The price of oil and the exchange rate between the US and Canada are frequently highly connected. Long-term, when the price of oil increases, the Canadian dollar, commonly known as the loonie, typically appreciates relative to the value of the US dollar. The main source of U.S. dollars for Canada is the selling of crude oil, and this accounts for a significant portion of the country’s overall earnings.
Canadian foreign exchange earnings and crude oil
Because crude oil sales account for a sizable portion of the country’s total foreign exchange earnings, there is a strong association between the Canadian/U.S. dollar exchange rate and oil prices. The world’s fifth-largest producer and exporter of crude oil in 2019 was Canada. 1 The main source of foreign exchange for Canada is crude oil, and its share has been rising.
The greatest foreign supplier of crude oil to the United States is Canada. In 2020, 61 percent of all U.S. crude oil imports came from Canada.
Demand and Supply
Supply and demand determine the price of any good or service, and in the case of the Canadian/U.S. dollar exchange rate, supply and demand for both Canadian and U.S. dollars play a role in setting the price. Changes in the price and volume of crude oil have a considerable impact on the flow of U.S. dollars into the Canadian economy since crude oil exports make up a significant amount of the U.S. money that Canada earns.
The amount of money Canada makes on each barrel of oil it sells will be high when oil prices are high. Because there will be a large supply of US dollars entering Canada relative to the supply of Canadian dollars, the value of the Canadian dollar will rise. On the other hand, when the price of oil is low, there will be less of a supply of U.S. dollars than there is of Canadian dollars, which will cause the value of the Canadian dollar to fall.
The Canadian Oil Market’s Future
By examining the quantity of crude oil present in proven reserves, we can gain insight into the future of oil in Canada.
The third-largest proven oil reserve in the world is found in Canada’s oil sands. Sand, clay or other minerals, and water are elements that naturally exist together to form oil sand. Additionally, bitumen, a viscous variety of crude oil, is present. Bitumen must be removed in order to obtain crude oil because of its density. In the next 25 years, the oil sands production in Canada is expected to increase by almost 2.5 million barrels per day, according to the International Energy Agency (IEA).