Bank of Canada says beware of commodity boom

Fri May 7, 2010 6:58am EDT
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OTTAWA (Reuters) - The Bank of Canada warned investors and governments on Thursday not to bank on a continuous rise in oil and other commodity prices, even though they could rise to unprecedented levels.

John Murray, deputy governor of the central bank, made no hints about the future of Canadian interest rates or monetary policy in his speech in Edmonton, Alberta. Alberta is home to the world's second-largest crude oil reserve.

Murray said it was tempting to see a spectacular future for the oil industry and other commodity sectors based on rapidly growing demand from emerging economies like China and India.

"If these two economies continue to grow at annual rates of 8 to 10 percent ... their prospective demand for commodities could be enormous," he said in the prepared text of his speech.

"Couple this with the fact that many of the world's resources are nonrenewable or are in limited supply, and you have a recipe for something that's surely breathtaking."

Before the heavy losses in oil prices this week triggered by fears over the Greek debt crisis, oil prices had been steadily climbing since hitting a recessionary low of less than $33 a barrel in late 2008. They had more than doubled to $80 per barrel in early May.

Murray said he could not rule out the possibility that commodity prices would rise to unprecedented levels.

"But if history is any guide, continuous rapid upward movement in real prices - oil or otherwise - is unlikely, as is a large permanent increase in the real price level," he said.

Canada's economy is particularly vulnerable to these price cycles, as natural resources account for about 10 percent of its gross domestic product and 45 percent of exports.   Continued...