Production Controls in North American Heavy Oil and Bitumen Markets

Abstract

In January 2019, the Canadian province of Alberta enacted limits on crude oil and bitumen production. These production controls, a policy referred as the curtailment, represent a shift for a government that historically avoided market intervention. Designed to shrink a growing and prolonged price di erential between theWestern Canadian Select price of oil, the key benchmark for Alberta's heavy oil production, and theWest Texas Intermediate benchmark, the curtailment created arti cial scarcity, shrinking the price di erential from more than $40 USD per barrel in November 2018 to less than $15 USD per barrel in February 2019. In the process, this policy transferred market surplus from re ners, mainly those in the US Midwest, to producers in Alberta. We review this large-scale market intervention and calculate the magnitude of the economic transfer. We nd that the curtailment increased producer surplus by $659M CAD per month and reduced consumer surplus by $763M per month. At the margin, every $1 reduction in consumer surplus translated into a $0.71 gain in producer surplus. We further show that if the Government of Alberta's objective was to maximize short-run producer surplus, it should further scale back production, setting the curtailment rate at 25%, rather than the initial 8.7%.