Oil and gas prices are rapidly rising around the world amid the U.S.-Israel war with Iran. Andrew Chang explains what’s driving the surge and why predicting the next moves in the oil market is so difficult. Here is a direct video link.
Spikes in oil prices, especially late in business cycles, when asset prices and debt levels are elevated, tend to trigger economic contractions (grey bars below since 1970).
Last week’s near 35% spike in the price of oil (WTIC) was the biggest gain in futures trading history, dating back to 1983 (shown below, courtesy of Bespoke Investment Group).
After closing at $90.90 a barrel on Friday, the price rose to $119.48 intraday yesterday, then slumped 15% to $80 this afternoon. That’s still up 47% year to date and +32% in the past month.
How long oil prices will remain elevated is impossible to predict. But initial price spikes are typcially short-lived because a higher price dents demand.
When Russia invaded Ukraine on February 24, 2022, crude peaked at an intraday price of around $125 (WTI) and $128 (Brent) on March 8, 2022, just days after the invasion began and then pulled back relatively quickly, returning to $66 a barrel (WTI) by March 2023.
That said, the Iran war impacts more oil flow than Russia’s assault on Ukraine. About one-third of global oil production comes from the Middle East, and much depends on how long the Strait of Hormuz remains disrupted.
As for potential upside for Canada in this, RBC economists note that price volatility driven by geopolitical events is unlikely to be viewed as structural enough to reverse the decade-long decline in Canadian oil and gas investment. And, without an investment response, the near-term impact on gross domestic product will likely be neutral.
Energy producer profits and government natural resource royalties rise alongside oil prices, and this is true for Canada and the U.S. as oil exporters. In Canada, the sector is smaller than a decade ago, but still accounts for 6.6% of GDP and 15% of total goods exports in 2025.
In the U.S., vulnerability to oil price shocks has diminished dramatically in recent decades, with production ramping up following the shale revolution—from 5.4 million barrels a day in 2004 to 13.5 million barrels a day in 2025 (EIA estimates). The U.S. has swung from being a net importer of energy products to a net exporter over the last decade.
At the same time, as shown below, nearly a third of US auto sales in 2025 were hybrid, EV or fuel cell vehicles, compared with 7.2% in 2020. A sustained spike in gas prices is likely to accelerate the move away from conventional ICE vehicles.
Energy costs are a tax on everyone, and higher fuel prices mean less funding available for other spending. Here’s RBC:
When oil prices rise, consumers face higher prices at the pump almost instantly. As more dollars are allocated toward energy purchases, the buying power for other goods and services decline – and the longer prices remain high, the greater those challenges become. Heightened economic uncertainty may also reduce households’ willingness to spend, further dampening demand.
The economy was already weak and shedding jobs over the past year; higher fuel costs intensify financial strain.
Another broad impact is that the size and duration of the oil price surge could delay or discourage policy easing from central banks. Anticipating this, Treasury prices have fallen over the past week, driving up the yields on which interest rates are based. Rate relief remains elusive for highly indebted households, and home sales are moribund.
Every cycle is slightly different, but all of these are reasons that past oil spikes have typcially accelerated the onset of recessions.
The investment sales world loves to talk about the defensive benefit of holding different equity sectors and global markets.
The pitch is that there’s always a bull market somewhere, so we can always-be-buying risk-on products. The US stock market is heavily concentrated (39%) in the top 10 most expensive companies today (dark blue bar below). No problem, we are urged to ‘diversify’ abroad. The trouble is that other global equity markets are nearly all more concentrated than the US (shown below, courtesy of ISABELNET.com).
Moreover, today, inflated prices are global, with equity valuations at historic highs across all major markets (the 12-month forward price-to-equity multiple, shown below in orange, versus the median for each region over the past 20 years).
In real life, correlations are strongly positive across global markets, particularly in sell-offs. Case in point, all major stock markets except Russia’s (MOEX) have been negative over the past week (in red below). Diversify this.
Protecting capital from the downside of asset bubbles requires more than just different equity marketing wrappers. Crypto isn’t holding up, precious metals and credit are slipping, too. Cash-like equivalents and short- to medium-term individual Treasuries with fixed maturity dates are the most stable allocations — unfortunately, few people hold them in any meaningful weight.
It’s tough to buy low when the masses are maxed out at all-time cycle highs, with little to no cash on hand for buying opportunities that come in bear markets. Poor risk management means the masses often bear capital risk without capturing the promised rewards. In the end, the house gets richer, and individuals end up losing over full market cycles. Rinse and repeat.
Cory’s Chart Corner
