A mild chinook is blowing through Calgary. Sunlight floods the Devonian Gardens, a massive indoor tropical park within the CORE, the city’s luxurious marble-and-glass downtown shopping centre.
But the mood in the adjacent food court is darker than usual among the office workers who populate the surrounding towers.
Nearly a fifth of the office space in the city is vacant after a wave of oil industry layoffs cut a swath through the professional, managerial and white-collar ranks. The toll has been roughly the same as that felt during the global economic recession in 2009, according to commercial real estate specialists CBRE.
“I can’t think of one person here who hasn’t been affected or know someone who’s been laid off. The cuts have been deep and swift. It’s middle and senior managers in their 40s and 50s who are making a couple of hundred grand a year and they’re saying bye-bye. That’s tough when you’re supposed to be in your peak earning years,” said Greg Kwong, executive vice-president and regional managing director of CBRE’s Calgary office.
If Fort McMurray, Alta., is the ground zero for Canada’s oilsands industry, Calgary is home to the broader oil and gas industry’s head offices. The industry accounts for roughly a third of the city’s direct economic output, but most of the city’s one million residents rely on it indirectly, whether they work at a car rental agency or a sporting goods manufacturer.
Canada’s oil and gas industry has cut its capital spending on future growth almost in half to an estimated $42 billion in 2016 from $82 billion in 2014, the Canadian Association of Petroleum Producers says, as the global price for oil plummeted from $100 (U.S.) a barrel to $30 over an 18-month period.
“That’s the equivalent to losing the entire manufacturing and forestry sectors,” says Terry Abel, the association’s director of oilsands.
The sector has cut at least 40,000 direct jobs, based on public announcements. Indirect job losses across the country could be as high as 150,000, the association estimates. The impact is greatest in Alberta.
“I venture to say there’s virtually no one in Calgary who doesn’t know somebody who’s being affected. You see it in the restaurants, they’re not as busy, and on the retail side,” Abel said.
People are nervous, he said. “They’re worried about how much worse things can get.”
Comparisons are made to previous downturns. Most people remember the slump in 2008, which was deep but short. “We’ve now seen depressed prices for the better part of 18 months,” Abel said. “At the current price, nobody is making much in the way of a return.”
White-collar workers were among the first to be hit when oil industry giants such as Suncor Energy, Cenovus, CNRL and others began cutting growth plans. Engineers, geologists, geophysicists — anyone working on projects that were being scrapped — were let go as much as a year ago. And more pain lies ahead as oil remains “lower for longer,” the new industry mantra.
In the early days of the downturn, most Albertans believed this would be just another V-shaped dip, over in a matter of months. They’d be back at work and back on track. People went home, worked on their houses and made virtually no lifestyle changes, figuring they’d be rehired within six months.
Instead, a year later, oil is trading even lower, more layoffs are being announced, wages are falling and the housing market is stalled.
After growing at an average of 4 per cent a year for the past five years, Alberta’s economy plunged into recession last year, losing an estimated 1 per cent. It’s expected to contract another 0.5 per cent in 2016.
“A year ago, people were in shock, then they were in denial, now they’re angry,” says Todd Hirsch, chief economist at ATB Financial, an Alberta crown corporation. “They’ve lost their job. Their neighbour has lost their job. They’re watching this thing we built come collapsing in on itself.”
The first cuts occurred nearly a year ago, in early 2015, when Suncor Energy chopped 1,000 jobs. The continued through to this week, with BP saying it would axe another 7,000 jobs worldwide. Another wave could occur at the end of the winter drilling season, when seasonal layoffs due to muddy, inaccessible roads turn into permanent job reductions, Hirsch predicts.
A lot of comparisons are being made to the late 1980s, when an oil price collapse, combined with the National Energy Program and sky-high 18-per-cent mortgage rates, sent the Alberta economy into a tailspin.
Hirsch believes it won’t be this bad this time around. Mortgage rates are ultralow, at about 4 per cent. And most families have two income earners now, providing more of a cushion. The Alberta unemployment rate has jumped to 7 per cent from 4.5 per cent in a year. But that’s still lower than in the ‘80s, when it hit 12 per cent, he says.
He doesn’t expect to see the same massive migration out of the province that marked that decade, he says. But that’s partly because there’s nowhere else to go.
Still, mortgage default rates are creeping up.
“I don’t think we’ll see the tsunami of houses coming on the market that we saw in the late ‘80s,” Hirsch says. However, house sales are falling, and he believes prices could decline in 2016 by as much as 10 per cent.
On the other hand, the fall from $100 a barrel was inevitable, and the adjustment, though painful, is necessary, Hirsch says. As oil prices rose, so did the cost of production, particularly labour rates, pushing the break-even point for new production to $80 or $90 a barrel.
“Everyone knew someone whose son was driving a truck for $80,000 a year,” Hirsch recalls. “It’s not sustainable.”