Shock amplification and delayed recovery in resource economies: The role of fiscal policy reform

This paper examines how global commodity price shocks propagate through resource-dependent economies, with a focus on the interaction between extraction costs and domestic policy responses. We develop a simple framework in which high-cost producers are more exposed to negative price shocks, but the persistence of their response depends on investment conditions and policy environments. We test these predictions using the 2014–2016 oil price collapse, comparing Alberta—one of the world’s highest-cost oil producers—to a synthetic control constructed from lower-cost jurisdictions. Alberta experienced significantly larger declines in hydrocarbon output, investment, and per capita GDP, along with a more prolonged recovery. However, placebo analyses for other high-cost jurisdictions reveal no comparable declines, indicating that cost structure alone is insufficient to explain the observed contraction. Exploiting within-province variation, we further show that Alberta’s response to the 2015 shock differs markedly from its response to the 2009 collapse, despite an unchanged cost structure. Event-study estimates indicate that the post-2015 decline is closely associated with contemporaneous fiscal policy changes. While policy responses may be endogenous, the combined evidence points to a transmission mechanism in which domestic policy shapes—and potentially amplifies—the effects of external shocks in high-cost environments.