How Much Should Canada Worry About Declining Crude Oil Demand?

As the world looks to limit fossil fuel consumption, there is rising concern that the Albertan and broader Canadian economy may be victimized by global trends away from fossil fuels, emulating the deindustrialization of the American Rust Belt. The economic impact of deindustrialization in Alberta could come with significant social and political consequences for Canada. The fear is that oil demand will fall soon and sharply, bringing about rock-bottom prices which initiate a rapid and catastrophic collapse of Canada’s oil industry.Given the inherent uncertainties in the complex interaction between oil supply and demand, believing that the Canadian oil industry is going extinct relies upon a tenuous array of pessimistic assumptions. While rapid oil demand decline is possible, sharp absolute declines in the global consumption of any form of energy are unprecedented in history. When it comes to a substance as adaptable and multifaceted as oil, this outcome is improbable.We could nevertheless see a substantial tapering of oil demand as some use cases are electrified. In this scenario, global oil prices may be depressed as the industry consolidates around a new outlook. While the Canadian oil industry has a reputation for high average costs and high carbon emissions intensity, there is evidence that the major oil sands projects are far more resilient than some contend. The frontloading of capital expenditures in the oil sands enables these operators to remain profitable even at low prices.A future of continued robust oil demand may cause mixed feelings for Canadians. Avoiding deindustrialization in the oil and gas industry is a major positive for the health of the Canadian economy. However, a world that continues to burn oil for energy will likely be one that misses its climate targets. Policies to reduce Canada’s emissions are warranted.