An Era of Change and the Loss of Control

The Petrochemical Industry

The early 1970s marked a very important era in Canada’s history as a net importer and exporter of oil and gas. In 1973/74, escalating oil prices caused Canada to question its domestic oil price, its division of economic rents and the relationships between public and private enterprises. At this time, Prime Minister Trudeau and his government announced the construction of a pipeline from Edmonton to Montreal to unify the Canadian market. This seemed like a move toward national energy self-sufficiency, but it was disrupted by a number of events which would take place in Canada and around the world.

Under Trudeau’s proposed National Oil Policy, Canada developed a two-tier pricing system which intended to set the country on par with the world pricing system. This furthered the national divide in prices and access to oil. There was no integrated national market, and independent companies began to ship their oil over the NOP line to Quebec.

This sparked the move toward licensing in Canada and ultimately the creation of the National Energy Board (NEB), which prohibited the movement of products across the NOP line and preserved the complicated two-tier pricing system.

Foreign owned companies were quickly purchasing up the Alberta tar sands and, because of the U.S. involvement and support of Israel during the Yom Kippur War in 1973, an embargo was placed on western supplies of petroleum by the Organization of Petroleum Exporting Countries (OPEC). This had severe implications from Montreal to the Maritimes as their access to affordable fuel was threatened. As a result, in 1973, Alberta, represented by Premier Lougheed, reached a deal with the Syncrude consortium, a billion dollar project that would tap into the tar sands and yield tremendous results. During this time, Canadian oil became very attractive to the U.S., and the Canadian government created a single, unified Canadian price maintained by government subsidies, which served as an incentive for the U.S., as prices were lower than both the U.S. blended price and the world price.

However, this incentive was quickly halted. The crude export tax (1974) which fed the Import Compensation Fund, the fund that allowed for the subsidies to impact the price, was running a deficit and required action to make up for the deficiency. There were ultimately two options for the federal government: raise taxes, which they did not want to do; or raise the price of oil to world levels, the more obvious answer. Royalties charged by Alberta increased as well. This was compounded when anticipated reserves of oil and gas decreased and there was a threat that these reserves would not adequately meet market demand beyond 1982. Due to this threat, exports started to be phased out, by invoking the federal government’s licensing power which was established in the early 1970s.

The disposition of economic rents was a major issue of the time. There was no clear economic criterion for the distribution of these rents and every market player had an interest in obtaining all or a portion of them. In order to control these rents, the federal government limited the provincial ability to extract them through the use of the Petroleum Administration Act (PAA), which allowed the government to set prices inter-provincially, disallowing the federal income tax deductibility which was previously granted to the oil companies for royalty payments to the provinces.

U.S. pricing made it difficult for Canada to raise its prices to the world level as it would eliminate the Canadian advantage on the market. Access to lower fuel costs was a driving factor in manufacturing investment in Canada and increasing prices could have led to the deindustrialization of Canada. The Canadian government responded with the creation of the Foreign Investment Review Agency (FIRA) in 1974, a defensive move to counter increasing U.S. investments. ‘Canadianization’ of the industry also came in the form of the creation of PetroCanada in 1973, a Crown corporation. This would mark the beginning of many new conflicts between the major players, specifically the United States and Alberta, both upset with the Canadian government’s interest in the tar sands.

These struggles were compounded during the Iranian Oil Crisis of 1979. As a result of this international tremor, world prices skyrocketed and the gap between Canadian prices and world prices grew. U.S. reactions were strong, and under President Jimmy Carter, the U.S. created a national energy plan, far exceeding Canada’s. Trudeau, who had been elected on the basis of his economic nationalism, answered back by introducing the National Energy Program (NEP) in 1980.

The NEP was central to a national energy policy in Canada and it served to reorganize the Canadian economy. Trudeau and his government realized the extent to which Canada was controlled by foreign interests, and the main objectives of the NEP were to assert federal control over oil prices and to assure the federal government a greater share of the economic rents. Prices were to reflect the nation’s contingent circumstances (including supply and demand) and the government proposed that rates should increase until they reached their appropriate quality determined level which was relative to the oil sands ‘reference price’. Prices were to rise annually with the world price or the Consumer Price Index (whichever was lower at the time).

The introduction of the Petroleum and Gas Revenue Tax and the Natural Gas Tax further enraged Alberta and the consumer, who would be forced to pay higher prices. Alberta’s response was bold; by reducing its flow of oil to eastern Canada by five percent, the province believed the government would be forced to raise its domestic prices to world levels, as Alberta desired.

Canada, as well as other players in the resource game, suffered an economic downturn. An agreement was reached in 1981, but not to Alberta’s advantage. Alberta did receive concessions on prices and on the export portion of the natural gas tax but for both Alberta and Canada, the agreement did not improve the economic situation. The demand for oil was reduced and it signaled the end of the NEP. The NEP’s goal of ‘Canadianization’ caused the U.S. to threaten taxation, regulation, and legally constraining Canadian companies in the U.S.

In 1984, the Trudeau government was replaced by Brian Mulroney’s Progressive Conservative government and the priority shifted from nationalizing the oil and gas industry to support for a network of free trade. In 1985, to better facilitate the opening of the Canadian market, Mulroney’s government ended the role of FIRA, replacing it with Investment Canada, which operated on different principles aimed at attracting foreign investment in Canada.

The next step to promoting free trade was the dismantling of the NEB and stripping it of its regulatory and enforcement powers. At the Shamrock Summit in March of 1985, Prime Minister Mulroney and then President Reagan met in Quebec City for preliminary discussions regarding a Canada/U.S. Free Trade Agreement (FTA). In September of 1985, the Royal Commission on Economic Union and Development Prospects was created and in May of 1986, Canada/U.S. free trade negotiations formally began. These negotiations would conclude in October 1987 and were ratified in January 1989. Mulroney saw oil as a continental resource and this is how it played into the FTA, a major part of the continental energy deal.

Article 904, the energy chapter of the FTA, contains the proportionality clause which posed detrimental implications for Canada as this chapter designated secure access for the United States to Canada’s energy resources. It obliged Canada to provide exports of energy resources for the benefit of the U.S. Canada no longer had the jurisdiction to place bans or quotas on energy resources, even in times of domestic turmoil unless Canadian consumption was considerably slashed. As well, Canada was no longer able to tax imports and exports. Prices of exports could not be higher than those of domestic prices.

This highlighted increased potential, once again, for the tar sands industry. Regulatory restrictions were relinquished by the Western provinces through the Western Energy Accord. This was supported by Lougheed as Canada no longer had the power to introduce another policy like the NEP and foreign and Canadian firms were to be treated as equals. The future did not look bright for Canada in terms of oil control, but in terms of oil production, large profits were to be made. The question that remained was who would stand to reap the benefits?

The Canadian Petrochemical Industry and Related Government Policies – Part 1
Energy in Canada – Superpower or Satellite? – Part 3

September 26, 2018, 3:39 AM EDT