Production Controls in Heavy Oil and Bitumen Markets: Surplus Transfer Due to Alberta’s Curtailment Policy

Abstract

In January 2019, the Canadian province of Alberta enacted limits on crude oil and bitumen production. These production controls, a policy referred to as curtailment, represent a shift for a government that historically avoided market intervention. The policy was designed to shrink a growing and prolonged price differential between the Western Canadian Select price of oil, the key benchmark for Alberta’s heavy oil production, and the West Texas Intermediate benchmark. The curtailment created artificial scarcity, shrinking the price differential 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 refiners, 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 find 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 translates 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%.