would rise continuously, or at least would stabilize at a much higher level. it ’ s always tempting to think that the next commodity cycle will be different. where have we heard that before? the scenario that i have just outlined is not implausible. that is what makes it so seductive. i can ’ t say definitely that commodity prices won ’ t rise to unprecedented levels, but if history is any guide, continuous rapid upward movement in real ( inflation - adjusted ) prices – oil or otherwise – is unlikely, as is a large permanent increase in the real price level. history suggests, therefore, that we should proceed with caution and, to use a rather corny commodity cliche, not count our chickens before they hatch. in closing, let me mention that tomorrow, we will be releasing a new bank of canada commodity price index ( bcpi. ) this is noteworthy because, as we ’ ve just discussed, the price of commodities in canada has important implications for the economy, and the interpretation of developments in commodity markets is important to the conduct of monetary policy. clearly, we need the most accurate measure of movements in overall commodity prices possible. this new bcpi, which incorporates a new methodology, will be more accurate, representative and flexible.

, harvard kennedy school, february 2010. this, obviously, is not an accurate characterization of countries like canada, australia, new zealand, and norway. nevertheless, canada and all other commodity - based countries are subject to serious economic challenges, linked primarily to the extreme volatility of commodity prices. the long and short of price volatility some countries are large enough commodity producers ( or consumers ) that their actions can materially influence global commodity prices. saudi arabia might be an example. but these are certainly the exception. for the most part, commodity producers are price - takers. they sell a fairly homogeneous product in a highly competitive market, and their actions have little effect on the price that they receive. unfortunately, for countries like canada and provinces like alberta, these prices are typically volatile, and highly uncertain. this volatility is caused, in large part, by the unusual nature of the short - run demand and supply curves associated with most commodity markets. the products that commodity - based economies sell typically have extremely low short - run demand elasticities ( i. e., demand is not very responsive to price changes. ) supply is similarly inelastic, since it often takes time to bring new production online if prices suddenly rise, or to reduce production if prices suddenly drop. 3 any move in either of these curves, therefore, is likely to lead to outsized changes in global prices. this erratic behaviour is evident in the movement of most commodity prices through time. commodity prices are typically much more volatile than those of other goods or services – and one of the most volatile commodity prices of all is that of oil. this is bad news for energy producers, and clearly complicates the task of planning and investment. oil and natural gas now account for the majority of canada ’ s commodity production. some commodities are also subject to frequent supply disruptions that accentuate price volatility. another important feature worth noting is that the long - run demand and supply elasticities for most commodities are typically much higher. if commodity prices remain high, consumers find ways to economize on their use, or find substitute products. new supplies also gradually come online. all of these factors work to push prices lower. in this sense, there is a selfcorrecting mechanism at play. indeed, over the very long run – and here, i am referring to decades – the average real price of most commodities has been surprisingly stable. 4 economists refer to this as “ mean reversion