Photo by: NASA
by Nicole Butler
July 2026
Table of Contents
- Introduction
- Geopolitical Background: Hormuz as Iran's Bargaining Card
- Market Optimism: The Gap Between Physical Prices and the Futures Curve
- Silver Linings: Canada’s Security Premium
- The Collapse of Peak Demand Consensus: Implications for Canadian Environmental Policy
- Conclusion: The Hormuz Crisis and Canada's Energy Future
- About the Author
- Canadian Global Affairs Institute
Introduction
Following U.S. and Israeli military strikes on Iran in late February 2026, the closure of the Strait of Hormuz in spring 2025 marks a decisive turning point in global markets, accelerating existing trends by undermining two load-bearing assumptions that have shaped investment and supply chain strategy for decades. The first is strategic: since the introduction of the Carter Doctrine in 1980, and its reinforcement by successive U.S. administrations, it has been assumed that no extra-regional power would be permitted to dominate the Persian Gulf. Markets, governments, and energy planners regarded this doctrine as a certainty, maintaining that the Strait could not remain closed because the United States would inevitably intervene. The second is structural: the expectation that global oil and gas demand would peak by 2030 and then decline—a projection routinely cited in environmental policy and amplified by IEA forecasts. This belief has driven nearly a decade of underinvestment in hydrocarbon infrastructure worldwide. By collapsing both assumptions simultaneously, the Hormuz crisis has forced a fundamental reassessment of the global energy landscape.
These assumptions are not independent. Underinvestment justified by the peak-demand consensus has left global supply with little resilience, just as the Carter Doctrine paradigm has collapsed. The result is a supply shock hitting a structurally tight market, with effects spanning both physical and financial systems. This report summarizes a Canadian Global Affairs Institute roundtable held in Toronto, Ontario, which convened energy market analysts, geopolitical strategists, and policymakers to assess the mechanics of the Strait of Hormuz crisis, the broader political dynamics that have made it a persistent risk rather than a temporary market disruption, and the implications of growing demand for secure and diversified energy sources for Canada's energy future.
Geopolitical Background: Hormuz as Iran's Bargaining Card
To understand the impacts of Hormuz, it is essential to grasp the central role of the first load-bearing assumption, which extends beyond market management into the policy realm. Operation Praying Mantis in 1988 neutralized Iranian naval capacity within an afternoon—a pattern long asserted by the U.S., which reinforced the belief that the United States would never allow an extra-regional, or even regional, power to dominate the Strait. Drawing on this confidence, and a severe underestimation of Iranian capabilities, the Trump administration approached Iran as a short-term issue despite cautionary predictions from tabletop exercises, while Iran leveraged this strategic blind spot.
The Trump administration’s overconfident approach to Iran was likely compounded by the ease of its successes in Venezuela, where the removal of Maduro was quickly followed by negotiations. When this logic was applied to Tehran, however, the comparison did not hold. The ideological resilience of the Iranian regime responded far more adversely than Venezuela’s materially incentivized governing apparatus. This left Trump facing a successor unwilling to negotiate on U.S. terms and struggling to find a viable negotiating partner. Trump’s miscalculation became a major strategic blunder, with the administration moving too late to secure the Strait. Accordingly, Iran discovered that Washington was far less invulnerable than it appeared.
Aware that the Strait must eventually reopen, Iran now uses its position in Hormuz as leverage to challenge U.S. zero-nuclear objectives, leaving it in a stronger negotiating position than ever before. Both countries are now locked in a contest over whose position erodes first. Iran knows that the 20 per cent market blockage is actively constraining supply and is waiting for the effects to reach North America, particularly as Trump’s confidence management draws stability from a signal that is increasingly disconnected from physical reality. Meanwhile, Washington waits for sanctions to affect Iran’s intermediary storage capacity in an attempt to offset Iran’s time advantage.
Market Optimism: The Gap Between Physical Prices and the Futures Curve
In the face of unprecedented disruption, the market remains optimistic, a disconnect likely caused by two trends that have historically shaped natural gas investment. The first is a general disbelief that such a large disruption will be allowed to persist for long. Faced with an unprecedented blockage, the natural impulse is to assume it will soon be resolved. This view is reinforced by the assumption that the U.S. would never allow such a disruption to continue indefinitely. Second, oil markets are inherently volatile. As was apparent during previous disruptions, such as the Russia–Ukraine war, Saudi oil facility disruptions, and the COVID-19 pandemic, significant market shocks have tended to be relatively short-lived, with prices stabilizing quickly, creating a market “boy who cried wolf” effect.
These entrenched beliefs have resulted in a pronounced market dislocation. Physical oil prices have soared to unprecedented heights, with spot barrels in some markets now commanding valuations unimaginable just months ago. Yet the futures curve paints a more nuanced picture. Exceptional backwardation—currently reflected in a spread of nearly US$30 per barrel between front- and back-month contracts—signals unusually strong demand for immediate delivery. In practical terms, this would typically incentivize investors to sell in May, repurchase in June, and capture a US$15-per-barrel arbitrage opportunity, a pattern that, in normal markets, would indicate acute undersupply and trigger immediate inventory releases.
Crucially, the futures curve should not be misconstrued as a forecast; rather, it is a real-time reflection of prevailing supply and demand dynamics, particularly during periods of scarcity. This distinction has been lost as changes in front- and back-month pricing are reported as oil price declines, which then become an operative signal for equity markets. While some of this disconnect may be attributed to excessive market optimism, it is also arguable that the market is behaving precisely as one would expect in response to a large but temporary pipeline disruption, rather than the closure of Hormuz. Accordingly, the market does not begin pricing the disruption further down the curve until physical inventory draws are realized, confirmed in the data, and understood to represent more than a transient shock. This risks creating a dangerous feedback loop: the administration’s ability to reassure markets through public statements dampens the economic pressures that might otherwise generate support for greater diplomatic efforts, leaving North America vulnerable to the consequences ahead. Political overconfidence risks perpetuating a dangerous divergence between market signals and underlying realities.
Silver Linings: Canada's Security Premium
The Hormuz crisis underscores both Canada’s opportunities and its current market challenges. Historically, oil prices fluctuated within a relatively stable framework, with organizations such as Standard Oil, the Texas Railroad Commission, and OPEC helping to regulate markets through consolidation and supply discipline, creating a favourable environment for energy investment. Since 2008, however, the absence of a durable market-management authority has contributed to persistent volatility, which has been particularly challenging for Canada’s risk-averse investment environment. After two decades, volatility remains a constant, and Canadian investment decisions must adapt to this enduring cycle between demand destruction and involuntary production shutdowns.
Several roundtable participants argued that this is an ideal moment for structural change. With Persian Gulf supply chains disrupted, many countries—particularly those accessible via western tidewater—view Canada as a key source of diversification. Offering stability and security, Canada benefits from a significant security premium. Whether exporting primarily to the United States or expanding into Indo-Pacific markets, Canadian oil commands considerably higher prices than it did 18 months ago.
Despite these opportunities, capital mobilization remains a key challenge. Canadian firms often prefer the established U.S. market, which requires less upfront investment than domestic projects. To change this dynamic, Canada must pair political will with targeted financial incentives that encourage investment at home. This will require increased coordination between federal and provincial governments, as well as greater engagement from Canadian industry.
Successfully mobilizing this investment hinges on a broader strategic question: how much should Canada diversify its export markets, and can it expect relations with the United States to normalize after the Trump administration? With ongoing trade uncertainty and growing efforts to reduce dependence on a single partner, several participants made the case for expanding Canadian energy exports to new markets. Overseas refineries are increasingly willing to accept Canadian crude, and Canadian LNG is well positioned to generate demand in emerging regions. By acting now, Canada can build a more resilient and diversified energy future.
The Collapse of Peak Demand Consensus: Implications for Canadian Environmental Policy
The collapse of the peak demand 2030 consensus further shows that, despite some speculation, the Hormuz crisis will not achieve what the Paris Agreement could not. Previous transitions, such as coal phase-outs, were accelerated during disruptions when alternatives like LNG were both profitable and viable. Today, the expansion of nuclear and renewable energy is promising, but not immediate. Ongoing innovation continues to improve intermediate storage capacities, enabling greater scalability for renewables, while technologies such as methane hydrate extraction are being explored. Ultimately, while policy incentives can support this process, this fundamentally differs from imposed sector constraints.
In light of the collapse of the peak-demand consensus, Canada faces a broader energy dilemma: how to respond to rising demand, which creates significant economic opportunities and the potential to supply global markets with cleaner Canadian crude. Export capacity, previously constrained by refining limitations, is improving as global refineries expand capacities. Canada must work to balance environmental policy with strong economic initiatives, incentivizing cleaner energy production while also strengthening its market position.
Conclusion: The Hormuz Crisis and Canada's Energy Future
The discussion suggests the Hormuz crisis has exposed the fragility of assumptions that have long anchored global energy markets and policy — namely, automatic U.S. intervention in the Gulf, peak demand, and the inherent resilience of major Gulf supply chains. The simultaneous collapse of these market underpinnings has created a supply shock in an already tight market, with consequences that will outlast the current standoff and affect how countries position their energy supply dependence. As they seek diverse and secure sources of energy, Canada faces both a warning and an opportunity.
The security premium now attached to stable, rule-of-law energy producers creates a window to mobilize capital, but one that will not remain open indefinitely. To seize this opportunity, Canada must reduce uncertainty by making federal-provincial coordination a priority, targeting investment incentives, and creating a policy framework that does not treat environmental objectives and energy expansion as mutually exclusive. On the market side, Canadian investors must come to the table and internalize volatility as the new norm, viewing Canada as an opportune market rather than looking south. By disrupting established energy flows, the Hormuz crisis compels Canada to enter the next era of global energy markets with clarity about its strategic position and a clear understanding that hesitation has consequences.
About the Author
Suneet Bains is a second-year undergraduate student at the University of Toronto's Munk School of Global Affairs & Public Policy, pursuing a double major in Public Policy and Peace, Conflict & Justice, with a minor in Energy Systems. From Bancroft, ON, Suneet has worked with various healthcare NGOs, and is a Millennium Fellow focusing on gender-based violence. Having worked at the G20 and BRICS research groups, she is currently serving as the Research Director of the COP Research Group at UofT and is also conducting cybersecurity research into LLM summarization at the Munk School. Suneet is particularly interested in expanding her knowledge of energy policy and its intersection with economic development, security, and climate transitions. This summer, she is looking forward to interning at the Ministry of Natural Resources as a Project Assistant.
Canadian Global Affairs Institute
The Canadian Global Affairs Institute focuses on the entire range of Canada’s international relations in all its forms including trade investment and international capacity building. Successor to the Canadian Defence and Foreign Affairs Institute (CDFAI, which was established in 2001), the Institute works to inform Canadians about the importance of having a respected and influential voice in those parts of the globe where Canada has significant interests due to trade and investment, origins of Canada’s population, geographic security (and especially security of North America in conjunction with the United States), social development, or the peace and freedom of allied nations. The Institute aims to demonstrate to Canadians the importance of comprehensive foreign, defence and trade policies which both express our values and represent our interests.
The Institute was created to bridge the gap between what Canadians need to know about Canadian international activities and what they do know. Historically Canadians have tended to look abroad out of a search for markets because Canada depends heavily on foreign trade. In the modern post-Cold War world, however, global security and stability have become the bedrocks of global commerce and the free movement of people, goods and ideas across international boundaries. Canada has striven to open the world since the 1930s and was a driving factor behind the adoption of the main structures which underpin globalization such as the International Monetary Fund, the World Bank, the World Trade Organization and emerging free trade networks connecting dozens of international economies. The Canadian Global Affairs Institute recognizes Canada’s contribution to a globalized world and aims to inform Canadians about Canada’s role in that process and the connection between globalization and security.
In all its activities the Institute is a charitable, non-partisan, non-advocacy organization that provides a platform for a variety of viewpoints. It is supported financially by the contributions of individuals, foundations, and corporations. Conclusions or opinions expressed in Institute publications and programs are those of the author(s) and do not necessarily reflect the views of Institute staff, fellows, directors, advisors or any individuals or organizations that provide financial support to, or collaborate with, the Institute.
Showing 1 reaction