The NATIONAL ENERGY PROGRAM (NEP) was an energy policy of the
Government of Canada
* 1 Background
* 1.1 Global context
* 1.2 Canadian context
* 1.2.1 National Energy Board * 1.2.2 Price controls
* 2 Petro-Canada
* 3 NEP goals
* 3.1 Program details
* 4 Global economic recession in the 1980s
* 5 Reaction in
* 6 Canada and the global recession in the 1980s
* 6.1 North American housing prices
* 7 Price of oil
* 8 Bankruptcies
In his preamble to the announcement of the National Energy Program,
introduced as part of the October 1980 federal budget, Finance
"... ever since the oil crisis of 1973 industrial countries have had to struggle with the problems of inflation and stubbornly high rates of unemployment. In 1979 the world was shaken by a second major oil shock. For the industrial world this has meant a sharp renewal of inflationary forces and real income losses. For the developing world this second oil shock has been a major tragedy. Their international deficits are now three to four times the sum they receive in aid from the rest of the world ... They are not just Canadian problems ... they are world-wide problems. At the Venice Summit and at meetings of Finance Ministers of the IMF and OECD, we have seen these new themes emerge."
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
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. :10 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 . :10 "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. :10
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 ... 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." :10 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."
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 articles: History of the petroleum industry in Canada and Energy policy of 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
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
National Energy Board
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", while the five eastern provinces, which included major
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,
National Energy Program
"The new energy policy limits the rise in prices of oil and gas to domestic consumers and thus continues to protect us from the violent shocks of OPEC price increases. It strengthens our specific measures to promote the most economical use of energy and in particular the displacement of oil by other fuels. It provides new impetus to the development of new sources of supply, through direct government programs and through new incentives of particular value to Canadian-owned producers. Energy policy is only the most urgent element of our new strategy. Renewed growth in productivity and lower costs are needed throughout the economy. Within the overall expenditure plan which I will lay before the House, we have assigned clear priority to economic development." — MacEachen October 1980
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
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 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
National Energy Program
"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." :6
GLOBAL ECONOMIC RECESSION IN THE 1980S
Main article: early 1980s recession
In the early 1980s, the global economy deepened into the worst
economic downturn since the
REACTION IN ALBERTA
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
In 1981, Trudeau and Lougheed signed "an oil and gas prices and revenue sharing" agreement, marking an end to "long bitter dispute."
"The agreement sets a series of price increases for old oil starting
with a $2.50 a barrel increase on October 1, 1981 and "generous" near
world prices for new oil, effective January 1, 1982, which will see an
estimated wellhead price of $49.22 per barrel by July 1, 1982. New oil
is defined as oil from pools initially discovered after December 31,
1980. It includes new conventional oil found in Alberta, synthetic
oil, including existing production from the SUNCOR and SYNCRUDE
plants, and new oil from Canada lands...At their press conference
Tuesday, the leaders of both parties estimated the deal is worth an
approximate $212.8 billion in revenues to Ottawa,
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. :284 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), :290 which was 30 per cent of the increase that would have been gained from going to world prices. :290 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, :294 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).
CANADA AND THE GLOBAL RECESSION IN THE 1980S
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 PRICES
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. :1
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
PRICE OF OIL
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
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. :23 For the period 1980 through 1985, bankruptcies per 1,000 businesses in Canada peaked at 50% above the 1980 rate. :20
During that same time the bankruptcy rate in Alberta's economy rose by 150% after the NEP took effect :12 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 estate :6 did much
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
NORWAY COMPARED TO ALBERTA
North Sea Oil Prices and Norway's Trade Balance, 1975-2000. Source: Statistics Norway
In around 1970
According to Grytten, "
Thus, not all oil based economies suffered as
WESTERN ALIENATION IN CANADA
Main article: Western alienation in Canada
The NEP was extremely unpopular in
Western Canada , especially in
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
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,
"The anger and alienation of this era would provide much of the fuel
behind the rise of Reform and Canadian Alliance parties, becoming the
Conservative party that rules Ottawa today. The anger and alienation
of Albertans also led Mr. Lougheed to oppose many of Mr. Trudeau’s
proposed plans for the Constitution Act of 1982; he argued against
END OF THE NEP
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."
* ^ A B C D E MacEachen, Allan J. (28 October 1980), Budget 1980
(PDF), Ottawa, ON, retrieved 27 January 2015
* ^ "Inflation calculation", Bank of Canada
* ^ "Bank of Canada Interest Rate History", Canada Bubble
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Reverberations (PDF), Washington, DC: The Middle East Institute (MEI),
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retrieved 28 January 2015
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Address, retrieved 27 January 2015
* ^ May, Gary (1998). Hard Oiler!: The Story of Canadians\' Quest
for Oil at Home and Abroad. Dundurn. p. 33. ISBN 978-1-55488-184-0 .
* ^ Petroleum History Society - Canadian Beginnings
* ^ A B C D E F "2000 May Report of the Commissioner of the
Environment and Sustainable Development", Auditor General, 15 November
2007, retrieved 27 January 2015
Government of Canada
* ^ McDougall, J. (1982), Fuels and the National Policy
Suncor rebrands \'Red Square\', 4 August 2009, retrieved 27
* ^ Pratt, Larry R.; Yusufali, Sasha (16 September 2011),
Petro-Canada, retrieved 27 January 2015
* ^ "National Energy Program", The Canadian Encyclopedia. Historica
Foundation of Canada, January 2005
* ^ Neustaedter, Carman (March 2001), The National Energy Program:
Canada and the United States, University of Calgary
* ^ A B C Gerson, Jen (14 September 2012), "A legacy rich as oil:
* Vicente, Mary Elizabeth. 2005. Political Issues