Moving Towards World Pricing for Oil and Gas

Abstract

Clearly, the controversial National Energy Program, introduced by the federal government of Canada in October 1980, is an attempt to attain the two major objectives of economic policy efficiency and equity. In the Canadian context, efficiency considerations include replacing expensive imported oil with less expensive domestic oil, converting Canadian homes and industry to more energy-efficient technology and usage patterns, and developing long-run sources of energy such as renewables. Equity considerations include revenue-sharing between regions of the country and between consumers and producers of energy, Any comprehensive energy program should attempt no less than to address each of these issues. The purpose of this paper is to show, however, that the net cost of using energy prices as a policy tool to meet both objectives is extremely large. Under the NEP, energy prices, while above those of previous policies, are set at a level considerably below those which would optimize Canada's position in the energy markets of the world, with the objective of transferring excess economic rents from producers to consumers and away from producing provinces. While the latter objectives are appropriate, the only question being the magnitude of the transfers, the use of energy prices to attain these objectives is very costly. Even though we recognize the political pressures on both sides which have led to the current unhappy stalemate, we hope to point out the potential gains to the nation of pricing at market levels for efficient utilization of Canada's energy resources and of using a revised tax system to achieve an equitable distribution of the rents. It is inevitable that pricing and revenue-sharing negotiations will have to take place simultaneously but we would hope that both sides would make the necessary concessions so that the negotiations would be on the basis of fair revenuesharing given efficient prices as opposed to which price level would be a compromise solution to meeting both goals. With the United States having recently moved to decontrolled pricing, Canada now stands almost alone in the western world with controlled prices for oil far below international levels. Several economists (for instance Scarfe, 1981), economic organizations and foreign statesmen have pointed out the suboptimal and irresponsible nature of this policy. Federal politicians have argued that the international oil price is set by the OPEC cartel and Canadian consumers should not be subject to it given our substantial domestic resources. However, Canada imports a significant portion of its daily oil consumption at world prices and has the potential for