and metals prices have historically moved with the business cycle in the developed world, this relationship has broken down over the past decade. for example, industrial activity in emerging asia now appears to be the dominant driver of oil - price movements, 2 and china alone is expected to become the world's largest consumer of energy by 2010. 3 emerging markets and developing economies have accounted for nearly 95 per cent of the increased demand for oil since see international monetary fund, world economic outlook ( washington : imf, april 2008 ) p. 198 - 99. c. cheung and s. morin, " the impact of emerging asia on commodity prices " ( working paper no. 2007 - 55, bank of canada, 2007 ). international monetary fund, " global energy : increasingly unstable, " finance & development 45, no. 1 ( march 2008 ). 2003. 4 as recently as the 1990s, marginal demand was roughly split between oecd and non - oecd countries. in the face of this demand, the supply response has been disappointing. consider oil. opec's annual production has declined by 2 per cent since 2005 and, with a few exceptions, non - opec supply has failed to meet expectations. among oecd countries, oil output has fallen by 8 per cent since 2002. as a consequence, inventories remain very tight at 31 days, and spare capacity is limited. with inelastic demand in the short term, actual or perceived supply disruptions can lead to sharp price spikes and continued volatility. there are many reasons why the supply response has been limited thus far. first, access to many of the world's most promising regions is often tightly controlled or wholly restricted to state - owned enterprises. second, while nominal investment has surged, so too have costs. 5 many in this room know from direct experience how hard it is to find skilled workers, drilling rigs, and pipeline capacity. exploration and development costs for conventional crude have doubled, and oil sands costs have tripled. across the global industry, surging investment costs have meant that real investment has remained flat. the net result is that a 70 per cent nominal increase in non - opec capital expenditure since 2003 has barely replaced declining production from existing fields. 6 over the medium term, high prices will encourage the development of new supplies and energy alternatives. canada will be one of the most important marginal suppliers of oil. with more than $ 150 billion of new investment in the oil sands proposed or under way

. in 2003 - 04, of course, we saw the reverse flow : investors became concerned about the large u. s. fiscal and current account deficits, foreign demand for u. s. financial assets declined, and the u. s. dollar, on balance, fell against many major currencies, including the canadian dollar. it can be very difficult to determine whether, at a given moment, type one or type two forces are driving the exchange rate. more often than not, shocks of different kinds occur at the same time, posing a challenge for the bank in terms of determining the implications for monetary policy. it's interesting to compare the exchange rate movements over the past few years, and their effects on canada, with those during the asian economic and financial crisis of 1997 - 98. because of that crisis, asian demand, which had accounted for a relatively large share of the growth of world demand for many commodities, weakened considerably. prices of key commodities produced by canada fell, and the growth of canadian aggregate demand was adversely affected. at the same time, and mainly because of the downturn in world commodity prices, the canadian dollar depreciated against the u. s. dollar. this depreciation, together with a strong u. s. economy, partly offset the negative effects of the asian crisis on canadian aggregate demand. the current situation, which in terms of commodities is the inverse of the one during the asian crisis, demonstrates the effectiveness and flexibility of the bank's monetary policy framework. while the particulars of today's situation are different, the monetary policy framework continues to support appropriate adjustments. adjusting to economic change in canada adjustment to economic change is never easy, either for businesses or individuals. over the past three years, changes in relative prices, including the appreciation of the canadian dollar, have contributed to a reallocation of labour and capital from the production of non - commodity tradable goods to the production of commodities. as i mentioned earlier, given the importance of commodities to our economy, and given the improvement in our terms of trade, there have been real economic benefits for canada as a whole. the flexibility and diversity of the canadian economy are also helping to facilitate adjustment to global economic developments. over the past three years, we have seen strong growth in capital spending in commodity - producing industries, as well as substantial gains in both capital spending and in employment in sectors with low exposure to international trade. capital spending has also increased, although at a more