New Report Shows Canada is Ill-Prepared for Anticipated Demand Decline for Oil and Gas

June 27, 2023, Ottawa – As the global economy moves away from fossil fuel dependence, the Canadian oil and gas sector is not well positioned to weather the drop in demand for their products, putting the workers and communities that rely on the sector at risk, according to a new report by the International Institute for Sustainable Development (IISD). 

Setting the Pace: The Economic Case for Managing the Decline of Canada’s Oil and Gas Production finds that the oil and gas sector’s historical role as one of Canada’s economic engines is changing with the global shift towards a carbon-neutral economy by 2050.  

Given that Canada exported 80% of its domestic oil production in 2021 and that more than 94% of those exports are shipped to the United States, the country is far too reliant on a single market that will be buying less and less of its product. In this period of transition, there is considerable risk associated with overinvesting in assets that may be of little value in the near future. 

Nor can the Canadian oil industry count on marketing itself as a producer of clean or ethical oil to preserve market share. The IISD report notes that the primary buyers of Canadian oil—refiners in the American Midwest—are focused on price, reliability, and quality. The same applies to the carbon intensity of oil products: intensity per barrel is not part of the decision-making process among Canada’s largest purchasers.  

“Oil refiners in the U.S.—Canada’s main customers—simply don’t care about environmental, social, and governance credentials,” says Aaron Cosbey, Senior Associate at IISD and co-author of the report. “They just want the product at the specified price and quality. And consumers will not force them to care. Gasoline is not like coffee—you won’t see an eco-label on gas at the pump.” 

Market for oil products is shrinking 

The report further notes that the U.S. Inflation Reduction Act (IRA) will accelerate the shift to a clean energy economy, with profound effects on Canada’s oil and gas industry.  

Near-term decreased demand for oil will be driven primarily by the electrification of passenger vehicles, which currently account for 27% of global demand. Data additionally suggests that falling demand for oil to heat buildings and generate electricity will lead to a peak in global oil demand by the end of this decade. Plastics—the second biggest end use—will be a more durable source of oil demand in the near term, but not in the long term, and that won’t be enough to stop a sharp decline in overall demand post-2030.  

“As economies decarbonize, the risks and economic costs associated with Canada’s continued reliance on fossil fuels will intensify,” says Nichole Dusyk, Senior Policy Advisor with IISD and co-author of the report. “These risks and costs must be factored into policy and business decisions and signalled to investors. The consequences of not doing so are potentially catastrophic for the workforce and communities that depend on this industry.” 

Market for natural gas is uncertain 

While the declining trajectory for global oil demand is clear, the outlook for gas is more uncertain. However, high liquified natural gas (LNG) prices have slowed demand in growth markets, while also leading to a rush of new LNG developments. The anticipated result is a glut of LNG, starting in 2025, that will drive down prices and make it difficult for Canadian exports to compete even if low prices keep demand high. 

The largest share of global gas demand (39%) goes to electricity generation. Now, however, “the costs of wind, solar, and storage technologies are competitive with combined-cycle gas in many jurisdictions,” notes Dusyk.  Similarly, heat pumps are emerging as an efficient means to electrify heating and cooling in residential buildings, as well as in some industrial processes. 

Actions government can take 

The IISD report highlights international experience as showing that a successful transition is possible, but it needs intention, planning, and time to help avoid the consequences of a potentially volatile demand decline. 

The report lists four actions that the Government of Canada can take immediately: 

• Continue strengthening climate policies, including through the implementation of the Canadian Sustainable Jobs Act and Plan. 
• Support subnational and Indigenous governments’ plans and programs on economic diversification. 
• Align fiscal policy with the reality of the expected decline in the oil and gas sectors.  
• Explore tools within the federal government’s jurisdiction to end expansion and prepare for phasing down of the production and use of oil and gas. 

Conclusion 

“The less the oil and gas sectors are prepared for the upcoming downturn, the more economically and socially painful the transition will be. As such, there is a strong public interest in ensuring that the eventual decline of Canada’s oil and gas sectors is well managed,” says Dusyk.  

“The most influential factor affecting the viability of the Canadian oil and gas sector is the peak and decline of global demand, which will inevitably be disruptive,” adds Cosbey. “The oil and gas sectors of the future will not be the drivers of prosperity we've known in the past, whether we measure that in jobs, investment, or government revenues." 

Media contact: 

Victoria Foote, Communications Advisor, IISD: Victoria_foote@hotmail.com,  647.290.9384