National Energy Program
Encyclopedia
The National Energy Program (NEP) was an energy policy of the Government of Canada
Government of Canada
The Government of Canada, formally Her Majesty's Government, is the system whereby the federation of Canada is administered by a common authority; in Canadian English, the term can mean either the collective set of institutions or specifically the Queen-in-Council...

. It was created under the Liberal government of Prime Minister
Prime Minister of Canada
The Prime Minister of Canada is the primary minister of the Crown, chairman of the Cabinet, and thus head of government for Canada, charged with advising the Canadian monarch or viceroy on the exercise of the executive powers vested in them by the constitution...

 Pierre Trudeau
Pierre Trudeau
Joseph Philippe Pierre Yves Elliott Trudeau, , usually known as Pierre Trudeau or Pierre Elliott Trudeau, was the 15th Prime Minister of Canada from April 20, 1968 to June 4, 1979, and again from March 3, 1980 to June 30, 1984.Trudeau began his political career campaigning for socialist ideals,...

 by Minister of Energy Marc Lalonde in 1980, and administered by the Department of Energy, Mines and Resources.

Description

The NEP was introduced in the wake of the energy crises of the 1970s. Because of high oil prices, several economic problems that were beginning to manifest themselves through the 1970s were accelerated and magnified. Inflation was most commonly between 9 and 10 percent annually and prime interest rates over 10 percent. Unemployment was epidemic in the eastern provinces. The NEP was designed to promote oil self-sufficiency for Canada, maintain the oil supply, particularly for the industrial base in eastern Canada, promote Canadian ownership of the energy industry, promote lower prices, promote exploration for oil in Canada, promote alternative energy
Alternative energy
Alternative energy is an umbrella term that refers to any source of usable energy intended to replace fuel sources without the undesired consequences of the replaced fuels....

 sources, and increase government revenues from oil sales through a variety of taxes and agreements. The NEP's Petroleum Gas Revenue Tax (PGRT) instituted a double-taxation mechanism that did not apply to other commodities, such as gold and copper (see "Program details" item (c), below). The program would "... redistribute revenue from the [oil] industry and lessen the cost of oil for Eastern Canada..." in an attempt to insulate the Canadian economy from the shock of rising global oil prices (see "Program details" item (a), below). By keeping domestic oil prices below world market prices, the NEP was essentially mandating provincial generosity and subsidizing all Canadian consumers of fuel.

Federal energy policy background

At this point in Canada's history the federal government (more specifically, the National Energy Board
National Energy Board
The National Energy Board is an independent economic regulatory agency created in 1959 by the Government of Canada to oversee "international and inter-provincial aspects of the oil, gas and electric utility industries"...

 or NEB) set the price of oil and natural gas in Canada. The producers neither were charged full world prices for the resource, nor were the consumers. These subsidies had a number of side effects, including larger trade deficits, larger federal budget deficits, higher 'real' interest rates and higher inflation.

Program details

The National Energy Program "... had three principles: (1) security of supply and ultimate independence from the world market, (2) opportunity for all Canadians to participate in the energy industry, particularly oil and gas, and to share in the benefits of its expansion, and (3) fairness, with a pricing and revenue-sharing regime which recognizes the needs and rights of all Canadians."

"The main elements of the program included:

(a) a blended or 'made-in-Canada' price of oil, an average of the costs of imported and domestic oil, which will rise gradually and predictably but will remain well below world prices and will never be more than 85 per cent of the lower of the price of imported oil or of oil in the US, and which will be financed by a Petroleum Compensation Charge levied on refiners...;

(b) natural gas prices which will increase less quickly than oil prices, but which will include a new and rising federal tax on all natural gas and gas liquids;

(c) a petroleum and gas revenue tax of 8 per cent applied to net operating revenues before royalty and other expense deductions on all production of oil and natural gas in Canada...;

(d) the phasing out of the depletion allowances for oil and gas exploration and development, which will be replaced with a new system of direct incentive payments, structured to encourage investment by Canadian companies, with added incentives for exploration on Canada Lands;

(e) a federal share of petroleum production income at the wellhead which will rise from about 10 per cent in recent years to 24 per cent over the 1980-83 period, with the share of the producing provinces falling from 45 to 43 per cent that of the industry falling from 45 to 33 per cent over the same period;

(f) added incentives for energy conservation and energy conversion away from oil, particularly applicable to Eastern Canada, including the extension of the natural gas pipe-line system to Quebec City and the maritimes, with the additional transport charges being passed back to the producer; and

(g) a Canadian ownership levy to assist in financing the acquisition of the Canadian operations of one or more multinational oil companies, with the objective of achieving at least 50 per cent Canadian ownership of oil and gas production by 1990, Canadian control of a significant number of the major oil and gas corporations, and an early increase in the share of the oil and gas sector owned by the Government of Canada."

The net effect of the change to the percentage shares of income at the wellhead (item e) combined with the Petroleum Compensation Charge (item a) meant that by 1983 the share distribution would be "more substantially" shifted to the federal government. The federal government's share would rise to 36 per cent from 10 per cent, while the provincial share and the industry share would go from 45 per cent each down to 36 per cent and 28 per cent respectively. Thus, a province would receive 20 percent less and industry would receive 40 per cent less.

NEP and the federal budget

The 1980 federal government budget introduced by Minister of Finance Allan MacEachen
Allan MacEachen
Allan Joseph MacEachen, PC, OC is a retired Canadian politician, a many-time Cabinet minister, a retired Senator, one of Canada's elder statesmen, and was the first Deputy Prime Minister of Canada, serving from 1977 to 1979 and 1980 to 1984.-Early life:Born in Inverness on Nova Scotia's Cape...

 projected a reduction of federal deficits from $14.2 billion in 1980 to $11.8 billion in fiscal 1984 due primarily to substantial increases in revenues from the oil and gas sector while maintaining expenditures. Some economists speculated the NEP would discourage large-scale oil investment projects and thus reduce these projected revenues. Whether or not the NEP itself was the cause, the program failed to deliver the anticipated revenues and, by 1983, the Department of Finance had concluded that the federal government had established a structural deficit
Structural deficit
Structural deficit forms part of the public sector deficit. Structural deficit differs from cyclical deficit in that structural deficit exists even when the economy is at its potential....

 of $29.7 billion, an increase from 3.5 per cent of GNP in 1980 to 6.2 per cent of GNP in 1983.

NEP and falling energy prices

The energy price declines of the early 1980s prompted the federal and provincial governments to update their revenue sharing agreements. The amended agreements allowed for $4.2 billion in higher revenues ($1.7 billion federal government, $1.2 billion each for provincial government and industry), which was 30 per cent of the increase that would have been gained from going to world prices. Interestingly, under the NEP industry was in fact not significantly exposed to the declining global oil prices but rather the largest part of direct revenue losses accrued to governments, meaning that the industry operated throughout the period of the NEP under relatively similar oil prices, the 'made-in-Canada' price of oil (see item (a) in National Energy Program Details, above).

Reaction in Western Canada

The program was extremely unpopular in Western Canada
Western Canada
Western Canada, also referred to as the Western provinces and commonly as the West, is a region of Canada that includes the four provinces west of the province of Ontario.- Provinces :...

, especially in Alberta
Alberta
Alberta is a province of Canada. It had an estimated population of 3.7 million in 2010 making it the most populous of Canada's three prairie provinces...

 where most of Canada's oil is produced. With natural resources falling constitutionally within the domain of provincial jurisdictions, many Albertans viewed the NEP as a detrimental intrusion by the federal government into the province's affairs. In Western Canada – and Alberta especially – the NEP was perceived to be at their expense in benefiting the eastern provinces.
Particularly vilified was Prime Minister Pierre Trudeau, whose Liberals didn't hold a seat west of Manitoba
Canadian federal election, 1980
The Canadian federal election of 1980 was held on February 18, 1980 to elect members of the Canadian House of Commons of the 32nd Parliament of Canada...

. Ed Clark
W. Edmund Clark
William Edmund "Ed" Clark is the President and Chief Executive Officer of TD Bank Financial Group , roles he held since December 20, 2002....

, a senior bureaucrat in the Trudeau Liberal government, helped develop the National Energy Program earning himself the moniker 'Red Ed' in the Alberta oil industry. Shortly after Brian Mulroney
Brian Mulroney
Martin Brian Mulroney, was the 18th Prime Minister of Canada from September 17, 1984, to June 25, 1993 and was leader of the Progressive Conservative Party of Canada from 1983 to 1993. His tenure as Prime Minister was marked by the introduction of major economic reforms, such as the Canada-U.S...

 took office, Clark was fired.

Petro-Canada
Petro-Canada
Petro-Canada was a crown corporation of Canada in the field of oil and natural gas. It was headquartered in the Petro-Canada Centre in Calgary, Alberta. In August, 2009, Petro-Canada merged with Suncor Energy, a deal in which Suncor investors received approximately 60 per cent ownership of the...

, the government-established oil company headquartered in Calgary, was made responsible for implementing much of the Program. Petro-Canada was backronym
Backronym
A backronym or bacronym is a phrase constructed purposely, such that an acronym can be formed to a specific desired word. Backronyms may be invented with serious or humorous intent, or may be a type of false or folk etymology....

ed to "Pierre Elliott Trudeau Rips Off Canada" by opponents of the National Energy Program, and the Petro-Canada Centre
Petro-Canada Centre
The Suncor Energy Centre, formerly the Petro-Canada Centre is a 1,945,000 square foot project composed of two granite and reflective glass-clad office towers of 32 floors and 53 floors, situated in the office core of downtown Calgary, Alberta...

 in Calgary became known as "Red Square." The popular western slogan during the NEP – appearing on many bumper stickers – was "Let the Eastern bastards freeze in the dark".

Premier of Alberta
Premier of Alberta
The Premier of Alberta is the first minister for the Canadian province of Alberta. He or she is the province's head of government and de facto chief executive. The current Premier of Alberta is Alison Redford. She became Premier by winning the Progressive Conservative leadership elections on...

 Peter Lougheed
Peter Lougheed
Edgar Peter Lougheed, PC, CC, AOE, QC, is a Canadian lawyer, and a former politician and Canadian Football League player. He served as the tenth Premier of Alberta from 1971 to 1985....

 went on national television to announce that oil shipments to the rest of Canada would be halted, forcing the federal government to import more expensive crude. Lougheed also stopped development on several oil sands projects. After negotiations between Trudeau and Lougheed, the NEP was revised so that the price of so called "new" Canadian oil (discovered after December 31, 1980) would eventually rise to the world price but existing "old" oil would still be capped at 75% of the world price.

Impact in Western Canada

The key areas of GDP, per capita federal contributions (since this was a federal program), housing prices and bankruptcy rates during the years of the NEP (1980–1985) are examined in this section. For housing prices and bankruptcy rates, the experience of Alberta in particular is contrasted to the other regions of the country in an attempt to see whether the problems experienced due to the early 1980s recession
Early 1980s recession
The early 1980s recession describes the severe global economic recession affecting much of the developed world in the late 1970s and early 1980s. The United States and Japan exited recession relatively early, but high unemployment would continue to affect other OECD nations through at least 1985...

 were worse in Alberta perhaps due to the NEP.

Alberta GDP

It has been estimated by a number of different scholars that Alberta lost between $50 billion and $100 billion because of the NEP, and that the cost to the average Albertan was about $18,000.

Alberta GDP was between $60 billion and $80 billion annually through the years of the NEP, 1980 to 1986. While it is unclear whether the estimates took into account the decline in world crude oil prices that began only a few months after the NEP came into force, the graph of long-term oil prices show that prices adjusted for inflation did not drop below pre-1980s levels until 1985. Given that the program was cancelled in 1986, the NEP was active for five years which are amongst the most expensive for oil prices on record and the NEP prevented Alberta's economy from fully realising those prices.

Provincial per capita federal contributions

In inflation adjusted 2004 dollars, the year the NEP took effect (1980) per capita fiscal contributions by Alberta to the federal government increased 77% over 1979 levels - from $6,578 in 1979 to $11,641 in 1980. In the five years prior to the NEP (1975–1979), the per capita contributions by Alberta had approximated the fluctuations in the price of oil (see graph Fluctuations: Oil Prices & Alberta Per Capita Federal Contributions 1975-1981). In 1980, however, the inflation adjusted average price of oil was only 5% higher than the previous year yet the per capita contributions from Alberta rose 77% (see graph Fluctuations: Oil Prices & Alberta Per Capita Federal Contributions 1975-1981).
Again in inflation adjusted 2004 dollars, the year the NEP was terminated (1986) per capita contributions to the federal government by Alberta collapsed to $680, a mere 10% of 1979 levels.

During the NEP years, 1980–1985, only one other province was a net contributor per capita to the federal government. It was Saskatchewan, another oil producer. In 1980 and 1981 Saskatchewan was a net per capita contributor to the federal government with their peak in 1981 at a mere $514 in comparison to Alberta's peak of $12,735 that same year, both values being 2004 inflation adjusted dollars. Thus, during the NEP years from 1980-1985 the province of Alberta was the sole overall net contributor to the federal government while all other provinces enjoyed being net recipients.

North American housing prices

As cited in a report by Phillips, Hager and North, the U.S. Office of the Federal Housing Oversight (OFHEO) reported overall declines in real estate prices of between 10% and 15% from 1980 through 1985, the years of the NEP. That same report presents information from the Canadian Real Estate Association (CREA) showing that during those years (1980–1985) most eastern Canadian markets fell 10%-15% and the Toronto market held relatively steady. In contrast, the CREA historical data shows a decline from 1980 through to 1985 of approximately 20% for Vancouver, Saskatoon and Winnipeg while the drop approached 40% in the oil dominated economies of Edmonton and Calgary, yet through those years oil prices were still historically high (see figure Long-Term Oil Prices, 1861–2007).

Bankruptcies in Canada

For the period 1980 through 1985, government statistics show that while the overall number of bankruptcies per 1,000 businesses in Canada peaked at 50% above the 1980 rate. During that same time the bankruptcy rate in Alberta's economy rose by 150% after the NEP took effect despite those years being amongst the most expensive for oil prices on record (see figure Long-Term Oil Prices, 1861–2007).

Comparing with other oil-based economies during the NEP years

In around 1970 Norway
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...

 started to become an oil dominated export economy comparable to Alberta. As with most of the world's manufacturing economies, Norway's manufacturing experienced recession beginning in the 1970s. However, in the late 1970s the rise in oil prices saw Norway's oil exports grow and provide the nation with a trade surplus (see figure North Sea Oil Prices and Norway's Trade Balance, 1975–2000).

"Norway saw deindustrialization at a more rapid pace than most of her largest trading partners. Due to the petroleum sector, however, Norway experienced high growth rates in all the three last decades of the twentieth century, bringing Norway to the top of the world GDP per capita list at the dawn of the new millennium."

Thus, not all oil based economies suffered as Alberta did during the global slowdown of the early 1980s. Norway experienced an economic boom during the NEP years thanks to the historically high oil prices (see figure Long-Term Oil Prices, 1861–2007). The economic boom of the early 1980s in Norway lasted until the price of oil collapsed in late 1985 just before the NEP was terminated (see figure North Sea Oil Prices and Norway's Trade Balance, 1975–2000).

End of the NEP

The rationale for the program weakened when world oil prices began to slowly decline in the early 1980s and then collapsed in late 1985 (see figure Long-Term Oil Prices, 1861–2007). A phased shutdown was commenced by Jean Chrétien
Jean Chrétien
Joseph Jacques Jean Chrétien , known commonly as Jean Chrétien is a former Canadian politician who was the 20th Prime Minister of Canada. He served in the position for over ten years, from November 4, 1993 to December 12, 2003....

 while he was Minister of Energy, Mines and Resources.

In the 1984 election
Canadian federal election, 1984
The Canadian federal election of 1984 was held on September 4 of that year to elect members of the Canadian House of Commons of the 33rd Parliament of Canada...

 the Progressive Conservative Party
Progressive Conservative Party of Canada
The Progressive Conservative Party of Canada was a Canadian political party with a centre-right stance on economic issues and, after the 1970s, a centrist stance on social issues....

 of Brian Mulroney
Brian Mulroney
Martin Brian Mulroney, was the 18th Prime Minister of Canada from September 17, 1984, to June 25, 1993 and was leader of the Progressive Conservative Party of Canada from 1983 to 1993. His tenure as Prime Minister was marked by the introduction of major economic reforms, such as the Canada-U.S...

 was elected to a majority in the House of Commons
Canadian House of Commons
The House of Commons of Canada is a component of the Parliament of Canada, along with the Sovereign and the Senate. The House of Commons is a democratically elected body, consisting of 308 members known as Members of Parliament...

 with the support of Western Canada after campaigning against the NEP. However, Mulroney did not eliminate the last vestiges of the program until two and a half years later, at which time world oil prices had dropped below pre-1980s levels (as adjusted for inflation - see figure Long-Term Oil Prices, 1861–2007). The conservative government's delay was a contributing factor to the creation of a new political party, Western Canada's Reform Party of Canada
Reform Party of Canada
The Reform Party of Canada was a Canadian federal political party that existed from 1987 to 2000. It was originally founded as a Western Canada-based protest party, but attempted to expand eastward in the 1990s. It viewed itself as a populist party....

.

Impact

The economic effect of the program is debated. After it was implemented, Canada, along with all of the economies of Europe (except for Norway due to their petroleum industry) and the economy of the United States, fell into a worldwide recession
Early 1980s recession
The early 1980s recession describes the severe global economic recession affecting much of the developed world in the late 1970s and early 1980s. The United States and Japan exited recession relatively early, but high unemployment would continue to affect other OECD nations through at least 1985...

. It would turn out to be the worst economic downturn since the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

.

Given that bankruptcies and real estate prices did not fare as negatively in Central Canada as in the rest of Canada and the United States during the NEP, it is possible that the NEP had a positive effect in Central Canada.

However, given that bankruptcies and real estate did much worse in Alberta than in other parts of Canada and the United States, petroleum exporting economies like Norway performed well, coupled with the estimated loss of between $50 and $100 billion in provincial GDP (at the time, this was an entire year's GDP for the province) due to the NEP during this period, it is plausible the NEP had a negative effect in Alberta.

Perhaps the greatest impact was the NEP's failure to deliver the revenues forecast originally in the 1980 federal budget. Federal deficits had been expected to decrease primarily due to substantial increases in revenues from the oil and gas sector. Instead, by 1983 the Department of Finance had concluded that the federal government had established a structural deficit
Structural deficit
Structural deficit forms part of the public sector deficit. Structural deficit differs from cyclical deficit in that structural deficit exists even when the economy is at its potential....

 of 6.2 per cent of GNP ($29.7 billion).

Finally, politically the NEP heightened distrust of the federal government
Government of Canada
The Government of Canada, formally Her Majesty's Government, is the system whereby the federation of Canada is administered by a common authority; in Canadian English, the term can mean either the collective set of institutions or specifically the Queen-in-Council...

in Western Canada, especially in Alberta where many Albertans believed that the NEP was an intrusion of the federal government into an area of provincial jurisdiction.

External links

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