The market may believe that energy demand is weakening, but the only thing that has been materially downgraded since hurricanes Katrina and Rita is the outlook for Gulf of Mexico oil and gas supply. Most of the weakness in the recent US Department of Energy demand numbers that sent oil and gas shares tumbling was concentrated in petrochemical inputs like propane and propylene. That has far more to do with storm-induced shutdowns in the US petrochemical industry than with either home heating or gasoline, the main staples of American energy demand.

Meanwhile, Energy Secretary Bodman’s remarks confirm what initial reports suggested: widespread and extensive damage to both natural gas and oil production in the Gulf. Four-fifths of Gulf oil remains offline and 66% of natural gas. Full restoration of past production levels will now not occur until well into next year. More importantly, the industry is no longer as sanguine about earlier plans for some 500,000 bbl/day in new output over the next two years from such fields as Mad Dog, Tahiti, Thunder Horse and Atlantis. The oil and gas industry may be finally realizing why the Mayans never built any cities along the Gulf coastline. If this year’s storm season is a taste of things to come, as some climatologists are now predicting, the industry will be lucky to maintain even current Gulf production levels.

The prospect of higher, not lower, energy prices in the future may not sit well with US consumers but it will

continue to boost some parts of the Canadian economy, namely Alberta and other energy producing provinces. But seemingly acceptable national growth numbers are going to conceal some of the most glaring regional economic disparities since the first two OPEC oil shocks. With rising oil and natural gas prices triggering massive capital investment in the province, the Alberta economy should grow at 8% next year, with the provincial surplus threatening to spiral into double-digit territory (see pages 6-9).

At the same time prospects for Ontario are deteriorating rapidly, not only as a result of soaring energy prices but also in response to a soaring Canadian dollar. Ontario’s growth is likely to fall below 2% next year, less than a quarter of Alberta’s pace as Ontario’s overweight auto sector is vulnerable to an increasingly visible retrenchment in US auto demand. The Ontario economy may face an even sharper deceleration in growth if the Bank of Canada permits the country’s soaring energy trade surplus to push the Canadian dollar much higher. At a 90-cent exchange rate, Canadian manufacturers, mostly in central Canada, would be saddled with exchange-adjusted unit labour costs some 25% higher than their US competition.

In the early 1980s, similar economic disparities from soaring energy costs prompted the federal government to impose its now infamous National Energy Program. If and how it plans to redistribute national wealth this time around remains to be seen.

CIBC World Markets Inc. • PO Box 500, 161 Bay Street, BCE Place, Toronto Canada M5J 2S8 • Bloomberg @ WGEC1 • (416) 594-7000 CIBC s for historical data: U.S. Department of Commerce, U.S. Department of Labour, and U.S. Federal Reserve Board.