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Feel free to panic about oil.

Okay, on a day when the stock market sell-off teetered on the edge of a soul-crushing rout (before bouncing back to merely awful), this might seem like I'm sounding the alarm bell about the wrong market. But it's not like we've never seen an October stock market slump before. 'Tis the season when money managers, eyeing their Oct. 31 fiscal-year-end positions, get nervous and jerky in the knees.

Yes, the Canadian stock market is down 11 per cent since early September, but let's try to remember that this was after rising 23 per cent in the 12 months prior. This is normal and manageable. A standard-order correction in stocks, even if it's a sudden and dramatic one, is not likely to undermine Canada's economic recovery.

But oil just might.

The undisputed champion of fossil fuels is falling like a skydiver with an anvil parachute; down 15 per cent in a little over two weeks, nearly 25 per cent in the past four months. The statement that makes about the spiralling gloom over the global economy is bad enough in itself.

But for Canada, whose fragile economic recovery has become so thoroughly intertwined with oil, this is potentially very bad indeed. It's no exaggeration to say that a drop in oil prices of this magnitude, if sustained, could tip Canada's wobbly economic applecart.

The energy sector makes up roughly 10 per cent of Canadian gross domestic product. That's more than retail, construction, agriculture and the public sector's contribution to the economy. Energy accounts for roughly one-quarter of Canada's exports.

And the sector has been punching well above its economic weight. In the first half of the year, energy accounted for 30 per cent of Canada's economic growth, and more than 40 per cent of export growth.

An oil collapse could stall the one reliable engine in Canada's otherwise sputter-prone economy: Alberta. The energy sector makes up nearly 30 per cent of the Alberta economy. Direct revenues from energy royalties account for more than 20 per cent of the provincial government's revenue base – and that's before we even get started on the big slice of the corporate and personal income tax pie that the sector delivers. Alberta's economic and fiscal health pivots on the well-being of the oil and gas business; a 25-per-cent drop in the price of crude is a big deal.

(Alberta government's current budget assumes an average West Texas intermediate oil price of more than $96 (U.S.) a barrel – $15 higher than the current price, although actually a bit below the average price so far in the fiscal year. Oil's plunge hasn't been around long enough to have gutted the province's budget yet, but stick around, this could get interesting.)

How much does Alberta matter? Well, as with any good native Albertan (full disclosure – born and raised), my knee-jerk tendency is to say "way more than the rest of you bastards combined." But in the current Canadian economy, that's alarmingly close to accurate. Alberta contributed one-third of Canada's economic growth last year, and is by far the fastest-growing province in the country again this year. Since the beginning of 2013, nearly half the jobs created in the country were in Alberta.

The unavoidable conclusion is that much of the country's economic health is tied to a mid-sized province whose overwhelmingly dominant industry is sneezing louder day by day.

Now, one of the handy things about Canada having a perceived petro-currency is that when U.S.-dollar-priced crude tumbles, the loonie typically goes with it – mitigating the damage to oil prices when converted into Canadian dollars, which is what really matters for the oil company profits that keep Alberta humming. But the dollar's decline hasn't even come close to making up for oil's plunge. The currency is down just 6 per cent since the beginning of July, offsetting only about a quarter of the oil price hit.

The oil sector has not only been leading the way in Canada's export recovery, it has also been the big driver in business capital investment in the country. That means the sector has been leading the way in the two key areas that the Bank of Canada has repeatedly identified as critical to sustaining Canada's recovery. Lower prices could stifle energy's contribution on both fronts; they are not only an automatic drag on the value of exports, they are also a notorious capital-spending killer.

All of this comes with a big "if" – as in, it's only a problem if the drop in prices is sustained. In volatile and unpredictable markets, that's a tough call. But the facts are that global demand is slumping and supplies are ample, absolutely justifying lower price levels. Canada's economy may have to get used to less support from its energy sector for a while. Unless other sectors can step up to fill the void – and that itself is a big if – Canada's recovery is at very real risk.

Follow David Parkinson on Twitter: @ParkinsonGlobeOpens in a new window

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