Fort McMurray, fondly known as Fort Mac, is a Canadian town located in Northeast, Alberta. Surrounded by forest, it has significantly contributed to the development of the petroleum or crude oil industry on a national and international scale.
At the beginning of May this year, a wildfire started in the forested area surrounding Fort Mac. While the exact cause of the fire is still unknown, experts have stated that the unseasonably dry winter, combined with a spring that saw soaring temperatures and strong winds, only helped to add fuel to the initial flames.
A few days after the fire started, most of the Fort Mac community was forced to evacuate, making it the largest wildfire evacuation effort in Alberta’s history. As of May 16, the fire reached around 285,000 hectares. As of May 19, the flames had grown to 505,000 hectares. To provide some context, one hectare is approximately the size of a football field, and 505,000 hectares is almost 60% of the Canadian province, Prince Edward Island (P.E.I). At the moment, there are well over 1,000 firefighters, 47 helicopters, 29 tankers and 200 pieces of heavy equipment being used to try and prevent this fire from spreading.
Fort Mac is built near the Athabasca oil sands, which consists of a form of crude oil, water, silica sand, and clay minerals. It is the main oil sand affected by the fire. Due to unpredictable shifts in the weather, the wind has helped the wildfire to continue to spread, moving towards many major oil sand camps and pipelines.
The main priority of officials dealing with this difficult situation is (and has always been) to keep the people living in the affected areas safe from danger. Despite the fact that the oilsands are one of Alberta’s (and Canada’s) major industries, this priority has not changed.
So far, work camps, which provide oil sand workers with accommodations, have seen the most damage. A work camp called, The Blacksand Executive Lodge has recently lost around 655 housing units, which effectively destroyed the site. Many others camps have since been evacuated including,
- Syncrude Facilities South of Fort MacKay
- Suncor Facilities South of Fort MacKay
- Ruth Lake
- MacKay River Lodge on Aostra
- Marathon Oil ? Birchwood
- Mildred Lake
- West Ells
- MacKay River
- Black Sands Lodge
- Brion Energy ? MacKay
- Grizzly Oilsands ? Thickwood
- Poplar Creek ? also called Birch
- Southern Pacific ? STP MacKay
- Sunshine Oil Sands ? West Ells
The sheer power and intensity of this fire is forcing firefighting crews to work practically around the clock to try and control as much of the damage as they can. This, combined with the weather makes it difficult to predict how long the fire will continue to burn. While rain is in the forecast for the area, experts say that it would take a significant downpour to stop the fire completely.
However, what it is clear is that this fire will have an impact on both the production and economy of energy on a provincial, national and international scale.
Overall Impact on Production
Over twelve oil sand operations in the area were shut down over the past few weeks including, Shell and Suncor’s oil sand mines. Other companies took precautions and reduced production including, Syncrude, Connacher, Husky, and other Suncor mine locations. Based on these facts, the Conference Board of Canada has estimated that there was a loss of 1.2 million barrels of oil per day, resulting in a gross domestic product loss of $985 million.
This estimate is important because it represents approximately 0.33 per cent of the province’s 2016 Gross Domestic Product (GDP) and 0.06 per cent of Canada’s GDP. The good news is that it is highly likely that Alberta will be able to make up the loss in production, provided that production resumes again at the beginning of June.
The biggest impacts from production will fall on the province of Alberta, as once the fire burns out it will take some time to rebuild and resume regular business activities.
The Import of Oil into the United States
Canada is home to the world’s third largest oil reserves. It is responsible for over 40% of the United State’s oil imports, which translates into approximately 3.5 million barrels a day. In particular, the country is a major supplier of oil to areas of the Midwestern United States as well as Oklahoma, Tennessee and Kentucky.
According to the U.S. Energy Information Administration, in 2015, the United States imported about 9.4 billion barrels of petroleum each day from various countries. Crude oil made up about 78% of these petroleum imports. Overall, Canada made up 40% of the United States gross import.
The Fort McMurray fires will have an impact on these areas of the United States, as there are not many other options to replace Canada’s cheaply produced oil. Prolonged production and importing disruptions might potentially generate an increase in cost for the American refineries. These price hikes would then trickle down to customers. However, it is possible that since gasoline stores are high, it could prevent or restrict massive price hikes.
Overall Economic Impacts
Those hardest hit by the Fort McMurray fires are undoubtedly the people of Alberta. Prior to the fire, the global price of oil was low, which had a significant impact on the industry across the province. Most of the major energy companies have corporate offices in Calgary, in addition to the production companies set up near Fort McMurray.
One month ago, the Canadian Association of Petroleum Producers determined that in two years, the capital investment in the oil and gas industry had dropped 62%. In the same period, the number of wells drilled was also estimated to lower by 66%. There is also the question of number of workers willing to return to Fort McMurray after the fires are put out.
The Canadian Conference Board has indicated that the province’s economy might see some growth starting in 2017. The damages to homes, businesses and industries will need to be rebuilt. These projects have the potential to add an estimated $1.3 billion GDP to Alberta. These efforts will run into 2018 and even some of 2019.
- The fire is estimated to have a slightly negative impact to Alberta for the rest of 2016.
- Over a two week period, $985 million has been lost in GDP.
- Rebuilding will help the province gain $1.3 billing GDP, resulting in an estimated overall growth of 0.4 per cent
The Economic Impact on Canada
Within Canada, there has been much talk from a political perspective around constructing new pipelines. These conversation highlight a growing concern regarding the affect those pipelines might have on climate change. The majority of Canada’s recently elected governments (on both the provincial and federal level) have also promised greater and improved economic diversification.
Despite these areas of focus, the disruption and reduction in production has affected the global price of oil. This shift might provide oil companies a bit of a boost, one that could definitely help out the Alberta economy recover once business resumes. Again, these estimates do depend on the overall final outcome of damages from the fire.
The Economic Impact on the World
Currently, the production of oil around the world is 96 million barrels per day. Overall, this means that on a global scale, oil is oversupplied by around 1 million barrels per day. This means that this brief production shutdown or reduction should not have a devastating long-term impact on the world’s price of oil.
West Texas Intermediate is what North America uses as an oil benchmark. In mid-February, it was trading at a low $27 USD a barrel. More recently, it has almost reached $50 USD a barrel. Part of this upswing is due to the Fort McMurray fires, but other supply outages from other areas in the world have helped to give the market a boost.
While the fires will eventually burn out, areas like Nigeria are facing attacks on their refineries and other facilities. Their typical 800,000 barrels of daily production has seen a substantial decrease. South America is another focus for traders because of the protests and political unrest in Venezuela. These are issues that are not easily solved, and will have a longer lasting affect on the prices at a global level.
This is a positive outcome for the price of oil, helping to prevent predictions of $20 USD or even $10 USD from coming true. Goldman Sachs has even stated that, “the physical rebalancing of the oil market has finally re-started.” It also estimates that oil will reach $50 USD a barrel in 2016, and $60 USD a barrel in 2017.
There is no question that the Fort McMurray fires have wrecked havoc on the people of Alberta. With over 80,000 people evacuated to date, it is difficult to find anyone within the province who has not been touched in some way shape or form by these events. The province’s primary focus still remains the safety of the people working and living in the area.
This methodology had also been adapted by the energy industry. Every oil sand company with employees on the ground is determined to protect their crews – both the ones who have already been evacuated as well as the ones that remain behind. While the loss of product and equipment is always devastating, the loss of human life at the expense of business is just not an option.