Oil prices jump as Fort McMurray wildfire slows down oilsands production

The price of crude is rising today as the wildfire in Fort McMurray, Alta., slows oilsands production.

The Wood Buffalo region of Alberta is the economic heart of the province, and key to world oil markets. It produces more than half of Canada's oil each day and is an important exporter to the United States.

While the oilsands plants themselves are not at risk at this moment, production has not just slowed down, but in some cases has stopped because the plants can't operate at full capacity without staff. The entire population of Fort McMurray has been evacuated, thousands of homes have been lost and it's unclear when the city will be habitable again.

Short-term reduction in supply

Production has shut down at Shell's Albian oilsands mines, as well as at Suncor's base mines north of Fort McMurray. Production has been curtailed at other Suncor operations, as well as Syncrude, Husky and Connacher.

"But not because it's at risk," said Tim Pickering, chief investment officer at Auspice Capital. "But because of the people issue. Of course, they're being sensitive to their employees and family issues."

The market is now estimating that between 600,000 and 800,000 barrels are off-line. World oil production is around 96 million barrels a day, and is oversupplied by approximately one million barrels a day, with lots of oil in tanks, so even if oilsands production slows in the short term, it should not have an effect on the world price in the long term.

Key staff evacuated from area

But in the medium term, the question becomes how to operate the oilsands without its key staff. Last year, Fort McMurray's population stood at 78,000, with a shadow population of 43,000. Most of the shadow population lives in work camps around the oilsands operations. Many of those workers have been sent home to other parts of the country because the camps are now housing residents evacuated from Fort McMurray.

But a substantial number of Fort McMurray's permanent residents live in the city and commute daily to work at the oilsands plants. Just one bus line, Diversified Transportation, carries 14,000 passengers a day to and from oilsands plants. It has seven routes a day from the Timberlea neighbourhood to the Syncrude plant. Timberlea is one of the neighbourhoods that has suffered serious losses in the fire.

While the energy sector has put into place its emergency response plans, the question is whether those plans include the displacement of a significant portion of the workforce.

Market reacts

Crude oil is trading higher by approximately three per cent this morning, in part because of the production slowdowns and questions about how long they will last.

"Ultimately, will this mean that the global surplus of crude will get winnowed down faster than we thought previously," said Judith Dwarkin, chief economist at RS Energy Group in Calgary.

"It really depends on how much is shut in and how long it's shut in, and we just don't know at this point how quickly the operators will be able to re-establish production at previous levels."

"What makes the Canadian energy sector great is that we have highly skilled people, and these people are now in a very difficult state," said Gaetan Caron, former head of the National Energy Board.

"The most significant impact in the short term and the midterm is the people whose lives have been affected; their priority right now is to stay safe and go back eventually to a normal life. That will have an impact on the resources available to companies in terms of the experience, the know-how, and the knowledge."

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