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The TMX Broadcast Centre in TorontoFrank Gunn/The Canadian Press

Declining crude oil prices are taking a brutal toll on the Canadian stock market, as investors take a dim view of the country's economic prospects in an era of cheap, plentiful energy.

The benchmark S&P/TSX composite index fell 329.50 points or 2.3 per cent, to 14,144.17, marking its worst stumble in about 18 months.

At its lowest point during the day, the index was down as much as 490 points.

The Canadian dollar fell to another five-year low of 87.10 cents (U.S.), down more than a third of a cent and offering another signal that investors are growing increasingly pessimistic about all things Canada.

The latest setback certainly ramps up the drama surrounding the commodity-exposed Canadian market, but it also continues a painful downturn that has persisted for more than two weeks.

The benchmark index has fallen a total of 6.4 per cent since Nov. 21 – eroding its year-to-date gain to just 3.8 per cent as investors ponder where oil is ultimately headed and what the repercussions will be.

The price of oil has retreated to five-year lows amid evidence that the world is producing more crude than the global economy can consume.

Despite the appearance of a glut, the 12-nation Organization of Petroleum Exporting Countries announced in late November that it will maintain its current level of oil production, exacerbating worries that high-cost producers in Canada and the United States will be forced to cut production.

"In our opinion, crude prices will remain in the $70 to $80 [per barrel] range for the next two to three years," said Scott Vali, a portfolio manager at the Canadian Imperial Bank of Commerce, in a note. "Below this level, production growth falls."

Oil fell to $62.95 a barrel in New York, down $2.89. That brings the overall decline since the summer to about 40 per cent and dealing yet another blow to key Canadian producers, which are already mired in a bear market.

The energy sector fell 5.7 per cent for its worst setback in more than three years.

Among the worst casualties, Canadian Oil Sands Ltd. fell another 10.4 per cent. The stock, a key component of the oil patch, has fallen nearly 50 per cent his year and is sitting at its lowest point in more than a decade.

Anyone who has avoided energy stocks has been spared some of the sharpest dips in the stock market, but the selloff is now spreading well beyond the oil patch.

The country's Big Banks, widely perceived as profit-growing and dividend-raising machines, were hit during Monday's selloff.

Toronto-Dominion Bank fell 2.8 per cent and Bank of Nova Scotia fell 1.7 per cent.

Analysts have been growing more cautious of the banks because of slowing earnings growth and high debt levels among Canadian homeowners.

But lower oil prices offer another risk. If energy companies cut back on exploration and drilling, Canadian economic activity could be affected, potentially affecting everything from consumer spending to real estate prices.

"It is likely the case that the direct impact of a drop in oil prices on the Canadian economy is negative as lower activity in the oil and gas sector offsets, at the national level, the benefit to consumers from lower gasoline prices," said Royal Bank economists in a note.

However, they believe that the damage will be limited to the oil-producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador; oil consuming provinces such as Ontario should enjoy the benefits of cheaper energy.

Observers believe that falling crude oil prices are similarly good news for the United States, Europe and Japan, if consumers spend the money they are saving from cheaper gas.

"An extended period of lower oil prices should be positive for the global economy as a whole, including key emerging economies led by China and India," said Julian Jessop, chief global economist at Capital Economics, in a note.

This explains why the contrast between the Canadian stock market and most of the rest of the world has been nothing short of stunning.

The S&P 500 fell 0.7 per cent on Monday – weighed down by energy stocks and falling monthly sales at McDonald's Corp. – but that's from a record-high close on Friday.

European blue-chip stocks fell 0.9 per cent and Japan's benchmark index rose 0.1 per cent, extending its recent winning streak to seven days even though the country's recession appears deeper than originally expected.

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