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Economic Repercussions of Fort Mac Fires—More Complex Than at First Glance

Fort McMurray has just experienced the unthinkable. On Sunday, May 1, uncontrolled wildfires resulted in evacuation warnings being sent to residents of communities southwest of Fort McMurray. Over the following two days, with the weather failing to cooperate, the wildfires took hold in and around the Regional Municipality of Wood Buffalo (which encompasses Fort McMurray). And by late Tuesday, residents were scrambling to escape the fires that had engulfed large swathes of the city of 80,000.1

In the days that followed, Canadians across the country watched the tragic events unfold—so many families displaced, patients evacuated from hospitals, pets left behind. Images showing the extent of the damage were hard to comprehend. Estimates suggest that more than 2,400 homes and structures were damaged or destroyed, and the loss count for vehicles and household valuables has yet to come. Luckily, no lives were lost in the fire, although road accidents during the evacuation did result in some fatalities. At the time of this writing, fires had spread over 2,000 square kilometres but were moving away from the city—heading east and southeast toward the Saskatchewan border.

While firefighters are working to snuff out remaining hot spots in the city, government authorities, insurers, and business leaders are assessing the damages and planning for a return to normal life in the Alberta city. At The Conference Board of Canada, our forecasters are looking at the immediate impact of the fires—how things will likely unfold in the coming days, weeks, and months—and what effect the wildfires will have on the economy over the longer term.

Assessing Economic Impacts

GDP measures economic activity that generates income through wages, profits, or the use of capital. It does not directly measure the losses in wealth or in assets such as homes and vehicles. Nor does it measure the direct hit to infrastructure or private capital. If, for example, a Fort McMurray retail store was destroyed in the fire, the loss in value of that store would not be directly captured in the GDP numbers. However, going forward, the loss of the store’s business operations, wages paid, and profits earned would be captured in the data and would take away from GDP. On the other hand, if the store is rebuilt, the construction effort would add to economic activity.

Near-Term Impacts

Economic activity in Fort Mac has come to a grinding halt. Recent announcements from Alberta Premier Rachel Notley and her government suggest that the city could be shut down for at least three weeks. Moreover, Fort Mac is essentially “supply central” for Alberta’s massive oil sands industry. The tragic events and evacuation of workers from the area resulted in many oil sands operations shutting down production. Estimates suggest that temporary shutdowns reduced oil sands production by more than 1 million barrels per day—some of it crude bitumen, but most of it pricier upgraded or synthetic crude oil. It is, however, still too early to get an accurate assessment of how long production will be shut down. Wildfires have so far not affected the production facilities directly, and most of them were shut down in an orderly way. This suggests that affected production facilities will be able to slowly resume operations as soon as workers are able to get back to the sites.

The impact of the shutdown of activity in Fort Mac and in the oil sands is a major hit to the local economy in the short term. At the provincial level, however, much of the economic activity lost in the city of Fort Mac will accrue elsewhere. Families have moved temporarily to other areas, mostly within Alberta, and they will spend on food and accommodations and other services—with much of the spending covered by insurance, donations, or government transfers. Oil sands production will be lost to the province and to the country for some weeks, but how large the hit will be will depend on the length of the shutdown. Some producers have already started ramping production back up, and we’ve assumed that most will be up and running by the end of the month. In total, we’ve assumed that lost production will average about 1.2 million barrels per day for 14 days. This would translate into roughly $985 million in lost real GDP2—or 0.33 per cent of Alberta’s projected GDP in 2016. For Canada as a whole, that share is only 0.06 per cent.

The timing of the emergency relief effort, household spending, and the cutback to oil sands production will all affect economic activity in the second quarter in the province.

There are mitigating effects to oil production losses. The sheer size of the firefighting, emergency, and clean-up efforts will generate plenty of economic activity. Having gained experience from the flooding in southern Alberta in 2013 and the Slave Lake fire in 2011, insurance companies have been quick to mobilize staff and services to assess damage and provide assistance. Insurers have opened field offices in Edmonton and surrounding areas and have been issuing emergency cheques and encouraging Fort Mac evacuees to keep receipts. Moreover, almost all home insurance policies cover fires—as soon as claims adjusters are able to enter Fort Mac, they are expected to start quickly expediting claims, despite the extent of the damage.3 These efforts will help bolster real economic activity in the province. Moreover, households are also getting emergency funding from the Red Cross, which, in the first few days following the fire, had accumulated $60 million from private donations and the federal government’s matching contribution. The Alberta government is also disbursing $1,250 per adult and $500 per dependent from evacuated households. These funds, totalling around $160 million, will be quickly spent to meet the immediate needs of evacuated households.

The timing of the emergency relief effort, household spending, and the cutback to oil sands production will all affect economic activity in the second quarter in the province. The likelihood of a significant negative impact is fading as news emerges that many oil sands producers will ramp up production relatively quickly. Overall, we estimate that the fires will take about 1 per cent out of real GDP growth in Alberta in the second quarter. While this is a significant hit, especially as the province is still in decline from the broader effects of lower oil prices, it is temporary. As oil sands production ramps back up, we should see real GDP growth boosted by a similar amount in the third quarter. At the national level, the impacts will hardly be noticeable.

As residents return to Fort Mac in the coming weeks, oil sands production gets back to normal, relief efforts continue, and the rebuilding gets under way, we expect activity to pick up to the point that the impact of the wildfires on overall GDP in Alberta for 2016 as a whole will be only slightly negative. (See chart.)

2017 and BeyondImage of chart showing the minimal impact of the wildfires on Alberta's GDP

If previous catastrophes are a guide, the rebuilding effort will really take hold in 2017. Estimates suggest that in Fort Mac, more than 2,400 buildings were damaged or destroyed, including 1,600 private dwellings that were completely destroyed. Various estimates of the extent of damage have emerged, but a solid number won’t be available until residents and insurance adjusters are allowed back in the city. As claims are settled, residents will repair, rebuild, and restock their homes. Most of Fort Mac’s public buildings were saved from the fire, but the city will require additional sums to repair and rebuild roads and other infrastructure.

In peak years, the Regional Municipality of Wood Buffalo’s residential construction industry was building 600 to 800 homes a year. But the city has been hit hard by the troubles in the oil patch, and new home construction fell to under 200 units in 2015. Over the next few years, construction activity will likely return to its peak-year levels as residential and other infrastructure is rebuilt. Overall, we expect the rebuilding efforts to add roughly $1.3 billion in real GDP to Alberta’s economy in 2017—or about 0.4 percentage points to economic growth. Construction will likely remain elevated in 2018, and possibly into 2019 as well until rebuilding is completed.

The true cost of this tragedy is its effects on people’s lives—the loss of personal items and homes— and livelihoods. And while rebuilding and replacing lost assets will generate economic activity, this doesn’t suggest that Canadians in general or Albertans in particular will be better off economically. The funds put toward replacing lost capital will leave the provincial and federal governments with more debt and the insurance industry with the challenge of absorbing what will most likely prove to be the costliest natural disaster in Canadian history.

1    Global News, “Fort McMurray Fire: Timeline of Events” (May 4, 2016).

2    Revenue losses do not equate one-for-one with GDP, in part because a portion of revenues accrue to the provincial government as royalties and because production data are converted to 2007 base year equivalents to align with real GDP estimates published by Statistics Canada.

3    Global News, “Fort McMurray Wildfire: Insurance Companies Begin Preparing for Fire Claims” (May 9, 2016).

 

Photo of Pedro Antunes Pedro Antunes
Executive Director, Economic Outlook and Analysis,
and Deputy Chief Economist
Photo of Marie-Christine Bernard Marie-Christine Bernard
Associate Director
Provincial Forecast