OUTLOOK May 2016

WOOD BUFFALO SEMI-ANNUAL ECONOMIC OUTLOOK

PrefaceThis briefing provides an economic outlook for the Regional Municipality of Wood Buffalo for the period 2016–20. It takes into account both the urban (Fort McMurray) and surrounding rural areas.

Population figures include the region’s shadow popula-tion—people who work in the region but do not reside there permanently. Total population, including the shadow population, was taken from the Government of Alberta’s official population counts.

Employment numbers were derived by taking place-of-work employment data (by industry) from Statistics Canada and boosting them to take into account people with no usual place of work. This was done by using the difference between Canadian place-of-residence data and Canadian place-of-work data.

Gross domestic product (GDP) measures the value of output minus intermediate inputs used in the produc-tion process. GDP at the sub-provincial level was cal-culated by dividing employment by place of work in the sub-provincial region by employment by place of work in the province, and then multiplying this ratio by provincial GDP. We did this for all industries. Hence, we are assuming that productivity is constant within an industry in different parts of a province. Total GDP was estimated by summing all the industrial GDP values. Values are posted in units of 2007 millions of dollars (real GDP); hence, inflation effects are eliminated.

Economic Outlook: Economic Insights Into Wood Buffaloby Jane McIntyre

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1 | Outlook—May 2016

A fter experiencing five years of phenomenal

growth, the Regional Municipality of Wood

Buffalo’s economy was stopped in its tracks in

2015 by a significant decline in world oil prices. A plunge

in investment left its mark on many sectors, resulting in a

2.7 per cent decrease in real GDP and a 1.7 per cent drop

in employment last year.

With oil prices remaining low this year, more weakness

is expected. Real GDP is expected to contract by 0.9 per

cent; employment, by 0.8 per cent. With lower demand

for migrant workers, the region’s population (including the

shadow population) is also forecast to decline in 2016,

down for the first time since 2002.

STRONG INVESTMENT LED TO SEVERAL YEARS OF BOOMING GROWTH

The Regional Municipality of Wood Buffalo’s economy boomed from 2010 to 2014, as real gross domestic product (GDP) rose by an average of 8.4 per cent annu-ally. Persistently high oil prices led to a flurry of activity in the area’s oil sands over this period. Indeed, increased exploration, the expansion of some existing sites, and the development of some new ones boosted output in the primary and utilities sector (Wood Buffalo’s lar-

gest sector) by an average of 8.8 per cent over these five years. As suppliers to the oil sands, manufacturers enjoyed even bigger gains, with output in that sector growing by an average of 12.5 per cent per year.

Billions of dollars in new energy investment contributed to a vigorous 12.3 per cent average annual increase in construction output from 2010 to 2013; however, construction output contracted by 1.6 per cent in 2014 after several projects had passed peak spending. The list of new developments included the Fort Hills Oil Sands Mine, phases 2 and 3 of Canadian Natural Resources Ltd.’s Horizon development, Athabasca Oil Corporation’s Hangingstone Project, Husky Energy’s Sunrise Energy Project, and the second phase of Imperial Oil’s Kearl operation.

The booming economy led to big leaps in employment, which led to surging in-migration. From 2010 to 2014, Wood Buffalo’s employment rose by an annual average of 4.2 per cent. As a result, Wood Buffalo’s population grew by 6.9 per cent per year over the same time frame, to reach 124,700 in 2014. This fuelled robust domestic demand growth, especially in the new housing market. Indeed, builders broke ground on an average of 732 units per year from 2010 to 2014, split between single-family homes, multiple units, and work camps. To serve the rapidly growing population, a number of new commercial and retail developments took place, such as an expansion of the regional airport; development and upgrading of several roadways, including the newly completed Parsons interchange; and the construction of Shell Place, a new entertainment and recreation facility.

The services-producing industries also benefited directly or indirectly from increased activity in the oil sands.Services sector output growth averaged 6 per cent per year from 2010 to 2014. The strongest increases came from the transportation and warehousing industry and business services, both of which have direct ties to the oil sands. Growth in the wholesale and retail tradesector was also quite robust. Consumption surged as wage

Wood Buffalo

Outlook—May 2016 | 2

increases propelled growth in personal income per cap-ita by an annual average rate of 4.1 per cent between 2010 and 2014. At more than $95,000 in 2014, per-sonal income per capita was well above the provincial average of $56,500, which was itself well above the national average of $43,800.

The majority of jobs created in 2010–14 were full time (see Table 1). Full-time employment advanced by an annual average of 4.6 per cent from 2010 to 2014, while part-time employment rose by an average of just 1 per cent per year. The unemployment rate fell from 5.8 per cent in 2011 to a low of 3.8 per cent in 2014, partially explaining the rapid wage growth.

LOW OIL PRICES TOOK THEIR TOLL IN 2015

Wood Buffalo’s economy suffered a downturn in 2015, with real GDP dropping by 2.7 per cent (see Table 2), as fears of a global oversupply sent oil prices tum-bling. The Organization of the Petroleum Exporting Countries (OPEC), long considered a market leader in oil production, has typically cut its production quotas to keep prices from falling too much. However, non-OPEC production, particularly in the United States, has surged in recent years. High oil prices and new technologies allowed previously unconventional sources of oil (including the oil sands) to be developed. In fact, in April 2015, U.S. oil production hit its highest level since the early 1970s—peaking at close to 10 million barrels per day. This has led to a decline in OPEC’s market share over the past few years.

Table 1 Economic Indicators

2012 2013 2014 2015 2016f 2017f 2018f 2019f 2020f

Real GDP at basic prices 12,950.8 13,946.2 15,059.2 14,646.2 14,508.6 14,904.1 15,426.6 15,861.4 16,348.5

(2007 $ millions) 6.0 7.7 8.0 –2.7 –0.9 2.7 3.5 2.8 3.1

Total employment (000s) 69.6 71.9 74.4 73.2 72.6 73.4 74.8 76.7 78.2

1.8 3.2 3.6 –1.7 –0.8 1.1 1.9 2.5 2.0

Part-time employment (000s) 7.8 7.4 7.9 8.2 8.0 8.0 8.1 8.2 8.3

7.6 –5.1 6.6 3.0 –1.8 0.1 0.9 1.5 1.0

Unemployment rate 4.8 3.1 3.8 7.6 8.0 7.2 6.0 4.8 4.5

Personal income per capita ($) 88,259 89,515 95,167 89,551 86,529 87,021 88,584 90,828 92,158

–3.9 1.4 6.3 –5.9 –3.4 0.6 1.8 2.5 1.5

Population (000s) 116.4 122.8 124.7 125.1 124.5 127.6 131.8 135.4 139.4

15.0 5.5 1.5 0.4 –0.5 2.4 3.4 2.7 3.0

Housing starts (units)

Single 347 363 231 74 73 124 194 229 252

Multiple 290 604 278 119 113 211 257 280 321

Total 637 967 509 193 186 335 451 509 573

f = forecast

Italics indicate percentage change.Sources: Statistics Canada; CMHC Housing Time Series Database; The Conference Board of Canada.

3 | Outlook—May 2016

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Table 2

Sectoral Gross Domestic Product

2012 2013 2014 2015 2016f 2017f 2018f 2019f 2020f

Total GDP 12,950.8 13,946.2 15,059.2 14,646.2 14,508.6 14,904.1 15,426.6 15,861.4 16,348.5

(2007 $ millions) 6.0 7.7 8.0 –2.7 –0.9 2.7 3.5 2.8 3.1Goods sector 10425.7 11292.7 12268.2 11823.2 11694.3 12029.4 12465.8 12803.1 13180.9

6.0 8.3 8.6 –3.6 –1.1 2.9 3.6 2.7 3.0Manufacturing 359.1 391.7 425.3 415.3 416.3 422.3 437.7 456.2 472.1

7.2 9.1 8.6 –2.4 0.2 1.5 3.6 4.2 3.5Construction 1870.9 2092.2 2059.7 1842.8 1686.4 1718.3 1779.7 1824.6 1885.7

11.2 11.8 –1.6 –10.5 –8.5 1.9 3.6 2.5 3.3Primary & utilities 8195.7 8808.7 9783.2 9573.1 9591.7 9888.8 10248.5 10522.2 10823.0

4.8 7.5 11.1 –2.1 0.2 3.1 3.6 2.7 2.9Services sector 2525.1 2653.6 2791.0 2823.0 2814.3 2874.6 2960.8 3058.3 3167.6

6.4 5.1 5.2 1.1 –0.3 2.1 3.0 3.3 3.6Transportation & warehousing 208.1 213.7 225.0 224.2 221.7 225.6 231.8 238.7 246.1

4.8 2.7 5.2 –0.3 –1.1 1.8 2.7 3.0 3.1Information & cultural industries 58.6 58.0 57.2 55.9 55.6 56.9 58.1 59.3 60.6

–1.2 –1.1 –1.4 –2.3 –0.5 2.3 2.2 2.0 2.1Wholesale & retail trade 480.1 514.5 561.4 569.3 548.5 559.2 578.1 598.7 622.3

8.7 7.2 9.1 1.4 –3.7 2.0 3.4 3.6 3.9Finance, insurance, & real estate 577.9 602.5 619.9 625.4 630.2 640.7 658.4 678.2 702.0

3.0 4.2 2.9 0.9 0.8 1.7 2.8 3.0 3.5Business services 434.8 450.7 465.7 456.1 454.0 463.0 476.3 493.2 511.6

8.4 3.7 3.3 –2.1 –0.5 2.0 2.9 3.5 3.7Personal services 245.5 259.6 274.2 279.0 278.5 284.6 292.1 301.4 311.1

7.7 5.8 5.6 1.8 –0.2 2.2 2.6 3.2 3.2Non–commercial services 269.1 280.0 292.4 305.5 312.8 322.0 332.1 342.7 354.0

5.4 4.1 4.4 4.5 2.4 3.0 3.1 3.2 3.3Public administration 251.1 274.5 295.3 307.4 313.1 322.6 333.9 346.2 359.9

9.6 9.3 7.6 4.1 1.8 3.0 3.5 3.7 4.0

f = forecastExcept for the total GDP line, the first line of each row is in thousands of dollars. In all rows, italics indicate percentage change.Sources: Statistics Canada; The Conference Board of Canada.

Outlook—May 2016 | 4

On the housing side, demand was hampered by a sharp deceleration in population growth in 2015, as the need for migrants slowed in line with a 1.7 per cent drop in employment. Wood Buffalo’s population rose by just 0.4 per cent last year. Meanwhile, rental vacancy rates soared, reaching nearly 30 per cent in October 2015, up from 11.4 per cent just one year earlier. These factors prompted builders to lower housing starts to 193 units, more than 60 per cent less than their 2014 level. In all, the investment slowdowns and cancellations helped lead to a 10.5 per cent decline in construction output in 2015.

Despite the drop in oil prices, several new oil sands projects started production last year, including ConocoPhillips Canada’s Surmont Project south of Fort McMurray, which added 118,000 barrels per day to oil sands output. Nevertheless, overall primary and utilities output fell by 2.1 per cent last year. In addition, manufacturing output declined by 2.4 per cent. Output in transportation and warehousing as well as in business services followed suit, with declines of 0.3 per cent and 2.1 per cent, respectively, last year. The decline in the transportation sector was partly due to the lower levels of activity in the manufacturing sector as well as to a reduction in air travel due to a decline in the number of fly-in/fly-out workers.

Last year’s 1.7 per cent decline in employment was all in full-time work. In fact, part-time employment con-tinued to rise in 2015, up by 3 per cent. As such, Wood Buffalo’s unemployment rate jumped to 7.6 per cent. Despite these job losses, output in wholesale and retail trade and personal services managed to be up by 1.4 per cent and 1.8 per cent, respectively, at year-end.

SLOWER GROWTH IS EXPECTED BEYOND 2016

With OPEC not backing down, oil prices have remained weak, slipping below US$29 per barrel for a time in January 2016. Although production is expected to ease south of the border this year, a number of factors—

5 | Outlook—May 2016

As a result, in spite of the oversupply, OPEC refused to reduce production in an attempt to lower prices to the point where higher-cost producers would be forced from the market and OPEC could regain some of their market share. Accordingly, the West Texas Intermediate (WTI) oil price—the benchmark for crude oil, slipped from an average of US$93 per barrel in 2014 to just under US$49 last year.

Faced with significantly lower prices, oil companies soon began announcing major cuts to their investment and drilling plans. Still, even though it generally costs more to extract oil from the ground, non-conventional projects (like those in the oil sands) tend to also have long lead times and are capital intensive. In Wood Buffalo, many of the projects were already under way or late in the planning stages; this included the Fort Hills Mine, the Horizon projects, and the Hangingstone development. These projects continued to move forward as significant investment had already taken place dur-ing the initial stages; therefore, it didn’t make financial sense to cancel the projects. Pipeline construction con-tinued across the region as well, with projects like the Grand River Pipeline, Northern Courier Pipeline, and Hangingstone Connector Pipeline.

However, the region was not left unscathed. Husky Sunrise, Suncore, and Shell all announced layoffs in 2015. At the same time, the long-delayed Shell Pierre River Mine was cancelled, and a host of new projects were put on hold, such as the Joslyn North Mine, and new phases of the MacKay River, Christina Lake, and Kirby North projects.

The energy investment slowdown carried over to the non-energy sector as well. The region cut $80 million from its municipal budget last year, including a $39-mil-lion waste water treatment plant. The Government of Alberta also pushed back the construction of the new Northern Lights Health Centre Rooftop Heliport by two years, and some road work was also delayed.

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including higher oil exports from Iran as sanctions are lifted—imply that world oil supply will continue to outpace demand for the next two years. As a result, world oil prices are not forecast to exceed US$40 this year and will be fortunate to reach the US$50 per barrel level by the end of 2017. A return to prices seen in the 2010 to 2014 period will be unlikely through the entire medium term. Oil companies are expected to cut their budgets sharply once again in 2016, and the possibility of starting any new projects will continue to hang in the balance. Wood Buffalo’s real GDP is forecast to con-tract a further 0.9 per cent this year.

Oil sands projects that are currently under way will help limit the damage and so, too, will some non-energy-related projects. Some projects set to get under way this year include water, sewer, and road upgrades under the Urban Infrastructure Rehabilitation Program, as well as a new fabrication plant to be built by Seko Construction. But overall, non-residential construction investment will still fall.

Residential construction will weaken further this year. The population is forecast to fall by 0.5 per cent in 2016, as fewer migrant workers make their way to Wood Buffalo. This would mark the first time in 14 years that the region’s population has fallen. Our cur-rent forecast calls for only 186 housing starts this year. In total, output in the construction sector is expected to fall by another 8.5 per cent in 2016.

Employment is forecast to fall by 0.8 per cent in 2016 (see Table 3), causing the unemployment rate to jump to 8 per cent. The deteriorating job market and plunging consumer confidence will push wholesale and retail trade output down by 3.7 per cent in 2016. At the same time, personal services output is projected to slip 0.2 per cent. The transportation and warehousing sector and the business services sector are also expected to see their output fall again this year. However, the non-commercial services sector, which includes provincially funded edu-cation and health care services, and the public adminis-tration industry are both expected to post decent gains in output this year. This will limit 2016’s overall decline in services sector output to just 0.3 per cent.

With oil sands projects still scheduled to come on line in the Wood Buffalo region, oil production is expected to rise in 2016, allowing primary and utilities output to gain 0.2 per cent this year. A similarly tiny expansion is our call for the manufacturing sector this year.

Given that we expect oil prices to rise only slowly over the medium term, economic growth in Wood Buffalo will remain below the rates seen in the 2010–14 period. Real GDP growth is forecast to average 3 per cent annu-ally from 2017 to 2020, more than 5 percentage points per year lower than the 2010–14 average. Still, as pro-jects continue to come on stream, output in the primary and utilities sector, and in the manufacturing sector, is forecast to rise in the coming years, up by an annual average of 3.1 per cent and 3.2 per cent, respectively.

The outlook for transportation and warehousing, and business services is also positive. This will lead to improved job prospects, pushing population growth and, in turn, domestic demand higher. Employment is forecast to increase by 1.9 per cent, on an aver-age annual basis, from 2017 to 2020, bringing the unemployment rate back down to 4.5 per cent by 2020. Population growth is projected to average 2.9 per cent annually over the same time frame. Residential invest-ment activity will pick up over the medium term, as will services-producing industries that serve the local market. It is anticipated that there will be 335 housing starts in Wood Buffalo in 2017, with this number rising gradually to reach 573 units by 2020.

The start of new energy-related projects in the region will be dependent upon how fast oil prices are able to recover. They will also depend upon the addition of new pipeline capacity. Even before the price of oil declined, oil sands investment had already been expected to level off toward the end of the medium term as pipeline capacity became a constraint. While there is some pipeline construction scheduled for the Wood Buffalo area, still more may be needed to avoid capacity constraints by 2020.

Outlook—May 2016 | 6

Table 3

Sectoral Employment

2012 2013 2014 2015 2016f 2017f 2018f 2019f 2020f

Total employment (000s) 69.6 71.9 74.4 73.2 72.6 73.4 74.8 76.7 78.2

1.8 3.2 3.6 –1.7 –0.8 1.1 1.9 2.5 2.0Goods sector 39.9 42.4 45.4 43.5 43.4 43.9 44.5 45.4 46.1

–1.9 6.2 7.1 –4.1 –0.3 1.0 1.4 2.1 1.6Manufacturing 3.1 3.3 2.7 2.9 3.0 3.1 3.2 3.3 3.3

3.5 5.0 –17.1 6.6 2.4 3.3 2.4 3.6 2.1Construction 14.7 14.0 14.3 13.5 13.3 13.2 13.6 14.2 14.7

–7.2 –4.5 2.4 –5.6 –2.0 –0.2 3.0 3.9 3.7Primary & utilities 22.1 25.1 28.3 27.1 27.2 27.5 27.7 27.9 28.1

1.1 13.5 13.0 –4.4 0.3 1.3 0.5 1.0 0.5Services sector 29.7 29.5 29.0 29.6 29.2 29.6 30.4 31.3 32.1

7.4 –0.8 –1.6 2.1 –1.4 1.1 2.7 3.1 2.6Transportation & warehousing 2.2 2.8 2.1 2.4 2.3 2.3 2.3 2.4 2.4

7.0 29.0 –25.7 15.2 –5.0 0.9 2.2 1.9 1.5Information & cultural industries 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3

21.6 –27.9 0.2 –0.1 0.7 0.8 1.5 2.3 0.7Wholesale & retail trade 6.6 6.1 6.2 6.8 6.7 6.7 6.8 7.0 7.1

6.1 –7.4 2.1 9.6 –2.3 –0.3 2.1 2.4 2.2Finance, insurance, & real estate 1.5 1.4 1.2 1.5 1.4 1.4 1.5 1.5 1.5

–15.0 –4.0 –15.9 23.7 –3.8 –0.7 1.3 1.2 1.6Business services 5.7 5.9 4.4 5.1 4.9 5.0 5.1 5.3 5.5

4.3 2.6 –24.5 14.5 –2.4 1.1 2.8 3.1 2.9Personal services 6.7 6.4 7.5 6.6 6.5 6.6 6.8 7.0 7.2

20.8 –4.8 16.6 –12.3 –0.9 1.4 2.7 3.4 2.4Non–commercial services 4.4 4.3 4.8 4.8 4.9 5.1 5.3 5.5 5.7

2.4 –2.3 12.0 0.9 1.3 3.1 4.0 4.3 3.3Public administration 2.3 2.3 2.5 2.2 2.2 2.3 2.3 2.4 2.5

11.4 2.9 9.0 –13.6 1.0 2.1 3.1 3.5 3.5

f = forecastIn all rows, the first line is in thousands of persons and the second line is the percentage change.Sources: Statistics Canada; The Conference Board of Canada.

7 | Outlook—May 2016

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Outlook—May 2016 | 8