By Tom Bradley

Last week Salman and I spent a couple of days in Calgary. I hadn’t been in Cowtown since our presentations last February, so I was anxious to see how things had changed.

In February, oil prices had been in the dumper for about 6 months, but I found the city to be in a resilient mood. Calgarians have been through many booms and busts and this was just another one.

But low energy prices have persisted and the situation has changed. Job cut announcements are a daily occurrence. There’s less traffic on the ‘Trails’. The hotels (we were exposed to) are relatively empty. There’s an endless supply of hardship stories (and fortunately a few survivor stories too). And with severance packages running out and few (no?) building projects being started, it’s likely to get worse before it gets better.

As we absorbed Alberta’s reality, I couldn’t help but think it provides some valuable lessons to B.C. and Ontario, the two parts of the country where I spend most of my time. I recognize that Alberta is unique and was hit by a massive, unpredicted shock, but some comparisons are nonetheless instructive.

Treating good times as being normal – The longer the boom went on, the more accepted it became that $100 oil and perpetual growth was the norm. Corporate and government budgets reflected it, and certainly nobody was predicting a severe downturn.

In Vancouver and Toronto, the equivalent of the oil industry is real estate. It’s booming and has gone on for so many years that it’s no longer viewed as being cyclical. Cautionary tales and predictions of lower prices (by me and others) now appear to be misguided. Few homeowners or lenders are expecting or preparing for a downturn.

Everything is related to oil – Everything!

When housing takes a hit, the impact on the overall economy will surprise people. The first order effects will be felt by agents, lawyers, designers, carpenters, electricians, plumbers, roofers, pavers, Home Depot, advertising outlets and the Government coffers. The second order effects? Well, you name it ... auto sales, restaurants, etc. For sure, the linkage of housing to B.C. and Ontario’s overall economies is not as strong as oil and Alberta, but the impact is extensive and broad.

Debt levels too high for cyclical nature of the economy – As is always the case, the real pain is being felt by companies and households that are heavily indebted. As noted above, borrowers and lenders were basing their projections (and dare I say risk management) on the good times continuing.

Many homeowners in Ontario and B.C. have highly leveraged balance sheets. A small change in the value of their homes has a huge impact on their net worth. The impact has been all good so far, but hopefully Alberta’s travails will remind us to never dismiss the cyclicality of a highly cyclical industry.

Good times breed excess – Go-go growth periods aren’t known for their fiscal discipline (at the government or corporate level) or good governance. The cost of finding, developing, pumping and administering a barrel of oil got way out of hand. We’re now finding out just how much fat there was built into the cost of some projects, and companies’ operations overall.

The unprecedented real estate boom in Toronto and Vancouver is also a fertile breeding ground for excesses. When things cool down, we’ll become much more aware of how much speculation, leverage, poor cost management, over building and fraud there was in the system.

Bad times breed opportunity – In most corners of Alberta, people are hunkering down and companies are running for cover. But there are, and will be, enormous opportunities that arise for those who are well financed and have a longer-term vision. Suncor’s current moves to grow and strengthen its franchise are examples of this.

In other parts of the country, there are people and companies that are positioned to weather any storm. They will be able to take advantage of any dislocation that happens. Tough times are the perfect time for the strong to get stronger.