Critical Issues with Respect to Energy Policy

MR. STALDER:

Distinguished members and guests, ladies and gentlemen: We have had the pleasure of welcoming the Honourable Mr. Chretien twice already--once on October 16, 1969, as Minister of Indian Affairs and Northern Development, and again on January 17, 1980, as Opposition critic for federalprovincial relations.

Now, in 1983, he comes to visit us as Minister of Energy, Mines and Resources, the stepfather to the National Energy Program.

And now he even makes us pay for our PetroCan litres with a smile. I tried it once with only a smile, but they wanted cash as well. Never mind, his is a fine ministry and a well-organized one. Making it apparent, the office IN sign says, "Watch your step," and the OUT sign says, "Watch your language."

That is why I shall not say any more, and just comment on our guest of honour. He is a relatively young man with a relatively long political career of twenty years in the House of Commons and he is (a) a survivor, and (b) loved and respected by the constituents of St. Maurice.

To describe this son of Shawinigan, allow me to recite the eleven jobs he has held until now, hoping that I somehow do his accomplishments justice. In the past, the Honourable Jean Chretien has been Parliamentary Secretary to the Prime Minister; Minister of State to the Minister of Finance; Minister of National Revenue; Minister of Indian Affairs and Northern Development; President of the Treasury Board; Minister of Industry, Trade and Commerce; Minister of Finance; Minister of Justice and Attorney General of Canada; and Minister of State for Social Development. Currently, he is Minister of Energy, Mines and Resources. Ladies and gentlemen, please welcome our guest of honour, the Honourable Jean Chretien.

MR. CHRETIEN

Mr. Chairman, ladies and gentlemen: I am pleased to be here to speak about some of the critical issues with respect to energy policy in Canada today. Earlier this week in Calgary I reminded people that the past two or three years have been unsettled, not only in energy terms, but in terms of visceral questions dealing with the fundamental nature of our country--from the Quebec referendum to the long, drawn-out constitutional debate. And as a country we resolved those issues very well.

I believe that it is now time for reconciliation, for settling down, for healing, for renewal, and for stability. And this is the objective I have been pursuing in my role as energy minister over the last seven months. I must say that I am particularly gratified by the degree of willingness on the part of the industry across the country, and on the part of the producing provinces, to work with me to meet the objectives we have established for ourselves and for our country. These objectives are:

1. energy security, which means not having to depend on imported oil;
2. fairness, which means sharing in a truly Canadian way the energy benefits and burdens; and
3. opportunity, which means having Canadians play a growing role in their energy industry. Meeting these energy objectives is not an easy task. It will require the co-operation of industry, of governments of producing provinces, of governments of consuming provinces, and of consumers in general. In the past, our policies as a federal government have been controversial. I do not intend to dwell on the controversies. Rather, I would like to reflect briefly on one major aspect of our policies--that of oil and gas pricing--and then I want to speak about where we go from here in this regard.

In a very real sense, the world as we knew it changed abruptly in 1973-74. The shock of OPEC price increases beginning ten years ago changed the international economic order and has been the major contributing factor in our weak economic performance, including high inflation and high unemployment around the world.

Over the course of the last ten years, the government of Canada made a conscious effort to protect Canadian industry and consumers against extraordinarily sharp increases in international energy prices. We have tried to ensure a gradual adjustment to higher prices. In order to do this, the producers and the producing provinces have had to forego revenues which would otherwise have accrued to them.

In terms of protection to the consumer from the shock of rapidly rising energy prices, our policies over the last ten years have been very successful. Since the inception of our pricing policies, the cumulative benefits to the consumer, as measured by the difference between world prices and ours, is $46 billion. To the average household, this has meant a saving of $1,850 in heating oil and gasoline costs, while the average farmer on the prairies, for example, has saved $8,200 on his oil costs. Over the same period, the Canadian airline industry has saved at least $1.3 billion. And, in the last five years, a Canadian world-scale petrochemical plant using oil as a feedstock has saved $525 million.

These, then, are a few examples of concrete consumer and industrial benefits from our policies. Moreover, we are doing more than any other major country to give oil consumers an opportunity to switch to cheaper and more plentiful energy sources such as natural gas and electricity.

These benefits to the consumer accrued during a period when the oil industry's cash flow was steadily increasing, and when revenues of producing provinces were growing by leaps and bounds as a result of steadily increasing prices. Now the world situation has changed drastically again.

What were the expectations when we installed our present pricing system back in September 1981 ? The framework assumed steady growth of international oil prices through the course of the 1980s and 1990s. When these policies were put into place in 1980 and 1981, this view was held not only by the federal government and the government of Alberta but by virtually every analyst closely involved in decision-making in the energy industry in Canada and abroad. The best advice we had two years ago--and it was nearly unanimous around the world--was that oil prices were going to continue to rise significantly.

But as you are well aware, over the past eighteen months conditions in the international oil marketplace have changed dramatically. Not only have rapid increases been halted, but international prices have begun to decline by significant amounts.

Since I do not have a crystal ball, I will not try to predict what will happen to world prices over the next few months or the next few years. I will not get into the game of forecasts. However, I would say that we are likely to be in for a period of continuing uncertainty, especially over the next few years.

Changes in both the perception and reality of international oil markets have led to a number of anomalies in our current policy framework. It certainly appears to me that the fairness of our current system has been affected by declining world oil prices. The deal worked well while oil prices were rising, and, even when that rise was halted, the basic objectives of our system remained fundamentally intact.

Lower world oil prices, however, have produced problems that must be addressed. We want benefits from lower prices, but we must at the same time ensure the health and viability of the producing industry in Canada. We cannot afford to lose sight of the fact that many thousands of Canadians are dependent upon the producing industry for employment. And we need a healthy industry to ensure energy security for the future.

I will, therefore, be reviewing our current pricing and revenue regime, paying particular attention to the issue of fairness. It is possible that this review may generate some changes to the system. These changes may be only minor adjustments to get rid of the anomalies. It is conceivable, however, that we may require more fundamental adjustments to realize our goals, to achieve a fair national balance.

In undertaking this review, I intend to continue consulting with industry, with producing provinces, and with consuming provinces, as I have been doing ever since I became Minister of Energy. What I hear from Canadians will help me and my colleagues in the decisions we have to reach. We have some time. Our current system provides us with an ongoing framework through mid-summer. This should give us the opportunity to discuss, to debate, and to decide. But we must also use the opportunity to find a solution that is acceptable to all parties concerned. As early as July 1 of this year, decisions with regard to our pricing system will be required. Between now and then, I am open, interested, and anxious to review our problems with all interested parties.

This government has been, and remains, committed to providing a secure supply of energy to consumers at reasonable prices. Second, and just as important, we want a system that is fair to producers, to investors, to all levels of government across the country, and to all users of energy. I am aware that all of these interests cannot be fully satisfied. All interests must compromise.

Let me now set out four options which Canadians should consider before governments make decisions. I want to be clear that I am cataloguing options which have been discussed in public by various interest groups. The cabinet has not yet discussed them; in fact, I have not even asked my colleagues to do so. Before I make recommendations to my colleagues, I want to hear the views of interested parties. I am clearly not in a position to suggest what my reaction would be to any of the options for change to existing policy, other than to say that they should be discussed.

First, as you know, most oil produced in Canada receives a price considerably lower than the international price. This so-called old oil price is limited by a cap of 75 per cent of the world price according to the 1981 agreement between the federal government and the government of Alberta. This has allowed Canadian consumers to enjoy advantages over consumers in most countries. At the same time, regular increases in the price for old oil have strengthened producers' cash flows. However, the decline in world prices recently has produced a situation whereby not only would the price for old oil be capped at 75 per cent by this summer, but where, according to our interpretation of the agreement with Alberta, the price should be rolled back, with the resulting benefit to consumers.

The rollback option I am describing would produce great spinoff benefits for nearly all sectors of our economy--for farmers, businessmen, factory operators, and airline companies alike.

But there is a downside, and that is the fact that lower prices caused by a rollback would reduce revenues to producers. If this happens, producers may well be less able to pursue further development of Canada's resources, and, in the long run, this might result in greater dependence on foreign sources of supply.

There is a second option and that involves changes to, or the elimination of, the 75 per cent cap. Alberta's interpretation of the agreement on pricing would prohibit any decrease in the old oil price and would effectively freeze current prices. The consumer would benefit less than from a rollback, but yet would see lower prices at the pumps as certain federal taxes would be reduced (and of course prices of imported oil would be less). While I do not necessarily agree with this option, it is legitimate and should be discussed.

A third option, which would increase the cash flow to producers, would be the extension of the world price to more categories of production while still maintaining a redefined old oil category at 75 per cent of the world price.

The fourth and most radical option is that of decontrolling the price of Canadian oil so that domestic prices would be set at world levels. This option would have been unthinkable to me if world prices had continued to rise. To be frank, it presents great political difficulties, since the government is committed to keeping the Canadian price below world price. But this commitment was made in the context of rising world prices, not in the context of the world price coming down towards the level we had contemplated for the Canadian price.

Decontrol in the present context would mean a marginal increase in oil product prices. But it should be recognized that the Canadian price would be going up, however marginally, when prices around the world are coming down, albeit from higher levels. Decontrol would mean more revenues for producers and more revenues for governments to offset against their deficits, but these additional revenues would come from the pockets of consumers and might hurt the competitive position of some of our industries. Decontrol would also mean the dismantling of a highly complex regulatory system.

While I remain to be convinced that decontrol is the preferred option, it is one that should be discussed and debated. But we must not forget our commitment to protect consumers if world prices rise sharply once again. I know that the Opposition in the House of Commons often charges that Canadian oil prices are worse than decontrolled prices--that they are above world levels. And although the point with respect to crude oil is incorrect, it is possible to prove the Opposition's point on prices if you carefully pick the oil product (gasoline products, for example), and the state and province for comparison. The problem here is largely the amount of ad valorem taxes on gasoline imposed by the consuming provinces.

From a political point of view, it is extremely frustrating to establish federal policies designed to give consumers a break, only to have the consuming provinces move in with their retail-level taxes and soak up the advantage we extended to consumers.

In Quebec, for example, the provincial tax is 40 per cent and gasline at the pumps is 8.3 cents per litre more expensive than in the state of New York. In Ontario, the provincial tax is not 40 per cent but 20 per cent, and gasoline is 4.6 cents more expensive per litre than in New York.

I am concerned about the fairness of our policy towards producing provinces when provincial governments in consuming provinces tax away the benefits to the consumer, and I will have to take this into consideration in my decision on pricing policy. In summary, I believe I have set out in a very frank way the options facing the government. Normally, major policy options are examined in secret. I hope my initiative will be regarded as a positive contribution towards an important national debate.

I have a further point to make before I finish and this deals with natural gas, since lower oil prices are also causing problems with the domestic price of gas.

Our agreement with Alberta provides for regular increments to the Alberta border price for natural gas every six months, whether or not the price of oil changes. For consumers, the federal government is committed to lowering its excise tax on gas to maintain natural gas prices at 65 per cent of oil. There was an increase in natural gas in January and on February 1 we did this; we dropped our tax almost 30 per cent.

However, with lower oil prices, the government of Canada alone is running out of room to manoeuvre. It now appears that unless oil prices rise, the federal tax on natural gas will be reduced to zero in the near future. I know that producers, and producing provinces, appreciate the importance of keeping gas prices market-oriented. Gas prices must be attractive relative to oil, electricity, and renewables to protect and expand market share. Many Canadians see natural gas as a serious energy option and we all want to keep it that way.

Producers, consumers, federal and provincial governments, all benefit when natural gas maintains and expands its markets in eastern Canada. It is important to remember that last year gas sales into the Ontario and Quebec markets nearly equalled total export sales. This situation can only be maintained and strengthened as long as the price for natural gas remains attractive relative to the price of oil.

The government of Canada's options on natural gas pricing are extremely limited at this time. We believe that it is in the interests of all parties that the current regime for establishing the border price for natural gas at Alberta is reviewed. Of course, the implications for government revenues and consumer prices on natural gas are similar to the implications for oil. Consumers would benefit if the price of natural gas were constrained to its current relationship with oil.

Finally, the weakness in world markets has important implications for Canada's position regarding trade in energy. As you know, I took steps this week to help Canada's gas producers sell more gas in the United States. By lowering the export price of gas, from $4.94 (American) per billion BTUs to $4.40 per million BTUS, we have reflected the recent changes in the world oil market.

In so doing, we have made our gas relatively more attractive in the American market, a market that was worth more than $4.7 billion to Canada last year. We are closely watching market trends in the United States. As a secure and reliable, long-term supplier of gas to the United States, we want to keep our market share. That is why my officials are now working with the industry and the producing provinces on the concept of an incentive price aimed at maintaining and expanding our markets in the United States.

At the same time, we know that our American friends recognize that we are willing to do our part, and that we have been very flexible in terms of price. Others must also be flexible. Our gas trade is one of mutual long-term interest. We recognize this, and we are examining future measures to enhance the position of Canadian gas in the American marketplace. However, there are limits to Canada's flexibility. I do not want to see Canada's gas industry jeopardized. It is now up to American importers to do their part, to observe existing contracts with Canadian exporters.

When we look at the question of exports, the importance of maintaining a secure supply of energy for Canadians in the future continues to be our government's overwhelming concern. Nevertheless, I recognize that the development of new sources of supply depends upon access to markets. If availability of Canadian oil and gas exceeds our foreseeable requirements, our options are either to keep the surplus in the ground or to look for new markets abroad. Shutting in surplus supplies not only reduces revenue to producers, it also discourages the development of new sources of supply.

We must find a way to ensure both the viability and continuity of exploration and development and Canada's long-term requirements for energy. We must protect Canada's national interest. But we also must ensure that we have enough oil and gas for future generations of Canadians. This means we have to have fair access and fair prices for our energy surpluses.

I remain convinced that Canada's so-called problems can be solved. Only through close co-operation--co-operation between us and producer governments, between governments and industry, and between industry and consumers--can we expect to solve the dilemmas that face us today as a result of new international uncertainty and the numerous options that our energy resources open to us.

We have great opportunity, great challenge, facing us again. We are always faced with some difficulties. I have to confess to you that I had not planned on having the problems of adjusting the price of oil and gas in today's context. Last September when the cabinet was changed, I was asked where I wanted to go. I said energy because I thought it would be peaceful. After two and a half years of doing the referendum and the constitution, I wanted something that would take me to western Canada and to the Maritimes once in a while, something where I wouldn't be fighting any more with Quebec or the other provinces. And now suddenly, I am faced with this difficult problem.

It is an illustration of how volatile the world scene is today that we are constantly faced with new challenges. We should not be afraid to take them on. In the past few years we have faced some fantastic challenges that now we have forgotten about. This is very much the Canadian way.

Three years ago almost to the day we faced the referendum in Quebec. We didn't know then whether our country would survive. From day to day we watched that situation wondering what the result would be. And now it's been solved, it's history and nobody remembers.

In Calgary the mood is not great these days. Westerners had a good time for many years, but now it is getting a bit tougher, but the Chamber of Commerce in Calgary has a slogan: "Yes, we can."

In Canada, we can all say, "Yes, we can." There is no country that is better than our country. We have come a long way. Look at yourselves and your backgrounds. Half of you--threequarters of you--have been in the cities for only two generations. Many of you have come from different nations. We have all come a long way.

"Yes, we can." Yes, as Canadians, we can do even better. But in order to do that we have to develop a sense of participation, a sense of contribution. Every citizen in this country has to realize that we are all patriots. We will all make our own contributions. Canada, ladies and gentlemen, is still the best. Merci beaucoup et bonjour.

The appreciation of the audience was expressed by Terrence Tyers, a Director of The Empire Club of Canada.