Oil patch immune from the meltdown: economists
Carrie Tait, Financial Post Published: Monday, September 15, 2008
CALGARY - Canada's oil and gas industry, including the massively cash-heavy oil sands projects, should be immune to the financial crisis gripping Wall Street - for now.
Economists say the multi-billion dollar oil sands projects and other exploration and production efforts will still be able to access capital, even as major institutions go under and banks shy away from lending money.
"The real worry has to be on the price of commodities," said Niels Veldhuis, a senior economist at The Fraser Institute, a Vancouver-based think-tank. "So long as commodity prices remain relatively high and the demand for commodities continues on, Western Canada will obviously receive their fair share of investment."
Eric Lascelles, an economist at TD Securities, said about a quarter of all Canadian companies obtain financing in the United States, but the resource sector is somewhat shielded from its woes. As long as profit margins remain strong, these companies will still be able to borrow. The cost of accessing capital may rise, but money will still be available.
"They're just about the last entity to lose their funding," he said. "This is one sector that remains massively profitable."
Crude oil fell to a seven-month low and gasoline tumbled as Lehman Brothers Holdings Inc. filed for bankruptcy and refineries along the Gulf of Mexico escaped major damage from Hurricane Ike.
Crude oil for October delivery was off US$4.11 to US$97.7 a barrel at 1:15 p.m. on the New York Mercantile Exchange. Futures dropped as much as US$7.05, or 7%, to $$94.13 a barrel, the lowest since Feb. 14. Oil on the exchange has given up most of its gain this year, rising 0.9% since the end of December.
Mr. Lacelles agrees that commodity prices will remain the key driver behind the banks' lending strategy, but even with oil below US$100, he thinks oil sands projects will still be in the good books.
The credit crunch that kicked off last summer has worsened dramatically, taking down two more Wall Street victims over the weekend. Lehman Brothers filed for bankruptcy protection Monday morning and Merrill Lynch is set to be sold to Bank of America after an intense scramble over the weekend to rescue the banks. Other financial mainstays such as Bear Sterns Cos. have already met their death. Eastern Canada has been dragged down by the United States' woes, but the west has remained a bright spot in the domestic and North American economy, driven primarily by oil and natural gas.
"That's what's going to drive investment into jurisdictions that have an abundance of resources," said Mr. Veldhuis, The Fraser Institute's economist.
