The
National Energy Program (
NEP)
was an energy policy of the
Government of Canada. It was enacted by
the government of
Prime
Minister Pierre Trudeau 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 out of control and interest rates were
through the roof. Unemployment was epidemic in the eastern
provinces where the Trudeau government had much of its political
support. 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 sources, and increase government revenues from oil sales
through a variety of taxes and agreements.“National Energy
Program.” The Canadian Encyclopedia. Historica Foundation of
Canada. N.d. January 2005.
/www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=J1ARTJ0005618>
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“The National Energy Program:Canada and the United States”
Carman Neustaedter, University of Calgary. March 2001.
/pages.cpsc.ucalgary.ca/~carman/courses/nep.html> (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,
primarily at Alberta's expense.Canadian Public Policy “The Federal
Budget and Energy Program, October 28th, 1980: A Review” Brian L.
Scarfe, Department of Economics, the University of Alberta. Winter
1981.
/economics.ca/cgi/jab?journal=cpp&view=v07n1/CPPv07n1p001.pdf>
page 8
Federal energy policy background
At this point in Canada's history the federal government (more
specifically, the National Energy Board 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.Canadian
Public Policy “The Federal Budget and Energy Program, October 28th,
1980: A Review” Brian L. Scarfe, Department of Economics, the
University of Alberta. Winter 1981.
/economics.ca/cgi/jab?journal=cpp&view=v07n1/CPPv07n1p001.pdf>
pages 2 - 5 These subsidies had a number of side effects, including
larger trade deficits, larger federal budget deficits, higher
'real' interest rates and higher inflation.Canadian Public Policy
“The Federal Budget and Energy Program, October 28th, 1980: A
Review” Brian L. Scarfe, Department of Economics, the University of
Alberta. Winter 1981.
/economics.ca/cgi/jab?journal=cpp&view=v07n1/CPPv07n1p001.pdf>
pages 2 - 5
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."Canadian Public Policy “The Federal Budget and Energy
Program, October 28th, 1980: A Review” Brian L. Scarfe, Department
of Economics, the University of Alberta. Winter 1981.
/economics.ca/cgi/jab?journal=cpp&view=v07n1/CPPv07n1p001.pdf>
pages 5 - 6
"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."Canadian Public Policy
“The Federal Budget and Energy Program, October 28th, 1980: A
Review” Brian L. Scarfe, Department of Economics, the University of
Alberta. Winter 1981.
/economics.ca/cgi/jab?journal=cpp&view=v07n1/CPPv07n1p001.pdf>
page 6
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.Canadian Public Policy “The Federal Budget and Energy
Program, October 28th, 1980: A Review” Brian L. Scarfe, Department
of Economics, the University of Alberta. Winter 1981.
/economics.ca/cgi/jab?journal=cpp&view=v07n1/CPPv07n1p001.pdf>
page 8 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 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.Canadian Public Policy “The Federal Budget and Energy
Program, October 28th, 1980: A Review” Brian L. Scarfe, Department
of Economics, the University of Alberta. Winter 1981.
/economics.ca/cgi/jab?journal=cpp&view=v07n1/CPPv07n1p001.pdf>
page 10 Some economists speculated the NEP would discourage
large-scale oil investment projects and thus reduce these projected
revenues.Canadian Public Policy “The Federal Budget and Energy
Program, October 28th, 1980: A Review” Brian L. Scarfe, Department
of Economics, the University of Alberta. Winter 1981.
/economics.ca/cgi/jab?journal=cpp&view=v07n1/CPPv07n1p001.pdf>
page 10 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“The Federal Deficit:Some Economic Fallacies” Marion
Wrobel, Senior Analyst, Depository Services Program, Canada.
February 1986.
/dsp-psd.tpsgc.gc.ca/Collection-R/LoPBdP/BP/bp144-e.htm> of
$29.7 billion, an increase from 3.5 per cent of GNP in 1980 to 6.2
per cent of GNP in 1983.“The Federal Deficit in Perspective”
Department of Finance, Canada. April 1983, p. 64. Table 1
Inflation-Adjusted Federal Government Budget Balances (National
Accounts
Basis)/dsp-psd.tpsgc.gc.ca/Collection-R/LoPBdP/BP/bp144-e.htm>
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.Canadian Public Policy “The National Energy Program
Meets Falling World Oil Prices” John F. Helliwell, Mary E.
MacGregor and Andre Plourde, Department of Economics, the
University of British Columbia. 1983.
/economics.ca/cgi/jab?journal=cpp&view=v09n3/CPPv09n3p284.pdf>
page 284 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)Canadian Public Policy “The
National Energy Program Meets Falling World Oil Prices” John F.
Helliwell, Mary E. MacGregor and Andre Plourde, Department of
Economics, the University of British Columbia. 1983.
/economics.ca/cgi/jab?journal=cpp&view=v09n3/CPPv09n3p284.pdf>
page 290, which was 30 per cent of the increase that would have
been gained from going to world prices.Canadian Public Policy “The
National Energy Program Meets Falling World Oil Prices” John F.
Helliwell, Mary E. MacGregor and Andre Plourde, Department of
Economics, the University of British Columbia. 1983.
/economics.ca/cgi/jab?journal=cpp&view=v09n3/CPPv09n3p284.pdf>
page 290 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,Canadian Public Policy “The National Energy Program
Meets Falling World Oil Prices” John F. Helliwell, Mary E.
MacGregor and Andre Plourde, Department of Economics, the
University of British Columbia. 1983.
/economics.ca/cgi/jab?journal=cpp&view=v09n3/CPPv09n3p284.pdf>
page 294 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, especially in Alberta
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.
Politically the NEP further fueled talk of a 'western separatist
party'. In Western Canada – and Alberta especially – the NEP was
perceived to be at their expense in benefiting the eastern
provinces.
Ed Clark helped develop
the National Energy Program and earned Clark the moniker 'Red Ed'
in the Alberta oil industry. Shorty after
Brian Mulroney took office, Clark was fired.
Particularly vilified was Prime Minister Pierre Trudeau, whose
Liberals
didn't hold a
seat west of Manitoba. This casting of Central Canada, the
federal government, and Liberal Party as 'the enemy' has persisted
in Alberta to the present day and likely has contributed to a
decades-long Conservative provincial government.
Petro-Canada, the
government-established oil company headquartered in Calgary, was
made responsible for implementing much of the Program.
Petro-Canada was
backronymed to "Pierre Elliott Trudeau
Rips Off Canada" by opponents of the National Energy Program, and
the Petro-Canada
Centre
in Calgary became known as "Red Square." A
popular western slogan during the NEP – appearing on many bumper
stickers – was "Let the Eastern bastards freeze in the
dark".Vicente, Mary Elizabeth. “The National Energy Program.”
Canada’s Digital Collections. Heritage Community Foundation. N.d.
January 2005.
/www.abheritage.ca/abpolitics/events/issues_nep.html>
Premier of Alberta Peter Lougheed went on national television to
annouce 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.Vicente, Mary Elizabeth. “The National Energy Program.”
Canada’s Digital Collections. Heritage Community Foundation. N.d.
January 2005.
/www.abheritage.ca/abpolitics/events/issues_nep.html> 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.Nickle's Energy Group. “Trudeau, Lougheed Sign Agreement”
Daily Oil Bulletin. September 2, 1981.
/www.nickles.com/history/article.asp?article=history%5Chistory_1116.html>
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 global
recession were worse in Alberta perhaps due to the NEP.
Alberta GDP
It is estimated by various scholars that Alberta lost between $50
billion and $100 billion because of the NEP. 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.Nickle's Energy Group. “Trudeau, Lougheed Sign Agreement”
Daily Oil Bulletin. September 2, 1981.
/www.nickles.com/history/article.asp?article=history%5Chistory_1116.html>
Fluctuations: Oil Prices & Alberta Per Capita Federal
Contributions 1975-1981
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 NEPPhillips, Hager and North Investment
Management Ltd. “North American Real Estate: Bubble Trouble?” June
24, 2004. p.1 Chart 1: U.S. Real House Prices (Indexed to 1975 =
100).
/www.phn.com/Portals/0/PDFs/Articles/North%20American%20Real%20Estate%20062504.pdf>.
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 steadyPhillips, Hager and North Investment Management
Ltd. “North American Real Estate: Bubble Trouble?” June 24, 2004.
p.6 Chart 10: Average House Prices (real terms), Eastern Canada
(Indexed to 1980 = 100).
/www.phn.com/Portals/0/PDFs/Articles/North%20American%20Real%20Estate%20062504.pdf>.
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 CalgaryPhillips, Hager and North
Investment Management Ltd. “North American Real Estate: Bubble
Trouble?” June 24, 2004. p.6 Chart 9: Average Annual House Prices
(real terms), Western Canada (Indexed to 1980 = 100).
/www.phn.com/Portals/0/PDFs/Articles/North%20American%20Real%20Estate%20062504.pdf>,
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.Statistics Canada.
“National and Regional Trends in Business Bankruptcies, 1980 to
2005” October 2006. p.20 Table A3 Number of bankruptcies per 1,000
businesses, Canada and regions, 1980 to 2005.
/www.statcan.ca/english/research/11-624-MIE/11-624-MIE2006015.pdf>
During that same time the bankruptcy rate in Alberta's economy rose
by 150% after the NEP took effectStatistics Canada. “National and
Regional Trends in Business Bankruptcies, 1980 to 2005” October
2006. p.12 Figure 4-2 Incidence of bankruptcies — Prairie
provinces, 1980 to 2005.
/www.statcan.ca/english/research/11-624-MIE/11-624-MIE2006015.pdf>
despite those years being amongst the most expensive for oil prices
on record (see figure Long-Term Oil Prices, 1861-2007).
How did other oil based economies fare during the NEP
years?
In around
1970 Norway
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."Grytten,
Ola. "The Economic History of Norway". EH.Net Encyclopedia, edited
by Robert Whaples. March 16, 2008.
/eh.net/encyclopedia/article/grytten.norway>
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 while he was Minister of Energy, Mines and
Resources.
In the
1984 election
the
Progressive
Conservative Party of
Brian
Mulroney was elected to a majority in the
House of Commons 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.
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 industryGrytten, Ola.
"The Economic History of Norway". EH.Net Encyclopedia, edited by
Robert Whaples. March 16, 2008.
/eh.net/encyclopedia/article/grytten.norway>) and the economy of
the United States, fell into a
worldwide recession. It would turn out
to be the worst economic downturn since the
Great Depression.
Given that bankruptciesStatistics Canada. “National and Regional
Trends in Business Bankruptcies, 1980 to 2005” October 2006. p.20
Table A3 Number of bankruptcies per 1,000 businesses, Canada and
regions, 1980 to 2005.
/www.statcan.ca/english/research/11-624-MIE/11-624-MIE2006015.pdf>
and real estate pricesPhillips, Hager and North Investment
Management Ltd. “North American Real Estate: Bubble Trouble?” June
24, 2004. p.6 Chart 10: Average House Prices (real terms), Eastern
Canada (Indexed to 1980 = 100).
/www.phn.com/Portals/0/PDFs/Articles/North%20American%20Real%20Estate%20062504.pdf>
did not fare as negatively in Central Canada as in the rest of
Canada and AmericaPhillips, Hager and North Investment Management
Ltd. “North American Real Estate: Bubble Trouble?” June 24, 2004.
p.1 Chart 1: U.S. Real House Prices (Indexed to 1975 = 100).
/www.phn.com/Portals/0/PDFs/Articles/North%20American%20Real%20Estate%20062504.pdf>
during the NEP, it is possible that the NEP had a positive effect
in Central Canada.
However, given that bankruptciesStatistics Canada. “National and
Regional Trends in Business Bankruptcies, 1980 to 2005” October
2006. p.12 Figure 4-2 Incidence of bankruptcies — Prairie
provinces, 1980 to 2005.
/www.statcan.ca/english/research/11-624-MIE/11-624-MIE2006015.pdf>
and real estatePhillips, Hager and North Investment Management Ltd.
“North American Real Estate: Bubble Trouble?” June 24, 2004. p.6
Chart 9: Average Annual House Prices (real terms), Western Canada
(Indexed to 1980 = 100).
/www.phn.com/Portals/0/PDFs/Articles/North%20American%20Real%20Estate%20062504.pdf>
did much worse in Alberta than in other parts of Canada and America
and petroleum exporting economies like Norway performed
wellGrytten, Ola. "The Economic History of Norway". EH.Net
Encyclopedia, edited by Robert Whaples. March 16, 2008.
/eh.net/encyclopedia/article/grytten.norway>; coupled with the
estimated loss of between $50 and $100 billion in provincial GDP
Vicente, Mary Elizabeth. “The National Energy Program.” Canada’s
Digital Collections. Heritage Community Foundation. N.d. January
2005. /www.abheritage.ca/abpolitics/events/issues_nep.html> (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.Canadian Public
Policy “The Federal Budget and Energy Program, October 28th, 1980:
A Review” Brian L. Scarfe, Department of Economics, the University
of Alberta. Winter 1981.
/economics.ca/cgi/jab?journal=cpp&view=v07n1/CPPv07n1p001.pdf>
page 10 Instead, by 1983 the Department of Finance had concluded
that the federal government had established a
structural deficit“The Federal
Deficit:Some Economic Fallacies” Marion Wrobel, Senior Analyst,
Depository Services Program, Canada. February 1986.
/dsp-psd.tpsgc.gc.ca/Collection-R/LoPBdP/BP/bp144-e.htm> of 6.2
per cent of GNP ($29.7 billion).“The Federal Deficit in
Perspective” Department of Finance, Canada. April 1983, p. 64.
Table 1 Inflation-Adjusted Federal Government Budget Balances
(National Accounts
Basis)/dsp-psd.tpsgc.gc.ca/Collection-R/LoPBdP/BP/bp144-e.htm>
Finally, politically the NEP heightened distrust of the
federal government 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.
See also
References
- “Uncertain Country.” Canada: A People’s History. CBC
Television. Prod & Dir: Susan Dando. Aired: TVO: CICI, Toronto.
January 10, 2005.
- McKenzie, Helen. Ed. Current Issues System: Western
Alienation in Canada. Ottawa: Research Branch, Library of
Parliament, Government of Canada, 1981.
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