If the effects of the market meltdown and accompanying recession on a particular city or region seem hard to predict, for Calgary, don’t even try. A general economic downturn could be devastating — or we might not even notice.

Falling commodity prices could trigger the apocalyptic resource-town bust of historical caricature — or we might motor through unscathed. Cancelled oilsands projects could sow a swath of destruction — or allow small companies to flourish. We’re just not like other economies.

The local economic dynamic is unusual, even bizarre. Its building blocks are the huge numbers of energy companies — hundreds of producers, drillers, technology services, pipeline/infrastructure providers and related enterprises. They’re combined with a corporate culture comfortable amid creative destruction, eager to launch, grow and dispose of companies over and over as circumstances and pragmatic financial metrics dictate. This generates an outsized metropolitan business life relative to the population and its GDP.

The most dynamic phase I’ve witnessed came in the early to mid-’90s. Natural gas was at $1.50 per thousand cubic feet, one-tenth the level it would reach a decade later; oil merely touching US$20 per barrel was cause for euphoria. Yet, the city thrived. By one count, we had 850 separate oil and natural gas producers. Low prices were hard on employment elsewhere in Alberta — but a main cause of our downtown boom. Calgary isn’t predictably countercyclical, though. At times, a general recession or low commodity prices have had the expected effects.

A big factor right now is the disconnect between oil and natural gas prices. The unusually high oil prices of the past two years have pulled capital, people and market attention away from the natural gas sector, focusing everything on the oilsands. The dollars involved are staggering and the projects are huge — expansion of Syncrude’s bitumen upgrader, for example, required 6,000 construction workers and cost more than $7 billion. But oilsands projects are few in number. The entire sector in the province barely numbers two dozen companies. Their projects drive huge employment in northern Alberta, but you could cram almost all their head-office teams into six office towers.

When oil prices fall, natural gas projects become relatively more attractive. Natural gas is pursued by the full range of companies, from tiny start-ups through the international super-majors. A natural gas boom is what really takes hold of downtown Calgary, making fortunes, careers and company names. Corporate growth swells the RRSPs of self-employed owner-operators in unrelated sectors who were clever enough to invest.

The current slump in oil prices could trigger a renewed wave of small-company activity. But don’t bank on it yet. The capital markets have punished good, solid cash-spinning gas producers almost as much as overleveraged financial institutions. One company I follow that’s on track to generate cash flow of $1 per share this year has been beaten down from $8 per share to $2. Two-times valuations don’t drive drilling booms.

A new and as yet untested factor is Calgary’s dramatic population growth. It has added perhaps 300,000 residents and tipped the city over the one million mark. The vast hordes of newcomers don’t all work downtown. A much higher population is employed in sectors such as retail, distribution and the MUSH (municipalities/universities/schools/hospitals) sector. No creative destruction for them. Their greater relative weight could make the city more subject to conventional economic drivers. Like a normal place. IE



More of George Koch’s articles can be read at
www.drjandmrk.com.