Eileen Kelly had already been out of work for several months and scratching around for something – anything – when oil prices fell off a cliff early in the new year.
Ms. Kelly, a born-and-raised Albertan who has worked at oil and gas companies for decades, most recently working on regulatory documents, had been through this before, having been laid off at the bottom of the province’s recession in 2016.
It took her two years to find full-time work at Accel Energy Ltd. But late last year, the company filed for protection from creditors as it became one of many small oil companies that were no longer able to pay their bills.
In recent weeks, as she waited for signs that Alberta’s economy was turning itself around, there were suddenly ominous headlines about pandemics, a possible global recession and an energy industry caught in a punishing international price war.
“You just don’t even want to hear any more terrible news,” said Ms. Kelly, 54, who lives in Calgary. “It’s just doom and gloom everywhere you look.”
Ms. Kelly, whose family has been able to make do on her husband’s salary, EI benefits and odd jobs she’s been able to pick up, said it was already difficult to even get a job interview in a depressed market.
The combined hit of the rapidly escalating COVID-19 pandemic and the Russia-Saudi price war that sent oil prices crashing this past week could not have come at a worse time for her family – and the entire province.
“You just can’t win. It’s frustrating,” Ms. Kelly said.
Despite decades of discussion of economic diversification, Alberta’s economy remains dependent on the vagaries of global crude markets. And it has been reeling for years.
The province was still shaking off the effects of the financial crisis when oil prices plunged in late 2014. That set off a two-year recession that pushed tens of thousands of people out of work.
The recovery since then has been painfully slow, and in recent months there were already signs that it had been grinding to a halt, or that Alberta was sliding backward.
Now, the novel coronavirus outbreak is weakening demand for oil and depressing prices, placing even greater pressure on the economy and the provincial government’s finances.
The oil price crash, which has brought prices for benchmark West Texas Intermediate crude down to about US$30 a barrel, from above US$60 at the start of the year, has turned the renewed unease about Alberta’s economy into a full-blown crisis.
The historic rout in oil prices and resulting stock market swoon has done even more damage to the value of the province’s dominant industry, oil and gas. It had already been under financial pressure as investors turned their back on the sector after years of regulatory uncertainty and delays in adding badly needed export pipeline capacity.
The S&P/TSX Capped Energy Index has lost 53 per cent of its value over the past month, tumbling to an all-time low.
Alberta Premier Jason Kenney now warns of imminent layoffs and has signalled his government may have to abandon its plans to balance the budget two years from now.
“This is the worst I’ve seen in energy in my 20-year career,” said Martin Pelletier, portfolio manager at Trivest Wealth Counsel in Calgary. “And it’s getting worse, so buckle up.”
From employment to insolvencies to real estate, the state of Alberta’s economy appeared grim even before the events of the past few weeks.
Unemployment in the province was 7.2 per cent last month, about where it’s been for the past two years, compared with a national average rate of of 5.6 per cent. The anemic labour market continues to hit young men the hardest.
When people lose their jobs, they are out of work for an average of about 20 weeks, and the province has a record income-support caseload of roughly 62,000.
Median home prices in Calgary and Edmonton are down about 1 per cent, year over year, after several years of steady declines, according to real estate boards in the two cities. Vacancies in Calgary’s downtown office towers remain high.
The oil price crash has also cratered the Kenney government’s budget, tabled last October, which projected a deficit this year of $6.8-billion on the assumption that the price for WTI would be US$58. Balancing in two years depended on prices reaching US$63 by then.
Critics said the price forecasts, as well as predictions for GDP growth and employment, were too optimistic. The past two weeks have added credence to that assessment.
Outside economists have suggested the Alberta government’s revenue will fall at least $5-billion short of projections this year. Finance Minister Travis Toews said his department is still working out the numbers, but acknowledges those estimates are likely not far off.
“I wouldn’t go a long ways to dispute that, but there’s a lot of uncertainty and we really don’t know where this is going to land," Mr. Toews said in an interview. “We weren’t fully recovered from the previous downturn, and so this catches us as a province at a weaker point.”
The government has already signalled it doesn’t intend to impose significantly steeper spending cuts and will be looking to increase stimulus, such as infrastructure spending in some areas. In addition, the response to the COVID-19 outbreak will add pressure to health spending, something Mr. Toews said could be absorbed through contingencies already in the budget.
On Friday, Mr. Toews told a news conference that he had been touch with his federal counterpart, Bill Morneau, as the province asks for federal help to deal with both the oil price crash and the fallout from the COVID-19 outbreak. Mr. Morneau said earlier that a “significant” stimulus package is coming next week ahead of the federal budget.
The oil price outlook had already darkened in early March as members of the Organization of the Petroleum Exporting Countries (OPEC) and Russia met to discuss limiting output to guard against global economic weakness brought on by the coronavirus contagion.
The talks broke off with no agreement, however, and Saudi Arabia and Russia have dug in for what looks like a long price war to wrest market share from each other.
Over the past two weeks, the price of U.S. crude has declined by more than 30 per cent, settling on Friday at US$31.92 a barrel.
“When you look at pandemics, that’s not new to commodity markets. When you look at price wars, that’s certainly not new to commodity markets either. But we’ve never had both at the same time,” said Michael Tran, managing director, Global Energy Strategy for RBC Capital Markets.
“We’re dealing with a supply shock and a demand shock, and that’s completely uncharted territory for the oil market.”
With Russia and Saudi Arabia unlikely to blink any time soon, U.S. crude could average in the mid-US$30s a barrel for 2020, Mr. Tran said.
The Canadian oil sands and heavy oil benchmark, Western Canadian Select, was selling this past week at a discount to WTI of about US$12, putting its value at around US$19 a barrel.
At that level, Alberta’s energy industry cannot operate profitably, and scores of companies have slashed capital spending or halted it altogether.
On Monday, Cenovus Energy Inc., the oil sands producer, slashed its capital expenditure program for the year by about $450-million, or 32 per cent. The move came soon after the company’s shares lost more than half their value in a single session.
Husky Energy Inc. followed suit on Thursday with $1-billion of spending cuts and plans to shut down unprofitable production.
In Alberta, the oil crash is reverberating through the economy. Calgary’s real estate market was setting up for another depressed year before this month’s oil price crash. Commercial real estate company Avison Young had predicted office vacancy at 24 per cent in 2020, up about a percentage point from last year, even with some expectation of an increase in local GDP.
Some towers, such as the former 37-floor former Nexen building on the west side of downtown, are empty.
The biggest hit has been to sub-premium properties outside the downtown core, where vacancies have topped 30 per cent. That was the market served by Strategic Group, whose 56 Alberta buildings were forced into receivership in late 2019, leaving lenders and other creditors out more than $700-million, making it the largest casualty in the province’s property market so far.
Gleaming new towers have only recently been completed in the core, adding to available square footage. Brookfield Place East, Eau Claire Tower and Telus Sky have pulled tenants away from older, lower-quality properties.
Alberta’s hotels, also dependent on the energy economy, have bled revenue and guests since the price of oil plunged five years ago. As drilling and production activity in the energy sector contracted, small-town inns were no longer packed with oil workers, with average occupancy in 2016 dropping by 10 per cent from the year before.
The loss of corporate bookings was particularly acute in downtown Calgary, which went from being the best city hotel market in Canada to one of the worst in just half a decade.
Dave Kaiser, president and chief executive of the Alberta Hotels and Lodging Association, said it didn’t help that Alberta added the most rooms of any province last year after projects planned during the boom finally opened their doors.
Mr. Kaiser said the impact from COVID-19 is still unknown, but it will likely compound years of hurt with cancelled business events and general unease around travel.
“Is there light at the end of the tunnel? If there was, it seems like it’s probably been shut off here with the events of the last couple of weeks,” he said.
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