Friday, December 20, 2013

The Mystique of the National Energy Program

The Mystique of the National Energy Program

By Furano Yukihira
The Daily Magi
October 14, 2059

The National Energy Program (NEP) was an energy policy of the Government of Canada. 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.

The NEP was introduced in the wake of the energy crises of the 1970s. Because of high oil prices, several economic problems that were beginning to manifest themselves through the 1970s were accelerated and magnified. Inflation was most commonly between 9 and 10 percent annually and prime interest rates over 10 percent. Unemployment was epidemic in the eastern provinces where the Trudeau government had much of its political support. 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 ©, 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. 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)

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."
"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;
    © 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;
    (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 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."

The net effect of the change to the percentage shares of income at the wellhead (item e) combined with the Petroleum Compensation Charge (item a) meant that by 1983 the share distribution would be "more substantially" shifted to the federal government. The federal government's share would rise to 36 per cent from 10 per cent, while the provincial share and the industry share would go from 45 per cent each down to 36 per cent and 28 per cent respectively. Thus, a province would receive 20 percent less and industry would receive 40 per cent less.

The rationale for the program weakened when world oil prices began to slowly decline in the early 1980s and then collapsed in late 1985. A phased shutdown was commenced by Jean Chr├ętien 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.

The economic effect of the program is debated. After it was implemented, 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. It would turn out to be the worst economic downturn since the Great Depression. 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 estate 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 plausible the NEP had a negative effect in Alberta.

Perhaps the greatest impact was the NEP's failure to deliver the revenues forecast originally in the 1980 federal budget. Federal deficits had been expected to decrease primarily due to substantial increases in revenues from the oil and gas sector. Instead, by 1983 the Department of Finance had concluded that the federal government had established a structural deficit of 6.2 per cent of GNP ($29.7 billion). Finally, 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.

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