Wildfires weigh on oil and gas activity
So far, the economic impact looks like it will be less than the damage caused by the 2016 Wood Buffalo fire
By ATB Economics 19 May 2023 4 min read
Alberta continues to be ravaged by wildfires. As of May 18, hundreds of thousands of hectares have burned and there were still over 10,500 evacuees. The fires are taking a heavy personal toll, destroying property and uprooting lives.
For the economy, there will also be an impact, with some of Alberta’s oil and gas producers temporarily shutting in production for safety reasons.
Given the importance of oil and gas to the Alberta (and national) economy, this matters a great deal. Exports of energy products* from Alberta hit a record high last year at $159 billion, accounting for 77% of the province’s international merchandise exports.
The impact of the production shutdowns on the economy, as measured by gross domestic product (GDP), will depend on the quantity of production impacted and the duration of the shutdowns. Both are uncertain.
However, some reasonable estimates can be developed based on plausible scenarios and drawing comparisons to the May 2016 Wood Buffalo fires.
Over 300,000 barrels per day (b/d) of oil equivalent were shut-in earlier this May when the fires broke out. Cooler and wetter conditions allowed a portion of this production to come back online, but some companies have moved to once again curtail or shut-in their operations. While the situation remains dynamic and difficult to gauge, a rough estimate is that over 200,000 b/d of oil equivalent are currently shut-in.
Duration is anyone’s guess, but there is no immediate end in sight.
In its latest outlook report, the International Energy Agency assumes that 120,000 b/d of oil equivalent will be shut-in, on average, during the month of May.
Under a lower impact scenario, it is assumed that an average of 100,000 b/d of oil equivalent will be offline in May. Under a higher impact scenario, an average of 300,000 b/d in May are shut-in before normalizing. Of course, the impact will fluctuate day by day. The point is to estimate orders of magnitude until we have better information. The potential impacts are illustrated in the chart below.
Under these scenarios, the monthly hit to Canadian oil and gas real GDP is about 2% to 5% in May. This translates into a 0.1% to 0.3% drop in national real GDP for the month of May given the weighting of the industry in the national accounts. For Alberta, the impact will be much greater. While provincial GDP data are not available by month, the annualized reduction under these scenarios in Alberta’s real GDP would be 0.05% to 0.15% in 2023.
How does this compare to the Wood Buffalo wildfires in 2016? The 2016 fires hit the major production center in Alberta’s oil sands region, temporarily shutting in as much as 1.5 million b/d of oil with the annualized production loss estimated at 110 thousand barrels b/d—much greater than the scenarios described above. Canadian oil and gas extraction real GDP (seasonally adjusted) fell 15% in May 2016 and stayed about 8% below April’s levels in June before bouncing back.
There are other differences as well. The oil production disruptions in 2016 primarily impacted bitumen output, whereas the current disruptions are impacting conventional oil and gas and natural gas liquids. The facilities currently shut down can be reactivated much more quickly than the larger oil sands operations.
In short, if the current situation does not materially escalate and, in particular, if the oil sands region is not impacted, it will have a much smaller impact on oil and gas production than the 2016 fires.
Of course, there are a lot of unknowns on the duration and magnitude of the current fires. This also does not cover the full extent of the GDP impacts, positive or negative. There will be disruptions to other sectors, but also increased spending on firefighting and ultimately reconstruction.
A final note. Impacts to real GDP do not measure the toll to human lives and property loss. The fires have damaged productive capacity, the replacement of which adds to GDP, but does not necessarily improve the underlying performance of the economy. Something to keep in mind the next time an economist talks to you about the “economic impacts” of natural disasters.
*Includes crude oil, bitumen, synthetic crude oil, natural gas, natural gas liquids and refined petroleum products.
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Answer to the previous trivia question: Albertans aged 65 and over represented about 15 % of the provincial population in 2022 compared to about 7% in 1971.
Today’s trivia question: The Diners Club card is considered the first modern-day credit card. When was it introduced?