4 million barrels a day and, before the recent drop in prices, was on track to increase its output to almost 4. 8 million barrels a day in 2020. we ’ ve also seen a powerful supply response to high prices in canada. oil sands production rose fivefold between 1993 and 2014, to 2. 3 million barrels per day, and now accounts for more than 60 per cent of canada ’ s crude production. between 2006 and 2013, investment in the oil sands more than doubled to over $ 30 billion ( chart 8 ). two distinguishing features of unconventional oil affect the dynamics of the market. first, the extraction cost of most of the new oil is relatively high. a barrel of shale oil costs between $ 40 and $ 80 to extract, depending on the project ; oil from canada ’ s oil sands costs closer to $ 60 to $ 100 a barrel ( chart 9 ). in many cases, this is mainly a reflection of the upfront cost of investment and exploration, rather than the continuing cost of keeping oil flowing from existing installations. of course, these costs may also vary over time with changing technology and competitive forces. second, it takes time and, in some cases, major investments, to bring a new supply of oil on stream. when demand increased over the past several years, supply could not be expanded right away. instead, prices shot up, creating incentives to explore, innovate with extractive technology and invest in new facilities. over time, these activities have delivered an outsized supply response, which has been driving prices down. so what happens next? when the price drops below the all - in cost of production, and is expected to stay there, that discourages further exploration and investment. indeed, in recent weeks, a number of oil companies have announced that they are scaling back investment. this is important, since new investment is needed to offset naturally occurring declines in production in existing fields. but before existing production is actually taken off stream, the price would have to drop a lot further – below the short - run marginal cost ( sometimes referred to as the “ cash cost ” ) ( chart 10 ). except for some smaller companies that may cut output more quickly as their access to financing is restricted, producers are likely to take time to adjust, especially if they have hedged against price movements. in all, it may take quite some time before supply and demand are brought back into balance – although technological change may enable some suppliers to adjust their production more quickly than in the

geopolitical developments often have a major impact on oil prices – since they can affect oil supply directly and since the threat of future supply disruptions can also build a risk premium into oil prices. as a notable example, in the early part of 2014, conflicts in libya and iraq led to temporary outages in their oil production, keeping world prices high, even as supply elsewhere in the world continued to ramp up. when production from those two countries came back on stream, that was an important trigger for the plunge in oil prices later in the year. of course, such conflict situations and other geopolitical events can change very quickly in one direction or the other, and continue to pose an important source of risk. second, the organization of the petroleum exporting countries ( opec ) has had an important influence on the dynamics of world oil markets, and this influence may be changing over time. the drop in oil prices was accelerated in early december by opec ’ s decision to leave its production target unchanged, even as prices were falling. in effect, opec members were allowing the price to fluctuate so that more supply adjustment would come from other producers, rather than acting as the “ swing producers ” as they had in some other episodes. this changing role may reflect, in part, the decline in opec ’ s share of world production – which, at about 40 per cent, is 10 percentage points lower than in its heyday ( chart 12 ). it is too early to tell whether and how opec ’ s behaviour will change as its market share continues to decline. third, financial linkages. with the run - up in commodity prices during the past couple of decades, much attention was paid to the “ financialization ” of commodities – including investor flows into commodity - based mutual funds and exchange - traded funds, increased involvement by global investment banks in commodity - backed lending and physical commodity trading, and the prominent role of large commodity - trading houses. 5 financialization has gone into reverse in recent years, owing to a combination of moderating trends in commodity prices and regulatory changes. the research we have done at the bank c. baumeister, “ the art and science of forecasting the real price of oil, ” bank of canada review ( spring 2014 ) : 21 – 31. t. lane, “ financing commodities markets, ” ( speech to the cfa society of calgary, calgary, alberta, 25 september 2012 ). bis central bankers ’ speeches of canada on the role