Oil Rising - and housing too!

Oil prices are rising and so are people's expectations and level of hope for more projects to start or re-start.

Recently, the President of Suncor, Rick George, noted that some of Suncor's shelved projects could be re-started sooner rather than later. See reports from the FortMcMurraytoday.com newspaper website. There are several Fort McMurray projects under varying stages of progress which could get the go ahead in the near future.

Also on a positive note, the Conoco Phillips Surmont Project Manager recently spoke at the Northern Alberta Aboriginal Business Association Dinner. He spoke positively for a decision to be made on whether they would proceed with an expansion to their project in The early new year.

Why did the brakes go on so suddenly in the fall of 2008?

Despite the recession and financial services meltdown,  local and industry factors came to play. A few of my own observations were that the overheated labour and oil construction project marketplace was suffering from excessive demand and limited supply of experienced personnel.

These demands were continuing to raise local housing and labour prices, sometimes way beyond market norms. One only has to look at the impact on house pricing in Fort McMurray to know that an average housing price of  greater than $600,000 for houses that would cost normally no more than 250-300,000 in other markets throughout the country is an impact of this overheating.

There were two significant factors which along with the pressure of high demand, drove the housing market to the stratosphere. First, there were limited numbers of camp rooms throughout the region given the demand. Each Oil Sands construction project set up their own camps or contracted suppliers to do the same. This was usually with a guaranteed purchase of space over a fixed period.

This took time to have them built, permited and installed. I recall just 18 months ago, that finding a rentable camp room was all but impossible for Project owners and construction managers. This led to a huge market for space in the area generally, over the past 3 years or so for "rooms".  To rent a room in a local home was a second income for many local homeowners, and for some was a prime source of income. Stories of 3 or four men renting an open basement with curtains for rooms and limited amenities at 1100-1200 each was not unheard of.

Despite the efforts of by-law officers and the municipality, the residential streets were congested with parked work trucks. This was way beyond the normal living population in the area.

The LOA or Living Out Allowance was the key to providing oil industry funds to pull off the need for construction workers, and indeed it was an employment supplement beyond most workers wildest expectations. The LOA was tax free income as long as the worker  had a second residence more than 200 km away and amounts of 3000-5000 per month extra were paid to cover lodging and subsistence costs. Rooming prices soon shot up to meet the price of hotel rooms on a per day basis. I lived in a home with a walkout basement which was rented at $3800 a month and then went up by an additional 1000 within a year.


One can also imagine that the lack of available housing in the area being a contributing factor with the lowest vacancy rate in the country of 0.2  -0.7% as published by CMHC saw increases in the total cost of a house by roughly $10,000 per month.
I recall some former residents of Stephenville buying a house in September 06 and selling it in February 07 for a gain of 80,000 or more.

Everyone got into the speculation business, even the local municipality. At least they tried to establish a large supply of Publicly assisted housing.

Land developments were slow to be approved and this further led to a deluge of older homes being sold to aid the early retirees who invested before the boom and those who had seen the wave from the days of little Fort McMurray, where most people knew who the other was. Others chose to depart for the east and other parts of the country as they could cash out and buy a house in their home community with money left over and start riding the sky train to work on a fly-in fly-out basis.


Recession triggers a pause!

Then, in the Summer and fall of 2008, changes started. The Regional Municipality of Wood Buffalo had established a planning tool over the past number of years that ensured Construction projects would prove the establishment of a Camp Room base equivalent to their incremental demand for employees. Another associated boom was on in establishing these construction camp rooms for both owners, private operators and also in additional hotel space in the local area.

In the fall of 2008, the tide was pushing back against this position of the Municipality. The Oil Sands Owners, who were doing their best to adhere to the "Camp Only" position of the Municipality were under pressure to get their projects going. Many of the workers were holding back, it was a hot job market and they had huge leverage. Unions were trying their best to get support for those workers who preferred to live in the town of Fort McMurray and those who required funds to make working here a worthwhile proposition. Many unionized personnel, by now used to the aforementioned supplementary income referred to in the trades as "Sub" short for Subsistence were renting $3500.00 per month furnished apartment / condos or $5000.00 homes  and could not manage without this support.

I recall from my own experience that some projects were not able to get qualified personnel. Then there was a blink and "camp only" had to take a backseat as there was a need to pay LOA by some due to camp room shortages. It only takes a shutdown, planned or not, or a fire at one plant to totally upset the balance and requirements for additional personnel. Crews of 1000 plus, even up to 2500 personnel at times can show up over a 1-2 week period to add to the local demand if an immediate need arises.

The sheer size and logistics of the camp room requirements for this area will again, I predict, give rise to shortages and essentially force the local rooms market into  higher dollar territory over the next 6-9 months.

A number of other contributing factors are Owners wanting company staff to live in town, Maintenance Shutdowns and expansions of all local plants to improve their per unit costs and pump more oil. I doubt that most residents, who, like myself, count on the additional potential to rent a rooms or two out to supplement the atrocious housing costs are aware that they have been dealt out of the equation from a planning perspective. There are only a fixed number of legal suites designated in the plans for subdivisions.  These are avoided by builders as the additional costs and bureaucracy to get permits and build them is an impediment to this aspect of local housing. Despite the balance against the high cost of housing, most find it prohibitive to pursue legal suites.

So what we are left with is a huge portfolio of unlicensed suites or rooms, a bevy of underutilized camp rooms in the region, a current surplus of unrented rooms in basements and throughout homes. A housing market which is holding its own despite the downturn with a recnet upturn of purchases and sales. With all and summary involved in the housing business in one form or another there is no incentive to see prices normalize. To normalize here is to  maintain value or rise in value. All involved have a vested interest in the status quo or growth. These include Municipal interests, banks, CMHC,  Oil Sands operators developing land with hired developers and builders, workers themselves buying houses on spec to rent and live and construction companies and others renting to maintain a base to fulfill project requirements.

It is hopeful that property investments in the area will retain their value. However, one has to wonder as the continued growth engine chugs along, how does one keep it in check, or should we hope that it goes back to hypergrowth!

I hope to write some more in the next post on the types of jobs and careers I think will be in demand based on the jungle grapevine and my own regular viewing of the classifieds and job ads published.