Resource Boom (and Bust) and Industrial Restructuring

March 11

Tar Sands: The Selling of Alberta (2008)

52 min long documentary on the Tar Sands, Canadian energy policy, American interests and environmental concerns.

Available from the York library.

Alberta lowers royalty rates, March 11, 2010 (reversing recent increases):

http://www.cbc.ca/canada/edmonton/story/2010/03/11/alberta-royalty-changes.html

Canadian Energy Exports

According to the government of Canada: Canadians and Americans share the closest energy relationship in the world. Energy infrastructure—including oil and gas pipeline networks and electricity grids—is

tightly integrated. Canada: the largest oil supplier to the United States. Since 1999, Canada has been the largest supplier of U.S. crude and refined oil

imports. As oil exports from Canada increase, pipelines and refineries are expanding in the

United States, representing more investment and more jobs for Americans.Canada: the largest electricity supplier to the United States. Canada is one of the world’s largest producers of hydroelectricity, producing about

13% of the world’s total. Canada: the largest natural gas supplier to the United States. Canada is the world’s third-largest producer and second-largest exporter of natural

gas. Canada has the world’s largest known deposits of high-grade natural uranium and is the

world’s leading producer of uranium for nuclear energy. Canada supplies approximately one-third of the uranium used in U.S. nuclear

power plants. http://www.canadainternational.gc.ca/washington/bilat_can/energy-energie.aspx?lang=eng#oil

Political Economy of Energy Resources

Regional issues and Federal-Provincial issues

Foreign ownership and domestic ownership

Foreign markets and domestic marketsImpact on the exchange rateEnvironmental issues

Regional issues

Through Canadian history (from coal, to oil, to hydroelectricity), the production of energy has been highly regionalized in Canada.

Despite vast Canadian resources, it has often been cheaper for some Canadian regions to import energy from international sources.

Federal-Provincial Issues

Provincial governments have constitutional jurisdiction over natural resources.

The federal government has jurisdiction over interprovincial and international trade.

Should there be a federal or ‘national’ energy policy?

Should there be a federal strategy to maximize the benefits of energy resources for Canada as a whole? For Canadian consumers? For Canadian manufacturers?

Oil Discovery

Alberta oil production began in 1947, near Leduc.See: CBC Archives – Leduc oil strike.http://archives.cbc.ca/science_technology/energy_production/clips/2143/http://archives.cbc.ca/science_technology/energy_production/clips/2136/

Impact of Leduc, 50 years later.http://archives.cbc.ca/science_technology/energy_production/clips/2142/

“The overriding objective of Canadian energy policy for the next 20 years was to stimulate the growth of the domestic petroleum industries. As a result, major oil and gas pipelines were built from the producing provinces to markets in both Canada and the US, encouraging investment and promoting exports” (Bregha).

http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=a1ARTA0002613

Pipeline Debate

In 1956 the “Pipeline Debate” dominated Canadian politics and contributed to the defeat of the federal Liberals in 1957 (having been in government since 1935).

The debate focused on issues of public versus private ownership and Canadian versus American ownership.

The natural gas pipeline from Saskatchewan to Montreal was completed in 1958 by TransCanada Pipelines.

American Ownership and American Markets “From the beginning, the US played a large role in the development

of Canada's oil and gas reserves, not only because the industry was largely American owned but because of the distribution of Canada's petroleum resources. Economic efficiency dictated that Alberta supply the markets closest to itself, ie, the American Pacific Northwest and Midwest, while eastern Canada continued to rely on American imports.”

“When pipelines were finally built from the western provinces to domestic markets, the western provinces exported part of the throughput to amortize the costs of transporting oil over these considerable distances. As a result of Canada's reliance on the export of oil and gas, first to serve its own energy needs and then to spur the growth of the oil industry, an increasing share of domestic oil and gas production was dedicated to the American market” (Bragha).

American Ownership and American Markets

In 2004, Canada exported 70% of its oil and 56% of its natural gas production to the United States.

Canada is a net exporter of oil, but it still imports 40% of its domestic requirements to meet 90% of Atlantic Canada's and Quebec's needs and 40% of Ontario's.

National Oil Policy

In 1959 the National Energy Board was created.

By 1961, the National Oil Policy established the ‘Ottawa Valley Line’ to preserve the Ontario market west of Ottawa for Alberta oil, while east of that line would be supplied by imported oil.

“In this respect, federal policy discriminated against Ontario consumers for the sake of stimulating Alberta’s oil industry” (Wallace, 2002: 152).

Oil Crises of the 1970s

OPEC countries limited their supply of oil in 1973 leading to a dramatic hike in oil prices.

“In March 1973 Ottawa moved to control the export of oil when a rapid jump in shipments to the United States threatened to disrupt domestic supplies. Then, in September, Ottawa froze the domestic price of oil for 6 months and imposed an export tax on oil to ensure fair returns from US sales and to help subsidize eastern Canadians dependent on oil imports. Interpreting these actions as federal intrusions into their traditional areas of responsibility, the western provinces retaliated through new legislation that purported to control the production, regulation, marketing and pricing of their resources. Included were new royalty schemes designed to capture a larger share of revenues” (Bragha).

“In December 1973, as part of its response to the ‘energy crisis,’ the federal government announced the creation of Petro-Canada - to boost oil and gas exploration in the North and offshore, to assist in the development of the tar sands and to secure reliable oil imports” (Bragha).

Oil Crises of the 1970s

“Between 1973 and 1978, the price of oil and natural gas in Canada rose quickly through agreements reached between the federal government and the producing provinces, but did not reach world levels. By mid-1978 the gap between domestic and international prices had closed to less than $3 per barrel. In the wake of the 1979 Iranian Revolution, however, world prices increased by 150% and the federal government renounced its intention of ensuring eventual parity between domestic and world prices. This left Canadian prices far below international ones and created difficult strains between Alberta and the federal government” (Bragha).

The Rise of Alberta

The ‘oil crises’ of the 1970s were an oil boom for Alberta.

See CBC archives, “West is the New East”http://archives.cbc.ca/science_technology/energy_production/clips/2139/

National Energy Program (NEP)

“In 1980 the federal government introduced the National Energy Program. Its objectives were to increase Canadian ownership of the oil industry, to achieve oil self-sufficiency and gain a greater share of energy revenues. Although all 3 objectives were controversial to some degree, the third aroused the most debate because it raised the concerns of the producing provinces and the oil industry that ‘their’ revenues would be reduced if the federal government increased its share. The means chosen to advance the NEP's objectives also proved contentious because they represented an unprecedented degree of federal intervention and were imposed without prior consultation with industry or with the producing provinces” (Bragha).

The NEP

“the NEP precipitated an intense confrontation between the province and the federal government. Alberta cut back its oil production and withheld approval of 2 large tar-sand and heavy-oil projects, and challenged in court the legality of the proposed federal tax on gas exports” (Bragha).

“An understanding between Alberta and Ottawa was only reached when the federal government substantially altered the NEP's pricing and taxation provisions to bring domestic prices closer to world levels. Although this agreement put an end to the political conflict, it failed to bring stability in energy policy”

The End of NEP

“by 1981-82 the world oil industry was in its worst crisis of overproduction, falling prices and glutted markets in 50 years. The oil-exporting countries lost their control of prices, which plummeted from over $40 per barrel to less than $10 per barrel in the space of a few months.”

“Adjustments to the NEP and provincial fiscal regimes were required almost immediately in response to the 1983 drop in world oil prices, the fall in gas exports and the recession. The 1984 election of a market-oriented Conservative government led to more dramatic changes as most of the NEP's interventionist policies - price controls, consumer subsidies, exploration incentives, production taxes and the 25% crown share on federal lands, or "back-in" - were gradually eliminated”

“Although both the oil industry and the western provinces welcomed these changes, they soon had to confront an even greater threat than the NEP: the 50% drop in world oil prices in 1986. The collapse in international prices forced the cancellation of energy investments across the country and battered the economy of the western provinces”

Legacy of the NEP

The NEP remains infamous in Alberta:

CBC archives, Looking back at Trudeau and the NEP:

http://archives.cbc.ca/science_technology/energy_production/clips/2149/

The Canadian-US FTA, 1989

“By committing both countries to let market forces dictate the pattern of energy development, the free trade agreement represented a far-reaching commitment to energy deregulation and the integration of continental markets”

According to Peter Lougheed, "The biggest plus of this agreement…is that it will prevent any future federal government from ever again bringing in a National Energy Program. They won't be able to do it, they won't be able to set a made-in-Canada price."

The FTA prevents Canada from ever again setting energy prices that "discriminate" against the United States.

Pat Carney, Mulroney's international trade minister at the time, "Critics say the problem with the FTA is that under its terms Ottawa can never impose another NEP on the country. The critics are right. That was our objective. If the Americans promise not to block our energy exports, we'll promise not to turn off the tap on our energy supplies to them."

Privatization of Petro-Canada

Partial privatization began in 1991 with the sale of about 30% of its shares,

Privatization continued in 1995 and the federal government share was reduced to 19%.

The remaining share of 19% of Petro-Canada was sold off in September 2004.

Oil Boom and Slowdown

During the late 1980s and through most of the 90s, oil prices were relatively stagnant and cheap (around US$20-25 a barrel).

Then, there was a cycle of bust (97-98), mini-boom (99-01), bust (01-02).

Subsequently, from 2002, oil prices began to climb. Prices peaked in July 2008, getting close to US$150 a barrel!

By December of that year, prices had dropped to under $35 a barrel.

After bottoming out, prices have climbed again to the current price of around $82 a barrel.

Industrial Restructuring

International competition Trade liberalization: NAFTA, WTO Rise of new competitors

The oil boom and the “Dutch disease”

Provincial Economies

GDP by province and territoryMedian total income, by family, by

province and territory

Equalization Payments

Introduced in 1957.Financial transfers from the federal

government to the “have-not” provinces. Federal revenues, of course, come from all provinces, including the “have-not” provinces.

These are non-conditional transfers to the provinces to be used as they see fit.

The principle of the equalization system was entrenched in the constitution in 1982.

The “Have-Not” Provinces

Three of the four Atlantic provinces, Quebec and Manitoba have received equalization payments every year since 1957.

Saskatchewan has received equalization payments most years after 1957, with the exception of a few years in the early 1980s and the very recent past.

BC received equalization payments for the first five years of the program and subsequently from 2000 to 2007.

Alberta received equalization payments for the first 8 years of the program.

Newfoundland did not receive equalization payments for the first time in 2008-09.

Ontario received equalization payments for the first time ever in 2009-10.

Equalization Payments (2006-07)

“Have-Not” Province Equalization PaymentReceived onPer Capita Basis

PEI $2,102New Brunswick $1,927Nova Scotia $1,475Manitoba $1,445Newfoundland and Labrador $1,334Quebec $725British Columbia $107Saskatchewan $13

Equalization Payments (2006-07)

“Have-Not” Province Total EqualizationPayment

Quebec $5,539 millionManitoba $1,709 millionNew Brunswick $1,451 millionNova Scotia $1,386 millionNewfoundland and Labrador $687 millionBritish Columbia $459 millionPEI $291 millionSaskatchewan $13 million

Total $11.535 billion

Major Federal Transfers, 2010-2011

See the Finance department website

http://www.fin.gc.ca/access/fedprov-eng.asp

In particular, 2010-11 transfers:

http://www.fin.gc.ca/fedprov/mtpt-ptfp10-eng.asp