Why “Diss” Integration? Canada’s Incontinent Energy Policy

by John W. Warnock

February 2006

Oil is a natural resource in a category all its own. Ever since the invention of the internal combustion engine, oil has been —-quite literally—-the fuel that fires economic growth. Transportation, agriculture, manufacturing, large cities—-none could exist in their current form without oil. Indeed, the entire global economy as it is currently constituted would simply grind to a halt without it.

The global struggle to control the resource began as soon as the British Empire switched its fleets from coal to oil, signaling a profound shift in the imperial powers’ strategic priorities. The United States had plenty of domestic oil reserves, but Great Britain, France and the other European powers needed secure supplies from the major oil fields in North Africa, the Middle East, Asia and Latin America. In this struggle among the imperial powers, and between the advanced capitalist states and the colonized Third World (where most of the world’s reserves were and still are located), First World governments and the largest oil companies worked closely together to gain and maintain control of strategic reserves so as to ensure a ready supply of cheap and secure oil. Recent wars in Afghanistan and Iraq—-which are widely conceded to have been wars over control of oil—-are merely the latest moves in this grand game.

With global reserves nearing peak production, and worldwide demand continuing to grow at an alarming rate, the stakes of this game have risen significantly in recent years, and Canada’s role in America’s energy wars has become increasingly evident. Canadian policy has stressed ownership and control of the oil and gas industry by large corporations that have enjoyed very high profits. Rather than developing this strategic industry in a sustainable way to benefit present and future generations of Canadians, federal and provincial governments have chosen to support the policy goals of the US government by steadily increasing our exports to the US. As a result, Canadians now face the grim prospect of higher and higher fossil fuel costs, with virtually no infrastructure of sustainable energy alternatives.

The oil industry in Canada

FROM THE BEGINNING, THE CANADIAN oil and gas industry has been dominated by foreign-owned corporate giants. But in the wake of the 1947 discovery of the Leduc field near Edmonton, two separate markets developed: Alberta production began to dominate the four western provinces, while the major oil companies continued to control Ontario, Quebec, and Atlantic Canada.

In the 1950s, the smaller Canadian-owned oil companies in Alberta began pressuring the Canadian government to create a national oil policy in which oil from Alberta would replace imported oil. There was strong opposition to this proposal from the oil majors, who were then importing cheaper oil from their overseas operations for their refineries in Ontario and Quebec. John Diefenbaker’s Royal Commission on Energy (1959) came down firmly on the side of the majors and urged instead the development of a continental energy policy, rejecting the proposed alternative of an integrated Canadian energy policy overseen by the federal government. The Commission’s key proposals were included in the (so-called) National Oil Policy adopted in 1961, according to which central and eastern Canada would continue to import oil, and the western Canadian oil industry was to seek additional markets in the US.

Canada has always played a supportive role in the Anglo-American imperial alliance. When the world�s greatest imperial and colonial power was Great Britain, Canada provided strong political, military and economic support to the British. This changed during and after World War II, when Canada’s economy and natural resource production became closely integrated into that of the US, resulting in a marked shift in the prime allegiances of Canada’s economic and political elite. This overall support for US policy became further and further entrenched as the Cold War deepened.

Promoting continental energy integration

During the Korean War (1950-3), US President Harry Truman appointed William Paley to head a Materials Policy Commission to look at the long term needs of the US for strategic natural resources. The commission concluded that the US government had relied, and should continue to rely, on a close relationship with major US corporations, and that the US government should actively support investment by US corporations in countries in the Western hemisphere. Canada was singled out as being both the most secure source of strategic materials and most receptive to US needs.

“In contrast to the Canadian government, Mexico demanded and was granted an exemption from all the terms of NAFTA that applied to energy.”

In 1965, as the US was becoming more deeply involved in the Vietnam War, the Canadian and US governments released the Merchant-Heeny Report which called for joint planning for the development of resources and “co-ordination between the two countries in the production and distribution of energy.” Canadian public opinion was hostile to the report’s recommendations, and was aroused again in 1970 when US Secretary of Labor George P. Shultz proposed that Canada phase out its dependence on oil imported from Latin American and the Middle East and create a single North American market for oil and gas protected by a mutual tariff system.

Joe Greene, the Canadian Minister of Energy, Mines and Resources, created a stir in May 1970 when he revealed that the government of Pierre Elliott Trudeau was seriously studying the proposal. He repeated the position of the oil majors, declaring that Canada had oil reserves that represented 923 years of supply and natural gas reserves that represented 392 years of supply, and so Canadians should not be concerned about a major increase in exports to the US.

The 1970s saw a rise of defensive nationalism in Canada, and a number of studies documented the adverse effect of foreign ownership of Canadian industry. The Liberal government under Pierre Elliott Trudeau shifted directions away from continental integration in 1980 by announcing the National Energy Program. The oil industry and the US government voiced strong opposition to the program, as both supported an integrated North American continental energy policy and opposed the creation of an independent Canadian energy market.

The election of Brian Mulroney and the Progressive Conservatives in 1984, however, opened the door to renewed continental integration. In March 1985, his government signed the Western Accord with the governments of Alberta, British Columbia and Saskatchewan which proclaimed a “free market” approach to the oil and gas industry, phased out the federal Petroleum and Gas Revenue Tax, and promised tax incentives for the oil and gas industry.

More good news for big oil was to follow. On October 3, 1987, the Mulroney government released the draft of the new Canada-US Free Trade Agreement. Nearly everyone was astonished to see that the draft included a continental free trade agreement in energy. Not even the provincial premiers knew this had been part of the negotiations.

The general public was even more shocked by the provisions related to energy. In the eventuality of an energy shortage, Canada is prohibited from reducing its exports to the US by more than the proportion sold to them over the previous three years (Article 904). The Canadian government is specifically denied the right to control intra-corporate transfers of “profits, royalties, fees, interest or other earnings” (Article 1606). The Canadian government cannot introduce a two-price system for energy and charge a higher rate for exports than for domestic consumption (Article 904). The agreement also stripped the Canadian National Energy Board of the power to set minimum export prices and export taxes (Article 903). And no future national energy programs can discriminate in favour of Canadian-owned corporations (Article 904).

The continental energy program was strengthened in the subsequent North American Free Trade Agreement (NAFTA) of 1994. In contrast to the Canadian government, Mexico demanded and was granted an exemption from all the terms of NAFTA that applied to energy.

The current situation

SO HOW DO THINGS STAND TODAY? Canada produces around 3.2 million barrels of oil per day. We export around 1.65 million barrels per day to the US. Since Canadians consume 2.3 million barrels per day, the balance has to be imported. According to the US Energy Information Agency, Canada has the lowest royalties and taxes on oil of any producing area in the world. Thus, when there are huge windfall profits from high oil prices unrelated to costs of production, as has occurred in the past year, the oil corporations take almost all of the increase.

“Our cheaper oil has all been exported, and we now have no choice but to depend on more expensive, harder-to-extract oil—-which, incidentally, we are also bound by NAFTA to export.”

Meanwhile, conventional oil is drying up on the Canadian prairies. Production peaked in 1971 and has steadily declined since then. In 1994, producing wells delivered, on average, around 30 barrels per day; this fell to 18 barrels by 2003. New fields are smaller. Fewer wells are being drilled. As they say in the industry, “the low-hanging fruit has been picked.” Our cheaper oil has all been exported, and we now have no choice but to depend on more expensive, harder-to-extract oil—-which, incidentally, we are also bound by NAFTA to export.

The prospects for natural gas are even bleaker. In 1985, the federal government, along with the governments of Alberta, British Columbia and Saskatchewan, proclaimed a deregulated and privatized market for natural gas. Since then the corporate sector has been exporting natural gas as fast as it can. This policy was strengthened by the free trade agreements, the reduction of the regulatory power of the National Energy Board, and the construction of additional pipelines to the US. Canada extracts around 6.6 trillion cubic feet of natural gas from the ground, and exports 3.5 trillion cubic feet of that to the US. But our reserves of conventional gas are disappearing; the US Energy Information Agency says that at current rates of extraction, “production will completely deplete reserves in 8.6 years.”

Canadian oil and gas policy has served, and continues to serve, the interests of oil companies and the US government. It has propped up the US economy by keeping US oil and gas prices artificially low. It has brought enormous returns to the corporations’ owners and shareholders. As a capital-intensive industry, it has brought well-paying jobs to some areas of Canada, as well as significant revenues to the government of Alberta and, to a lesser extent, other provinces. But as prices for oil and gas continue to rise, and supplies dwindle, Canadians will come to realize that oil and gas integration has left them out in the cold: short-term gains for some have come at the expense of long-term pain for the great majority.

John W. Warnock, a Regina political economist, is preparing a report on the oil and gas industry in Saskatchewan for the Canadian Centre for Policy Alternatives.

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