Ottawa’s seers fall flat on faces

Lawrence Solomon
London Free Press
February 28, 1983

Special to the Free Press

Three years ago, Canada’s government was displeased with OPEC for raising oil prices, and furious with the western provinces for their intention to raise the price of oil by more than $2 a barrel.  In January of this year, International Trade Minister Gerald Regan went to the United Arab Emirates to plead for OPEC to keep the world price of oil high.  Two years ago, when the National Energy Program was being negotiated, the federal government promised to keep Canadian oil prices from rising above 75 per cent of the world price. This year, faced with a $26 billion deficit, the government is wavering on its commitment to shield Canadians from full world prices for oil and Petro-Canada Chairman” William Hopper is openly calling for Canadian consumers to pay 100 per cent of the world oil price.

These dramatic reversals in policy are not examples of government inconsistency: they are examples of the impossibility of accurately predicting the future. In 19SO, almost everyone was predicting rapidly increasing oil prices, and it was on this basis that government planners laid out their long-term plans for the petroleum industry, and for the revenues that would flow to the government from it.

The $13 billion Alsands project, which would have produced 137,000 barrels of oil a day, was going to be the first of A series of tar sands plants built in the 1980s and 1990s.  Other megaprojects, such as Cold Lake and the Alaska Highway Gas Pipeline, were also being counted on as part of Canada’s energy strategy.  Revenues from those projects and others would keep the federal government in gravy in the 1990s, when the cost of a barrel of oil was expected to top $80.  Until the megaprojects were built, revenues from the conventional oil and gas industry were expected to escalate rapidly along with the price of oil. For the 1981-1986 period alone the federal government was expecting a whopping $6l billion in revenues from the oil and gas industry.

Unfortunately, the universe did not unfold for the federal government as the government’s planners had supposed. The anticipated $61 billion in revenue plummeted by $23 billion to an anticipated $36 billion within a year, when the planners’ long-term forecasts of how much fuel we would need failed them. Revised forecasts in 1982 again proved wrong, arid expected revenue has dropped further.

And now, as it is becoming apparent that the Arabs are not going to keep the price of oil high for us, the federal government is forced to look for other ways of keeping oil prices high or risk seeing its expected revenues drop further still.

The government’s quandary is exacerbated by two other factors. Its energy planners were so sure that the price of oil would continue to rise that. They persuaded the government to in vest heavily in the petroleum industry. As a result, we have sunk billions into Dome and Petro-Can, buying out Petrofina and BP in the process.  At the same time that we were tying cur future so closely to the fortunes of the petroleum sector, the government unleashed a flurry of programs designed to get Canadians off oil, robbing itself of customers. According to government plans, 90 per cent of the homes, offices, and industries that ran on oil in 1980 would be converted to some other fuel by 1990.

It was a colossal gamble. The long-term planners thought they could afford to get most of us off oil because increasing oil prices would keep the government’s investment sound, and its revenues intact But they miscalculated both in their ability to control the price of oil and in their ability to control the rate at which Canadians went off oil.

As a result, the government has been left by its planners in an almost impossible trap. It is locked into:

  • Heavy investments in the petroleum industry, whose oil stocks have been halved in value since the National Energy Program was unveiled in 1980.
  • Continuing programs designed to get still more Canadians off oil.
  • Dependence on taxes from an industry that has ever fewer customers.
  • Declining revenue expectations because, unless the 75-percent ceiling in oil is removed, Canadian consumers will be paying less than expected for the oil.

Abolishing the 75-percent ceiling may not help generate government revenue either, since the higher cost to consumers will only drive them away from oil at a faster rate.

The government, it is becoming painfully clear, has been led astray by crystal-ball gazers attempting to do the impossible – predict what the world would look like years away. The cost of that mistake will have to borne by us all.  But there is a glimmer of hope that the lessons learned from this experience with long-term planning will prevent similar mistakes in future. The government’s strategy of putting all of its eggs into one basket – megaprojects with long lead times – is being widely questioned, even by the minister who oversaw it.

Bud Olson, federal minister of economic development, has concluded that, instead of megaprojects, “we need shorter-term, smaller projects that can be built in two or three years” to reduce the massive risks involved. Alsands’ collapse, he believes, was a jarring reminder to government that big, flashy resource projects inject a huge element of risk into a country’s economic development strategy. Instead, the idea should be to “think smaller” and stay more flexible.  His views are echoed by Petro-Can’s Hopper, who says it is fine to have long-term goals, as long as the policies stay short-term and adaptable, and by Alberta Energy Minister Mervin Leitch, who wants to minimize the need for long-term planning by tapping the tar sands, but in smaller, less risky projects that can be expanded in stages.

Many in industry would concur, since so many success stories were written using this very formula. Canadian Hunter’s discovery in the mid-1970s of the Elmworth-Deep Basin gas field, for example, was developed one step at a time – a well here, a mile of pipe there, a plant here. Yet despite the gradual pace of the expansion, the field is today capable of producing as much energy as an entire Alsands’ plant and without the benefit of a single long-term planner.

Long-term planning does, of course, have a role, such as in forecasting how many high schools will need to be built for particular communities, or in predicting the future revenues required to keep, say, the Canadian Pension Plan viable.  But we are all learning the hard way that planners should be called in only after options with shorter lead times have been rejected. And even then, we must all remember that, like the advice that comes from any seer, a planner’s advice should be taken with a grain of salt.

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