Limited Choices: Canada's Needs and Foreign Oil

MR. MACNAUGHTON:

Ladies and gentlemen of The Empire Club of Canada: Several months ago James Schlesinger stepped down as the United States Secretary of Energy. In a speech to the American people at the time of his departure he addressed himself to the rhetoric that too frequently distracts from meaningful efforts to solve the energy crisis.

The political left blames the oil industry. The political right blames the government. But such behaviour simply reflects that post-Watergate tendency to lash out at institutions. Institution bashing is just another way of evading the problem; it is unlikely to produce much more crude oil.

Mr. Schlesinger's words are as appropriate to the situation in Canada as they are to that in the United States. However, in this country, the finger pointing at government is easier than it is south of the border because in Canada we have a state oil company which has served as a focus for much of the criticism of government involvement in one of our economy's most entrepreneurial industries.

Since it first began operations in January 1976 the nature of the comments on Petro-Canada have varied as the nature of the company itself has changed. The criticism has also varied because, to the chagrin and surprise of some of its early critics, Petro-Canada has had important successes in its frontier exploration program.

Nonetheless, in spite of the fact that Petro-Canada, as both a concept and as a reality, has the support of many Canadians, the bashing of Petro-Canada has continued unabated and it has had to withstand brickbats from all sides; its existence became an election issue and its future is now the topic of a Prime Ministerial Task Force that is expected to report shortly.

The man who has been at the centre during all of the ongoing Petro-Canada debate is our guest of honour today, Wilbert H. Hopper. He brings to his post as Chairman and Chief Executive Officer of Petro-Canada a variety of experiences in both the public and private sectors. Since graduating from the American University with a Bachelor of Science Degree and the University of Western Ontario with a Master's Degree in Business Administration, he has been, in chronological order, Petroleum Geologist with Imperial Oil, Petroleum Economist with Foster Associates; Senior Energy Economist with Canada's National Energy Board; Senior Petroleum Consultant with Arthur D. Little in Cambridge, Massachusetts; Senior Adviser, Energy Policy with the Department of Energy, Mines and Resources; Assistant Deputy Minister in the same Ministry; and founding President and Chief Executive Officer of Petro-Canada.

Mr. Hopper is a member of several economic and geological associations in both Canada and the United States. As a man whose corporate responsibilities require him to have his ear to the ground in Ottawa and in Calgary, he is a member of both the Rideau Club and the Ranchmen's Club.

Several weeks ago, when the Task Force on Petro-Canada was appointed, Mr. Hopper observed that the child is seldom consulted in a custody dispute and thereby served notice that he would not be engaging publicly in the Petro-Canada debate. His choice of topic for today's address continues that self-imposed oath of silence.

However, if Mr. Hopper is one of those who follows Bernard Baruch's counsel, "Never answer a critic, unless he's right," his silence speaks volumes on his views of the role and importance of a state oil company.

Wilbert Hopper was one of the first speakers to accept an invitation to address the Empire Club during our 1979-1980 season. His letter of acceptance is dated March 15th of this year and the interest with which members have looked forward to his address has grown steadily since then as events at home and abroad have continued to underscore Canada's vulnerability to the international energy crisis.

In commenting on developments in international energy markets, there are few Canadians who can speak with knowledge or authority equal to that of Wilbert Hopper. Therefore, it is my pleasure, on your behalf, to welcome him here today to address us on the topic "Limited Choices: Canada's Needs and Foreign Oil."

MR HOPPER:

Incredible as it may sound, the true petroleum era--the period during which it has been the prime source of commercial energy for most nations--began no more than twenty-five years ago. The primitive use of oil encompasses all of recorded history but it has been only in our lifetime that it achieved such universal importance. It is certain to remain significant throughout the next quarter-century.

But by the end of that era we are likely to have become accustomed to the appearance of alternative forms of energy.

When that time comes, many of our current concerns will have faded. But we cannot leap over time. There are tough years ahead, when nations will compete to obtain their oil from whatever amount is placed in world trade. It is on the next decade that I want to focus your attention. Issues of economic and social progress, of war and revolution--or peace--may depend on how carefully we appraise our risks and our opportunities.

It is a task which confronts virtually all nations. The industrial world, and most of the developing countries, will remain dependent on imported oil as their predominant source of energy. "Imported" is another way of saying most nations will have to have access to someone else's oil.

The federal government has set the end of the next decade as a goal for attaining self-sufficiency in oil. But in the intervening years we shall pass through a time in which our continuing dependence on imported oil will be a vital consideration in all that we do--as businessmen, bankers and as government. The need for imported oil will be a factor in all our relationships, domestic and foreign.

It will be an ever-present concern, for not only are there real prospects of a chronic shortage of crude in world trade, there is the absolute certainty that all governments will use all available means, everything from gold to guns, to obtain their needs. We are warned daily of this by OPEC. The oil powers of Saudi Arabia, Iran, Iraq and Kuwait have all been telling us to get going and develop our own resources, to conserve. We still find this hard to take seriously although these four countries alone provide well over half of all the oil available for oil imports. Oil has been plentiful, it has fueled our economic growth and enhanced our standard of living. What has happened? What is going on today? Let me review a few of the hard facts of the present situation.

The first fact is that for the past quarter-century, all of the truly great additions to conventional petroleum reserves have been in the Middle East. Discoveries in Canada, in Alaska, in Nigeria, in the North Sea, are not of "Middle East" proportions; collectively, they total only those of Kuwait (seventy-one billion barrels). Mexico may be the single exception of an addition to reserves of some magnitude: perhaps forty-five billion barrels.

The second fact is that oil consumption has soared while dependence upon the Middle East has become more and more concentrated. In 1960, a scant twenty years ago, total world oil consumption was some eighteen million barrels per day; today, it approximates sixty-six million barrels daily: a fourfold increase in two decades. And whereas, in 1960, the United States was still an exporter of oil, the U.S. is now far and away the largest importer of oil at over eight million barrels a day. Its consumption has its parallel in Europe (fourteen), in Japan (five). Oil consumption is rising everywhere in the developing world and has the potential to rise at an exponential rate. The Middle East alone provides seventy per cent of all oil in world trade. We have every reason to believe that over the next ten years, that share will not be less.

For most nations, the third fact is that there is no available alternative to oil as the primary commercial fuel. There is nothing else at hand to which we can turn without great effort, great expense and time. The vital role of oil will continue throughout this next decade, and well into the following one.

The fourth fact is that Canada is going to be dependent on costly imported oil for the next decade. The whole region of Canada east of Montreal depends primarily on imported oil to meet its energy needs. We import approximately 420,000 barrels per day at a cost today--no one knows what tomorrow will bring--of about eleven million dollars per day.

The fifth fact is perhaps the most difficult to deal with: the availability of oil put into world trade, most particularly by the OPEC states, is not now, and is not going to be for as far ahead as one can see, determined by commercial considerations. The time when supply was tailored to match demand--the province of the "seven sisters" of giant oil--is rapidly coming to an end. What is taking its place?

On the side of the oil exporters, governments, and national oil companies have moved in and are in a position to determine how much oil will be made available for world trade, what balance is to be struck between heavy and light crudes, at what prices, and for what destinations. Their determination of these factors represents a complicated and ever-changing mix of domestic and foreign objectives, of economics, finance, of the securing of political goals, of military considerations; and also of the level of production which represents prudent extraction rates.

As well, every key member of OPEC has not only imposed a limit on its production for export, each has warned that it will continue to do so and may in fact lower the limit even further. In blunt terms we are being warned that the present knife-edge balance between oil demand and supply is going to be more difficult as our demand for oil continues to go up. Nearly everyone is doing it--not just OPEC. Norway holds exports down. We do. Mexico warns it will do so, and Britain will conserve.

On the side of oil importers, most nations are scrambling to maintain the precious oil imports that they require. When oil went short this year, Germany paid over forty dollars a barrel for crude. Japan paid the same. Some crude which landed on the U.S. east coast was at that level. How many countries, equally dependent on oil, can put up that kind of money, find the means to meet what was a seventy-five per cent increase in the oil price?

The situation is no longer one in which private oil interests can be expected to always obtain and deliver oil. Each transaction, directly or indirectly, involves a government presence. Not one drop of oil moves today from the Middle East without a government agreeing to it. And almost every sizeable oil importing nation has its government in the act.

The private oil companies remain technologically strong, are still possessed of a global logistics network, but have little power to influence the terms on which the oil is supplied. It is no longer "theirs." The companies' relationship to oil exporters, and to oil importers, is subject to continual stress as they seek to meet the needs of the two sides, the sellers and the buyers, for whom the use of commercial processes is no longer the norm.

We are not at the end of this evolution. Importing governments are reminded repeatedly by OPEC states that it is the producers' preference to deal directly with them and not the private sector. The number of producing states implementing this policy grows. It is quite possible that as of today as much as thirty per cent of oil in world trade is being obtained on a government-to-government basis. The implications of this shift are clear: the "politics" of oil have changed and escalated. It is unlikely that we shall ever again regard international oil as a private commercial commodity.

Canada as an importer must take heed when producing governments shock the international oil system by cutting supplies, sending oil to someone else, raising the price or using oil supply as a bargaining tool.

I have examples. Algeria wants support for its Saharan objectives; Libya wants to control Chad; Egypt wants support for its North African and Middle East interests. Iraq wants none of its oil to go to South Africa or Israel; Saudi Arabia has interests it wants the United States to maintain; Iran has a long list. Nigeria tells the world of its views on South Africa. Oil supply has become a tool in international diplomacy; it is actively used to pursue these objectives.

There is no sure way for any country to move securely through this confusion. There may be no single route to follow but a mix of government and the private sector in obtaining foreign oil. Flexibility will be essential for two other facts have now become evident. First, there is now no such thing as a "long term supply contract;" any oil agreement can be changed unilaterally. Second, there is also no durability to price clauses. No one can tell for sure what the price will be for any transaction.

This, then, is the setting in which our nation will, for at least the next decade, be attempting to secure oil imports. Remember, we will not be alone in our efforts. Even with serious, sustained efforts at conservation, and allowing for modest economic growth, the United States, Europe, and Japan, and Canada--and nearly everyone else--will continue to increase their consumption of oil, and for most, this translates into continuing and growing dependence on imported oil.

Tightening the supply situation even further could be new claimants, such as Russia, moving from a net exporter to a net importer. There has been little consideration given to the needs of developing nations and the domestic requirements of the OPEC states themselves. These two--developing nations and OPEC states--could soak up easily, all by themselves, any conceivable increase in oil volumes placed in world trade over this coming decade.

Under these circumstances, any importing nation will have three fundamental, related objectives: (1) to obtain an adequate volume of imported oil; (2) to get the oil continuously and; (3) to get it at a price within its capacity to pay. Any nation has to obtain all three of these objectives; if only one is missing, it remains vulnerable.

Canada's needs will not take a large share of world oil in the 1980s, but our comparatively modest requirements will be far from easy to meet. The competition for each barrel in world trade will be considerable.

Some Canadians may feel that oil obtained on a government-to-government basis will be "cheaper" and provide more "long term security" because the private interest of companies is no longer the essential ingredient. I cannot tell you today that government-to-government deals, made throughout the world, have resulted in a lower price, a more assured supply or are on a more long-term basis. The most that can be claimed for such deals is that there is a presumption that with the range of powers and interests governments can employ, there may be greater durability to an agreement or, at least, greater reluctance on the part of suppliers to reduce or cease supply. I believe this is a reasonable presumption.

We cannot be sure. The choice of instruments, government or the private sector, is not ours alone to make. Decisions and attitudes by the exporters to increase government-to-government transactions will tend to limit our options.

I have laid out for your consideration the principal aspects of the world oil market with which Canada and all other oil importers will be dealing, over the next decade. There is almost certain to be an imbalance between vital needs and supply; there exists no readily available substitute for oil; there will be increasing competition for the barrel of oil put into world trade by exporters each of which will have a mix of economic and political objectives. Above everything, from all sides, there is this increasing role of exporting governments in setting the terms on which oil is made available and by importing governments in trying to get what they require.

I do not, however, expect the decades following 1990 to be as bleak. We, in Canada, are nearly unique amongst all other nations by the magnitude of our undeveloped energy resources. In this respect we are truly blessed.

We have every reason to believe we can discover and unlock the vast petroleum resources of this country. Technology and logistics, capital and management skills can be applied. New understandings will be needed within the nation as to the incentives required, the most effective roles for government and the private sector, durable policies and agreement on how the benefits can be shared. The realities of dependence on imported oil that I have just described should add urgency to the need for Canada to get its house in order and insulate itself from the uncertainty of being an importer.

And we have no time to lose. The lead times required to put great enterprises into operation can easily consume most of the difficult decade ahead. If the more distant future is to be different we have to realize the changed nature of world oil trade, learn to respond, and accelerate the development of Canadian energy resources. It can be done; Canada's energy supply will have been secured and our vulnerability to foreign supply will have disappeared.

In the meantime, there is no sure way by which Canada can insulate itself completely against international conditions by special kinds of deals. We will, in effect, have limited alternatives. We must continue to rely on our present suppliers, including the traditional oil companies, for as long as the exporting governments acknowledge their continuing need for their services. Simultaneously we must improve upon our government's knowledge of oil supply, and sharpen our government's tools to be able to be involved when ' necessary. We will have to be alert to the need to diversify our sources of imported oil. We will have to continue to offer, as do all other oil importers, food, technology and capital goods and services in return for oil. It is this array of objects which only a government can marshal. It lies far beyond the capability of a private oil company to muster. These represent limited choices for any government. The fact is, we have no options. We have to play in a new game. But it most certainly need not be forever. The limited choices which we now have while we import to satisfy our needs must not be our permanent condition.

The thanks of the club were expressed to Mr. Hopper by William M. Karn, a Past President of The Empire Club of Canada.