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Stephen S. Poloz is Governor of the Bank of Canada. This is an edited excerpt from his speech Monday to the Calgary Economic Club.
Because Canada has been endowed with such a wide variety of resources, we’ve had to learn how to deal with large swings in their prices. I don’t just mean the usual high degree of volatility common among many raw materials. I’m also referring to the long-term swings in prices that are often called “supercycles.” These long-term swings are driven by the fundamental economic laws of supply and demand, as well as the continuous technological progress that can affect both output and consumption.
The pattern is familiar. A large and persistent increase in demand leads to sustained upward pressure on resource prices. The higher prices act as an incentive to boost supply, and companies act by, for example, investing in new capacity and finding methods to increase efficiency.
While high prices can certainly spur research and development, technological progress has been a constant theme in natural resource industries. Because of this progress inflation-adjusted commodity prices have generally been trending lower for 200 years.
Any economy that relies on natural resources will naturally be challenged by large movements in their prices. These shocks are more than just swings in national income; they also force businesses to make decisions about the way resources such as capital and labour are allocated. These decisions often lead to difficult adjustments, but they are necessary for maximizing our economy’s potential.
While an abundance of raw materials may complicate the management of companies and the conduct of economic policy, it’s far better for a country to have resources than not to have them. Even when prices are falling, as they have been recently, our endowment represents a store of value and a source of future riches.
Now let me say a few words about oil prices. Why did oil prices fall so much? The main reason is that supply rose sharply, thanks primarily to technological advances in oil extraction everywhere. This includes the oilsands, tight oil and the Bakken deposits. Consider in particular the technological progress that enabled producers to tap tight oil reserves.
Output from the United States alone, which essentially didn’t exist before 2008, reached 4.2 million barrels per day last year. That increase is roughly equivalent to all the oil that Canada produces in a year.
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