Crude Oil Prices and Fixed-Asset Cash Spending in the Oil and Gas Industry: Findings from VAR Models

This note investigates the relationship between crude oil prices and investment in the energy sector. We employ a set of vector autoregression (VAR) models (unconstrained VAR, vector error-correction and Bayesian VAR) to formalize the relationship between the West Texas Intermediate (WTI) benchmark and fixed-asset cash spending in the oil and gas extraction and support activities sector of the Canadian economy. Using data from Statistics Canada’s Quarterly Financial Statistics for the period 1999Q2–2015Q4, we report that, for example, an average WTI of $50 in 2016 would yield a 27.1 to 31.4 per cent (year over year) decline in fixed-asset cash spending in the sector relative to 2015.