Crude Economics
Troubled Times for Albertan Oil

When the left-leaning New Democratic Party ousted the more oil-friendly Progressive Conservatives in Alberta’s recent elections, greens hailed the results as a death knell for oil sands production. Bloomberg reports on how the new regime plans to crack down on the industry:

[New Democratic Party leader] and soon-to-be Premier Rachel Notley, a 51-year-old lawyer whose father ran the party in the 1970s, plans to make the oil industry pay up and fill a C$7 billion ($5.8 billion) budgetary gap for schools and hospitals—even after crude prices collapsed last year. “We need finally to end the boom-and-bust roller coaster that we have been riding on for too long,” she said in her May 5 victory speech. That means higher corporate taxes, a review of royalties that companies pay the government for extracting fossil fuels, and tougher environmental and climate rules for a province that accounts for 38 percent of Canada’s carbon emissions.

Environmentalists (rightly) take issue with the crude from the oil sands for being particularly dirty and energy-intensive. But while new taxes and royalties might tighten the vice on the industry, the real problem for Alberta’s oil sands is the oversupplied market. Alberta’s reserves rank amongst the most expensive in the world to produce. Even in the heady days of $100+ per barrel prices, Alberta’s crude operators already had their work cut out for them. Now that the price of oil has dropped precipitously, the firms involved have had plenty to worry about. With OPEC showing no willingness to cut production, and with the U.S. shale industry finding ways to produce even in these difficult conditions, it’s hard to envision this glut ending anytime soon.

Energy production doesn’t turn on a dime, and the difficult nature of oil sands extraction makes it especially sluggish to respond to market and political forces. The investments the industry has already made into production have been large enough and have long enough lifetimes that output won’t fall as fast as prices have (it’s actually increased since last summer). Moreover, Alberta’s crude will eventually come out of the ground based purely on the notion of supply and demand—and the fact that oil is a finite resource. But, that said, things aren’t looking good. The oil sands are in for a rough patch, and Alberta’s—and Canada’s—economy is going to suffer for it.

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