NOVEMBER 22, 1973
Energy and Government
AN ADDRESS BY
The Honourable W. Darcy McKeough,
MINISTER OF ENERGY, PROVINCE OF ONTARIO
CHAIRMAN The President,
Robert L. Armstrong
The term energy has, at this point in time, I am sure, achieved its greatest prominence in the history of the English language, and it is fitting indeed that The Empire Club of Canada is honoured by the presence of Ontario's Man of Energy, The Honourable Darcy McKeough.
And what more appropriate time for us to receive a message on the subject of energy than Grey Cup Week, which is climaxed by our great national gridiron classic at CNE Stadium Sunday afternoon where the best of the twain shall meet. Would that we could harness all the energy associated with this great annual spectacle both on and off the field of battle.
Our speaker today heads the new Ministry of Energy and is Member of the Provincial Parliament for Chatham-Kent. He is a resident of the City of Chatham and is a graduate of Ridley College and the University of Western Ontario. The tradition of dedication to the public service began with his forbears in 1847 and he is the sixth member of his family to have held public office in Chatham. At 26 he first became a candidate on the local political scene and was elected as a Member of the Chatham Municipal Council. Four years later he was elected Progressive Conservative Member of the Ontario Legislature for his home constituency. An active back-bencher for three years, serving on many committees, our speaker was named Minister without portfolio in the Robarts Cabinet in November, 1966, and one year later accepted the portfolio of Municipal Affairs.
Here Mr. McKeough demonstrated his real ability to govern, and with the power of his open and responsive personality and his boundless energy was able to persuade many recalcitrant Municipal Councillors to modernize their planning to keep up with the fast-moving twentieth century. Reform-sometimes painful and drastic reform-was required and the steps that had to be taken were not always politically popular. Mr. McKeough was convinced that Municipal Government and services must adapt to the current needs of residents and that the impetus for reform required Provincial Government leadership.
He was responsible for the incorporation of the Regional Municipalities of Ottawa-Carleton, Niagara, York, Sudbury and Waterloo, for the amalgamation of the cities of Fort William and Port Arthur, and the incorporation of the City of TimminsPorcupine.
In March, 1971, Premier Davis appointed him Treasurer of Ontario and Minister of Economics, and Chairman of the Treasury Board. He was reappointed Minister of Municipal Affairs in February, 1972, and in April of that year was appointed Treasurer of Ontario and Minister of Intergovernmental Affairs. Here he championed the development of an atmosphere in Ontario in which the tax system will operate fairly and in the interests of individual initiative and effort. He was responsible for the Assessment Act, the Audit Act and the Residential Property Tax Reductions Act.
He resigned from the Cabinet on August 31, 1972, and for several months did some real soul searching as to whether he should abandon the political scene in favour of more lucrative and less demanding pursuits in private industry.
It is our good fortune in Ontario that our speaker stayed on in Government, and in January 1973 he was appointed Parliamentary Assistant to the Premier with special responsibility for energy policy. After six eventful months Mr. McKeough was appointed Ontario's first Minister of Energy. In a feature article in the October 1, 1973 issue of the Toronto Star the headline read "The new McKeough is raring to go".
He is a take-charge guy who has been likened by some to the late C. D. Howe. Undoubtedly Mi. McKeough will never be accused of saying "What's a million". He is referred to in the Legislature as the "Duke of Kent", but his motto appears to be that of the Prince of Wales-"I serve".
Our speaker was active in earlier days in Little Theatre in Chatham, and once won the Western Ontario Drama Award as best supporting actor. He might well qualify for an equivalent award in the Provincial Government.
Rumour has it that his charming wife, Joyce, is taking private flying lessons and I am not sure whether she has received her licence yet. In light of recent events there may be more than passing significance here.
Ladies and gentlemen, I am proud to present to this audience the Honourable Darcy McKeough, Minister of Energy for the Province of Ontario, who will address us on the subject: "Energy and Government".
It is intriguing to think of the action out at the CNE Stadium that we will see on Sunday. It's not just Grey Cup week. It's Edmonton meeting Ottawa. And those of us in the energy field have come to recognize that when Ottawa and Edmonton come face to face it can be quite a spectacle!
I'm not going to talk about football today. I'm going to talk about energy. And because my talk is rather longer than I would have preferred-this is an important audience and there are a number of things I would like to say-I'll move into my subject.
I propose to speak of areas of agreement and disagreement between Queen's Park and the banks of the Saskatchewan River in Edmonton.
Areas of misunderstanding are understandably highlighted. This can cloud the fact that there are major areas of agreement. And, although we might phrase it differently and shift the emphasis on some points, I think that the substance would be basically the same whether stated by me or by an Alberta spokesman.
1. The first area of agreement-and I think the citizens of Canada have every right to anticipate that we would agree on this -is that Alberta and Ontario share the view that the interests of all Canadians are paramount and that neither province should use any leverage that it may have to reduce the common welfare of all Canadians.
2. Second, as I noted in my June 1 report to the Premier, "The era of cheap energy is over". Alberta and Ontario agree.
3. The third point is not as clear cut. Alberta does not qualify its insistence that the provinces own the resources. Ontario agrees that this expresses the narrow legal position but tends to think that the legitimate expectations of Canadians should modify the specifics of the legal position.
In this context Premier Davis made the following statement in his June 7 speech in the Ontario Legislature:
"We fully acknowledge that Alberta, and all other provinces in Canada, share the same claim we are asserting as Canadians to the national resources of Canada. Ontario has rich resources--uranium, nickel, copper, iron ore. We insist that resources in Ontario are Canadian resources with all that this connotes. Only secondly should they be available to the markets of the world."
In terms of the legal ownership of the natural resources there are no differences. Ontario, however, is ready to make all resources in Canada part of a negotiating package. This may be less true of Alberta.
4. As part of the concern of our two provinces with respect to nationhood, we are agreed that the capability should exist to supply all parts of the country from domestic oil source.
5. We are in full agreement that the maximum upgrading of resources should take place before they are exported from Canada. I am confident we are agreed that the location of facilities should be dictated by the best interests of the nation. Certainly this is the position of Ontario and, again, I would refer to a statement in the June 7 speech by Premier Davis:
"When we brought forward legislation designed to reduce the export of concentrates and minerals in a relatively unprocessed state we required that the additional processing should be done in Canada: the mining companies are fully able to satisfy the requirements of our legislation by processing in any province of Canada ore that has been produced in Ontario."
Ontario and Alberta equally agree in fair competition and in nation building: so we agree there should be the maximum processing of Canadian resources in Canada, irrespective of where in Canada the processing takes place.
6. We agree that we have the kind of responsibility toward the United States that any neighbour and supplier should extend to any good neighbour who, over a long period of time and changing supply and demand circumstances, has been a faithful customer subject, obviously, to the interests of Canadians being paramount.
To elaborate a little, I suggest that if some belt tightening should be necessary in Canada to sustain current exports to the United States I, for one, think we should tighten our belts. And this isn't pure altruism. Any tendency to pull the eagle's tail feathers should be avoided. In the first instance, if I may use an old fashioned word, it isn't very honourable to harass an old friend, in a time of distress. In the second instance, it isn't smart. In trade negotiations with Canada and in terms of the impact of their policies on specific regions of Canada, the United States has strength and relevance, as well as historic rights.
The United States was, is and will be a trading partner of this nation. Modifications in trade policy with the United States should not be unilateral and precede discussion. And for pragmatic reasons we should recognize that the market value of various energy sources can alter. We don't want the actions of the mid-1970's to rise to haunt us in the mid-1980's.
7. Alberta holds the view that the revenue from any export tax should accrue to the producing province and not to the nation. It is probably correct to say that Ontario has sympathy with this feeling, subject to some further definitions. In terms of the definitions we might diverge.
Export taxes might go to the producing provinces and some part, indeed, might go to the producing companies to provide capital for further exploration. There are strong arguments for assuring that exploration is not significantly reduced, at least relative to the need for future supplies. That's fine. But if the consuming provinces, including Ontario, have served the national interest by failing to resist all price increases, in fairness some of the tax benefits, if practicable, should ultimately be applied, no matter how indirectly, to influencing supply security. This may mean investment in other than the presently producing provinces by either or both of the public or private sectors.
8. Our eighth area of agreement is one on which we all must agree: there is a real need for conservation of energy across the nation and, in the circumstances of today, to waste energy is wrong.
9. I would suggest that the ninth area of agreement is a recognition by Ontario of the validity of Alberta's concerns as to the place of its resources in price terms in, if I might so phrase it, the time stream. In other words, if Alberta held its oil and natural gas in the ground and sold it five or ten years from now it is not unreasonable to expect a higher price, in constant dollars, compared with moving it out today. This is a crucial consideration with any depleting non-renewable resource.
Ontario accepts that the assumption is probably valid that the future price will be higher, especially given that gas from the Mackenzie Valley and the Arctic Islands will come on stream at a higher wellhead price and carrying a far higher transportation component.
Point nine leads me directly into the basic issue-price. . We hang up, to a degree, on that tenth point. Is there, in fact, a formula or, indeed, a broad principle which consumer and producer can jointly endorse with respect to price?
I would like to explore, with your indulgence, one proposal that has many of the characteristics of a "straw man". I refer to indexation and, more specifically, to the indexing of the price of natural gas to the cost of equivalent BTUs found in oil.
I want to deal at some length with the proposal to index the price of natural gas to oil, to indicate the complexity of pricing and to make it clear that, even in the areas upon which we have not reached agreement, discussion, thought and exploration is still going forward.
It is easy to overlook some of the implications of indexation and to be simplistic. In this context I want to quote four short paragraphs from a statement made in late September by the Minister of Energy, Mines and Resources to a meeting of the Canadian-American Committee, in which he almost incidentally seems to come out in favour of indexation.
This is what he said:
"Natural gas shortages in the U.S. are very real, incremental supplies of natural gas are being priced far in excess of Canadian export prices under long-term contract.
"The government is actively considering methods by which to increase the price of gas moving into export markets.
"In the domestic market gas is currently under-valued. The government is seriously considering proposals that would call for increased wellhead prices of natural gas to western producers.
"It is not the government's intention to hold gas prices below competitive fuel prices in Canada. We are seriously considering proposals which would allow gas prices in Canadian markets to fluctuate and reflect prices of other competitive fuels."
My concerns as to federal policy-or the lack of it- have been widely reported and I do not propose to reiterate them today. But there are implications in this statement that concern me.
As a case in point, I would like to discuss with you the validity of the unqualified statement that "in the domestic market gas is currently undervalued". Is it? If we are talking about the relative cost of BTUs from gas and oil it could be equally argued that gas is appropriately priced and that oil is over-priced.
This is not simply a provocative statement. Let me elaborate. Since the establishment of the national oil policy in 1961, oil west of the Ottawa Valley has been permitted to reflect U.S. price levels and, in particular, prices in the Chicago market which for many years were among the highest crude oil prices anywhere.
Why were they so high? The U.S. oil producers in the 1950's persuaded the U.S. public and the U.S. government that they should be high in order to permit a fast recovery of the exploratory development and production investment. This, the argument went, would enable producers to plough back wellhead revenues and enhance U.S. crude oil reserves through the resulting new discoveries. To accomplish these purposes and so serve the national interest, they needed to be artificially shielded from crude oil imports.
What passed for wisdom and public concern in the 1950's is revealed in the 1970's as self-serving folly. The continental U.S. oil reserves are now approaching depletion. The high wellhead revenues of that period accomplished two purposes:
1. It enriched the U.S. oil industry (which, in fairness, has ploughed much of its profits into exploration all over the world); and
2. It laid a firm foundation for the exacerbation of the U.S. oil crisis of the winter of 1973/4. The hard fact is that the U.S. oil companies did not establish reserves adequate to meet the demands of a couple of decades later and, protected from the competition of oil from the Middle East and elsewhere, speeded the depletion of the reserves under the control of the United States. U.S. crude oil production was maximized during the 1960's when it should have been conserved through the substitution of oil from offshore. The results belied the simplistic high field price arguments advanced by the U.S. oil industry in the 1950's and, to some extent, advanced today by gas producers.
To revert to the quotation, the Minister went on to say that "It is not the government's intention to hold gas prices below competitive fuel prices in Canada." With respect, and trying to be as constructive as possible, I would invite him to join me and to cross the border and look at the experience in the United States where the life index of gas reserves exceeds that of oil in spite of the fact that the historic price differential has favoured oil. The proposition that higher prices necessarily increase available reserves of fuel from conventional sources is subject to serious dispute.
I am not advocating rolling oil prices back to the point where, in terms of price per BTU, it is equivalent to natural gas. I am aware of the market circumstances. The U.S. conventional gas and oil reserves are rapidly depleting. O.P.E.C. exists and is an important factor in the world petroleum pricing equation. The Arab states are using oil as a bludgeon in their foreign policy.
Circumstances have altered but that is no reason why, in Canada and abroad, there should be over-reaction and impulsive moves based upon too little thought and too little study. The oil will flow again from the Middle East. Conservation measures will begin to have an impact. Alternative sources of energy and relevant new technology will be developed. The world is not going to hell in a hand basket-or on a bicycle. And so let's not imperil the future in an ill-conceived and hysterical effort to ameliorate the concerns of today.
It's easy to jump prices. It's hard to roll them back. The U. S. was led, happily singing, down the garden path of assuming that permitting prices to run up, irrespective of changes in production costs, would result in secure supplies. It didn't have that effect and it's just not wise to blindly walk that trail again.
And indexation wouldn't just escalate the price of gas. It would have effects with respect to economic policy in Canada, to the regulation of energy prices, to monetary policy, to our existing anti-combines regulations and to past postures by the producing companies. It would have some other direct effects.
I'll touch very briefly on each of these points.
Indexation and Economic Policy
Indexation would tend to insulate the price of gas from changes in costs of production and, instead, would tie it to changes in the price of another important commodity. This would tend to act as a fuel to inflation and, equally, to deflation and so would accentuate upswings and downswings in the economy.
I suggest that is not good economic policy.
Indexation in Private Enterprise and Regulated Systems
I'm a businessman and a free enterpriser from a long way back. I've based my business philosophy on the simple faith that price was determined in the long run by the cost of production and that price adjustment clauses in agreements ordinarily were activated by the presentation of irrefutable evidence of unanticipated cost changes. In the short run, of course, price responds to the interaction of supply and demand. Where the market is clearly and demonstrably imperfect, as with utilities which have a monopoly, the public sector, on behalf of the relatively defenceless citizenry, imposes some form of price regulation. That regulation is designed to assure the welfare of the community through protecting the citizens from unreasonable price increases and, concurrently, assuring that the returns to the regulated industry are such that it can provide the needed level of services and supply.
An indexation that automatically passes on a price increase related to a purported value change-not a cost change-departs pretty wildly from my concept of pricing.
Indexation and Monetary Policy
Monetary theory and practice combine to confirm that a price increase that does not reflect cost increases tends to be inflationary.
In the speech which I quoted earlier in this paper the Minister of Energy, Mines and Resources told the Canadian-American committee members that it would be possible to index gas prices to those of competitive fuels to ensure that they rise in step with energy prices generally and, in the same speech, indicated that the export tax on oil was a necessary anti-inflationary measure to keep domestic oil prices from being automatically dragged up by ever-rising U.S. oil prices.
With respect, I would suggest that it is inconsistent to slap down one inflationary cause and to propose to nurture another:
Indexation and Anti-Combine Regulations
I think it reasonable to insist that the petroleum industry establish that indexation of gas prices to those of a mix of oils does not do violence to the provisions of Canada's anti-combines regulations.
Indexation and the Industry
I don't suppose it is quite fair to ask corporations to be wholly consistent over time and changing circumstances. Up to 1971 the price of Western Canadian natural gas delivered in Toronto exceeded the price of the hypothetical mixture of fuel oils to which it is now proposed the price of gas should be indexed. Prior to 1971 therefore, there was little talk of indexing. Relative prices of gas and oil and the absolute price of the advocates of indexing have altered in a significant way since that date!
Direct Effects of Indexation
I see a distinct possibility of the consumer and the Canadian economy being whip-sawed if indexation was agreed upon. It is being advocated to push up the price of gas. Assuming the market works at all this will result in a marginal shift from gas to oil by consumers and this will put up the price of oil; this will automatically escalate the price of gas and, in lock step, the price of gas and the price of oil will march up together.
In the energy sector we would create an inflationary monster that fed on itself.
Surely there are better ways of ensuring the adequacy of Canada's reserves.
You have been very patient and I have spoken at some length. I wish to add a few concluding comments.
My concerns with respect to indexation are real but I do not want to leave the impression I do not think it is worthy of further thought. Its implications must be thoroughly explored. I cannot at this time see it as a simple, definitive answer but, equally, I do not think it helpful or appropriate for me to assume simplistic, fixed postures.
My strong disposition is to feel that the Holy Grail we are seeking-try hard to think of me as a Galahad!-in this pursuit of a Canadian price for a Canadian resource is a point on a spectrum-a point that is located somewhere between wellhead price controls at one extremity and the opportunity price obtainable from distressed export customers at the other.
Where on that spectrum the price should locate is not yet an area of agreement between Alberta and Ontario, but I am confident the two provinces would agree it cannot be at the highest price any distressed buyer abroad might be prepared to pay. So that's a point of agreement.
I would have to say that I don't particularly favour the other end of the spectrum: nationally administered wellhead price controls present problems of administration, a real difficulty in defining what is a reasonable rate of return and a problem in agreeing as to who will be the cat-beller who will make that price determination. I suspect that's another point of agreement.
Somewhere in between the dictated price at the wellhead and the pure opportunity price the answer must lie. This tenth area of complete agreement is awaiting definition. Certainly I can state that Ontario is attempting, with an open mind, to find that point on the spectrum that is "reasonable" for both the producer and the consumer in a Canadian context.
My concerns, predictably and properly, are for Ontario, but I insist that I am equally concerned as to the national welfare. In this I claim no exclusive virtue. I must assume that the governments of Canada and Alberta and the other provinces, as well as the officers of the various corporations involved, are influenced by the same broad motivations. I make the assumption that the differences are in perspectives and not in motives.
As Canadians we must do the right thing.
The circumstances in the Arab countries and the world have created abnormal circumstances. It is a mistake to make policy in the eye of a hurricane, where perspectives are distorted and twisted. It is a mistake to make fundamental, irreversible, structural changes in the pricing policy of fossil fuels at a time when the Arab world is holding the rest of the world to ransom.
I am not pleading the case of the user provinces. I am pleading the case of the nation. It would be far too easy under the pressures of today to pay too high a price for apparent security of supply and build an unnecessarily high energy cost component into the heating of the homes of our citizens and the powering of our industries.
Tomorrow the Provincial Ministers responsible for energy, together with the Minister of Energy, Mines and Resources, will, at long last, together discuss a national energy conference-date, time, place and agenda. This will give some substance to an eleventh area of agreement between Alberta and Ontario-an agreement supported by all the other provinces-that a national energy conference should be held.
It underlines-and in this area underlining is long overdue-that Canada is not a unitary state. It is a federated state and it is specific in the Constitution that the provinces are not creatures of the central government.
If there were, in fact, a single government within the nation it might be somewhat easier to accommodate the interests of the producing and the consuming regions of the nation. But given that there are eleven governments and all produce energy and all consume energy, and given that all the governments have ownership in energy resources within their borders, the real alternative would seem to be that all must and should make inputs into the design of a national energy policy.
I repeat that this is a federal state with eleven governments, all having authority for decision-making within all or some part of the nation. If there is to be effective planning it must involve the ten provincial governments. If it does it is possible that solutions can be found in these areas where there is presently an absence of agreement.
I assure you that Ontario, for one, will be seeking an answer- an answer that is fair and equitable and that is acceptable not only to Ontario but to all of Canada.
Thank you very much.
The Honourable Mr. McKeough was thanked on behalf of The Empire Club of Canada by Mr. Sydney Hermant.