MIKEroeconomics: State of the Oil Industry in Alberta

Cars run on gas. Even staunch environmentalists must reconcile with that fact when they drive across the country to protest a proposed oil pipeline. However, the game is changing. More Albertans are ditching their gas guzzling cars in exchange for hybrids because they are cheaper on fuel. The extreme people are ditching gasoline completely and now exclusively riding bikes, and buying up complementary products such as helmets. We still need cars in Alberta, but our demand for them has become far more elastic due to the passage of time and the substitutes now available to us. The City of Calgary’s Transportation Plan outlines our future plans to reduce the amount of cars on the road. One LRT can replace numerous cars on the road per trip, and we will continue to make the entire city more accessible by bicycle. This will naturally reduce our demand for gasoline powered cars. Let’s face it – the price of gasoline is always going to go up, which is going to drive up demand for bikes. Our preferences are also changing, and it is more hip to carpool or bike to work than to admit you are the sole occupant of your Escalade on your daily commute. In the future we will actually be able to do a cross-elasticity calculation to see just how much demand for bikes was affected by the price change of gas, by dividing the percentage change in demand for bikes by the percentage price change for gasoline.

Alberta’s oil industry can only stand to gain from the province’s own demand for cars becoming more elastic in the long term, because it frees up more of the oil we produce to export. The demand for oil is much higher and more inelastic in the American and Chinese markets due to their larger populations and lifestyles. This will translate into a rise in income for Albertans, which will shift our demand for luxury items to the right. We can measure this by dividing the percent change in the quantity demanded for a luxury item by the % change in our income.

All in all, the oil and gas industry in Alberta is doing fine, and the future looks bright. Our continued policies of building cities less reliant on gasoline will lower our demand for oil, meaning we can export more. The Keystone XL Pipeline may have to cross some hurdles before it is built, but the Enbridge Gateway from Alberta to the coast of BC seems on track, and will increase exports to China and the Pacific Coast of the United States by 2017.