COLUMN

Interrupting Ottawa’s fantasies

Dian Cohen March 21 1983
COLUMN

Interrupting Ottawa’s fantasies

Dian Cohen March 21 1983

Interrupting Ottawa’s fantasies

COLUMN

Dian Cohen

In these days of panic over whether collapsing oil prices will spell disaster for us all, we should appreciate

the fact that lower energy prices will do more for the world’s long-term economic health than any other single factor since the drop in interest rates last fall. The Organization of Petroleum Exporting Countries cartel succeeded for nearly a decade in setting the price for crude oil. The inability of the rest of the world to deal with the effects of that price-setting caused, in turn, inflation, depression, subsiding inflation and the unsticking of the cartel itself. Canada, while an oil producer, has never been a price setter but rather a price payer. It is time for us to learn from some of the lessons of the past decade: Canada must recast the 1981 National Energy Program to deal with the new reality on energy prices.

The fact is that for the past 10 years the nations of the world, with few exceptions, have swallowed hook, line and sinker the mistaken notion of permanent energy shortages (sooner or later), accompanied by petroleum prices that can only rise. Although Canadian policymakers are slower moving than most, the NEP was a direct response to the mistaken belief that energy prices can only go up. Ottawa looked forward to $61 billion in tax revenues by 1986more than enough to dissipate not only the worries about the size of the federal budget deficit but the deficit itself. Ottawa, Dome Petroleum and other oil companies looked forward to those higher prices to cover the billions of dollars borrowed shortsightedly to buy out other energy companies at obscenely inflated prices.

But there are fallacies in the “permanently rising prices” scenario, the first being that there is no such thing as a permanent shortage. The biggest problem monopolists have is in calculating the needs of the world for their product—this is now clear in the case of the OPEC cartel. In the marketplace there is no such thing as “needs.” There is only effective demand—effective because the demanders can pay the price. But when the price gets too high, demand simply falls off, and the monopolists are left tripping over themselves in their scramble to find the “right” marketclearing quantity to produce at the “right” market-clearing price. This process has consumed OPEC for the past six months in a series of meetings.

Canadian energy policymakers are in the same boat as the flailing OPEC representatives although, predictably, they seem not to recognize that fact. They still try to anticipate needs by setting prices. Canada charges the world price—$34 (U.S.) per barrel—for what little oil it exports and subsidizes oil prices at home (Canadians currently pay about 72 per cent of the world price). But the Canadian government is also holding fast to its 1981 export price for natural gas—$4.94 (U.S.) per thousand cubic feet—a price that is today so unrealistically high that it can legitimately be called a mirage. The Americans, at that price, are now taking substantially less than half of the volumes of Canadian natural gas authorized for export by the National Energy Board.

Clearly, it is no longer possible for Canada to sell natural gas at yester-

*Canadian energy policymakers are in the same boat as the flailing OPEC ministers but do not seem to know iV

day’s prices. There can be little doubt that a drop in the Canadian natural gas price would do some good. In the first place, the lower price would enable Canada to sell more gas. Even at a substantially reduced price—say $2.60 per thousand cubic feet—Canada could, over the next several years, earn several billion dollars more in revenue. Secondly, selling our natural gas today, even at a substantially reduced price, makes us better off economically than leaving the gas in the ground for 20 years in anticipation of a higher price. It is like the bird in the hand being worth two in the bush. Money used sensibly today can do a million things that energy in the ground cannot do. The revenue could, for example, help to develop different, more efficient, energy processing and producing plants and equipment. Since Canada is drowning in a sea of natural gas, the country would be far better off having access to the gas revenue now than it would be by leaving the resource in the ground, to be used for the future—when the gas may not even retain its current value. Thirdly, cheaper imported natural gas would certainly help the Americans, if only marginally, to keep general prices down. As their economic recovery proceeds, Canada will benefit not just in growing markets for natural gas but in growing markets for all of our goods and services.

Finally, according to Morris Adelman, a professor of economics at the Massachusetts Institute of Technology and a clairvoyant oil analyst (he predicted both the formation and the denouement of the OPEC cartel years before either happened), lower Canadian export prices would not only generate higher sales in the United States but they would create a more favorable climate for investment in the development of new Canadian gas reserves. Says Adelman: “Until recently the cartel had to restrict capacity to maintain prices. Saudi Arabia operates only 15 out of 50 known fields. It drills half as many wells as it did in 1973. Venezuela has three trillion barrels in place in its Orinoco belt, of which practically none has been made into reserves. But,” he adds, “at lower prices, the only sensible course for oil producers is to expand development in the known fields and initiate exploration in every promising region, of which there are several.”

As for domestic oil prices, since Canada is now close to world prices, the easiest and least complicated course would be to go to world prices. This would spare Canadian policymakers the futile effort of trying to predetermine market demand and would delight investors who could plan on the basis of the known world price. The OPEC countries will undoubtedly expand capacity in their attempts to prevent prices from falling. Canadians should be doing the same thing but will not because the NEP, which has put such horrendous restrictions on resource development, stands between us and more plentiful supplies of energy. It is time to get rid of the constraints of the NEP and deal with today’s reality: energy prices are on their way down, and, for the foreseeable future, energy looks as if it might become a market-determined commodity like any other. Surely Ottawa is smart enough to devise a policy sufficiently flexible to accommodate a real-life scenario in which prices can move both up—and down.

Dian Cohen is a Montreal-based economics writer.