Burning Up Economic Growth

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Image source: http://www.canadianbusiness.com/

BY ASHTON COLLEGE 

The tragedy of the Fort McMurray fire is front page news. Not just in Canada but the world over. The Queen of England sent a personal letter to Albertans stating that her thoughts and prayers are with the town’s beleaguered citizens and the Russian government has extended its hand as well, offering to send giant IL-76 transport aircraft converted to water bombers to help battle the blaze. The devastation the fire has caused will remain in the public consciousness for years to come and it is doubtful that the area will ever recover to the levels of prosperity that it was once known for.

But while the human cost is immediately tangible, there is another cost that will be paid: a decrease in economic growth. Not just for the province of Alberta but for the entire country. Like it or not, the oilsands are a cash cow and Canada’s GDP is inexorably tied to them. When production drops or trade lessens, the dollar tends to plummet almost immediately. This is the reality of being a resource driven economy.

The Fort McMurray fire, as damaging as it is to the city also affects oilsands production. With the fire estimated to be 85,000 hectares in size, high levels of smoke has forced a shutdown of oil production in some locations, effectively turning off the tap at the source. According to the Royal Bank of Canada[1], this means the loss of 900,000 to a million barrels of oil per day, equivalent to roughly a quarter of all production. Peter Labrie, securities broker and financial services instructor at Ashton College says that although the oil facilities are thus far untouched by the fire, the human cost is palpable. “There are logistical disruptions, people are displaced, and there are infrastructure delays.”

Running the figures, the effect is startling: a mere two week shutdown means a drop of a full 0.5% of Canada’s GDP in May. With a full 30% of the country’s annual GDP tied up in oilsands production, a drop of half a percent in a single month is significant. The shutdown couldn’t have come at a worse time as the oilsands are experiencing record growth after a miserable first quarter in which oil dropped to its lowest point in over a decade.

The shutdown, however brief, has implications that are being felt throughout the country and with costs-per-barrel up 75% from Q1, it couldn’t have come at a worse time. Nearly all of Canada’s oil is shipped directly to the United States and the loss of a million barrels a day drags the dollar down even further than it already has. This is something Canadians would like to avoid as typically it is ordinary citizens that will feel the brunt of the impact and it will come in the form of rising prices at the pumps.

But even with rising fuel costs, fire damage to the town of Fort McMurray, and a dip in oil production many people are confident that Alberta can and will bounce back. RBC analysts expect the upturn to begin in the third quarter with other financial experts echoing this prediction. Labrie too, believes that a comeback is imminent. “Albertans are a resilient bunch” he said.

[1] http://www.cbc.ca/news/business/fort-mcmurray-economists-1.3570061

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