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 dierential 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 dierential 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