The National Energy Program (NEP) was an energy policy of the Government of Canada from 1980 to 1985. It was created under the Liberal government of Prime Minister Pierre Trudeau by Minister of Energy Marc Lalonde in 1980, and administered by the Department of Energy, Mines and Resources.
In his preamble to the announcement of the National Energy Program, introduced as part of the October 1980 federal budget, Finance Minister Allan MacEachen echoed concerns by leaders of developed countries globally regarding the recession following the two oil crises of the 1970s and the "deeply troubling air of uncertainty and anxiety" shared by Canadians. The Bank of Canada reported on economic problems that were accelerated and magnified. Inflation was most commonly between 9 and 10 percent annually and prime interest rates over 10 percent.
Historically, the United States had been by far the world's largest oil producer, and the world oil market had been dominated by a small number of giant multinational (mostly American) oil companies (the so-called "Seven Sisters of oil": Standard Oil of New Jersey, alias Exxon (US); Standard Oil of New York, alias Mobil (US/UK); Standard Oil of California, alias Chevron (US), Gulf Oil, now part of Chevron (US); Texaco, now part of Chevron (US); Anglo-Persian Oil Company, alias BP (UK); and Royal Dutch Shell, alias Shell (UK/Netherlands).Template:Rp During the late 1940s, 1950s, 1960s, and early 1970s, the discovery and development of a large number of giant oil and gas fields outside of the United States by these and other companies kept the world flooded with cheap oil. At the same time, global demand increased to take advantage of the increased global supply at lower prices. In particular, American oil consumption increased faster than American production, and the US, which had previously been a net oil exporter, became a major oil importer.
In 1970, US oil production unexpectedly peaked and started to decline, causing global oil markets to tighten rapidly as the US started to import more and more Arab oil.Template:Rp As the decade continued, global demand caught up with global supply, and there were two major oil price shocks: the 1973 oil crisis and the 1979 oil crisis. The first occurred when the Organization of Arab Petroleum Exporting Countries (OAPEC) (whose membership consists of the Arab members of the similarly-named Organization of Petroleum Exporting Countries (OPEC), plus Egypt, Syria, and Tunisia) imposed an embargo on oil exports to the US, the UK, the Netherlands, Japan, and Canada in retaliation for those countries' support for Israel during the Yom Kippur War. US producers had been able to defeat the previous 1967 oil embargo by ramping up domestic production, flooding the world market with additional product at cut-rate prices, but declining domestic production combined with the ongoing rise in global demand made a similar response to the 1973 Arab embargo impossible. The result was immediate shortages and lineups for gasoline in the importing countries, particularly the US, signaling the end of decades of cheap oil and a change in the balance of power from the consuming countries (which now included the United states) to the producing countries. On October 16, 1973, the Ministerial Committee of the Persian Gulf OPEC membership announced an immediate rise in their posted price from $2.18 to $5.12 per barrel of oil.Template:Rp "Thus for the first time in oil history, the producing countries assumed power to consider and set the oil price unilaterally, and independently of the" Seven Sisters.Template:Rp
The Yom Kippur war ended in October, but the price of oil continued to increase, and by January 1974 it had quadrupled to US$12 a barrel. "The more than seven-fold increase in the oil price from $1.80/b in 1970 to $13.54/b in 1978 created profound and far reaching changes in the world oil balance, as well as the prevailing relationships among major oil producers, principal oil importers, and the major oil companies ... [and the] spectacular jump of the crude spot price to more than $US40/b following the 1979 Iranian Revolution, turned the global oil market into total disarray."Template:Rp Norwegian economics historian Ola Honningdal Grytten described this period in the 1970s as one of a prolonged global recession and slow growth that affected most developed economies.
The 1979 oil crisis, precipitated by the Iranian Revolution and compounded by the Iran–Iraq War, was the second major market disturbance of the 1970s. "The curtailment of oil supplies and the skyrocketing of oil prices had far-reaching effects on producers, consumers, and the oil industry itself."Template:Attribution needed
In his State of the Union Address in January 1980 President Jimmy Carter described how United States' "excessive dependence on foreign oil is a clear and present danger", and he called for a "clear, comprehensive energy policy for the United States".
- Main article: History of the petroleum industry in Canada
The Canadian petroleum industry arose in parallel with that of the United States. The first oil well in North America was dug in Ontario in 1848 using picks and shovels, the year before the first oil well in the United States was drilled in Pennsylvania. By 1870 Canada had 100 oil refineries in operation and was exporting oil to Europe. However, the oil fields of Ontario were shallow and small, and oil production started to decline around 1900, at the same time as the automobile started to become popular. In contrast, oil production in the United States grew rapidly after huge discoveries were made in Texas, Oklahoma, California and elsewhere. By the end of World War II, Canada was importing 90% of its oil, most of it from the United States.
The situation changed dramatically in 1947, when Imperial Oil drilled a well near Leduc, Alberta, to see what was causing peculiar anomalies on its newly introduced reflection seismology surveys. The peculiar anomalies turned out to be oil fields, and Leduc No. 1 was the discovery well for the first of many large oil fields. As a consequence of these large finds, cheap and plentiful Alberta oil produced a huge surplus of oil on the Canadian Prairies, which had no immediate market since the major oil markets were in Ontario and Quebec. In 1949, Imperial Oil applied to the federal government to build the Interprovincial Pipeline (IPL) to Lake Superior, which allowed it to supply the US Midwestern United States. By 1956 the pipeline was extended via Sarnia, Ontario, to Toronto and became, at Template:Convert the longest oil pipeline in the world. In the other direction, the federal government gave approval to build a pipeline west, and in 1953 the Template:Convert Transmountain Pipeline was built from Edmonton to Vancouver, British Columbia, with an extension to Seattle, Washington. The pipelines did more to improve the energy security of the United States than that of Canada; the Canadian government was more interested in Canada's trade balance than in military or energy security. The Canadian government assumed that eastern Canada could always import enough oil to meet its needs, and that imported oil would always be cheaper than domestic oil.
National Energy BoardEdit
- Main article: National Energy Board
The National Energy Board (NEB) was created in 1959 "to monitor and report on all federal matters of energy as well as regulate pipelines, energy imports and exports and utility rates and tariffs". The NEB regulated mostly the construction and operation of oil and natural gas pipelines crossing provincial or international borders. The Board approved pipeline traffic, tolls and tariffs under the authority of the National Energy Board Act.
From its introduction in 1961 to its end in September 1973, the National Oil Policy (NOP), was the cornerstone of Canadian energy policy. The NOP "established a protected market for domestic oil west of the Ottawa Valley, which freed the industry from foreign competition",Template:Attribution needed while the five eastern provinces, which included major refineries in Ontario and Quebec, continued to rely on foreign imports of crude oil, for example from Venezuela. In 1973 "the federal government announced the extension of the inter-provincial oil pipeline to Montreal (completed in 1976), froze prices of domestic crude and certain oil products, and sought to control export prices. The federal government announced this change in policy so that supply problems in the United States would not automatically raise prices for Canadian consumers."Template:Attribution needed After the first OPEC price shock in 1973 the federal government "formally broke the link between domestic prices and international prices. The objective of 'made-in-Canada' prices for crude oil was to protect Canadians across the country from the whims of the world oil market and to provide producers with enough incentives to develop new energy resources."Template:Attribution needed
In 1981, Edmonton eonomist Brian Scarfe claimed that the NEB setting the price of oil and natural gas in Canada meant that producers did not receive full world prices for the resource and consumers were not charged world prices.Template:Rp He claimed that these subsidies had a number of side effects, including larger trade deficits, larger federal budget deficits, higher real interest rates, and higher inflation.Template:Rp
In 1974, Canada inaugurated its first system for pricing oil, with three objectives: to regulate prices of domestic crude oil through federal-provincial agreements, to subsidize imported oil so that consumers in eastern Canada would enjoy lower prices, and to control prices and quantities of crude oil and products in the export market. Synthetic crude oil (upgraded petroleum from oil sands) was exempted from this policy and sold at the world price. The federal government levied a tax on all oil refined in Canada to pay for the difference between the prices of synthetic and conventional crude oil.
The Canadian federal budget of October 1980 reflected the concern that Canada could "become increasingly dependent on insecure foreign supplies and, therefore, unnecessarily subject to the vagaries of the world oil market."
On 28 October 1980, the Minister of Finance, Allan J. MacEachen, introduced the National Energy Program but cautioned that things could get worse if there were "new shocks coming from the price of oil or food or if the upward momentum of costs and prices proves impervious to the economic climate I am seeking to create." Template:Quote
- Main article: Petro-Canada
In 1975 the federal government created Petro-Canada, a Crown Corporation of Canada and national oil company in response to the world energy crisis. Petro-Canada was involved in the big Hibernia oil find off Newfoundland and was a partner in the Syncrude oil sands venture in Fort McMurray, Alberta. At that time the Alberta oil industry was overwhelmingly owned by Americans. The United States was also the major importer of Albertan oil. The Petro-Canada Centre (1975–2009) was known in the oil patch as "Red Square" until it was purchased by Suncor. The NEP included plans for a "greatly expanded Petro-Canada"Template:Attribution needed
The goals of the Program were "security of supply and ultimate independence from the world oil market; opportunity for all Canadians to participate in the energy industry; particularly oil and gas, and to share in the benefits of its expansion; and fairness, with a pricing and revenue-sharing regime which recognizes the needs and rights of all Canadians."
The NEP was designed to promote oil self-sufficiency for Canada, maintain the oil supply, particularly for the industrial base in eastern Canada, promote Canadian ownership of the energy industry, promote lower prices, promote exploration for oil in Canada, promote alternative energy sources, and increase government revenues from oil sales through a variety of taxes and agreements.
The NEP's Petroleum Gas Revenue Tax (PGRT) instituted a double-taxation mechanism that did not apply to other commodities, such as gold and copper (see "Program details" item (c), below). The program would "... redistribute revenue from the [oil] industry and lessen the cost of oil for Eastern Canada..." in an attempt to insulate the Canadian economy from the shock of rising global oil prices (see "Program details" item (a), below). In 1981 Scarfe argued that by keeping domestic oil prices below world market prices, the NEP was essentially mandating provincial generosity and subsidizing all Canadian consumers of fuel, thanks to Alberta and the other oil producing provinces (such as Newfoundland, which as a result of the NEP received funding for the Hibernia project).Template:Rp
The National Energy Program "had three principles: (1) security of supply and ultimate independence from the world market, (2) opportunity for all Canadians to participate in the energy industry, particularly oil and gas, and to share in the benefits of its expansion, and (3) fairness, with a pricing and revenue-sharing regime which recognizes the needs and rights of all Canadians."Template:Attribution neededTemplate:Rp
"The main elements of the program included:
(a) a blended or 'made-in-Canada' price of oil, an average of the costs of imported and domestic oil, which will rise gradually and predictably but will remain well below world prices and will never be more than 85 per cent of the lower of the price of imported oil or of oil in the US, and which will be financed by a Petroleum Compensation Charge levied on refiners...;
(b) natural gas prices which will increase less quickly than oil prices, but which will include a new and rising federal tax on all natural gas and gas liquids;
(c) a petroleum and gas revenue tax of 8 per cent applied to net operating revenues before royalty and other expense deductions on all production of oil and natural gas in Canada...;
(d) the phasing out of the depletion allowances for oil and gas exploration and development, which will be replaced with a new system of direct incentive payments, structured to encourage investment by Canadian companies, with added incentives for exploration on Canada Lands (lands which the federal government held the mineral rights as opposed to private lands and lands which provinces held the mineral rights);
(e) a federal share of petroleum production income at the wellhead which will rise from about 10 per cent in recent years to 24 per cent over the 1980-83 period, with the share of the producing provinces falling from 45 to 43 per cent and that of the industry falling from 45 to 33 per cent over the same period;
(f) added incentives for energy conservation and energy conversion away from oil, particularly applicable to Eastern Canada, including the extension of the natural gas pipe-line system to Quebec City and the maritimes, with the additional transport charges being passed back to the producer; and
(g) a Canadian ownership levy to assist in financing the acquisition of the Canadian operations of one or more multinational oil companies, with the objective of achieving at least 50 per cent Canadian ownership of oil and gas production by 1990, Canadian control of a significant number of the major oil and gas corporations, and an early increase in the share of the oil and gas sector owned by the Government of Canada."Template:Rp
Global economic recession in the 1980sEdit
- Main article: early 1980s recession
In the early 1980s, the global economy deepened into the worst economic downturn since the Great Depression. Canada, along with all of the economies of Europe (except for Norway due to their petroleum industry) and the economy of the United States, fell into a worldwide recession.
Reaction in AlbertaEdit
National Post journalist Jen Gerson would state that "the NEP was considered by Albertans to be among the most unfair federal policies ever implemented. Scholars calculated the program cost Alberta between $50 and $100 billion."
Helliwell et al. (1983) reported that energy price declines of the early 1980s prompted the federal and provincial governments to update their revenue sharing agreements.Template:Rp The amended agreements allowed for $4.2 billion in higher revenues ($1.7 billion federal government, $1.2 billion each for provincial government and industry),Template:Rp which was 30 per cent of the increase that would have been gained from going to world prices.Template:Rp According to Helliwell et al., under the NEP, industry was in fact not significantly exposed to the declining global oil prices but rather the largest part of direct revenue losses accrued to governments,Template:Rp meaning that the industry operated throughout the period of the NEP under relatively similar oil prices, the 'made-in-Canada' price of oil (see item (a) in National Energy Program Details, above).
In 1981 Edmonton Economist Scarfe argued that the greatest impact was the NEP's failure to deliver the revenues forecast originally in the 1980 federal budget. The 1980 federal government budget introduced by Minister of Finance Allan MacEachen projected a reduction of federal deficits from $14.2 billion in 1980 to $11.8 billion in fiscal 1984 due primarily to substantial increases in revenues from the oil and gas sector while maintaining expenditures.Template:Rp Scarfe speculated the NEP would discourage large-scale oil investment projects and thus reduce these projected revenues.Template:Rp Federal deficits had been expected to decrease primarily due to substantial increases in revenues from the oil and gas sector.Template:Rp Instead, by 1983 the Department of Finance had concluded that the federal government had established a structural deficit of $29.7 billion, an increase from 3.5 per cent of GNP in 1980 to 6.2 per cent of GNP in 1983.Template:Rp
Canada and the global recession in the 1980sEdit
- Main article: Early 1980s recession#Recession in Canada
Canada experienced higher inflation, interest rates and underemployment than the United States during this recession. The bank of Canada rate hit 21% in August 1981, and the inflation rate averaged more than 12%. According to the Bank of Canada, during this inflationary period, Canadians sought to protect themselves through investment in the housing market. Some saw an advantage to high interest rates through speculation in real estate and other assets. This increase in transactions was financed through borrowing and ultimately caused debt levels to rise. In the early 1980s, Canada’s unemployment rate peaked at 12%. It took almost four years for the number of full-time jobs to be restored.
North American housing pricesEdit
As cited in a report by Phillips, Hager and North, the U.S. Office of the Federal Housing Oversight (OFHEO) reported overall declines in real estate prices of between 10% and 15% from 1980 through 1985.Template:Rp That same report presents information from the Canadian Real Estate Association (CREA) showing that during those years (1980–1985) most eastern Canadian markets fell 10%-15% and the Toronto market held relatively steady.Template:Rp In contrast, the CREA historical data shows a decline from 1980 through to 1985 of approximately 20% for Vancouver, Saskatoon and Winnipeg while the drop approached 40% in the oil dominated economies of Edmonton and Calgary,Template:Rp yet through those years oil prices were still historically high (see figure Long-Term Oil Prices, 1861–2007).
Price of oilEdit
- Main article: Price of oil
Throughout the 1950s, 1960s, and 1970s, the retail price of petroleum in Canada consistently remained close to the price of gasoline in the United States (and at oftentimes lower than prices seen in the U.S., especially during the price spikes of the 1970s). Following NEP (which raised the price of fuel in the West and coincided with a hike in provincial gas taxes in Ontario and Quebec), the retail price of gasoline in Canada became noticeably higher than in the U.S. (a trend which continues to this day).
In 1982 during the severe worldwide economic depression, there were over 30,000 consumer bankruptcies in Canada, a 33% increase over the previous year. The bankruptcy rate began to fall from 1983 to 1985 as the economy strengthened.Template:Rp For the period 1980 through 1985, bankruptcies per 1,000 businesses in Canada peaked at 50% above the 1980 rate.Template:Rp
During that same time the bankruptcy rate in Alberta's economy rose by 150% after the NEP took effectTemplate:Rp despite those years being amongst the most expensive for oil prices on record (see figure Long-Term Oil Prices, 1861–2007).
Given that bankruptcies and real estate prices did not fare as negatively in Central Canada as in the rest of Canada and the United States during the NEP, it is possible that the NEP had a positive effect in Central Canada.
Furthermore, given that bankruptcies and real estateTemplate:Rp did much worse in Alberta than in other parts of Canada and the United States, petroleum exporting economies like Norway performed well, coupled with the estimated loss of between $50 and $100 billion in provincial GDP (at the time, this was an entire year's GDP for the province) due to the NEP during this period, it is unquestionable that the NEP had a negative effect in Alberta.The key areas of GDP, per capita federal contributions (since this was a federal program), housing prices and bankruptcy rates during the years of the NEP (1980–1985) are examined in this section. For housing prices and bankruptcy rates, the experience of Alberta in particular is contrasted to the other regions of the country in an attempt to see whether the problems experienced due to the early 1980s recession were worse in Alberta perhaps due to the NEP.
Alberta GDPEditAlberta GDP was between $60 billion and $80 billion annually through the years of the NEP, 1980 to 1986. While it is unclear whether the estimates took into account the decline in world crude oil prices that began only a few months after the NEP came into force, the graph of long-term oil prices show that prices adjusted for inflation did not drop below pre-1980s levels until 1985. Given that the program was cancelled in 1986, the NEP was active for five years which are amongst the most expensive for oil prices on record and the NEP prevented Alberta's economy from fully realising those prices.
Provincial per capita federal contributionsEdit
In inflation adjusted 2004 dollars, the year the NEP took effect (1980) per capita fiscal contributions by Alberta to the federal government increased 77% over 1979 levels - from $6,578 in 1979 to $11,641 in 1980.Template:Rp In the five years prior to the NEP (1975–1979), the per capita contributions by Alberta had approximated the fluctuations in the price of oil (see graph Fluctuations: Oil Prices & Alberta Per Capita Federal Contributions 1975-1981). In 1980, however, the inflation adjusted average price of oil was only 5% higher than the previous year yet the per capita contributions from Alberta rose 77% (see graph Fluctuations: Oil Prices & Alberta Per Capita Federal Contributions 1975-1981). Again in inflation adjusted 2004 dollars, the year the NEP was terminated (1986) per capita contributions to the federal government by Alberta collapsed to $680, a mere 10% of 1979 levels.
During the NEP years, 1980–1985, only one other province was a net contributor per capita to the federal government. It was Saskatchewan, another oil producer. In 1980 and 1981 Saskatchewan was a net per capita contributor to the federal government with their peak in 1981 at a mere $514 in comparison to Alberta's peak of $12,735 that same year, both values being 2004 inflation adjusted dollars. Thus, during the NEP years from 1980 to 1985 the province of Alberta was the sole overall net contributor to the federal government while all other provinces enjoyed being net recipients.Template:Cn
Norway compared to AlbertaEdit
In around 1970 Norway started to become an oil dominated export economy comparable to Alberta. As with most of the world's manufacturing economies, Norway's manufacturing experienced recession beginning in the 1970s. However, in the late 1970s the rise in oil prices saw Norway's oil exports grow and provide the nation with a trade surplus (see figure North Sea Oil Prices and Norway's Trade Balance, 1975–2000).
According to Grytten, "Norway saw de-industrialization at a more rapid pace than most of her largest trading partners. Due to the petroleum sector, however, Norway experienced high growth rates in all the three last decades of the twentieth century, bringing Norway to the top of the world GDP per capita list at the dawn of the new millennium."
Thus, not all oil based economies suffered as Alberta did during the global slowdown of the early 1980s. Norway experienced an economic boom during the NEP years thanks to the historically high oil prices (see figure Long-Term Oil Prices, 1861–2007). The economic boom of the early 1980s in Norway lasted until the price of oil collapsed in late 1985 just before the NEP was terminated (see figure North Sea Oil Prices and Norway's Trade Balance, 1975–2000).
Western alienation in CanadaEdit
- Main article: Western alienation in Canada
The NEP was extremely unpopular in Western Canada, especially in Alberta where most of Canada's oil is produced. With natural resources falling constitutionally within the domain of provincial jurisdictions, many Albertans viewed the NEP as a detrimental intrusion by the federal government into the province's affairs. Edmonton economist Scarfe argued that in Western Canada—and Alberta especially—the NEP was perceived to be at their expense in benefiting the eastern provinces. Particularly vilified was Prime Minister Pierre Trudeau, whose Liberals didn't hold a seat west of Manitoba. Ed Clark, a senior bureaucrat in the Trudeau Liberal government, helped develop the National Energy Program earning himself the moniker "Red Ed" in the Alberta oil industry. Shortly after Brian Mulroney took office, Clark was fired.
Petro-Canada, established in 1976, was responsible for implementing much of the Program. Petro-Canada was backronymed to "Pierre Elliott Trudeau Rips Off Canada" by opponents of the National Energy Program.
According to Mary Elizabeth Vicente, an Edmonton librarian who wrote an article on the National Energy Program in 2005, the popular western slogan during the NEP – appearing on many bumper stickers – was "Let the Eastern bastards freeze in the dark".
McKenzie argued in 1981 that politically the NEP heightened distrust of the federal government in Western Canada, especially in Alberta where many Albertans believed that the NEP was an intrusion of the federal government into an area of provincial jurisdiction.
According to a National Post journalist,
End of the NEPEdit
The rationale for the program weakened when world oil prices began to slowly decline in the early 1980s and then collapsed in late 1985 (see figure Long-Term Oil Prices, 1861–2007). A phased shutdown was commenced by Jean Chrétien while he was Minister of Energy, Mines and Resources.
In the 1984 election the Progressive Conservative Party of Brian Mulroney was elected to a majority in the House of Commons with the support of Western Canada after campaigning against the NEP. However, Mulroney did not eliminate the last vestiges of the program until two and a half years later, at which time world oil prices had dropped below pre-1980s levels (as adjusted for inflation - see figure Long-Term Oil Prices, 1861–2007).
In 1985, the Western Accord deregulated "domestic oil prices. The accord abolished import subsidies, the export tax on crude and oil products, and the petroleum compensation charge. It also phased out PIP grants and the PGRT. In addition, controls were lifted on oil exports."Template:Attribution needed
- Vicente, Mary Elizabeth. 2005. Political Issues - National Energy Program This short article was written byh an Edmonton librarian in 2005. No bibliography.
- Breghat, Francois. 6 July 2002. “Energy Policy.” The Canadian Encyclopedia. Historical Foundation of Canada.
- “Trudeau, Lougheed Attend Energy Conference.” Television News. Reporter: Don McNeill. CBC Television. CBC Archives. April 9, 1975. January 6, 2005.
- “West Historically Exploited for Resources.” Radio Interview. John Crispo, interviewed. Sunday Magazine. CBC Radio. CBC Archives. December 9, 1973. January 6, 2005.
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