Impact of Oil Prices on Canadian Economy

This report examines the relationship between oil prices and the Canadian economy, focusing on the point at which higher oil prices cease to provide benefits. It details an empirical strategy that combines structural VAR analysis and local projections to assess the impact of oil supply shocks on Canadian GDP. The findings indicate that while higher oil prices generally benefit Canada, this effect diminishes as prices rise, particularly beyond the US$120–US$130 range in 2026 dollars. The report highlights that the traditional positive relationship between oil prices and Canadian economic activity weakens due to lower global demand and tighter financial conditions at elevated price levels. It also discusses the implications of supply-driven oil price increases, which may not yield significant positive impacts on the economy. The analysis suggests that there is a 'sweet spot' for oil prices, beyond which the benefits may become neutral or negative. The report emphasizes the need for caution in interpreting these findings due to the complexities involved in the economic modeling.