Oil prices fall

The spot price of a barrel of oil has fallen sharply to 49 dollars and the futures market which has an enormous impact upon the spot market price is heavily discounting future spot prices. Bears outnumber bulls by about 3:1. This means that the earlier peak of close to 80 dollars a barrel is now history and we can , short of another middle eastern crisis expect the spot or current market price to fall towards $40 dollars and perhaps below as more and more production comes on stream and the OPEC cartel loses its ability to impose its desired price and production levels.
This fact has enormous implications for Canadian energy policy, environemental policy and monetary and fiscal policy. Our central bank has wrongly presumed that high oil prices were here to stay for the forseeable future. This has turned out not to be so and will   affect the overall growth rate of the GDP to the extent it is driven by inward investment in the oil sands in Alberta and the spin offs from the resource sector generally. In addition, the Bank of Canada's interest rate stance, refusing to cut the 4.25 overnight interest rate target because it continues to believe that this interest rate level is appropriate given its judgement about inflationary expectations now looks less and less defensible. The Bank itself has downgraded its expectations of growth to just 2.3 % for 2007 - too lo a rate for unemployment to drop further and recent developments in central Canadian manufacturing show continued weakness in the economy. At its next interest rate setting if there is no sign of improvement it is time for the bank to cut the overnight rate and continue to cut it in subsequent settings to bring the real rates   down by at least a percentage point.

Recent speculations about ramping up tar sands production from the current 1.1 billion barrels a day to as much as 4 million barrels a day by 2020 are intriguing. There are very clear environmental and social considerations that need to be considered. The Alberta industry leaders are even speculating about 5 million barrels a day by 2030. This may well be desirable from the point of view of guaranteeing American oil security but the potential environmental
damage from this short of major technological changes in the process of tar sands production makes this goal one that must be subject to careful planning and full public debate.