notes on the energy aspects of the 1974 budget

Canadian Public Policy

Notes on the Energy Aspects of the 1974 BudgetAuthor(s): Eric KieransSource: Canadian Public Policy / Analyse de Politiques, Vol. 1, No. 3 (Summer, 1975), pp. 426-432Published by: University of Toronto Press on behalf of Canadian Public PolicyStable URL: http://www.jstor.org/stable/3549390 .

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Notes on the Energy Aspects of the 1974 Budget

ERIC KIERANS/Department of Economics, McGill University

Last year, Canadians had the benefit of two sets of budget proposals. The first was defeated in the House of Commons but not in the country and the government was returned with a solid majority. Both budgets, the original May and the new improved November version, were directed at the immediate and pressing problems of inflation and recession, but in the process the federal government undertook a major rearrangement of its taxation policy with respect to the resource sector. Admitting that this sector had never been required to pay a fair share of the tax burden, even after the 1971 Tax Reform, the federal government moved to increase its percentage of the tax revenues accruing from the profits, both systematic and windfall, and rents flowing into the resource companies. This revenue-raising measure brought the federal government into direct confrontation with the industry and producing provinces. It is not my present purpose to discuss the federal- provincial aspects of the budget or the problems of allocating the revenue from our petroleum resources among the federal government, the producing provinces and the industry.1 Given the rate at which our existing reserves are declining and our demand for energy growing, it is quite clear that we are focussing on the wrong problem. The federal government may look for an 18 per cent share in oil revenues, leaving 45 per cent to the producing provinces and 37 per cent to the industry,2 but the public is interested in continuing supplies of gas and heating oil for their homes and gasoline for their cars. What is needed now and badly is a conservation program with teeth, a drastic reduction in oil exports, a review of the basis on which recent gas export licenses were granted and a federal commitment to exploration, development and technological research that is meaningful.3 Equally important would be

I For an imaginative and creative treatment of this issue, see Gainer and Powrie (1975). 2 Opening Remarks on Oil and Natural Gas Pricing and Related Issues, Hon. Donald S. Mac-

Donald, Federal-Provincial Conference of First Ministers, April 9-10, 1975, P. 8. 3 On conservation see Richard Gwyn's discussion of the Energy Conservation Office, Montreal

Star, April 21, 1975 in which he writes 'the spectacle is both sad and sickening'; for the misleading information supplied to the Cabinet by the petroleum industry when applying for additional gas



Energy aspects of the budget / 427

decisions as to the means which the government intends to employ to ensure adequate supplies of energy for Canadians in the foreseeable future, i.e. whether there shall be major reliance on the public or the private sector.

Canadian concern about future energy supplies is real enough. We spend about 'one quarter of our disposable income ... to purchase and operate equipment to provide heat, light and transportation.'4 Our consumption of energy has tripled in the last quarter century and in the process we have come to depend on oil and gas for roughly two-thirds of our needs. Hundreds of billions of dollars have been invested in plant and equipment, homes and transport that depend on mineral fuels for their continued operation and maintenance. While we have our share of extravagances, climate and distance harden the core of our demand for hydrocarbons and underline our vulnerability to changing conditions of supply.

The concern that Canadians feel about increased prices for energy and diminished supplies to meet our domestic requirements is sharpened when they read of the cool and detached manner in which the Minister of Finance describes a rapidly deteriorating situation. 'Our demand for energy is rising and our known reserves are declining. New sources of supply, given their nature and location, will be expensive to find, develop and bring on stream.'5 This cannot be termed a call to action.

There is a hint here of conversion from the government's position of a year earlier when he and the Prime Minister were throwing their weight behind the immediate construction of the Mackenzie Valley Pipeline and assuring the Americans that 'Enormous quantities of gas are available to be transported from the Far North.'6 But Mr. Turner's budget reminder comes at least five years late, for Canadians and the industry have long known that our meagre supplies of conventional oil and gas have been running out and that we have hastened this depletion by domestic extravagance and waste and by commit- ting ourselves to the export of surpluses that do not exist when even the most modest estimate of domestic needs is taken into account.

A significant aspect of the November budget lies in the determination of the federal government to reduce the share of provincial revenues and to restore control of the petroleum industry and the responsibility of assuring our future energy supplies to the private sector. Thus, 'We have pulled back from our original proposals. We want resource industries adequately taxed; but we want to see their financial position sufficiently strong to enable them to develop and to deliver the supplies needed in the years ahead. We have done our part. I now appeal to the provinces ... to do their part. I have no doubt that if the provinces respond to the needs of the industries and the nation as I have

export contracts see my 'The Day the Cabinet was Misled,' Canadian Forum, March 1974, PP. 4-8; for the record to date on federal funds allocated for tar sands research amounting to less than $I million see Minutes of Proceedings and Evidence of the Standing Committee on National Resources and Public Works, Issue No. 8, March 6, 1975, PP. 8:5-8.

4 An Energy Policy for Canada: Phase I, Volume I Analysis, Introduction, Ottawa, Information Canada, 1973, P. i.

5 Hon. John N. Turner, Budget Speech, November 18, 1974, P. 14. 6 Rt. Hon. P.E. Trudeau, Prime Minister, Debate on Petroleum Policy, Hansard, December 6,

1973.



428 / Eric Kierans

tonight, the problem will be resolved." Mr. Turner's own estimate of the amount of the pull-back from the May (minority) budget valued the increase in savings for the resource companies at $ 185 million for the year 1975.

To make certain that there was no misunderstanding about federal policy, Mr. Turner reiterated his unbounded faith in the capacity of the private sector to deliver the goods and to relieve the government, if not all Canadians, of any anxiety about future energy supplies. 'Let me repeat my conviction that Canada must have strong private resource industries if we are to obtain the supplies needed in the years to come. They need a sufficient cash flow to undertake further exploration and expansion and provide a fair return to their shareholders.'" With this resounding vote of confidence and an improvement of substantial proportions in their cash flow, the industry could reflect on the blessings provided by majority government.

What is the significance for Canadians of the budget's triple renewal of vows of faith and hope in the petroleum industry? Obviously, the federal government believes itself impotent to secure for Canadians the flows of petroleum energy that are the lifeblood of our economy and our main defense against climate and distance. Our chosen representatives believe that the security of this nation, the protection of the economy, can best be secured not by the government elected for that purpose but by turning the responsibility over to the subsidiaries of global corporations. Abdication by governments of their obligation to ensure the maximum social advantage and security of their people can only serve to strengthen the claims of those political philosophers who make politics and political power a function of economic and technological strength. Thus, Hans J. Morgenthau, 'The technological revolutions of our age have rendered the nation-state's principle of political organization as obsolete as the first modern industrial revolution of the steam engine did feudalism.' (Morgenthau, 1975) Or Charles Kindleberger, 'The nation-state is just about through as an economic unit.' (Kindleberger, 1969) Most of us, however, will insist that sovereign power must continue to reside in our elected representatives for it is only through politics that we can make our choices and priorities known and hold government responsible for carrying them out.

The May and November budgets represent a reassessment of federal policy towards development of our natural resources of major proportions. From a position of favoured tax treatment, this sector is now expected to bear its share of the revenue burden. While the review was going on, one wonders if the more fundamental question raised by Karl Polanyi was considered. 'To isolate it (land) and form a market out of it was perhaps the weirdest of all undertakings of our ancestors.' (Polanyi, 1957) One can believe in the principle of individual freedom, in the capacity of competitive markets to solve the problems of prices and production of goods and services without requiring that land and resources, fixed or depleting in supply, be treated as part of the market system. For as J.S. Mill pointed out - 'The ordinary progress of a society which is increasing in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater

7 Budget Speech, p. 15. 8 Budget Speech, p. 12.



Energy aspects of the budget / 429

proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in their sleep, without working, risking or economizing.' (Mill, 1848) The whole lesson of the current energy crisis is simply a verification of the truth that he, who controls the land and its resources, has an inestimable advantage in a market economy and can hold even the most advanced industrial and technologically sophisticated nations to ransom.

Nevertheless, Mr. Turner, in his budget, has decided that the country must rely on the private sector to furnish its petroleum energy needs. Consider the magnitude of the problem. By the year 2,000 our population is expected to reach 35 million on middle or standard estimates. Our energy consumption is expected to quadruple by that time. A growing economy with a rising standard of living (or will it be?) will be consuming petroleum resources at four times the current rate to sustain itself, to provide employment, to keep its factories operating to transport people across this land and to keep their homes heated. Our dependence on oil and gas will remain as now at approximately two-thirds of our total energy requirements. Is it reasonable to expect that so enormous a responsibility as the energy base of a large industrialized and growing nation can be entrusted to a commercially oriented and profit-seeking private sector, oligopolistically structured?

Without seeking to downgrade the private sector in any way, it must be accepted that there are some challenges and responsibilities that we expect our governments to undertake, not to pass on. Energy is so clearly a matter in the general interest that the management and development of these publicly owned non-renewable resources are basic functions that can be performed only by governments acting in the interests of the people who elected them. There is no market for politicians who promote the life, love and pursuit of happiness of their citizens in a cold climate.

Leaving the supply of petroleum to the private sector may not have been too costly when sources, both domestic and international, seemed limitless and low cost. Pursuing the same policy when domestic reserves are declining, foreign supplies are in monopoly hands and markets are producer controlled will increase the dependence and vulnerability of the Canadian economy. Energy or the lack of it can literally dictate the nature and shape of political, social and economic developments in this country. Energy policy, therefore, must be integrated with investment priorities, government expenditures, balance of payments and commercial policy. It is far too important, under today's rapidly changing conditions to be left to the private sector.

The Minister of Finance has admitted that our reserves are declining while demand is rising; in other words, that we are in serious difficulties with respect to future petroleum supplies. It would seem to follow that a thorough review of existing energy policies is required, not a blatant, thrice-repeated endorse- ment of the private sector and its performance to date.

The facts are that the mineral fuel sector is dominated by very few firms who have exerted enormous political pressure on the government in matters ranging from tax reform to commercial policy. In 1971, Statistics Canada reported that 17 firms out of a total population of 835 corporations controlled 55 per cent of the assets, 73 per cent of the product sales and 83 per cent of



430 / Eric Kierans

profits before taxes in the mineral fuels sector. My own estimate of the power and influence of this small group is that it reached a high water mark in the summer of 1971 when my colleague, Hon. J.J. Greene, Minister of Energy, Mines and Resources was touring the country making speeches on the theme that Canada had to expand exports of gas and oil quickly before new technology made these natural resources obsolete and quoted Canadian Petroleum Association figures which placed Canada's potential reserves at 197o rates of production as amounting to 923 years (not 9oo or 924) supply of oil and 392 years supply of gas. It should be remarked that a minister does not make such speeches on his own. Not only must he be convinced of what he is saying but so must his deputy minister, speech writers and departmental policy-makers. Similarly, other departments concerned with economic policy, - finance, trade and commerce, - are equally persuaded as would be the Privy Council Office or the minister would be asked to desist. Such was the power of the oil cartel in the summer of 1971.

The submissions made to the National Energy Board supporting success- fully applications for additional gas export licenses are a matter of public record and should be reread in the context of today's supply situation. The exaggeration in many of these projections did mislead the government and induce it to expand exports to the immediate profit of the private sector but at great social cost. In the event, Canada's exports climbed to 341 million barrels of oil and I.007 trillion cubic feet of gas in 1972, a new record. This record was broken in 1973 when 420 million barrels of oil and I.o31 tcf of gas were exported. In 1974, exports came down slightly as the government finally realised that the profit hungry private sector was depleting our meagre resource base and the National Energy Board reported in 1974 that there would not be enough crude oil production by 1982 to meet the needs of the Canadian market. (NEB, 1974).

The objectives of the private sector are nowhere better illustrated than in a speech by W.O. Twaits to the Canadian Institutional Investors in November, 1972. Noting that technology would respond with new sources of energy if Canadians decided to bank their petroleum resources, he added 'Any simple discount calculation will quickly demonstrate that a barrel of oil in the ground has almost no value today even at a price of $4-$5 a barrel twenty years hence.'9 Of course this is the whole point. The private sector, facing political risks to their ownership or control, must maximize the immediate sales value of an asset. But the public sector must be concerned with the needs of tomorrow, stability, security and a whole quantum of social, political and economic effects. For a nation the quick buck will be the last consideration. The conservation and orderly exploitation of natural resources simply cannot be entrusted to the private sector as Mr. Turner and Mr. Twaits demand.

Any examination of the methods used by the petroleum industry to pressure the government will disclose a number of dubious initiatives and doubtful propositions. One of the least worthy presentations by an industry spokesman was contained in that same address by Mr. Twaits to the institutional investors. Criticising those arguing for the conservation of resources, he stated,

9 W.O. Twaits, Chairman and Chief Executive, Imperial Oil Limited, Remarks to Second Annual Canadian Investors Conference, November 16, 1972, P. 7.



Energy aspects of the budget / 43 I1

'Estimated recoverable reserves of conventional hydrocarbons and heavy oil deposits in Canada now represent the equivalent of 20o years of hydrocarbon energy supply at I99o projected rates of demand.'10 A little further in the same paragraph he added 'and advancing technology surely will add substantially to those years of supply.'1'

And yet in 1972, when Mr. Twaits made these statements he also knew that Imperial Oil reserves of oil and gas had declined for the third straight year. They have continued to decline in 1973 and 1974. Despite the fact that Imperial Oil has tripled its exploration expenditures since 1969 from $29 million to $89 million in 1974, their reserves of oil have declined 29 per cent from 1.7 billion barrels in 1969 to 1.2 billion barrels in 1974 and their reserves of natural gas have fallen 22 per cent from 3.3 tcf in 1969 to 2.6 tcf in 1974. Despite all the talk aimed at Ottawa about limitless reserves, increased exploration expenditures have failed to uncover any major new reserves for nine years.

Nevertheless, bureaucrats and politicians sitting in Ottawa could not be expected to know what was common knowledge in the industry. Mr. R. Brown of Home Oil was investing his exploration funds in Prudhoe Bay and the North Sea and openly stating in I969 that oil exploration in Alberta was no longer economic. The industry got its export licenses and in the last three years, Canada has exported 3 trillion cubic feet of gas and I. I billion barrels of oil. The companies have their cash; the oil and gas is no longer in the ground; what the home owners of 1978 will do remains to be seen. Private sector domination has led to the only two mistakes that Canadian energy policy could make, the under-estimation of demand and the over-estimation of supply.

The objectives of the modem corporation can never coincide with those of society. Public corporations charged with the dual objectives of achieving social goals and operating at a profit are monstrosities. The commercial corporation is no longer a means, a form of business organization, it is an end in itself. It can grow without limit, through time. As it grows, it expands beyond national boundaries and ranges across the world. Far from associating itself with the nation's objectives, the corporation seeks freedom from the constraints of national governments and peoples' priorities, from social control. Hence, the search for an international charter and the importance of being stateless, subject to no national objectives.

The corporation has become a vehicle for the perpetual accumulation and growth of wealth. Its force and strength is derived from within, the internal flows that it generates from the control of resources, the direction of markets and consumers' demands along the lines that best fit, not real needs, but its own capacities. As it grows, it affects people more and is less and less affected by external forces, i.e. by people or by markets. It is disheartening, in this day and age, to see the Minister of Finance adjusting his budget so as to make it attractive for a handful of oil giants to include Canadian economic and energy objectives with the pursuit of their own objectives of growth in assets, power and profit.

Nevertheless, there is a lesson here in expectations. External conditions Io Ibid., pp. 7-8. II Imperial Oil Limited, Annual Report, 1974, pp. 27-8.



432 / Eric Kierans

may change radically as they have in the production and pricing of oil but public policy to meet the new circumstances evolves slowly. It emanates and flows from a compound of all previous responses and policies. There can be no sharp break with our history as a civil service, - the repository of the public record, documents, legislation, treaties - reminds us.

To create policy, to bring forward new responses to challenges is to run the risk of failure, at best to face uncertainty. The established ways are better and the private sector aggressively pushes its claims. Even a new cabinet, en- thusiastic about its mandate is hesitant to effect more than the most modest rearrangement and adaptation of existing institutions and practices.

Energy policy may be evolving, but as far as the Turner budget is concerned, it is definitely anchored in the past.

REFERENCES

Canada. National Energy Board (1974) In the Matter of the Exportation of Oil (Information Canada) October.

Gainer, W.D. and T.L. Powrie (1975) 'Public Revenue from Canadian Crude Pet- roleum Production,' Canadian Public Policy -Analyse de Politiques, Vol. I no. I, Winter, pp. 1-I2.

Kindleberger, Charles P. (1969) American Business Abroad: Six Lectures on Direct Investment (New Haven & London: Yale University Press) p. 207.

Mill, John Stuart (I848) Principles ofPolitical Economy (Penguin Books Ltd.) p. 169. Morgenthau, Hans J. (1975) 'The New Diplomacy of Movement: A Caveat,' The

University of Chicago Magazine, Vol. LXVII, No. 3, Spring, p. Io. Polanyi, Karl (I957) The Great Transformation (Beacon Paperback Edition) p. 178.



notes on the energy aspects of the 1974 budget

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