The Harper government's Big Idea for the future of the Canadian economy is that Canada should become an "energy superpower." What will make it so is the gargantuan development of the Alberta tar sands, which the Harperites and their friends depict as "ethical oil." In truth, the development of the tar sands is reducing northern Alberta to a stinking hell. Long after this dystopian nightmare has been put aside, Albertans will be left with the environmental catastrophe that is being wrought. Not only is the tar sands a disaster for Alberta, it is helping drive the planet down the path to irreversible climate change. Our grandchildren will pay the price for this.
The members of the Harper government are driving the Canadian economy into a dead end. Far from promoting the diversification and qualitative development of our economy, they are returning to us to our colonial roots, an economy based on digging stuff out of the ground to send to other more advanced economies, for their profit, while we get to clean up the mess that is left behind.
The Harperites will not face the two most pressing realities of this century: climate change and peak oil. Humanity needs to change course. Canada needs to change course.
Facing these twin imperatives, Canadians need to rebuild their cities, their transportation systems, and their manufacturing sector. That's how we will create jobs and make a contribution to the betterment of the planet.
It used to be fun to go abroad as a Canadian and receive kudos from people about how great our country is. Not any more. They know we're "the colossal fossil." Let's change that.
Here's a look at the evolution of the petroleum industry in Canada and the "ethical" tar sands:
Eastern bankers turned up their noses at Alberta petroleum in its early decades which was one reason that the Alberta oil patch fell into the hands of the major American and European oil companies. The Alberta oil industry came of age in 1947 with the discovery of the major oil field at Leduc just south of Edmonton by Imperial Oil, the country's largest petroleum company. Imperial was a subsidiary of Standard Oil of New Jersey (now Exxon Mobil), with 69.7 per cent of the company's stock held by Jersey Standard.
By 1960, non-residents owned 77.3 per cent of the investments in the Canadian petroleum industry. Foreign control of the industry was even higher at 89.8 per cent. A decade later, foreign investment in the Canadian petroleum industry totalled $9.8 billion and more than 91 per cent of the assets and more than 95 per cent of the industry's sales were accounted for by foreign-owned firms. Eighty per cent of that foreign ownership was in the hands of major U.S. based petroleum companies.
During the 1960s and early 1970s, the basic goal of the Canadians subsidiaries of the foreign-owned petroleum companies was to increase the export of oil and natural gas to the United States. To stay in compliance with the regulations of the National Energy Board of Canada which required that enough oil and natural gas be set aside for domestic needs, the companies issued reports that made the case that Canadian petroleum reserves were ample for the domestic market for decades to come, and that, therefore, Canada could safely increase its exports to the United States.
Then came the global oil price revolution of 1973 and things turned upside down. Between December 1973 and the middle of 1974, the global price of oil soared from about $3.00 a barrel to $11.00 a barrel. The Liberal government of Pierre Trudeau responded to the global petroleum crisis by establishing a regime of price controls and export taxes for the sale of Canadian oil. Under this regime, Ottawa froze the domestic price initially at $3.80 a barrel in September 1973. After the world price skyrocketed, the federal government raised the domestic price of petroleum to $6.50 a barrel. Meanwhile, Canadian oil was sold to the U.S. for the world price. The difference between the domestic price and the world price, for this exported oil, was collected by Ottawa in the form of an export tax.
The Trudeau government's petroleum regime generated fierce opposition from the major oil companies, the governments of the petroleum producing provinces, Alberta and Saskatchewan, and from the United States government. The companies swiftly demonstrated that they had the means to fight the new regime. Prior to the global oil price revolution, the companies, in their testimony before the National Energy Board had assured Ottawa that Canada had plenty of oil and natural gas to meet domestic needs for the long-term future. In 1972, Imperial Oil, making the case for additional exports of Canadian petroleum included this statement in the company's annual report: "In the current debate, the export of Canada's energy resources is being questioned; in effect, we are being urged to 'bank' our petroleum resources. Our present energy reserves, using present technology, are sufficient for our requirements for several hundred years." Two years later, after Ottawa's pricing regime had been established, Imperial and the other petroleum giants sang a far different tune. In 1974, with their eye firmly on the demolition of Canada's two-price system for petroleum, one for Canadians and another for Americans, the petroleum companies warned of looming oil and natural gas shortages within a few years. Gone were the surpluses that had supposedly existed as far as the eye could see.
By the time the oil companies claimed that they needed incentives to explore for the petroleum Canadians would need in the not too distant future, the Trudeau government had become highly suspicious of the trustworthiness of the industry. The fact that top ministers and officials had concluded that the information provided by the petroleum companies was heavily slanted to serve their interests was one of the reasons, the Trudeau government decided to establish a publicly owned oil company, Petro-Canada. The NDP, which held the balance of power during the minority Parliament of 1972 to 1974, had pressured the Liberals to create a crown-owned company. Before the election in the summer of 1974 in which the Liberals regained their majority, the government committed itself to create Petro-Canada. It was after the election, though, that major steps were taken provide the company with a strong capital base to take over the assets of a number of foreign-owned oil companies operating in Canada. Petro-Canada was to become a vertically integrated company, operating in all aspects of the industry, from exploration to production, refining, transporting and retailing petroleum products. Crucially, the company would provide a much needed "window on the industry" whose data on petroleum reserves could be relied upon by the government.
In March 1975, Energy Minister Donald Macdonald made the case in the House of Commons that Canada needed Petro-Canada to deal with the vast changes that had roiled the petroleum industry: "It is the extent and nature of these changes which have in our view tipped the balance decisively in favour of federal entrepreneurship in the oil and gas industries."
Petro-Canada moved quickly to acquire the assets of foreign-owned petroleum companies in Canada, under the Trudeau government, prior to its defeat in the election of 1979, and then again following the Liberal victory in a second federal election in the winter of 1980. Between 1976 and 1982, the crown company purchased the Canadian assets of Atlantic Richfield, Phillips Petroleum, Petrofina Canada, and British Petroleum, spending $3.7 billion these acquisitions.
In 1980, following the resumption of power by the Liberals in an election early that year that defeated the short lived Conservative government of Joe Clark, the Liberals introduced the National Energy Program. The NEP's centerpiece was the Canadianization of the petroleum industry -- the goal was fifty per cent Canadian ownership by 1990 -- through both the growth of publicly owned Petro-Canada and through the encouragement of privately owned Canadian petroleum companies. Petro-Canada had already been enlarged through numerous acquisitions of the assets of foreign-owned firms in Canada. The emphasis in the NEP was to foster the growth of privately-owned Canadian firms through a tax incentive scheme designed to further this objective. The Petroleum Incentive Program (PIP) established a tax system with higher rates for foreign-owned than for Canadian owned petroleum companies. The additional taxes reaped from the foreign owned companies were used as so-called PIP grants to provide additional capital for the Canadian owned firms.
The federal government retained its system of price controls, setting the domestic price of oil lower than the world price. In 1981, the federal government negotiated a revenue sharing deal with the Alberta government. Tensions between the two governments remained high, however.
And then in 1982 the world price of oil plunged from about U.S. $30 a barrel to about U.S. $10 a barrel. The reasons for the collapse of petroleum at that time were not mysterious. The collapse resulted from the restoration of oil production in Iran -- production had dropped perilously close to zero at the time of the Iranian Revolution in 1979, which had provoked a temporary doubling of the world price of oil.
With the onset of a sharp recession in 1982, and a surplus of oil production in the OPEC countries and from the North Sea, demand fell and so did the price. Alberta's jobless rate soared above the national average. Thousands of people turned to food banks to sustain themselves. In Calgary, newly-constructed office towers were mothballed as projected business expansion turned to ashes.
At the time, the Trudeau government was confidently forecasting an era of energy mega-projects that would propel the nation's economy forward as the world price of oil rose, according to some forecasts, to U.S. $60 a barrel. One attractive feature of the mega-projects for the members of the Trudeau government was that most of them would be located outside Alberta, in the North West Territories, the Beaufort Sea or off the coast of Newfoundland in the Hibernia field which was being explored at the time. Such massive developments would reduce the disproportionate power of Alberta in the energy politics of the country, induce capital investment, create jobs and generate revenue for the federal government. When the price of oil fell, Ottawa's hopes disintegrated and the mega-projects vanished from the drawing boards and from public discourse.
Along with many other petroleum producing regions, such as Texas which was equally hard hit -- office towers were also mothballed in Houston -- Alberta suffered during the years of the bust. In Alberta though, a legend grew up, more truthfully it was concocted, and it persists to this day. According to the legend, the slowdown in the Alberta oil patch was caused by the Trudeau government's National Energy Policy (NEP).
When the price of oil fell, the petroleum companies sharply reduced their exploration activities in Alberta. As the province lapsed into a period of sharp recession, the myth spread like a prairie fire that the pain was caused by the NEP. The theory was established -- based on no evidence -- that interference from Ottawa had imperiled the well-being of the Alberta oil patch.
The myth served the interests of the foreign-owned oil companies, the United States government, and Conservative politicians who detested the idea of government involvement in the petroleum sector. Those who were not served by the myth were Canadians, in particular Albertans. Politicians looking for votes in Alberta are often tempted to attack the bogeyman of the NEP to curry favour in the province.
The trouble with the myth is that it has provided cover for the thoughtlessness and rapacity of energy policy in Alberta and in Ottawa over the past several decades. In 1984, when Brian Mulroney's Conservatives swept to power in a federal election, the new prime minister quickly traveled to New York to address the Economic Club and tell his corporate audience that Canada was "open for business" once again. The Mulroney government quickly ended the regulation of petroleum prices in Canada, and dispensed with the National Energy Program. Instead of encouraging the growth of Canadian ownership in the petroleum industry, Mulroney sang the praises of foreign investment. He replaced the Trudeau era Foreign Investment Revenue Agency (FIRA), which had been established to ensure that particular foreign takeovers of Canadian companies served the national interest, with Investment Canada, a body established to encourage foreign investments and takeovers.
The most important initiative the Mulroney government took to ensure that no future Canadian government would ever attempt to do the things the Trudeau government had done in the petroleum sector came under the heading of what was misleadingly labelled as "free trade." Under both the Canada-U.S. Free Trade Agreement and the North American Free Trade Agreement, negotiated with the U.S. by the Mulroney government, Canada's ability to control its own petroleum industry was dramatically curtailed.
The FTA, which came into effect on January 1, 1989, abolished the right of Canada to embark on a future NEP. Not only did it, in the "national treatment" provision, specify that Canada cannot tax Canadian and U.S. (later Mexican with NAFTA) companies at different rates, thereby negating a repeat of the PIP grant scheme, it also provided that Canada cannot institute a two-price petroleum policy with a higher price for petroleum exported to the U.S. and a lower price for Canadians. On top of these measures, the trade agreement stipulated that Canada had to continue exporting as much petroleum to the U.S. as it had been exporting on a rolling average of the previous three years. This meant, among other things, that Canada would be required to continue its exports of petroleum to the U.S. even if imports of petroleum to eastern Canada from overseas were cut off as a consequence of a supply crisis generated by falling supplies or a geo-political conflict. This stipulation meant that Canada had to make the supplying of the American petroleum market a higher priority than meeting the requirements of Canadian markets experiencing a shortage.
If, as the Harper government hoped prior to the economic meltdown in 2008, the opening of new tar sands projects dramatically increased Canadian petroleum production, the country's commitment to export more petroleum to the United States would rise in lock step. The whole point of more tar sands operations is to meet the oil requirements of the U.S.
The petroleum provisions of the FTA and NAFTA compromise Canadian economic sovereignty more gravely than any previous undertaking ever made by a Canadian government. Significantly, Mexico, also a major exporter of petroleum to the U.S., did not make a commitment to sustain the level of its oil shipments to the U.S. Moreover, Mexico retained its right to sell oil to American purchasers at the world price while keeping domestic oil prices regulated at a lower level. Mexican nationalism would have made a Canadian-style energy deal with the U.S. political inconceivable.
The provisions in the trade agreements the Mulroney government negotiated have been accepted without demur by both the Chretien-Martin Liberal and the Harper Conservative governments ever since. Canadians should recognize these agreements for what they are -- "unequal treaties" -- the phrase used by the Chinese to describe the treaties signed by China's governments with the great European powers during the 19th century.
To the extent that the Harper government has an economic policy in addition to its basic inclination to let the free market operate unhindered, it has been to make Canada an "energy superpower" in the 21st century. What this means is that Canada should export an increasing amount of oil and natural gas to the United States.
Indeed, over the past couple of decades, the American reliance on Canadian oil has grown steadily larger. In July 2006, at 1.6 million barrels a day, Canada was the largest single exporter of crude oil to the United States. Rounding out the top five exporters to the U.S. were Mexico with just over 1.5 million barrels daily, Saudi Arabia at over 1.2 million barrels, Venezuela with nearly 1.2 million barrels, and Nigeria with just over 1.0 million barrels. These five countries were the source of sixty-six per cent of American oil imports. What these totals make clear is the high dependence of the United States on Canada and other Western Hemisphere sources of oil and its relatively low reliance on Middle Eastern sources.
The resource on which the Harper government's vision of Canada as a major world petroleum exporter is based is the Alberta tar sands. As oil, national security and the war on terror have become tightly aligned in the thinking of American political leaders, Canada's largest petroleum deposit, the tar sands, has been ever more closely scrutinized from Washington. Located across an enormous region of north-eastern Alberta -- in three major areas spread over 140,800 square kilometres, an area larger than the state of Florida -- centred on Fort McMurray about three hundred kilometres north of Edmonton -- the tar sands contains almost as much oil as the conventional reserves of Saudi Arabia.
In the early years of this century, tar sands investments total nearly $200 billion. By the spring of 2008, oil sands production reached 1.3 million barrels a day, more than half of Canada's oil production. Ten per cent of North American crude oil production already comes from the tar sands. Incredible as it may seem, the Alberta government produced one scenario that by 2050, the tar sands would produce eight million barrels of oil a day, transforming Alberta into a North American Saudi Arabia.
The problem is that this oil is very expensive to extract and that producing oil from the oil sands involves strip mining on a vast scale and the reduction of huge tracts of land to a scarred horror. In addition, the production of oil from the oil sands requires enormous inputs of fresh water and natural gas. Moreover, the industrial process by which the oil is separated from the sand results in the release of large quantities of green house gases into the atmosphere.
The oil sands has become by far the biggest source of emissions in Canada. It is no exaggeration to say that without a steep reduction in the production of synthetic crude oil from the tar sands, all other programs in Canada to reduce emissions will be fruitless. Tar sands development has directly shaped the environmental policies of the Harper government. In keeping with the lobbying position of the petroleum industry, which calls for what is euphemistically described as a "Made in Canada" policy, the Harper government has repudiated any Canadian effort to join the struggle against climate change.
The Harper government developed its policy approach at a time when oil prices were rising dramatically to a peak of U.S.$150 a barrel in the summer of 2008. As the oil price soared, the short-term economic prospects for the oil sands grew ever brighter. Capital investments by the companies in new oil sands projects skyrocketed. Calgary oilmen and the members of the Harper government to whom they were closely tied looked forward to a time when Canada would be producing as much as four million barrels of oil a day, three quarters of it from the tar sands. Most of this production would be transported by pipeline to U.S. refineries specifically geared to refining heavy, dirty synthetic crude.
As tar sands production increased, as did the number of projects to enable higher output in the future, Fort McMurray was bursting with new development. The city's labour shortage pushed up wages and the demand for workers who flooded in from across the country. Weekly non-stop flights from St. John's, Newfoundland to Fort McMurray imported workers to toil at oil sands projects and then took them home a few weeks later, full of good cheer, their wallets bursting with the earnings to spend when they got back home. There were thousands of new jobs in the city constructing houses, roads, shopping centres and schools. The province hired construction crews to improve the notoriously dangerous highway from Edmonton to Fort McMurray.
The rise of Fort McMurray and the tar sands was not without immediately damaging consequences for other regions of the country. For one thing, as the price of oil rose and investments flowed into the oil sands, the Canadian dollar took off on a tear against the American greenback. The Canadian dollar peaked at U.S.$1.10 in the early autumn of 2007. The pace of the dollar's acceleration negatively affected other sectors of the economy, particularly the manufacturing sector. The price of labour, relative to that in other countries, rose so fast that industries had little time to adapt to the shock. The auto industry and the industries that supplied it were among the casualties.
In the boom atmosphere of the times, these costs to other industries seemed minor in comparison to the new wealth flowing from a single sector. Later, when the global economy crashed, it would be seen that numerous industries were dangerously weakened on the eve of Canada's descent into economic malaise.
Those who approved of Canada's recent approach to economic policy-making would make the argument that it has always been the case that one booming sector could derail other sectors, drawing labour away from them and pushing up their costs. What mattered, they have and continue to argue, was the overall performance of the economy. The Canadian story had always been one of rising and falling sectors. It was not the job of government to try to pick winning sectors; that was the job of the market.
The price of oil began to plunge from its high in the summer of 2008 to a low of just over U.S. $40 a barrel by the end of the year, before it began to climb again the spring of 2009. The collapse of the price of oil was a consequence of the general economic collapse. (In early September 2011, the price of crude oil is $86 a barrel, bouncing up and down on the receipt of economic news and forecasts.)
As with the storms that have washed the rainbows out of the skies of previous resource booms in Canada, the transition from boom to bust had its genesis outside Canada. New tar sands investments dried up quickly as the economic downturn took hold. Alberta's economy was hard hit by job losses and lagging output. Over the past two years, as the price of oil has climbed, the prospects for the tar sands have brightened once more in the eyes of its promoters, petroleum companies and the members of the Harper government. With the American economy shaky (that's a euphemism) and with projections that U.S. growth and job creation will be slow for years to come, the future of the tar sands is very iffy. It's a very expensive source of petroleum and despite the nonsense about its "ethical" character, the world's flinty-eyed investors are not driven by such non-material considerations.
If we retain the policy framework we have had in Alberta and at the federal level over the past quarter century, what can we expect in the future from our petroleum industry? As exports of oil to the U.S. rise, slowly in my opinion, so too will Canada's NAFTA obligation to sustain the higher level of exports for the long term. Canada, as so often before over the centuries, will set forth on a course of development based on the excessive export of primary products at the expense of all else.
And Alberta, which has had a right-wing government, with one change of party label since 1935, will go on selling its oil while collecting peanuts for this in relation to the royalties collected elsewhere. With roughly the same population as Alberta, Norway has accumulated more than U.S. $500 billion from the sale of its North Sea oil production, compared to the $15 billion Alberta put aside -- and is rapidly frittering away. Norway's capital is not used to defray current government costs. It is invested to generate economic development in Norway long after its own oil reserves are depleted.
The tale of the petroleum industry today is a classic case of the dead-end Canadian approach to resource development. The country continues to do what it has done for four centuries -- export the staple products other countries need without figuring out how to use this to further our own development qualitatively.
There are two ways to eliminate NAFTA's intolerable intrusions into Canadian sovereignty in the future. The first would be by renegotiating NAFTA with the U.S. and Mexico to remove the offending clauses. The second would be by giving notice under the terms of NAFTA that Canada intends to withdraw from NAFTA.
The approach of the Conservatives to the economic crisis (the latest numbers show that our economy is not growing and we now have an over-all trade deficit) is to wait for the Americans to get their act together so that demand for the commodities Canada sells will increase and Canada's economy can recover. It's the old Canadian way, tried and not-so-true. It leads the country from one horizon to the next, but never to the promised land of qualitatively more advanced economic development. Those who have not learned the lessons of their country's economic history are condemned to go on repeating them.
This article was first posted on James Laxer's blog.
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