By Jeff Sanford
Calgary, Alberta — August 10, 2016 — Alberta continues to suffer through a painful economic slump. The price of oil is relatively low. The effects have rippled through the provincial economy creating interesting challenges for Calgary-based collision repair centres.
Those living in Alberta have long ridden the cyclic nature of the energy industry. The price of crude determines the overall direction of the economy. When the price of oil is high, the province is flooded with money. Governments collected generous royalty payments. Oil companies pull in big profits, begin to build big new energy projects, hire employees at high wage rates to do so.
Boom periods in the provincial economy occurred in the 1970s and early 2000s when the price of a barrel of crude spiked to record levels. In those eras the provincial economy boomed. But the bust soon followed, a scenario Albertans are reliving again now.
Since 2008 the price of oil has generally fallen from the record high price of almost $150 a barrel in the summer of that year and is now around $40. Economic trends in the provincial economy reversed. Growth gave way to a period of rising unemployment and stunted growth.
Rick Hatswell is the chief operating officer of Craftsman Collision. The company operates a chain of collision repair centres across the west, including in both British Columbia and Alberta. He has noted the difference between the slower Alberta economy and the currently booming BC one. “It’s been an interesting year. BC has been busy. It’s really rocking. But Calgary has been quiet,” says Hatswell.
Before the fire in Fort McMurray, oilsands projects were being scaled back and cancelled. The pool of available tradesman in the province has deepened. This is good news in a province that has a famously tight and competitive job market for tradespeople. “It’s really hard to find techs out here,” says Hatswell. Trades people can make great money in the oilsands. This puts pressure on business owners in other sectors of the economy. Hatswell has created what is arguably the most sophisticated apprenticeship program in the country. It’s a necessity if you are going to attract workers in this region. Could the infamously tight Alberta labour market finally loosen up a bit now that hiring in the oilsands have turned to layoffs? You might think so. But Hatswell hasn’t had much luck yet—turns out that years of receiving high salaries in the energy sector has put expectations into unrealistic territory in terms of wages.
Hatswell says he’s been looking to take on some estimators for his shops. But he hasn’t had that much luck yet. “With the oil slow down you’d think more employees would come in,” says Hatswell. The few who do come have outrageous expectations regarding compensation. “I’ve had people come to apply to be an estimator. They have no experience in this industry. They’re like a lot of people in Alberta, they have a little bit of everything. But they come in expecting $90,000 a year to write four sheets a day.” Such is life in the shadows of the energy sector.
Also managing the ups-and-downs of the Calgary economy is Brenda Petraschuk, vice-president of PET Auto Body Ltd. She and her partner Darrell have run the heavy truck collision repair business since 1992. Like so many in the province of Alberta these days she’s a little worried about the economy.
Petrashuk says there was lots of work to go around during the boom years. The trucks that haul materials to remote construction sites experience vibration damage, cracked windshields and dented bodies. Those trucks would often show up at their shop. But today almost a dozen major energy projects have been put on hold. With fewer big projects underway, the oil-dependent Alberta economy is sluggish.
“The business in Alberta right now is not as it has been. It’s trickling in. There is not as much work being done right now. No one is doing any more than they have to,” says Petrashuk. “Customers aren’t spending money. They’re not upgrading equipment. If they have to fix something, they fix it, but they’re not doing anything extra. Summer is the slow time. Clients will sometimes use that time to get their trucks painted. Hopefully we’ll see some of that this year,” she says. “We’ll see how this summer goes.”
Like many in Alberta she would like to see major infrastructure projects go ahead. “We’re hoping the pipelines get built,” she says.
Another local executive in the Calgary collision repair industry is Steve Ray, general manager of Western Paint & Body Works Inc. The company had been doing work for the energy industry, but has since switched their focus to RV collision repair in an attempt to find a more stable, sustainable business niche. Ray says he sees the same slowdown that so many others do. “It’s tough in the province right now. The street we’re on is quiet. I can see three or four ‘For Lease’ signs from my office. There’s nothing going on. It’s like a light switch went off here in Alberta,” he says.
A couple years ago the company had been doing heavy equipment maintenance and painting in a bid to steer clear of DRP programs (which Ray felt were becoming too restrictive. The company ended up doing heavy painting and maintenance for clients in the oil patch. “We ended up in a fleet situation. These are self-insured long-haul companies that have warehouses, oil equipment transport companies and the oil companies themselves. They needed our services,” says Ray.
The shop ended up doing final preparation and painting for a fleet of trailers used to carry the equipment used to send pressurized hydro-fracking liquids down well holes. These devices are built on large fifty-five foot heavy truck trailers. Western had the parts delivered on a pallet and then did the painting and final construction. “We painted a huge number of frack pumps, forty two of them. It’s a very challenging bit of work in terms of equipment. The physical exertion by the workers is extreme,” says Ray. The work was hard on the equipment. Since then Ray has shifted the focus of business to the RV collision repair market.
But shifts are happening across the auto service eco-system in Alberta. This spring executives at AutoCanada, the Edmonton-based, publicly-traded dealership group, began warning that car sales were weakening. As a result AutoCanada announced a management overhaul. Steven Landry, a one-time Chrysler Canada president, took over as CEO as the company was said in a report to be working through one of the most “challenging periods in its 20-year history.” The company operates 48 dealerships across eight provinces; with roughly half of those stores in Alberta. And in that province, according to the report, “same-store revenue fell 12.1 per cent and same-store sales of new vehicles plunged 21 per cent.”
An analyst with one of the big banks that covers AutoCanada recently noted that, “conversations with dealers suggest sales in the Calgary-area fell 10 to 25 per cent in the first two months of 2016.” The analyst went on to say that the drop in oil prices has led to a significant “increase in unemployment, a lessening in consumer confidence and a greater difficulty in consumers obtaining auto loans, particularly in Alberta.” That said, the analyst also noted that sales of used vehicles has jumped ahead of late, with a 16.5 per cent jump in sales of older cars. The increase in used car sales was accompanied by a “2.6 per cent increase in parts, service and collision repair revenue as consumers opted to buy used cars or hang onto their old ones a little longer.” That owners would hold on to older cars, even if they were in a collision, is actually good news for collision repairers.
It should also be said that there are optimists out there that expect the situation in Alberta to turn around fairly soon. One of those optimists is Todd Hirsch, chief economist with the well-known Alberta-based financial services organization ATB Financial. He addressed a meeting of Canadian Home Builders’ Association last week and predicted that the “rising unemployment rate in Alberta will crest this fall,” according to the report. He thinks Albertans will “see the light at the end of the tunnel by Thanksgiving… The next four to six months will be the worst of it, but 2017 and beyond, I am much more hopeful. My guess in 2016 is we will see more markers of net-out migration, which isn’t great…. However, I don’t think we can expect a mass stampede of people leaving the province, not like we saw in the ’80s. For the single reason that there really isn’t that many places in the Canadian economy that are on fire right now, with the exception of British Columbia. I think we will see some quarters, and maybe all of 2016, with net-out migration, but I don’t think it will be on the same magnitude of other generations.” Which would be good for collision repair centres looking for employees (assuming workers accept the radically high wages paid in the oilsands in the 2000s were an anomaly and are not going to happen in other sectors).
On labour costs Hirsch said that, “those are expected to come down. Labour costs had escalated disproportionally over the last 12 years. So now we’re in this period of re-balancing. It’s painful, there’s a lot of job loss in the energy sector that is spilling over into periphery industries…”
Hirsch went on to warn that Albertans “have become accustomed to exceptional growth rates in the four and five per cent range, people will have to readjust their expectations in the mid-term… Moving ahead, 2017 to 2020 are going to feel sluggish, but the Alberta economy is going to look more like a typical Canadian province with growth in the range of one to two per cent. I believe in 2017 we will return to the positive side of the ledger…. I do think the worst of this downturn is yet to come, at least in the labour market in the next four to six months,” Hirsch said. “I expect the unemployment rate will trend higher over the summer and into the early fall. We’re already at seven to 7.5 per cent unemployment, and my guess is by the time we get to the early fall, it will crest somewhere above eight per cent.” He went on to say that employment stability “will follow oil, stabilizing around $50 to $55 by the end of 2016… And then the unemployment rate will gradually start to come down in 2017,” according to Hirsch.
When does oil get back to $50, or $55, a barrel? This is the biggest question when talking about the Alberta oil-based economy. Peter Tertzakian, an energy economist with ARC Financial, has been quoted as saying that, “meaningful cash will not start trickling back into the oil and gas industry until crude goes beyond $50 a barrel.” Right now a barrel is selling for just above $40 a barrel. Which way it goes from here is great question.
On one side of that argument are those who expect the price to crash again relatively soon, partly as a result of an over-saturated market. As well, in a media report, Tertzakian suggested there is, “much uncertainty about how much business will actually be generated given that the energy industry faces a future in which people’s consumption patterns are undergoing a major transformation.” A massive influx of electric cars is expected to hit the market over the next 10 to 15 years. “This will significantly affect fuel demand,” according to Tertzakian. His prediction is that the many major projects in the oil sands going ahead have been cancelled and will not be revived “even if oil rebounds.” This suggests wage rates could be more stable and generally lower over the longer-term, a good thing for collision repairers.
Of course, there are those betting on the price of oil recovering in the year to come. According to experts the current oversupply will be used up quickly. The so-called glut is not as big as many think. The low price of oil has caused many drillers to pull back in terms of drilling. As a result some of the new fracked shale plays that drove the American production boom over the last decade will experience declines in production. The fracked shale wells deplete faster than conventional oil wells. As currently-producing wells deplete, the lack of new drilling will see overall production levels drop. This will put upward pressure on prices.
At the same time there are those who say the world will also experience a dip in total global production of conventional oil as well. Today the amount of oil produced daily in the world is stalled out around 90 million barrels a day.
A century and a half into the modern harvest of crude oil, and daily production is no longer rising as fast as it has before. Now, after 150 years the industry is turning to hard-to-access oil like that in the oilsands and in the shale beds to replace flow from the big conventional oil fields. But the flow from unconventional oil is not keeping pace with declines.
Along with lower drilling activity global total daily production could dip a bit by the end of the year, according to some analysts. One of the reasons the economy seems generally stagnant since 2008 is that in that decade and half since, total daily global production has gone “sideways.” Total global daily production hit a “plateau” at around 90 million barrels a day after a long century and a half of growth in daily flow. This limiting of the world’s single most important source of energy is limiting the ability of the economy to grow as easily as it has in the past. The global economy is hitting a natural limit to growth.
Just as some oil industry theorists predicted, interest rates have gone to one percent in a desperate bid to maintain growth. But even with rates at a radically low level (a level very few experts predicted) the economy remains listless, unable to grow. Rates this low would have sent the economy into hyper levels of growth in the 1990s. Now it seems that radically low rates occurring has many puzzled. The inability of hyper low interest rates to kick in a new round of growth is something that key peak oil activists predicted. Also as the peak oil activists warned, the oil industry seems to be at a point of peak production. The new “peak oil” cap on global production is going to put further upward pressure on prices. That is, some think the price of oil is going much higher in the months and years to come.
A recent report finds some speculative hedge funds managers have begun buying up future contracts that will pay out if the price of crude oil hits $100 a barrel in the months ahead. Maybe the province is about to boom again. That would be a welcome development in a province fighting to keep up with the boom and bust nature of the oil industry.
