In this week’s The Seven… 

• The Iran crisis - potential Alberta impacts
• Thinking out loud - the impact of AI
• Next week - Canadian jobs data
• Interesting Fact:  the psychology of the 1979 oil price shock  
• Chart of the Week:   Canada’s investment problem  

It’s been a whirlwind start to 2026. In just the last two months we’ve witnessed U.S. intervention in Venezuela, threats of Greenland annexation, crises in Cuba and Mexico, and now the war in Iran.

As I write this, WTI oil prices are above US$90/bbl, up from last week’s close of US$67/bbl. Shipping through the Strait of Hormuz—the route for one fifth of global oil and liquefied natural gas flows—has effectively come to a standstill.

Equity markets have whipsawed this week, with the S&P 500 currently tracking 2% below last Friday’s close. A disappointing U.S. jobs report (payroll employment down 92K, unemployment rate up to 4.4%) contributed to the sell-off this morning. 

The unfolding conflict in the Middle East is first and foremost a human crisis, with this week's recent escalation creating a period of intense uncertainty for millions in the region and around the world.

The coordinated strikes on Iran have also fundamentally rewired global energy flows, at least in the immediate-term. As a result, we’ve once again entered scenario land, and in today’s Seven, we try our best to sort out what this could mean for Alberta’s economy.

The Iran crisis reinforces the importance of energy security. As highlighted in a report by ATB Cormark Capital Markets this week called “Northern Pivot”, the crisis has shone a spotlight on Canada as a reliable, safe and democratic producer of oil and gas with long-duration assets.

Against this unstable global backdrop, it’s also worth remembering what is in Canada’s control to improve its own economic prospects. This week in partnership with Studio.Energy, we released a paper showing that the Canadian growth problem is fundamentally an investment problem (see Chart of the Week below). To build Canada’s economic muscle, the next leg of growth will need to come from building productive capacity, not just consuming. While the concern this week shifted to global conflicts, we also cannot lose sight of domestic efforts to fast-track major project spending and boost overseas exports. 

The Iran crisis and impact on Alberta

How will the attacks on Iran, and the sudden jolt to oil prices, impact Alberta’s economy? That’s been the recurring question I’ve received this week.

I wish I had a 30 second soundbite. But like most things in life, it’s a little more complicated than that. Here’s how I think through the problem.

Higher incomes (the nominal boost)

Let’s start with what we know: Alberta exported $134 billion in energy products last year to global markets, accounting for 76% of its total international goods exports and 28% of its GDP. That means income generated in the province will go up; higher oil and gas prices mean Alberta generates more income from its exports. 

We estimate that a US$10/bbl increase in oil prices (from our base case of $US61/bbl for WTI) directly translates into a roughly 4% increase in Alberta’s nominal GDP—the broadest measure of income—without factoring any positive lift to investment. The scatter plot below clearly makes this point.  

Energy producers and governments will see the income gains first. The Alberta Government estimates that its revenues will rise $680 million for every dollar increase in WTI over a full fiscal year. Higher prices also flow through to personal incomes (via employment, wages and dividends). But the magnitude of impact on labour income depends on how much of the extra cash gets converted to investment. We turn to that next.

The more uncertain ‘real’ impact

Higher prices make it more profitable to produce, and encourage investment. 

However, oil prices don’t have the same torque on investment as they used to. To illustrate, we plot oil and gas investment against the Bank of Canada’s energy price index (heavily weighted to oil and natural gas). A strong relationship historically, but much less so in the last decade. 

What’s changed? Producers have been reluctant to invest in new growth projects even in a higher price environment, and instead are optimizing existing assets to increase production. The oil price spike post Russia’s invasion of Ukraine is a good example; investment increased from COVID lows, but not as much as in past cycles. 

Much of the additional cash flow generated has been used to reward shareholders via dividends and share buybacks. ARC Energy estimates that the reinvestment ratio (the share of after tax cash flow invested) has averaged just under 50% over the last five years. In a fall survey by ATB Capital Markets, producers and investors cited federal regulatory barriers and insufficient pipeline access as constraints to new investment. Uncertainty over global demand and durability of price increases also likely play a role.  

Choose your scenario

Now that we have set the stage, we can think through scenarios. There’s a lot we don’t know, notably the severity and duration of the conflict and oil disruptions. For now, we consider three possibilities.  

Scenario 1: Supply shock, with limited global economic impact

The Strait of Hormuz continues to be disrupted and there is damage to export infrastructure. Oil prices hold near current levels for the next 2-3 months, and then ease later in the year to pre-crisis levels.  

As a result, WTI averages US$75/bbl in 2026 - up from US$61/bbl in our December forecast. 

Higher oil prices slow global growth as inflation rises, but the overall economic impact is minimal. The AI boom continues and trade tensions ease. Oil and gas companies increase investment, though remain cautious on investing in new growth projects. Alberta real GDP grows 3-3.5% (vs. 2.1% in our December base case) in 2026.

Scenario 2: Supply shock, with pronounced global slowdown

Oil prices average US$85/bbl, and the global economy sees a significant slowdown. Oil and gas producers and related industries benefit, but activity slows in industries not tied to oil and gas. Real GDP growth comes in at 1.5-2.5% depending on the severity of a global slowdown.

Scenario 3: Crisis eases quickly

Oil prices fall to pre-crisis levels due to a rapid de-escalation of tensions. GDP growth is around 2% this year under this scenario, consistent with our December baseline.

This is back of the envelope for now. We’re back to the drawing board as we re-work our March forecast and will have more to say in the coming weeks. 

Thinking out loud  - The impact of AI

Why did PM Mark Carney’s speech get so much global attention? One theory is that he simply said what many were thinking out loud (cue Ed Sheeran). Indeed, Carney himself said “everyone is thinking the same thing” when discussing the reaction to his speech. 

For the same reason, I was struck by an excellent economic study by Moody’s Analytics. It tackles what everyone is thinking about out loud - the economic impact of AI.

The water cooler conversation around AI tends to spark polarizing views depending who you talk to (mass unemployment vs. boundless opportunity).  The reality is more nuanced, and what’s missing is a framework for thinking through the problem.

That’s what the Moody’s study did, outlining three specific scenarios for how the AI economic story will unfold:

Scenario 1: AI-Empowered (40% Probability - Baseline): Steady productivity growth (2.5% per annum) that is absorbed by rising demand, resulting in higher living standards without mass unemployment.

Scenario 2: AI Falls Flat (25% Probability): Adoption rates disappoint, leading to a "bursting bubble" in tech valuations similar to the Y2K internet crash, potentially causing a modest recession.

Scenario 3: Job Market Upheaval (20% Probability): Automation outpaces job creation so rapidly that it triggers significant unemployment and severe social inequality.

Two big things I like about this paper:

1. The authors are being honest; they don’t know exactly what will happen with AI, so they run scenarios (like we did for the Iran crisis).
2. It shows that AI, like other transformational technologies, creates new opportunities even as it causes disruption. It’s easy to come up with the jobs destroyed (coders). It’s harder to anticipate the new jobs (electricians, AI human collaborator specialists) that will be created. If AI is productivity enhancing, it will create additional income that will be spent - and that leads to other types of jobs.

It’s true that scenarios 2 and 3 aren’t great, and we should think through such outcomes. But the baseline (and highest probability) scenario of higher productivity growth and living standards is somewhat reassuring. 

Interesting Fact: The 1979 oil price shock

Following the 1979 Iranian Revolution, actual global oil supply only dropped by about 5%, yet prices doubled. Psychology contributed to the price spike:

• Hoarding: Scarred by the 1973 oil embargo, companies and consumers began panic-buying to stockpile reserves.
• The idling cost: In the U.S., the infamous "gas lines" were so long that motorists burned fuel idling their engines while waiting to reach the pump.

Chart of the Week - We have an investment problem

You often hear that Canada’s GDP per capita has stagnated, and the U.S. is pulling even further ahead. That’s true, but it misses an even more important point.

Looking under the GDP hood, we should be concerned with what’s been driving Canada’s paltry GDP growth over the last decade. It’s mostly consumption and government spending. That’s not sustainable. The Canadian economy desperately needs investment and the exports that stem from building more productive capacity. As our Chart of the Week shows, investment per person has not grown at all over the last two decades. Neither have exports.

I have found that discussion of Canada’s languishing GDP per capita often turns into a discussion about the measure itself. Critics argue it’s an incomplete gauge of living standards and well-being. Those are valid concerns (though I would argue that the measure still has value). 

So what if we talked less about GDP per capita and more about investment - a primary source of weakness?

People can debate GDP per capita as a measure, but it’s much harder to argue that we shouldn’t be concerned about the decline in investment in Canada.

That’s the topic of my latest article, co-authored with energy expert Peter Tertzakian at Studio.Energy.  

Answer to the previous trivia question: Agnes Campbell Macphail (1890–1954) was the first woman elected to the Canadian House of Commons, winning her seat on December 6, 1921.

Today’s trivia question: Who was the first woman to be Premier of Alberta?