Production Controls in North American Heavy Oil and Bitumen Markets

31 Pages Posted: 12 May 2021

See all articles by Brandon Schaufele

Brandon Schaufele

University of Western Ontario - Richard Ivey School of Business

Jennifer Winter

University of Calgary - The School of Public Policy; University of Calgary - Deptartment of Economics

Date Written: May 12, 2021

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%.

Keywords: Oil sands, production controls, market surplus

JEL Classification: Q48, L71, L52

Suggested Citation

Schaufele, Brandon and Winter, Jennifer, Production Controls in North American Heavy Oil and Bitumen Markets (May 12, 2021). USAEE Working Paper No. 21-495, Available at SSRN: https://ssrn.com/abstract=3844233 or http://dx.doi.org/10.2139/ssrn.3844233

Brandon Schaufele (Contact Author)

University of Western Ontario - Richard Ivey School of Business ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada

Jennifer Winter

University of Calgary - The School of Public Policy ( email )

Calgary, Alberta
Canada

HOME PAGE: http://www.policyschool.ca

University of Calgary - Deptartment of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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