Oil production cuts are on the table. Here's what that might mean for Alberta

Premier Rachel Notley says the plunging price of oil has become a crisis for Alberta, and she’ll announce a short-term solution on Sunday evening.

Premier Notley to announce plan to deal with low price of oil on Sunday evening

Premier Rachel Notley will announce a plan to deal with the low price of oil on Sunday at 6 p.m. (Canadian Press)

Premier Rachel Notley says the plunging price of oil has become a crisis for Alberta, and she'll announce a short-term solution on Sunday evening.

CBC political analyst Graham Thomson said he's under the impression Notley will impose mandatory cuts to oil production.

"If she wasn't going to do anything, she wouldn't be going to this great length to try and soften us up beforehand," he said, highlighting a letter Notley wrote about the struggling industry that was provided to the media.

"She's trying to show Albertans that she is doing all she can to ... raise the price of oil."

Notley said 35 million barrels of oil are sitting in storage, unable to make it to market because pipelines are congested. Oil is being sold at "fire-sale prices" to get it moving.

This isn't just the NDP being the nanny state and imposing its will on the free market.- Graham Thomson, political analyst

There are two short-term solutions for reducing the stockpile and closing the price gap, Notley said: Let the free market "sort itself out" or temporarily restrict oil production.

Both the United Conservative Party and Alberta Party are in favour of curtailing production.

"This isn't just the NDP being the nanny state and imposing its will on the free market. This is the NDP backed by other parties, notably the United Conservative Party," Thomson said.

"If this doesn't work out as planned, they're all going to share in the blame. But if it does work out as planned, they'll all be trying to claim the credit for this."

Pipelines: the problem and solution

The Federal Court quashed cabinet approval of the Trans Mountain expansion project this summer. (Dennis Owen/Reuters)

Notley is expected to announce whether the province will intervene or let the free market handle the differential on Sunday at 6 p.m. MT. 

Barbara Engelbart McKenzie, executive director of the Leduc-Nisku Economic Development Association, said a production cut isn't ideal.

"Making a cut doesn't promote capital investment. It's not going to promote growth in the sector. It's not going to get new projects started," she said. "It's just going to ... deal with what we're facing today, which is the large differential."

The best-case scenario would be getting more pipelines built — a solution that requires federal backing, she said.

In her letter, Notley said the province will keep fighting for pipelines, which are the long-term fix for increasing the price of oil.

University of Calgary economics professor Trevor Tombe said congested pipelines are the root of the problem, noting more expensive transportation methods like railcars are used when pipelines are at capacity.

"It's that added transportation cost that's really behind the widening differential that we've seen recently," he said.

Possible downsides

Notley noted there isn't an industry consensus on whether a production cut is the right move.

It could help some producers by increasing prices, said Richard Dixon, a professor with Athabasca University's faculty of business. But he noted it could also hurt refineries which benefit from lower prices, as well as smaller producers not anticipating a cut.

"For Suncor and other companies that have refineries that have the front end and capacity, Shell and others, this is going to hurt. Because right now, they're able to turn a very good profit," Dixon said. "So who are we helping and who are we hurting? The premier alludes to that, [but] it needs to be a lot deeper."

Tombe noted the effects of potentially curtailing production will depend on the details anticipated to be announced on Sunday.

CBC will livestream Notley's announcement on Facebook and online on Sunday at 6 p.m. MT.