Alberta wildfire disaster to burn hole into Canada economy

An estimated 40 per cent of the country’s oil producers has been halted, and it could be weeks before the shuttered operations start up again.

A wildfire burns south of Fort McMurray, Alberta, near Highway 63 on Saturday. Jonathan Hayward / The Canadian Press via AP

The economic fallout of the northern Alberta wildfires, one of the largest disasters in Canadian history, will be felt for months and comes at a time when the resource-dependent nation’s economy has been hammered by the plunge in oil prices from the peaks of 2014.

The cost of the disaster, now entering its second week, remains unquantifiable, but in the words of Ralph Goodale, the federal public safety minister, the toll will be “far-reaching and deep”.

About 40 per cent of the country’s oil production has been halted. It could be weeks before the shuttered operations start up again.

Meanwhile, the fires keep burning.

“In no way is this fire under control,” said Rachel Notley, Alberta’s premier, in a press conference on the weekend. On Sunday, she said the fires didn’t spread quite as fast as expected at the start of the weekend, offering a glimmer of hope, but officials warned that they could continue to burn for weeks.

The province of Alberta remains in a state of emergency as the wildfire, which sent about 90,000 residents of the city of Fort McMurray fleeing for their lives last week, covered about 1,600 square kilometres as of yesterday, or about six times the size of the emirate of Ajman.

The flames have been fuelled by unseasonably hot, dry weather and strong winds of more than 40km per hour. More than 500 fire fighters continue to battle the blaze with help from 15 helicopters and 14 air tankers. The latest forecasts offer the hope of relief: cooler temperatures and a chance of rain showers in the Fort McMurray area, although the winds could pick up to 50kph.

The scene in and around Fort McMurray, considered to be the oil capital of Canada, looks like a war zone, with houses flattened and surrounded by charred furniture, vehicles and appliances. Burnt out cars and trucks are stranded along Highway 63 out of the city, left behind by evacuees who ran out of fuel. More than 1,600 structures have been destroyed, according to the most recent estimates – including homes, businesses, hotels and gas stations that reportedly exploded because of the unforgiving flames.

Major oil producers, including Suncor Energy, Syncrude Canada and Husky Energy, suspended production at their operations several kilometres north of the city, in part because of the fires but also to provide shelter and support to thousands of people who have been forced out of their homes. Fires threatened some of their operations on the weekend but as of late Sunday had blown past without any significant damage, according to reports. Provincial officials say most oil and gas facilities were prepared with well-trained fire-fighting crews and by setting up barriers such as gravel fields and firebreaks to stop the fire from spreading to their sites.

The economic toll

The disruption to oil production, estimated at about one million barrels of oil per day, has already led to an uptick in crude prices.

Oil prices leapt yesterday morning due in part to the lost production in Alberta, which is tightening global supply. At midday UAE time, futures were up by as much as 2.9 per cent for West Texas Intermediate crude in New York and 2.5 per cent for Brent in London, reaching prices of US$45.94 and US$46.48 respectively. Prices eased later in the day.

While that is welcome news for producers located outside the oil sands, the disaster is expected to take a chunk out of Canada’s gross domestic product, at least in the near term.

A two-week shutdown could lead to a half percentage point reduction in GDP growth this month, according to an estimate from the Royal Bank of Canada, the country’s largest bank. Combined with Canada’s other economic difficulties, this prompted the bank to lower its GDP growth forecast for the quarter to 0.5 per cent, from its previous estimate of 1.5 per cent. The bank said that “the situation remains fluid” and it’s unclear how long production will remain offline.

BMO Capital Markets cut its second-quarter GDP growth estimate to zero from 1.5 per cent, citing “severe disruptions to oil production” from the wildfires.

“This estimate should be viewed only as a placeholder, until we receive further information on the full impact of the disaster,” the bank said.

That includes the cost of the massive clean up and its impact on insurance companies. BMO said that the disaster could cost insurers as much as 9 billion Canadian dollars (Dh25.4bn), making it “by far the largest potential catastrophe loss in Canadian history”, said Tom MacKinnon, BMO’s managing director, who covers insurance.

The disaster came at an awful time for Fort McMurray, the province of Alberta and Canada as a whole. The country’s oil industry has already lost more than 40,000 jobs since prices began their fall of roughly 60 per cent from the highs reached in June 2014.

Alberta, after years of boasting budget surpluses and the country’s lowest unemployment rate, is in a recession and its government is deep in the red. Unemployment in the province sits at 7.2 per cent, up from 5.6 per cent a year earlier, and is now expected to rise even further. That will be a further drag on Canada’s economic growth.

“The wild fires are likely to contribute to an already expected cooling trend in Canadian economic activity over the second quarter of the year,” wrote Diana Petramala, an economist at TD Bank, in a note. She said growth forecasts for the second quarter had already been downgraded after recent trade data showed a pull back in exports from a slower US economy.

She forecasts Canada’s growth to be 1 per cent in the second quarter, after an estimated increase of 2.5 to 3 per cent in the first quarter. “In light of the wild fires in Alberta, the economy may be hard pressed to grow in the second quarter of the year,” she said.

The human toll

For the people in Fort McMurray and the surrounding region a rebound of any kind seems a long way off. Right now, it’s day-by-day for most, especially those who lost everything. Many are still feeling lucky to have survived.

Shaun Chalk, a resident of Fort McMurray, thought he and his family were going to die as they drove out of the city on Tuesday last week, with flames raging around them. “I looked at the sky and it was like Armageddon,” he told the Globe and Mail newspaper.

His is one of thousands of harrowing tales of residents forced to leave the city with little but the clothes on their backs. Two people died in a vehicle accident as part of the mass exodus. Many residents fled to oil camps outside of the city but then had to be relocated as the fire followed them. Some had to be removed by emergency-crew led road convoys and airlifts.

People from across Canada have been digging deep to help the city’s people. Many of the donors previously lived in the largely transient town, having been lured there by the higher salaries once paid to everyone from truck drivers to fast-food workers – at least before oil’s latest downturn.

More than C$54 million has been donated to the Red Cross for victims of the wildfires, as of Sunday, and Justin Trudeau, Canada’s prime minister, says the federal government will match individual donations made from May 3 to 31.

A number of companies and organisations have pitched in, including oil sands companies and suppliers, banks, retailers, restaurant chains, car companies and unions. Peter Munk, the founder of the world’s largest gold miner, Barrick Gold, pledged C$1m to the Red Cross through his foundation.

Newly settled Syrian refugees are also donating clothing and money to fire victims, saying that the scenes of people fleeing burning homes remind them of having to leave their homeland only a few months ago. “It’s not easy to lose everything. We can understand them more than anyone in Canada. We were in the same situation,” Rita Khanchet told the Calgary Herald. “Me and my family wanted to do something for these people. Canadian society helped us when we came to Canada.”

Fort McMurray residents aren’t yet sure when they will return home, and if they even have a home to return to, but many residents living in shelters, hotels and with friends and family across the province have pledged to return and to rebuild.

Writ large, their efforts could invigorate the Canadian economy starting in the year’s third quarter. The economy is expected to gather itself up after oil production is restored and the reconstruction efforts begin.

“We could see economic growth jump back to 3 per cent in the third quarter,” Ms Petramala said.