EARLIER THIS month the head of one of Canada’s largest oil companies asked the government in the energy-rich province of Alberta to set aside its free-market principles and legislate reductions in oil production. Government intervention was the only way Alberta could avoid “wholesale economic catastrophe”, said Alex Pourbaix of Cenovus Energy. The cause of the crisis was the record-low price for Western Canadian Select, the benchmark price for heavy crude from Alberta’s oil sands. It hit US$11.43 a barrel on November 20th. Andrew Leach, an economist at the University of Alberta, says once the price of diluent needed to move the heavy crude through pipelines is figured in, producers are almost paying people to take their oil. Why is Alberta’s oil so cheap?

In normal times the heavy crude mined or extracted by steam from the oil sands costs US$10-US$15 less per barrel than West Texas Intermediate, because it is more difficult to refine and must be transported longer distances to refineries in the American Midwest and on the Gulf coast. That gap has widened considerably since July, sometimes surpassing US$50. Oil producers and the Alberta government both blame a lack of pipeline capacity for the problem. They insist that if the federal government had pushed to get at least one of five proposed pipelines built, these problems would have been averted.

There is more than one reason why the oil price plummeted. Canadian oil firms, though aware of existing pipeline capacity, have been increasing production. Heavy crude, most of which comes from Alberta, will hit almost 2.3m barrels a day this month, up from 2.1m barrels a day in January, according to the National Energy Board, a government agency. As pipelines have filled up, producers have turned to more expensive rail transport, which costs between US$12 and US$20 a barrel, compared with US$5-13 a barrel for pipeline transport. The number of barrels moved by rail rose from 144,000 per day in January to almost 270,000 in September. Even as supply was rising, demand fell because a number of large refineries served by the hub in Cushing, Oklahoma, which is where most pipelines from Alberta lead, closed for scheduled maintenance. Refineries in the Midwest were running at 73% of their capacity in the last week of October, the lowest level since 1985. Those that bought oil did so at a heavy discount in the knowledge that they would have to store it until they were operational again.

Some of the price pressure will let up when the American refineries reopen and the Sturgeon Refinery near Edmonton, the first new refinery in Canada for 30 years, reaches full production sometime next year. But that still leaves Alberta’s oil firms contending for space on American pipelines with American producers who are rapidly increasing production. This is where calls for a new pipeline come in. Canadian firms want something similar to the Keystone XL, but which would bypass Cushing and go directly to refineries on the Gulf coast where a comparable crude, Maya, is fetching around US$60 a barrel. Alternatively, Trans Mountain Expansion would carry crude to a port near Vancouver, where it can be shipped to buyers in America and Asia offering higher prices. Yet the three most promising proposals—Trans Mountain, Keystone XL and Enbridge Line 3—are delayed by government and judicial reviews and are unlikely to be built any time soon. Nor is the Alberta government likely to legislate production cuts. While Cenovus’s call has support from some oil producers, it is opposed by the likes of Suncor and Imperial, which have refining operations that benefit from cheap oil. Alberta crude will probably be a bargain for a while.