Energy Deregulation and Uncertain World Oil Prices: What Are the Connections?

Abstract

policy changes that are intended to reduce the extent of federal price regulation for crude oil and natural gas in Canada. In this paper, we first examine the likely extent and meaning of deregulation for Canadian oil and natural gas, including the impact on Canada of natural gas price deregulation in the United States. Since these policy changes are being made in an environment of considerable uncertainty about the future level of world oil prices, we use the MACE model to assess the effects of lower and higher world oil prices on the aggregate economy, and on the revenues of the petroleum industry, the governments of the producing provinces, and of the federal government. We also compare these effects under deregulation with those under the modified National Energy Program (NEP) regime, wherein some, but not all, domestic oil prices move to match changes in world oil prices. Finally, we shall use our model results to assess the need for, and consequences of, further changes that have been suggested for energy taxation in Canada, including the modification or removal of the Petroleum and Gas Revenue Tax (PGRT), and some 'standby' system for insulating Canadian energy consumers and producers from the effects of very large swings in world oil prices. For Canadian crude oil pricing, the current pivot point is the regulated price for old oil, since all other prices are determined by reference to it. Producers of old oil receive it directly, while producers of synthetic oil or of conventional oil from pools discovered since 1974, or produced from in-fill drilling of fields discovered previously, receive a supplementary payment to bring their price up to the New Oil Reference Price (the NORP) which has a built-in quality differential linked to the posted price for an equivalent quality of international crude oil. Oil importers receive a subsidy based on the difference between the old oil price and an import reference price, and oil exporters pay an export tax which is set so as to approximate the difference between the old oil price and the US market price for comparable crudes, with adjustment for transport costs in both cases. The basis for the price to Canadian oil users is the old oil price plus the Petroleum Compensation Charge (PCC) and the Canadian Ownership Special Charge (COSC). Under the 1981 Energy Agreements, the PCC was supposed to be adjusted so as to cover the sum of the subsidy payments to users of imported oil and the price supplements paid to producers of new oil, synthetic oil, and other categories receiving higher prices. However, during most of 1984 the required increases in the PCC were not made, and even after the increase in November 1984 there remained a