The major geographical area of Canada is rich in natural resources like energy, minerals and timber. Amongst all, energy, especially crude oil, contributes most to the prosperity of the Canadian economy. As the 6th largest producer of oil, Canada produces 4.6 million barrels of oil per day (MMb/d), of which exports constituted 3.7 MMb/d and imports being 0.6 MMb/d.[1] [2] The country produces more oil than it imports or consumes; thus, Canada is considered to be a net exporter of crude oil. Provided that the oil and gas industry contribute to around 8% of Canada’s GDP in 2019, oil business, therefore, plays an important role as one indicator of the Canadian economy.[3] In 2014, due to factors like the unprecedented oil production growth in the US and weakened global demand, especially from China’s slower economic growth, the world’s oil price collapsed by over 70 percent to $40 a barrel in January 2016. Despite the gradual recovery to about $60 a barrel, the current price level is 50% under the pre-shock level. As a result, the lower oil price can have material impacts on the Canadian economy through different channels. This paper aims to provide the economic consequences of falling oil prices with empirical evidence supporting the net negative impact on the Canadian economy. The adverse effect of a negative oil shock is transmitted through both the supply and demand channel and demonstrated by major economic factors of employment, exchange rate, trade balance, and government revenue. Corresponding to the worsen Canadian economy, this paper will conclude with the recommended policies to remove the negative externalities or commodity cycle.

Producer output/capital investment

The fall in oil price negatively affects both the supply and demand sides of the Canadian economy through its effect on producer output and capital investment. Given that 96% of Canada’s oil is produced in the provinces of Alberta, Saskatchewan, and Newfoundland and Labrador, there would be an initial disproportional negative effect in these regions.[4] For example, oil producers, especially the upstream providers, would experience a sharp decline in revenue from the reduced price. In short-run, due to fixed production technologies and capital inputs, oil projects begun before the downturn would be completed. However, oil firms would reduce future investments in new oil projects as lower price decreases the economic feasibility of capital-intensive oil projects. Figures from 2015 showed that the oil industry was expected to lose 37% revenue totalling to CAD$43 billion from reduced production and investments.[5] According to CERI, “every Canadian million dollars invested and generated in the Canadian oil and gas sector, the Canadian GDP impact is CAD$ 1.2 million.”[6] The cutback in oil projects would further tamper Canada’s already weak business investment relative to other economies.[7] Additionally, the lessened profitability discourages not only domestic but also a foreign investment in Canada. Indeed, after the price shock in 2014, many large foreign-controlled international businesses operating in the oil sands have withdrawn their investment and sold their equity shares (reference) as uncertainty increased.The adverse effects spill over to the demand for oil-field related sectors through significant ­capital expenditure on non-residential tangible assets, particularly in the industrial sectors such as construction and manufacturing.[8]  Oil producers would also exert pressure suppliers to reduce price, hence may further reduce their profita