Opinion: A managed energy market didn't work before and it won't work again

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One notable result of the pandemic is that many commentators have resurrected the 1970s theme of “self-sufficiency” — not just for pandemic paraphernalia, which makes some sense, but also, strangely, for oil. Even Rex Murphy and Conrad Black, who normally advocate open markets, espoused this old policy nostrum. Thus: “Take care first of your own citizens, which means limiting the contingencies of external dependence” (Murphy) and “Dispense with foreign oil imports and reduce fuel and gasoline costs for Canadians” (Black). More recently, Diane Francis has suggested that by joining our energy system with the U.S.’s we would “eliminate the supply chain dangers of relying on energy from Russia, Saudi Arabia and other OPEC countries.”

© Provided by Financial Post Who will tell Irving Oil it must terminate its 60-year arrangement with the Saudis to supply its St. John refinery and instead run Alberta bitumen?

But don’t these former “Free Marketeers” remember Canada’s earlier experiments with managed oil markets?

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“Ultimate independence from the world oil market” was a key goal of Pierre Trudeau’s National Energy Program (NEP) 40 years ago. I should know. I administered Canada’s “Made-in-Canada” oil price system in the early 1980s and experienced firsthand how managed markets send perverse price signals to both consumers and producers. The NEP showed why energy self-sufficiency was economic nonsense. It was costly, ineffective, distorted private investment and left a permanent scar on national unity, a scar recently re-opened by the current federal government’s ambivalence towards oil.

But managing oil markets in North America didn’t start in 1980. The 1950s were also a period of economic nationalism and political and industrial turmoil in both the global and North American oil markets. With the major U.S. companies importing cheap oil from the Middle East and Venezuela and their Canadian affiliates leading the post-Leduc oil boom in Alberta, the North American market was flooded with supply. Canada set up a national inquiry into how oil and gas exports should be regulated. The National Energy Board was created in late 1959 as a result.

In March of that year, after a decade of falling import prices threatened relatively high-cost, small independent producers in Texas, President Dwight Eisenhower reluctantly agreed to establish the Mandatory Oil Import Quota Program. In theory, at least, Canadian oil, coming overland and therefore deemed “secure,” was not subject to quotas. In practice, however, Canada agreed to control export volumes to Chicago.

With over half of Alberta’s oil effectively shut-in, Ottawa had to do more to increase market access for Alberta crude. In 1961, it announced the National Oil Policy. Refineries west of the Ottawa Valley Line were obliged to process Canadian crude; refiners in Quebec and Atlantic Canada could process much cheaper imported crude. West of the Line, consumers paid a price linked to the U.S. price, some 60 per cent higher than the price of Middle East oil delivered to the east coast.

In the end, domestic U.S. production simply couldn’t keep up to soaring demand; President Nixon, having already controlled gasoline prices to help manage inflation, cancelled the import quotas in 1973 and began to phase out oil price regulation. In Canada, after cancelling oil export licenses in early 1973, Pierre Trudeau froze the price of domestic crude — beginning the managed Canadian oil market that would last for 12 years. In effect, North America had a managed, fettered oil market from 1959 until 1986, when the NEP was cancelled. It didn’t work.

Ms. Francis would take us back to the NEP and require all provinces to pay a “managed” price for oil higher than they would pay for imported crude. Could Mr. Murphy convince his fellow Newfoundlanders to go along with this scheme? Who will tell Irving Oil it must terminate its 60-year arrangement with the Saudis to supply its St. John refinery and instead run Alberta bitumen? Will Ottawa compensate Irving and other eastern-Canadian producers for the massive costs of converting refineries to run on a bitumen-rich diet?

Conrad Black reminds us of Cardinal Richelieu’s warning that “countries have durable interests; the constancy of friends fluctuates.” The U.S. has to be the exemplar of interests trumping friendship. Canada expedited oil pipelines, CANOL and Trans Mountain, to support the U.S. military in the Second World War and the Korean War, respectively. In 1977, the two countries signed the Transit Pipeline Treaty and the Northern Pipeline Agreement to enable the transit of Alaskan Gas to the lower 48 states. To accelerate supply, we approved the “pre-build” to move Alberta gas south. But then, in politically convenient amnesia, Presidents Obama and Biden cancelled the permits for Keystone XL.

A few months after signing the 1977 Transit Treaty, during one of the worst blizzards in U.S. history, Canada pulled out all stops to approve emergency gas supplies to the northern states, which were gripped by a deep freeze that killed many more people than the recent Texas freeze. Current Michigan Governor Gretchen Whitmer was seven years old. She might remember snow up to her waist, her school closed for a couple of weeks and hospitals facing shortages of heating fuel. Canada parked its obsession with “self-sufficiency” and came to the rescue. That’s what true friends do.

Keystone, Line 5, and steel and aluminum tariffs are all reasons why Canada must distinguish between our genuine American friends, of whom we have many, and American political leaders, whose interests will always come before ours. Rex Murphy advises: “Take care first of your own citizens.” Yes. That is right. But not by imposing cost penalties on Canadian oil and limiting imports. Rather, by securing the best possible prices by diversifying buyers of our exports. A managed North American energy market in the name of self-sufficiency is an old, not-so-brilliant idea that hasn’t worked before and won’t work again.

Robert Skinner is an Executive Fellow at the School of Public Policy, University of Calgary.