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Livin' on a Prayer - How Alberta's Oil Production Cap Became Redundant in Crazy Times

On December 1, the government of Alberta will officially end its nearly two-year-old policy of curtailing crude oil production to help shrink the massive price discounts that producers had been enduring. It would hardly be an overstatement to say that North American oil markets have changed dramatically since the production cap was implemented by Canada’s largest oil-producing province in January 2019. A short-but-bruising oil price war and a pandemic that slashed demand for crude resulted in Alberta producers making supply cuts even bigger than their government had mandated. Today, we look back at the provincial government’s policy and what has changed to motivate its suspension.

To survive in Alberta, Canada, you have got to be tough. Not only must Albertans endure brutally cold winters but the energy sector there, which by some estimates makes up more than a quarter of Alberta’s economy, faces its own set of challenges. In particular, oil producers in Alberta have had to brace themselves against the winds of political and market changes. Supplying primarily oil sands-based crude oil from a remote, landlocked region, with essentially one dominant export customer (the U.S.), has meant waiting on Canadian and provincial regulators to sanction enough pipeline capacity to ship growing supplies to market. In addition, wild swings in price discounts for oil supplies has resulted in immense value losses for both producers and the province of Alberta when spare pipeline capacity runs short. Most of the time, Alberta and its oil producers have had to roll with the punches and cope as best they can.

In November 2018, the punches started coming fast and furious in the form of big price discounts for Western Canadian Select (WCS) and other Alberta crude. At that time, West Texas Intermediate (WTI) prices were trading in the $60/bbl range, while WCS, the benchmark heavy oil price marker, was fetching less than $20/bbl, meaning record price discounts in excess of $40/bbl. On December 2, 2018, then Alberta Premier Rachel Notley announced that the province had had enough of the gaping price discounts and would be exercising its authority to limit oil production in an effort to improve the price received for Alberta’s oil.

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