Earlier this month in Canada, the Albertan provincial government made a nearly unprecedented decision to mandate a cut in oil production on their producers in a desperate attempt to boost the extraordinarily low price of oil in the region. The last time this was tried was in 1980, but the move was to protest federal energy policies, not manipulate prices.
Although it intends to help local producers, this measure ignores the root cause of the issue — a lack of pipeline infrastructure. To make matters worse, this measure could result in a slew of unintended consequences and will certainly hurt the Albertan oil business in the long-run.
{mosads}The local price of oil has reached new lows because of an abundant supply of oil in the region. The primary market that Alberta’s producers have access to is the United States, which also happens to be blessed with unprecedented levels of oil production. It is clear that Albertan oil producers need access to other markets to boost the price of their product, and this is something the industry has known for years.
So why have companies not acted to build new pipeline infrastructure and increase exports?
The answer is they have. For years, Kinder Morgan has attempted to expand the Trans Mountain pipeline to the Pacific Coast. This expansion alone would triple the flow of oil from Alberta oil fields to the coast and give producers much needed access to global markets with higher demand.
Unfortunately, the Trans Mountain pipeline has been in legal limbo, despite being initially approved by the federal government two years ago and having wide public support. The situation is so dire that even liberal Prime Minister Justin Trudeau’s government took the extreme and misguided action of purchasing the pipeline to get it completed.
The primary opponents of the pipeline have been deep-pocketed environmental activists, whose goal is to keep all fossil fuels in the ground. These activists have teamed up with sympathetic politicians in British Columbia to further complicate the approval process.
The recent action to forcibly cut production will not only further the goals of the extreme keep-it-in-the-ground movement, it will harm Canadians’ ability to do business. Even though this is being dubbed as a “temporary measure,” this intrusive government intervention sends a negative message to investors about the business environment in Alberta and Canada and ultimately, shrinks local industry.
It is also bad for companies currently in Alberta because the government is now picking winners and losers and distorting essential market price signals. Financial analysts have already reported that oilfield service companies and major integrated companies will bear the brunt of the cut, while other energy producers will benefit.
Alberta’s abundant supply of oil could be exported and put to good use elsewhere if it wasn’t for government and environmental activists standing in the way. Nothing has been solved with this mandated cut in oil production. Oil companies will continue to push for access to the necessary pipeline infrastructure needed to grow their business, but now the door has been opened to rent seeking, or lobbying for government exemptions to get a leg up on the competition. This new government mandate will only contribute to the downward spiral of the Albertan oil industry in the long-run.
Observers in the United States should take note of the current situation in Canada. Environmental activists who want to keep-it-in-the-ground are pursuing a similar agenda when they attempt to block energy infrastructure or energy exports in the U.S. If successful, we could find ourselves in a similar debate about how to “fix” low prices to deal with an excess supply of energy.
Thomas Pyle is president of the American Energy Alliance (AEA), a not-for-profit organization working to support abundant and reliable energy for America’s consumers and businesses.