Monday, March 5, 2012

Exercise 4-3: Demand elasticity in the Oil & Gas industry in Alberta

This week's Assignment had me look into the current state of the Oil and Gas Industry inAlberta. I have an interest in this sector, as I have recently started my new Position at a Power Station with an Oil & Gas company and haven't had any exposure to this industry before. Since our Power Station is powered by natural gas, we actually profit from the current low natural gas prices.

An article from "The Alberta Oil Magazine" (find the article here) suggested that the natural gas prices will remain low for the foreseeable future, which again, is good news in my particular situation, as our input cost at the Power Station will allow for a good profit. But I guess it is safe to say, that Oil and Gas company in Alberta in general would rather see the price come back up.

If we take a look at the price of natural gas in Alberta in the last ten years, we can see how the price spiked and then dropped three times, but every
time it spiked, it actually didn't quite make it the the previous high. What I also find interesting is the fact, that the price seems to have reached a consistent level. In the previous ten years, it has never taken that long, before the prices started to raise at least a little bit:

image retrieved on March 5th, 2012 from the National Energy Board of Canada (

On the website of the National Energy Board of Canada, I have also found a forecast for the natural gas demand, which interestingly shows a fairly consistent demand, except for the Energy sector, which will increase it's demand over time. I would assume part of it could be the conversion of many coal powered Power Stations to Natural Gas Power Stations in the future, as well as the raising demand for Power itself:

image retrieved on March 5th, 2012 from the National Energy Board of Canada (

The forecast for the demand goes hand in hand with the Energy Board's forecast for the price as seen here:

image retrieved on March 5th, 2012 from the National Energy Board of Canada (

This brings me to my conclusion.
I think there is a fair amount of elasticity when it comes to natural gas. If the gas price would be exploding, there are alternatives on how we produce power as well as how we heat our homes and businesses. Even cars are still mainly powered by gas and the industry is moving towards electric cars. Hydrogen cars are another alternative and I have worked for a manufacturer of Natural gas and Hydrogen vehicle gas tanks before.
This last image clearly shows, that there is more supply than demand right now and it certainly shows, why the Alberta Oil Magazine doesn't expect the gas price to recover anytime soon.

image retrieved on March 5th, 2012 from the National Energy Board of Canada (

But all it takes is one really cold year and demand can increase immediately. After all, switching energy sources to warm up our home's can't be done over night either - and most of us would probably rather spend the money, than freeze at home.

Alberta Oil Magazine (
National Energy Board of Canada (

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