcefully. The Canadian policy rate rose from below 10 percent early in the decade to nearly 20 percent in 1981, a move that triggered a deep recession but restored price stability.
Bond Yields and Expectations Government of Canada 10-year yields tracked inflation, moving from single digits before 1973 to well above 10 percent by the early 1980s as investors demanded an inflation risk premium. Governor Tiff Macklem later noted that delaying action in the 1970s forced steeper hikes and a sharper slowdown.
1990 Gulf War Oil Shock
Conflict and Oil Shock: In August 1990 Iraq invaded Kuwait, threatening a large share of world crude. Prices climbed from about US$15 to US$30 by autumn and briefly topped US$40 in mid-October as supply fears intensified. The United States–led coalition ended the war by February 1991 and released reserves, pulling Brent back below US$20 by mid-1991.
Inflation and Growth Impact: Canadian CPI hovered near 5 percent in 1990 and rose further on higher gasoline and heating costs. The shock dented confidence and helped push Canada into the 1990 to 1991 recession. With demand collapsing, CPI fell below 2 percent by 1992. BMO later noted headline inflation was lower two years after the shock began, showing how a deep slowdown can erase a supply-driven price spike.
Interest Rate Response: Governor John Crow kept the Bank Rate in the low double digits through mid-1990 to anchor expectations, and it peaked near 16 percent in February 1991. As the war ended and the economy contracted, the Bank cut rates sharply through 1991 and 1992. By late 1992 the overnight rate sat in the mid-single digits, mirroring similar Fed cuts.
Bond Yields and Market Reaction: Investors initially fled to safety, trimming U.S. Treasury yields, while Canadian bond yields stayed high because of domestic inflation and heavy borrowing. After inflation eased and policy rates fell, ten-year Canada yields dropped several percentage points from 1990 peaks. The episode featured a brief spike in short-term rates followed by a swift decline and a delayed fall in long-term yields as disinflation took hold.
Early 2000s Conflicts: 9/11 Aftermath and the 2003 Iraq War
Conflict and Oil Shock: After the September 11 2001 attacks the United States invaded Afghanistan in 2001 and Iraq in 2003. In the months before the Iraq campaign crude climbed from about US$25 to US$35–40 as a war premium grew. The Bank of Canada warned that a wider conflict could push oil above US$50 and lift global CPI. Major combat lasted only six weeks and Iraqi output resumed quickly. Brent fell back to the low US$30s by late April so the spike proved brief and no lasting shortage emerged.
Inflation and Growth Impact: The jump in pump prices lifted Canadian headline CPI above 3 percent for a few months in early 2003, yet core inflation stayed near 2 percent and slack remained. Global growth was weak after the tech bust and the Bank noted that a longer war could damage confidence. Canada’s GDP slowed in the first half of 2003, worsened by SARS, but growth rebounded in 2004 as oil retreated.
Interest Rate Response: Balancing higher CPI and soft demand, the Bank raised the overnight rate twice to 3.25 percent by March 2003. When oil steadied it cut the rate back to 2.75 percent by July, stating that inflation would return to 2 percent within two years and that temporary oil swings would be ignored. Markets agreed: short rates fell after April and ten-year Canada yields drifted lower through late 2003 as investors priced in weaker growth and further easing.
2011 Arab Spring and Libyan Civil War
Conflict and Oil Shock: Unrest in North Africa and the Middle East cut Libyan output by roughly 1.5 million barrels a day in early 2011. Brent crude jumped from the low US$80s at end-2010 to more than US$120 by April 2011. The Bank of Canada observed record commodity prices. As other producers filled the gap and European debt worries curbed demand, Brent eased toward US$100 by late 2011.
Inflation Impact: Headline CPI averaged 3.3 percent in the second quarter, up from about 2 percent a year earlier. Gasoline prices rose more than 20 percent year on year, lifting transport and food costs. A strong Canadian dollar near parity blunted some import inflation, and slack in the economy limited wage pass-through. By 2012 CPI fell back below 2 percent.
Interest Rate Response: The Bank of Canada held the overnight rate at 1.00 percent all year, judging the oil-driven rise in inflation transitory and citing global risks from Middle East turmoil, the Japanese earthquake, and the Eurozone crisis. Core inflation stayed near 2 percent. Five-year Canada yields climbed near 3 percent in April on rate-hike bets, then sank near 1.5 percent by December as growth fears mounted. Analysts praised the Bank’s steady guidance for keeping inflation expectations anchored.
2023 Israel–Hamas War
Conflict and Oil Shock: Fighting that began on 7 October 2023 lifted Brent crude from about US$85 to roughly US$92 within days, while Canadian pump prices ticked higher. Because neither Israel nor Gaza supplies oil, the move reflected a risk premium tied to fears Iran or key shipping lanes might be drawn in. As the war stayed contained, Saudi supply rose and by late October Brent had slipped back to its prior level.
Market Interest Rates: The first reaction was a risk-off bid for safe assets that trimmed Canadian ten-year yields from just over 4 percent. Once crude retreated and broader growth data re-asserted themselves, yields climbed again, finishing 2023 at multi-year highs. Equities showed a brief pullback that faded quickly, and analysts at RBC noted global risk aversion dissipated within weeks.
Bank of Canada Policy: The Bank held its policy rate at 5.00 percent in October and December, citing the conflict as a modest upside risk to inflation through energy prices and a mild downside risk to growth through confidence. October’s Monetary Policy Report nudged near-term CPI forecasts higher but Governor Macklem said the Bank would not react to temporary price swings. Headline inflation fell to 3.1 percent in October and was projected near 2 percent by mid-2024, allowing the Bank to pause further hikes while monitoring any broadening of the conflict.
Learning From History: Iran–Israel Tensions in 2025 and Policy Outlook
Oil now trades around US$74 because traders fear that escalating Iran–Israel tension could disrupt the Strait of Hormuz, a route that carries about one fifth of global crude. Analysts at RBC Capital Markets warn that any closure could push Brent well above US$100. The Bank of Canada has run similar scenarios and concludes that every US$10 increase in oil adds roughly 0.4 percentage point to Canadian CPI over a year, meaning a jump to US$100 would raise inflation by about 1 point. Governor Tiff Macklem has therefore signaled that the Bank will slow or pause its planned rate cuts if energy prices surge, yet he remains prepared to ease further should growth falter.
Past conflicts guide that stance. In the 1970s, supply losses persisted, inflation expectations drifted higher, and policymakers had to drive rates toward 20 percent to regain credibility. The 1990 Gulf War, by contrast, produced a swift spike that vanished once fighting ended and the resulting recession allowed the Bank to cut rates from double digits to mid-single digits within two years. Shorter-lived shocks in 2003 and 2011 followed a similar script: energy prices briefly lifted headline inflation, but core inflation stayed near target, so the Bank either held steady or reversed minor hikes. These episodes show that duration, not the headline jump itself, determines whether an oil shock hardens inflation or merely dents demand.
With Canadian inflation back near 2 percent and private forecasts leaning toward a mild recession, the most likely path is a brief pause in the easing cycle rather than a return to tightening. If Brent remains above US$80 but stabilizes, the Bank can resume gradual cuts once core prices and wages confirm that inflation expectations stay anchored. Only a prolonged supply hit, which keeps oil elevated and feeds into wages, would force policymakers to rethink and possibly tighten. History suggests those longer shocks are rare; most fade before they override the need to support growth.