Setting the Pace: The economic case for managing the decline of oil and gas production in Canada

The world is emerging from a far-reaching energy crisis. As the pandemic hit in 2020, demand plummeted suddenly. In the years that followed, COVID-19 continued to impact energy supply and demand, as well as the broader economy. Instability turned into crisis when Russia’s illegal invasion of Ukraine further tightened energy markets.

The result was unprecedented volatility and high oil and gas prices, leading to windfall profits for global oil and gas producers, including those in Canada. This influx of revenue has renewed interest in expanding Canadian production and infrastructure.

However, the current boom will not last. Despite the supply crunch, the shift away from oil and gas has only accelerated. The European Union has moved quickly to curb its use of Russian supplies, and global climate action is accelerating, including via the United States’ Inflation Reduction Act. Though scenarios have yet to align with 1.5°C pathways, it is clear that economic trends, including oil and gas demand, are swiftly departing from business as usual.

Since the most influential factor affecting the viability of the Canadian oil and gas sector is global demand, it will be impossible to avoid disruption to this industry.

Setting the Pace examines how global demand trends and increasingly volatile global markets will negatively affect Canada’s oil and gas sector. We examine projections for oil and gas demand, what this means for end uses and exports of Canadian products, and the implications for Canada’s economy. We then explore lessons from jurisdictions that have successfully managed to phase down fossil fuels. Finally, we propose a proactive role for the federal government to reduce risk, safeguard jobs and economic stability, and support Canadian communities by sending clear policy signals to the energy sector.

Overall, we find that the Canadian oil and gas sector is set to decline, and the industry is not well positioned to weather drops in global demand. The oil and gas sector’s historic role as one of Canada’s primary economic sectors is already changing. Given demand projections, business as usual in the sector is no longer an option. To minimize the risks to dependent workers, communities, and regions, governments must take an active role in overseeing a predicted phase-down of oil and gas production and diversifying the economy.

The federal government should act in four complementary ways:

1. Continue to implement and strengthen climate policies and the Sustainable Jobs Action Plan. The government should base these policies on robust and internationally credible sectoral analyses of the future of the oil and gas sector, including projections for demand and employment.

2. Support subnational and Indigenous governments’ plans and programs on economic diversification. The Regional Energy and Resource Tables are a start, but plans must be fully aligned with sectoral analysis, net-zero pathways, and inclusive processes, including social dialogue.

3. Align fiscal policy with the reality of the expected decline of the oil and gas sectors. This step includes eliminating fossil fuel subsidies and public finance, regulating the financial sector, and ensuring that government spending is not risking taxpayer dollars by artificially prolonging or increasing production.

4. Explore tools within the federal jurisdiction to end expansion and prepare for a phase-down of the production and use of oil and gas. This step includes a discussion with subnational governments on collaborative solutions, considering the implications of declining production in areas of federal responsibility (such as the regulation of international and interprovincial pipelines), and exploring options and legal limitations that respect jurisdiction while addressing sectoral transformation.