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In this Jan. 14, 2014 file photo, oil pumps work in the Persian Gulf desert oil field of Sakhir, Bahrain. In the second half of 2014, oil prices dropped by half.

Hasan Jamali/AP

A top Bank of Canada official is warning that the oil price collapse may not be over and crude could stay cheap for a "significant period."

Demand for high-priced oil sands crude will eventually rebound, but in the meantime the Canadian economy could be in for a rough ride, Deputy Governor Timothy Lane said in a speech Tuesday.

"Over time, higher-cost oil is still likely to be needed to satisfy growing global demand, but prices could go lower, or remain low, for a significant period before those medium-term forces do their work," according to remarks prepared for a business audience in Madison, Wis.

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On balance, Mr. Lane said the massive drop in the price of oil – to less than $50 (U.S.) per barrel from more than $100 – is bad for Canada, but beneficial to the global economy.

However, Mr. Lane offered no new estimate of the hit Canada will take. In mid-December, when oil was trading at roughly $60 per barrel, Bank of Canada governor Stephen Poloz said lower prices would shave about 0.3 percentage points off economic growth in 2015. He described the impact "non-trivial," given the bank's forecast of 2.4 per cent growth this year in Canada.

Mr. Lane hinted that the central bank may have more to say Jan. 21, when it is scheduled to make its next interest rate announcement and update its forecasts for the economy.

Mr. Lane said the bank is carefully analyzing "the interplay" between the various oil-related impacts as work their way through the economy.

"We see important risks to Canada's economic outlook stemming from the recent decline in the price of oil and other commodities," he said.

The bank will "look through" cheap oil's effect on consumer inflation, while focusing on what it will mean to growth and the timing of the economy's return to full production potential, he said.

While consumers, exporters and energy-intensive manufacturers stand to gain from lower oil prices, these gain will be "more than reversed" as lower incomes and curtailed investment in the oil patch filter through the economy, according to Mr. Lane. He pointed that there are already signs of oil patch players scrapping projects and scaling back investments.

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The loss of income from oil exports will also "reduce the country's wealth," he pointed out.

The bank's conclusions are more pessimistic than some private sector economists. The Royal Bank of Canada, for example, said in a report last week that the boost to consumer spending and exports from lower oil prices has "the capacity to more than fully offset a likely drop in business investment."

Over the long haul, Mr. Lane said the fundamentals of supply and demand would push oil prices back up.

"With current expectations for global economic growth, the demand for oil will continue to rise – and the world is likely to require some higher cost oil to satisfy that demand," he said.

Mr. Lane put the cost of oil sands extraction at $60 to $100 per barrel and roughly $40 to $80 per barrel for shale oil.

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