Energy Policy

Energy Policy

Energy policy comprises government measures concerned with the production, transportation and use of energy commodities. Governments may adopt energy policies to meet goals such as economic growth, the distribution of income, industrial diversification and the protection of the ENVIRONMENT. Since the large jump in energy prices in the early 1970s, governments around the world have played an increasingly active role in energy policy.

Although Canada appears to be generously endowed with major forms of ENERGY, eg, COAL, OIL AND NATURAL GAS, URANIUM and HYDROELECTRICITY, and although its production of certain fuels has occasionally exceeded domestic requirements, it has never been entirely self-sufficient in energy. Historically, Canada has been dependent on energy imports largely because of the great distances separating indigenous sources of supply from markets. It is therefore primarily as a result of geography, rather than geology, that questions concerning the importation, export and particularly the transportation of energy have preoccupied energy policymakers.

The attempt to reconcile diverse economic interests in overcoming the transportation challenge has been a central theme of Canadian energy policy. These interests have traditionally pitted energy producers - whether of Nova Scotia coal before WWI, of Nova Scotia and Alberta coal between the 2 wars, or Alberta oil and gas since WWII - against energy consumers, the majority of whom live in Ontario and Québec.

A second major determinant of Canadian energy policy derives from Canada's system of government. As a result of the constitutional DISTRIBUTION OF POWERS, strong powers over resource management (see RESOURCE RIGHTS) are vested in both levels of government. Section 109 of the CONSTITUTION ACT, 1867, grants the provinces control over all the natural resources within their territory. A province also has the right to levy direct taxes (royalties) on these resources.

The federal government, however, enjoys broad taxation powers and has jurisdiction over all aspects of interprovincial and international trade. The federal government also has the constitutional power to void provincial legislation and to assume control over provincial works "for the general advantage of Canada," although neither power has been invoked in recent years.

Because this division of power gives the 2 levels of government overlapping responsibilities, Canadian energy policy has often been the product of federal-provincial bargaining. The bargaining can become acrimonious when the federal government and the producing provinces diverge in their views, as they did for most of the 1970s and early 1980s (Canada is perhaps unique in encompassing in a single country the interests that globally divide energy producers and consumers).

The influence exerted by the US constitutes a third major element that has shaped Canadian energy policy. Over the years, the US has both supplied and bought energy from Canada; Canadian-American energy trade exceeded $10.7 billion in 1985. The US has also represented an important source of investment capital and has consequently played a large role in the development of Canada's oil and gas resources.

Canadian Energy Policy to 1973

After Confederation in 1867, Canadian energy policy was designed to promote the greater use of domestic coal reserves by the imposition of a tariff on American imports. This tariff was part of the 1879 NATIONAL POLICY. Nevertheless, Canadian coal rarely comprised more than 50% of the domestic market. Ontario, the largest consumer, was (and still is) supplied by Pennsylvania mines, while Nova Scotia and Alberta producers supplied the eastern and western provinces, respectively.

Following WWI, as a result of the increased penetration of American imports and growing concerns about energy security, new policies (including the subsidy of transportation costs) were introduced to protect the Canadian coal industry. These policies had limited success in relieving the industry's chronic productive overcapacity, a problem that was aggravated by the discovery of oil in 1947 at Leduc, Alberta. After WWII, government policy was aimed at sustaining coal communities.

The importance of coal as a dominant source of energy declined (which deeply affected New Brunswick and Nova Scotia) until Canadian domestic consumption rose between the mid-1960s and late 1970s by some 150%. The US has increased its coal consumption as well, and the expanded use of coal in both countries has contributed to environmental problems, particularly that of acid rain. As a result, some Alberta coal producers have demanded that they supply central Canada, partly because Alberta coal contains 8 times less sulphur (the main ingredient of acid rain) than American coal. However, as in the 1920s, the counterargument is that Alberta coal is too expensive.

Oil and Gas

Although oil was being produced in southern Ontario as early as 1857, reserves and domestic consumption were small. The modern oil era was triggered by the 1947 strike in Leduc and by several subsequent oil and gas finds in the 3 western provinces. Coincidentally, demand for oil in Canada and internationally had increased rapidly as a result of the war and the subsequent economic boom.

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.

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. This share peaked in 1971, when Canada exported to the US 57% of its oil production and 47% of its gas production.

The oil industry's rapid growth in the 1950s, the controversy surrounding the construction of Canada's first 2 major gas pipelines (the 1956 TransCanada PIPELINE DEBATE contributed to the electoral defeat of the Liberal government the following year), and an acknowledgement that the government's information concerning energy matters was inadequate led in 1957 to the creation of the Borden Commission (see ENERGY, ROYAL COMMISSION ON) to study Canadian energy policy. The commission's recommendations resulted in the creation of the NATIONAL ENERGY BOARD (1959) to regulate the interprovincial pipelines and the interprovincial marketing of energy resources, and to advise the federal government on energy matters.

The commission also championed the establishment of a national oil policy (NOP) to shelter the Canadian oil industry against imports of cheaper foreign oil. This policy, introduced in 1961, established a protected market for domestic oil west of the Ottawa Valley, which freed the industry from foreign competition, while the 5 eastern provinces continued to rely on imports. The NOP remained the cornerstone of Canadian energy policy for the next decade.

The 1960s were a period of consolidation; no new major policy initiatives were launched until the early 1970s. Canadian oil and gas consumption grew steadily, prices were stable, and the country's hydrocarbon potential appeared virtually unlimited. This uneventful decade made the adjustment to the energy crisis of the early 1970s traumatic.

Hydroelectrical and Nuclear Policy

The public sector has played an important role in the development of Canada's electricity resources since the early 1900s, when the Hydro-Electric Power Commission of Ontario was created. Today, every province except Alberta and PEI manages its own power utility. The federal government's involvement in hydroelectricity, however, has historically been limited, partly because electricity-generating sources are more evenly distributed across the country and the interprovincial trade in electricity has therefore been on a smaller scale.

Nevertheless, in 1907 Parliament passed the Electricity and Fluid Exportation Act to regulate the export of electricity and natural gas, a function that was transferred to the National Energy Board in 1959. In 1963 the federal government announced a National Power Policy (the basic tenets of which still endure) to encourage development of power resources, the greater interconnection of provincial transmission systems and the export of surplus power to the US.

Hydropower in the 1980s provided fully 70% of Canada's electricity needs. Expansion of hydroelectrical power presents significant difficulties, as most remaining potential hydro sites are far from centres of population and long-distance transmission lines are costly to build. The building of dams can also cause severe environmental damage. The federal government was deeply involved in the development of NUCLEAR ENERGY, largely as a result of its expropriation in 1944 (for military reasons) of Canada's only (at the time) uranium mine.

The government strengthened its control over uranium resources in 1946 with the passage of the Atomic Energy Control Act, which transferred jurisdiction over uranium from provincial to federal authorities and regulated the production and uses of uranium in Canada. Two important federal crown corporations have been involved in atomic energy: ATOMIC ENERGY OF CANADA LTD (AECL) and ELDORADO Nuclear Ltd. The former is responsible for nuclear research; the latter for the mining and refining of uranium.

Canada's nuclear energy program was born in 1953 when feasibility studies on the CANDU reactor design were initiated. Although the first commercial CANDU reactor began operations only in 1971 in Pickering, Ontario, by 1980 nuclear energy accounted for 38% of Ontario's electricity consumption. In 1985 there were NUCLEAR POWER PLANTS in Ontario, Québec and New Brunswick.

Canadian Energy Policy after OPEC

Canada, like most industrialized countries, was unprepared for the consequences of the 4-fold increase in international oil prices and the partial oil embargo imposed by the Arab members of the Organization of Petroleum Exporting Countries (OPEC) in the wake of the 1973 Middle East war. Canadian energy policy entered a decade of unprecedented turmoil as a result of the fight between the western provinces and the federal government for control over growing energy revenues and over the issue of whether domestic oil and gas prices should track world levels.

Some of the federal government's initiatives between 1973 and 1974 provoked forceful provincial reaction. 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.

Alberta also created the Alberta Petroleum Marketing Commission, with broad powers over the production, pricing and provincial marketing of oil. The federal government responded by amending the Income Tax Act to disallow the deductibility of provincial royalties from corporate income tax, and by enacting the Petroleum Administration Act, under which Ottawa assumed broader powers to control oil and gas pricing in Canada.

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 (see BITUMEN) and to secure reliable oil imports. By the 1980s Petro-Canada had become one of Canada's largest petroleum companies. As the federal government's "window on industry," it has both acted as a source of information to the government about oil and gas and served as a policy instrument, eg, in frontier drilling.

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.

The 1980 National Energy Program

The 1979 increase in world oil prices aggravated some of the problems Canada already faced. First, it represented a large transfer of wealth from consumers to producers. In Canada this wealth transfer had 2 significant dimensions: a large interregional transfer of wealth from Ontario and Québec (which together accounted for 58% of domestic oil consumption in 1980) to Alberta (which produced 86% of Canada's oil), and an international transfer of wealth from Canada to the US as a result of the high level of American ownership of the oil and gas industry (seeFOREIGN INVESTMENT).

Second, the rapid increase in international prices made it difficult for the federal government to manage the national economy. It aggravated inflation and strained the EQUALIZATION PAYMENTS system. It contributed to the federal deficit as well, because the federal government continued to subsidize oil imports to maintain a uniform domestic price across the country. The increase in the world oil price, however, also represented an opportunity to achieve a higher level of oil self-sufficiency through the development of high-cost oil in the frontier and increased synthetic production from the tar sands.

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.

For example, to "Canadianize" the industry, the federal government introduced a tax to fund acquisitions by Petro-Canada and favoured Canadian-owned companies when distributing exploration grants. In addition, the federal government continued to hold domestic oil prices below international ones. Finally, to achieve oil self-sufficiency, the government sponsored expensive frontier exploration and instituted a system of grants to encourage consumers to conserve energy and switch to alternative fuels.

Previously, energy policy had reflected the assumption that demand can only rise and that new supplies must therefore be developed continually. But the NEP's recognition that the solution to a "shortfall" in energy lay in controlling demand and supply was an innovation. Although most conservation and "off-oil" programs have been eliminated since the NEP came into being, the government still encourages conservation.

Coming after 2 years of unsuccessful negotiations with Alberta, however, 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. As energy producers, Saskatchewan and BC also denounced the NEP without, however, retaliating directly against the federal government. 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.

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. It also led to renewed calls for government intervention to stabilize prices and revenues.

As 1987 drew to a close, the oil industry's prospects improved: oil prices had rebounded from the previous year's low and revenues were up. More important still was the FREE TRADE agreement negotiated between Canada and the US. 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.

Conclusion

Oil and gas will continue to fill a large share of Canadian energy requirements into the next century, although oil's importance is already declining. The depletion of western conventional reserves will force Canada to become dependent on imports as well as on oil from the tar sands, on heavy oils, and on arctic and offshore oils. New domestic sources of oil will be more expensive to find, will in some instances pose new environmental risks, and will often require the development of new technology.

The rising cost of energy - oil, gas, electricity - has already led to a greater emphasis on conservation and to a search for alternative sources of energy particularly liquid fuels and renewable forms of energy, such as SOLAR ENERGY, WIND ENERGY and BIOMASS ENERGY. These and other forms may eventually replace many contemporary oil and gas uses, although hydrocarbons are likely to remain important in transportation fuels and as components of petrochemical products.