A terahertz oscillator based on Smith-Purcell effect was presented. The terahertz oscillator is composed of an electron gun, a modulation cavity, an output cavity and a collector. In the modulation cavity of the novel terahertz oscillator, electron beam was modulated by Smith-Purcell effect. As bunching electron beam passes through output cavity, high-frequency electric field is produced in the gap of output cavity. By the high-frequency electric field, part of the kinetic energy of electron beam can be transformed into the energy of high-frequency field, and the terahertz radiation can be emitted. The simulation results show that when the length of the grating period is 0.6 mm, and energy of electron beam is 100 keV, the terahertz radiation frequency at 349.017 GHz and 346.324 GHz , power spectral density approach 4 kW/GHz, and maximum output peak power over 2 kW can be generated in the terahertz oscillator based on Smith-Purcell effect.