Impact of Canadian Regulatory Changes on Cross-Border Trade

Abstract

In the year following oil deregulation Canada's crude oil productive capacity grew by 5%, but production was unchanged due to a lack of pipeline capacity, the effects of prorationing and a lack of price flexibility. While Canadian oil demand remained stable, exports of crude oil increased by one-third and imports by one-half. Export prices followed world trends with light crude oil export prices declining from $C 40/bl to $C 15 in July 1986. Natural gas exports were down by 17% in the first nine months of the 1986 contract year. This period coincides with the implementation of the Agreement on Natural Gas Markets and Prices, but was also a period marked by declines in US gas prices, declining US gas demand, and significant changes in US gas industry regulation. Prices for gas exports by licence have been renegotiated and some short-term interruptible sales have been made. Export prices approached those for interprovincial sales, which typically offered a better load factor. Licence holders have been able to average export prices over all sales under a licence to satisfy the minimum export price requirement in relation to the domestic reference price. As a result, since the Agreement of 31 October 1985, all renegotiated prices for exports of gas by licence have been approved. The factors having the most impact on gas exports by licence appear to be the 6% decline in US gas demand, limitations on pipeline access during the period of transition in US pipeline regulation, priority given by US pipelines to managing lower-48 take-or-pay obligations, and the changing role of US pipelines to being transporters rather than merchants of gas to the detriment of some Canadian gas export contracts. Exports by licence were at a level of 42% of authorized volumes for most of 1986. Volume authorizations were therefore, not an impediment to exports by licence. There was no volume restriction for short-term exports by order. Gas exports by short-term interruptible order faced US pipeline access restrictions but were affected by the domestic reference price floor. Short-term interruptible exports grew rapidly after the Agreement, peaking in January 1986 and then declined as US competitive prices fell below comparable Canadian domestic prices. Short-term interruptible exports have accounted for only 3% of total exports in the first nine months of the current contract year. Canada's disappointing 1985–6 gas export performance was attributable to weak US gas markets, changing US market structures, and delayed US regulatory change. Although there has been some impact on short-term interruptible sales, the overall decline in gas exports was not significantly relatable to Canadian gas export regulation.