Oil prices have continued to rise in the wake of the U.S. killing of Iranian Gen. Qassem Soleimani and the situation has been having a ripple effect on the Saskatchewan and Canadian economy.

On Friday morning, a U.S. airstrike killed Soleimani, 62, and others as they travelled from Baghdad's international airport.

West Texas Intermediate Crude is hovering around $63 US per barrel, its highest point since mid-September. The other major price benchmark, Brent Crude, hit $70 US per barrel on Monday.

Western Canadian Select, heavy crude oil from the prairies, was trading for about $40 US per barrel on Monday.

About 60 per cent of the oil produced in Saskatchewan is non-heavy and sells above the Western Canada Select price.

The Saskatchewan government's budget prediction for WTI for 2019-20 was $59.75 US per barrel, which was reduced to $57.03 at mid-year.

"When the global oil price goes up, it doesn't take that long for oil and gas prices to go up for consumers and for producers," said Richard Masson, executive fellow at the University of Calgary's School of Public Policy and vice-chair of the World Petroleum Council of Canada.

A volatile situation

Masson said because of the volatility of the situation, Canadian companies are unlikely to increase drilling.

"Right now we're seeing higher prices and that's helping companies pay down debt but it's probably not going to result in a lot of extra activity this spring because it's not a guarantee it can last for an extended period of time."

"Forty to 45 percent of every incremental dollar we get from higher prices flows through to governments. If there is a price spike that lasts for a few months it will help budget situations. But again, governments shouldn't count on that being sustained."

On the rising WTI price, the Saskatchewan government said in a statement: "While an increase in the price of oil would be beneficial, there are a number of other factors that affect revenue, including the Canadian dollar and the light-heavy oil differential (as a percentage of WTI)."

"The 2019-20 Budget forecast oil at $59.75 and today's prices is $63.35. However, it is too early to know what result the price will have on revenue. The 2019-20 budget remains on track to balance without relying on an increase to non-renewable resource revenues to reach this balance."

The government added that because of the volatility of the market conditions and international relations, it has made an effort to reduce its dependency on resource revenues. In 2008-09 non-renewable resource revenue accounted for 32 per cent of its budget. The government has reduced that to 12 per cent in 2019-20.

Masson said Canadian producers and governments would end up with more tax and royalty revenue from increased oil prices but because of a shortage of capacity, Canadian companies wouldn't be able to step up and supply needy markets with oil.

"We couldn't do much to help them because we don't have any spare pipeline capacity or any spare rail capacity right now," he said.

In this aerial photo released by an official website of the office of the Iranian supreme leader, mourners attend a funeral ceremony for Iranian Gen. Qassem Soleimani and his comrades, who were killed in Iraq in a U.S. drone strike on Friday, in Tehran, Iran, Monday, Jan. 6, 2020. The processions mark the first time Iran honored a single man with a multi-city ceremony. Not even Ayatollah Ruhollah Khomeini, who founded the Islamic Republic, received such a processional with his death in 1989. (Office of the Iranian Supreme Leader via AP) (Associated Press)

Escalating tensions

Masson said oil prices are secondary to concerns about escalating military conflict in the Middle East.

"The concern about oil supply in the world is something we really need to pay attention to. Way more important to us is going to be if this turns into a big conflict."

"Oil is a small part of all of that. It'll be one of the things to react quickest but we've got much bigger worries right now."

This satellite image from Planet Labs Inc., on Sept. 14, 2019 shows thick black smoke rising from Saudi Aramco's Abqaiq oil processing facility in Buqyaq, Saudi Arabia. (Planet Labs Inc via AP)

In September, Yemen's Iran-backed Houthi rebels launched drone attacks on the world's largest oil processing facility in Saudi Arabia. The strike briefly took out about half of the supplies from the world's largest oil exporter. The U.S. directly blamed Iran, which denied involvement.

Saudi Arabia accounts for 10 million barrels of crude oil per day. The facility accounts for about five per cent of worldwide oil production.

The total volume of Canadian oil imports from Saudi Arabia has increased by 66 per cent since 2014, with imports rising every year during that period.

"This just reinforces how vulnerable the world is to the oil that comes out of the Persian Gulf," Masson said. "So there's something on the order of 20 million-plus barrels a day of the world's 100 million barrels a day go through the Persian Gulf and the Strait of Hormuz and so we're hugely vulnerable to a war in that region or to Iran targeting tankers or doing things to slow oil traffic."

Masson said Iran could see Saudi Arabia as a "proxy" for retaliation against the U.S. "which could lead to big outages and price spikes."