Oilpatch facing tough times, but auto sector was hit worse in 2009, says study
A memo from the Ministry of Labour examining the two crisis said the broken credit system during the recession hit the auto sector more acutely
The February memo, prepared for Labour Minister MaryAnn Mihychuk, examined the two economic crises after some observers had called on governments to help Alberta’s energy industry—much like the 2009 bailout of the automotive sector.
The auto sector’s situation was much more dire, the document concluded.
“With the current downturn in worldwide oil prices, some have advocated a similar type of assistance be made available to support the oil and gas industry,” said the briefing note, obtained by The Canadian Press under the Access to Information Act.
“However, the context differs considerably. The impact on the Ontario automotive industry was far more acute than what has been seen so far in the Alberta economy.”
The federal and Ontario governments spent a combined $13.7 billion to rescue automakers Chrysler Canada and General Motors Canada from potential bankruptcy.
At the time, consumers had difficulty securing car loans because of a credit crunch. Sliding sales stung the car companies, which could no longer generate enough cash to finance their operations.
They couldn’t seek help from flagging financial markets, so they knocked on government doors.
Fast forward to today and Alberta’s energy-dependent economy remains hobbled by stubbornly low oil prices, which started their plunge about two years ago.
Cheaper crude has pushed once-booming Alberta into recession, leading to big drops in business investment in the energy sector as well as large-scale layoffs in the industry and along the supply chain. The fallout has also been felt at the national level.
The memo compared the two situations.
The unemployment rate in Alberta’s oil sector climbed to 7.9 per cent in 2015, up from 2.9 per cent in 2011. By comparison, the analysis found, the jobless rate in Ontario’s auto manufacturing sector peaked at 21.9 per cent in 2009, an increase from 8.4 per cent in 2007.
It also noted that the 2008-09 recession was an international economic crisis, while the current context represents slowing global growth _ but not a recession.
The 2009 bailout came amid concerns Canada could lose auto-sector jobs “at an accelerated pace” due to lower-wage jurisdictions in the southern United States and Mexico, the document added. Since oil and gas resources aren’t mobile, there was a lower risk of jobs being moved out of Canada, it noted.
The analysis also underlined the importance of GM and Chrysler to the entire automotive supply chain. A bankruptcy, it said, could have had a “ripple effect” across the country.
When it came to Alberta’s energy sector, the document said some “smaller highly leveraged” oil firms may have been at some risk of default. But it argued that major oil companies had yet to approach governments for assistance and remained in relatively good financial shape.
Since February, when the federal memo was created, Alberta’s economy has faced even more challenges.
Not only have crude prices remained low, the provincial economy suffered another hit when huge wildfires forced the temporary closures of critical production facilities. The blazes also destroyed more than 2,000 structures and triggered the evacuation of 90,000 people from Fort McMurray.
The latest labour market survey said Alberta’s overall unemployment rate climbed last month to 8.6 per cent—its highest mark in nearly 22 years.
Statistics Canada said the jobless rate in the province’s oil and gas sector peaked at 12.3 per cent in February. It fell to 11.8 per cent in March and was 9.7 per cent in July.
Alberta, however, has also received some help from Ottawa.
The federal government announced earlier this year that Alberta was eligible for an automatic payment of $251.4 million in financial relief through its seldom-used fiscal stabilization program.
In their March budget, the Liberals also boosted employment insurance benefits for hard-hit regions of the country, which included some parts of Alberta. The changes, however, were criticized for omitting Edmonton.
Mike Moffatt, a Western University economics professor, said the biggest difference between ongoing struggles in Alberta and 2009 was that, unlike today, the credit system back then had broken down.
He said the unusual set of circumstances had left banks unable to provide capital even when it made financial sense. So, if automakers couldn’t make their payrolls, they couldn’t turn to the banks for help, Moffatt added.
That made the “exceptionally rare” decision to provide an industry bailout necessary, he said.
“There was this underlying understanding that if we weren’t at the table, we could kiss the entire industry goodbye.”