Ottawa has committed billions to new spending without showing whether its finances could withstand a prolonged collapse in oil prices

Ottawa has unveiled a federal budget built around stronger economic growth, improved revenues and ambitious spending commitments. But a sharp reversal in global oil markets raises an uncomfortable question: How much of that improved outlook depends on oil prices that may not last?

Just as Prime Minister Mark Carney’s government presented its 2026 budget, crude oil prices began shedding the war premium that had pushed them higher throughout October.

The Iran war has disrupted Middle Eastern production and shipping, particularly through the Strait of Hormuz, raising concerns about global supplies. Following Republican losses in the U.S. midterm elections, traders began anticipating that political pressure might encourage Washington to seek an end to the conflict, contributing to falling crude prices.

West Texas Intermediate (WTI), the North American benchmark, settled Nov. 6 at US$90.83 a barrel, while Brent crude closed at US$98.32.

Higher oil prices have benefited Canadian producers by strengthening export earnings and profitability. Unlike provincial governments, which collect oil royalties, Ottawa benefits indirectly through increased economic activity and federal tax revenues.

The budget, presented Nov. 5 by Finance Minister François-Philippe Champagne, projects a considerably better fiscal position than Ottawa anticipated in the spring. Ottawa now estimates the deficit for 2025-26 at $39.3 billion, considerably below the $66.9 billion projected in April. For 2026-27, however, the government still expects a $62.3-billion shortfall.

Stronger revenues and lower-than-expected program expenses contributed to the improved outlook, although the budget does not establish how much, if any, of that improvement came from higher crude prices.

Ottawa now assumes WTI will average US$85 a barrel in 2026, compared with US$73 anticipated in the spring. For 2027, the forecast has increased to US$79 from US$66.

Because the forecasts are annual averages, a brief decline would not necessarily undermine them. A sustained downturn would be another matter.

Lower crude prices could reduce Canadian export earnings, weaken producer profitability and discourage investment, particularly in Alberta, Saskatchewan and Newfoundland and Labrador. Those effects could spread through the economy and eventually affect federal tax revenues. Cheaper energy would benefit consumers and businesses outside the oil industry, but it is uncertain whether those gains would fully offset the losses.

The problem is not that Ottawa assumes oil prices will remain at their wartime highs. It does not. The problem is that the government is making substantial long-term financial commitments while relying on an economic outlook that has improved partly because of more favourable oil-price assumptions.

Those commitments cover infrastructure, electricity generation and transmission, housing and increased defence spending, along with tax incentives intended to encourage business investment. These measures could strengthen productivity and Canada’s competitiveness, but their potential benefits do not eliminate the need for realistic financial planning.

The budget anticipates WTI averaging US$69 in 2028 and US$67 in 2029. The government has already incorporated falling crude prices into its longer-term projections.

But anticipating a gradual decline is not the same as preparing for a prolonged downturn.

Ottawa has examined alternative economic scenarios, including one in which continued Middle Eastern supply disruptions push oil prices higher while weakening economic growth. Under that scenario, the federal deficit would increase by an average of approximately $2.2 billion annually over the budget’s planning period. The budget does not present a comparable scenario showing what would happen if crude prices fell substantially below its forecasts and remained there.

Goldman Sachs has warned that recovering Middle Eastern supplies could push the market toward surplus, while JPMorgan has pointed to evidence that global oil supplies are already exceeding demand. Renewed conflict could reverse that outlook, but the uncertainty itself warrants caution.

A prolonged oil-price decline would be difficult enough to manage. If it coincided with slower economic growth, continued U.S. trade restrictions and higher borrowing costs, Ottawa would face fiscal pressures from several directions at once.

Even worthwhile investments take time to deliver results, and not all will produce the expected benefits. In the meantime, the spending commitments are real.

Canada cannot control the course of the Iran war or the direction of global crude markets. It can control how prudently it plans for their consequences.

Until the government demonstrates that its fiscal plans can withstand a sustained decline in crude prices, its improved economic outlook should not be mistaken for lasting financial security.