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How Big Government Helps the Economy: The Case of Alberta Oil
No good deed goes unpunished.
The Alberta Provincial Government has just recently rescued its oil sector. It has received little but hisses and catcalls from the crowd.
Alberta is Canada’s largest oil and gas producer producing nearly 80% of Canadian oil and gas. It is the largest shale oil producer in the world. The industry represents 7% of Alberta’s GDP, which is high in a province with a greatly diversified economy. Other sectors such as equipment manufacturing and transportation are dependent on activity in the oilfields.
Alberta’s oil industry has two serious windows of vulnerability.
1. World oversupply can kill oil prices.
2. It is hard to get the oil out of Alberta. The number of pipelines and railway cars is limited. New pipelines face endless ecological and regulatory hurdles.
Both problems became extremely severe in late 2018. Canadian oil prices collapsed from $50 a barrel to $12 a barrel, making the product nearly worthless. World oil prices dropped as well, but by only one-third. The problem was brought on by very substantial Canadian over-production combined with sizable increases of production by the Saudis, the Russians and the United States. The oversupply produced a glut of unsold Alberta oil that was dragging down the price of new production.
The Canadian oversupply put significant pressure on pipelines and rail transport. The pipelines and the rail companies could charge top dollar for shipping oil, pricing many small producers out of access to transportation.
The Alberta Provincial government entered the picture and basically began to play the hero.
The province imposed a 9% cut in production for all oil companies. The purpose was to get rid of the glut of oil to bring prices back to their original level.
It made plans to lease 4,400 rail cars, bought oil from small producers, and transported the oil in its own railcars to the United States for resale. The purchases would bail out the small producers, and essentially get them the transportation they needed.
The production cut seems to have worked extremely well. Canadian oil prices rebounded strongly. By late February, Canadian West Select was selling at $46 a barrel, nearly the price of the previous year’s high. Oil overstocks had nearly disappeared. The profitability of many oil producers was restored; although they were selling less, they were getting substantially more revenue for every barrel sold. The rapid relief of both the oversupply and low price problem allowed the Province to remove most of the production limits that had been imposed in the crisis period.
The jury is still out on the rail car plan since a lot of that program has not been fully implemented.
In principle, one would think the Alberta Provincial government would get some credit for saving one of its most important industries and a critical source of Canadian exports. No such luck.
The policy was implemented by a governor from the New Democratic Party, which is a Center-Left party. To their credit, the United Conservative Party, a major political rival, has stood by the governor and supported the production cut.
Other voices have not been so kind.
Alberta is traditionally a pro-laissez-faire pro-free-market province. The Chief Economist of the Conference Board of Canada complained that now that Alberta has set a precedent for government management of production levels, the province will be a less attractive place to invest in the future. The overwhelming majority of Canada’s oilfields are in Alberta. So if an investor wants in on the Canadian oil boom, in just what other province are they supposed to invest?
Oil companies that run refineries complained. They liked buying their Canadian oil super cheap. They wanted the crisis in Alberta to continue.
Pipeline companies complained. They liked scarcity of transportation (unless there could be other pipelines which they could control.) They liked the monopoly power that allowed them to charge high prices for transportation access and disliked the presence of competition from new railcars which would make pipeline charges go down.
Moral: Government interventions in the economy can be spectacularly successful. But the government will still be critiqued by free-market ideologues and special interests.
There is a joke about a woman by a river in winter screaming for help because her little girl has just fallen through the ice. A policeman hears the mother’s screams, throws off his coat and dives under the ice to save the child.
He is down for one minute … two minutes …three minutes…four minutes.
Finally, he resurfaces with a nearly lifeless girl. The child is not breathing and is almost blue. The policeman starts resuscitation and breathes air into the toddler’s mouth while pumping her chest. One minute …two minutes … three minutes.
Suddenly the child starts breathing. She sits up. The little girl is going to be okay!
The mother turns and faces the policeman.
“So where’s her hat?”
For More Information
A basic summary of this story can be found in the March 4, 2019 Bloomberg Businessweek “Canada Tries the OPEC Way.”
For an upbeat account see Oil Price.com’s
On the flak, see CBC’s “Alberta's OPEC‑style cuts draw down oil backlog, analysis firm says” www.cbc.ca/news/business/alberta‑oil‑cuts‑1.4991497