From credit crunch to energy crisis?

From credit crunch to energy crisis?

SHAWN McCARTHY
Wednesday, November 12, 2008

OTTAWA — Global oil companies are sowing the seeds of a new supply crisis and a return to record-high prices by cutting back on current investments in response to the global slowdown, the International Energy Agency warns.

Four months ago, economists warned of “demand destruction” as record prices and a slumping economy slowed the growth of global crude consumption. But now, the IEA is worried about “supply destruction” as producers delay expensive projects, including some in Canada's oil sands, that would bring much-needed supplies to market.

“We think that the investment decisions that are being made now are of crucial importance, not only to meet future growth in demand, but to compensate for the decline in existing fields,” the agency's chief economist, Fatih Birol, said in an interview.

“If the investments are postponed, which is happening now, [then] when the demand rebounds we will see a supply crunch which may exceed the situation we saw this summer.”

Mr. Birol noted that producers across the globe – from multinationals tapping Canada's oil sands to national oil companies operating in the Middle East – have been cutting back their capital budgets as oil prices slumped from record highs this summer to a 20-month low Tuesday of $59.33 (U.S.) a barrel.

In a report released Wednesday, the Paris-based agency – which advises rich countries on energy policies – warned that the world's energy system is on an unsustainable path that could lead to both oil shortages and, eventually, in “catastrophic and irreversible damage” to the planet's climate.

To meet rising energy demand over the next 22 years, the industry would have to invest a minimum of $26-trillion – half of which is needed just to maintain current levels by replacing declining oil fields and aging power plants.

The IEA projects oil demand will climb to 106 million barrels a day in 2030, from 85 million barrels today. Despite concerns raised by some economists that the world has reached peak oil production, the agency said there is plenty of oil available to meet that rising demand, so long as the investments are made to boost productive capacity.

It expects prices to rebound from their current level of about $60 a barrel to average more than $100 between 2008 and 2015, rising to $200 by 2030.

That longer-term bullish outlook is widely shared in the industry. In Calgary yesterday, an executive at Canadian Natural Resources Ltd. agreed that prices will rebound once the economy turns around. “I'm quite optimistic that once we get over the current financial crisis we will get back to having healthy demand,” said Réal Cusson, the company's senior vice-president for marketing.

Still, Canadian Natural has slashed its investment budget by nearly half in response to slumping crude prices, notably by delaying planned expansions in the oil sands.

“There's definitely capital expenditure cutbacks happening among oil and gas companies of all sizes,” said Peter Tertzakian, chief energy economist at ARC Financial Corp. in Calgary. Mr. Tertzakian said companies are proceeding with projects that are near completion, but are postponing any new developments.

“We may take comfort in the low prices we are seeing today but the lower the prices go, the less expenditure you are going to see. And then two years from now, when we're out of this [economic] mess, that is when you'll see the problems on the supply side.”

Virtually all the growth in oil consumption will occur outside the leading industrialized countries of the 30-member Organization for Economic Co-operation and Development.

With files from reporter Norval Scott in Calgary

AGENCY CALLS FOR ‘ENERGY REVOLUTION'

The world is hurtling down an energy path that will lead to “catastrophic and irreversible” damage to the planet's climate unless the United States and China lead in a “major de-carbonization” of global energy supplies, the International Energy Agency says.

In a report to be released today, the IEA says that under a “business as usual” scenario, greenhouse gas emissions will rise 35 per cent between 2005 and 2030, a track that would lead to a 6 degree Celsius increase in average global temperatures by the end of the century.

“What is needed is nothing short of an energy revolution,” said the agency, which advises rich nations on energy policy.

The United States and China are the leading emitters of greenhouse gases in the world – with the U.S. as the largest source per capita and China representing the fastest growth in emissions. As a result, both will have to show a leadership role when countries meet in Copenhagen a year from now to negotiate a climate change deal for the post-2012 period. (The Kyoto Protocol contained no commitments beyond that year.) The IEA said the world will need to spend some $4-trillion (U.S.) over the next 22 years for conservation and energy-efficient technologies, such as low-carbon sources of energy and carbon capture and storage. But the resulting reduction in energy use could actually save $7-trillion, it added. Shawn McCarthy

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Markets close to bottom: CIBC

Markets close to bottom: CIBC

STEVE LADURANTAYE
Tuesday, November 11, 2008

With interbank lending showing “signs of life,” there are signs that stock markets have reached their bottom and the rest of the year will unfold without another meltdown, CIBC World Markets said in a report released Tuesday.

“With credit and liquidity fears abating somewhat, concern is rapidly shifting to one of the other key factors clouding prospects for a heavily resource-weighted TSX, the troubled global economy,” chief economist Jeff Rubin commented.

Mr. Rubin also cited China's massive stimulus package, which he said could boost the country's economic growth by up to 3 per cent over the next two years. He also pointed out the United States is poised to bring in another stimulus plan.

“We are cautiously optimistic that we can ride out the balance of the year without any further systemic shocks,” Mr. Rubin said.

Still, he said, the “building blocks” for a sustained rally in stocks are not firmly in place, even though it “seems safe to assume that a grim economic outlook is already well priced into valuations.”

“Our 12,000 target for the TSX composite next year would represent only a typically paced recovery, benchmarked to past cyclical yardsticks,” he said. “It is certainly consistent with the three-year period it has taken to fully reverse comparable percentage declines, although the rapidity of today's crash may suggest, given the speed of market reactions, a more rapid recovery when the news brightens.”

The S&P/TSX was trading around 9,415 Tuesday morning, down 2.82 per cent or 273.60 points, as oil fell near a 20-month low of $60 a barrel. The Dow Jones industrial average was off 2.78 per cent, of 246.27, to 8.624.27. The S&P 500 fell 2.81 per cent, or 25.82 points, to 893.39.

David Baskin, the Toronto-based president of Baskin Financial Services, said investors need to take a step back and realize that the last five weeks actually haven't been that terrible. The S&P/TSX closed trading on Oct. 9 at 9,600 – on Tuesday, it also opened around 9,600.

“It feels as if we've been through worse than that,” said Mr. Baskin, who manages client assets of about $400-million. “We've gone through the ups and downs, but the fact of the matter is, if you look at the numbers, it's remarkable that all of those losses were really in the first week of October.”

Mr. Baskin said the most positive development in recent weeks has been the change in the London interbank offered rate, or Libor rate. It has fallen from its highs, which means banks are lending to each other again after pulling back in light of a credit crisis that forced Lehman Brothers Holdings Inc. into bankruptcy and forced world governments to injection hundreds of billions of dollars into their economies to keep financial markets operating.

“If you look at the Libor, it's gone almost straight down for 17 days in a row,” he said. “It's been incremental, but it should provide some comfort that the banking situation is in hand, though obviously it's not quite cured yet. But at least we don't need to worry about a systematic collapse, and hopefully we've gotten past thoughts of the world coming to an end.”

Fourth-quarter earnings, Mr. Baskin said, will be disappointing when they are released in January. But, the market may have already priced in a lot of the bad news.

“Assume earnings are down 30 per cent,” he said. “The market has been down more than that. If you're a stock owner, you need to force yourself to look past the immediate negativity and discount the headlines. We are trading where we were a month ago, and to me that would indicate we've found a floor.”

Danielle Park, a Barrie, Ont.-based portfolio manager for Venable Park, pulled all of her clients out of the market in May. She's still 92 per cent in cash and bonds, but has stepped lightly back into the market.

“At the end of October, markets were heavily over-sold on our measurements and so we thought and still think a bounce of a few weeks or months may well be in order,” she said. “We are thinking that if we do see a rally take shape over the next few weeks it may be only for a trade before the indices break down again into the spring... We are tactical and watching very careful for signals as to the next phase. We think it is no time yet to make big, bold bets long or short.”



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