After my post last night got me reading Budget 1980 and the National Energy Program, I stumbled upon something completely fascinating: the hated National Energy Program proposed an indexed price for synthetic crude from oil sands projects which, had it been followed until today, would have been above the Canadian dollar price of WTI in every year but 1980, 1981, and 2008.
The key paragraphs in the Budget of 1980 state that:
The reference price, Madam Speaker, is a special incentive price which will be offered to synthetic crude from the oil sands. Effective January 1, it will be $38 per barrel escalated annually by the consumer price index.
The government is also prepared to offer incentive prices for enhanced oil recovery and for upgraded heavy oil.
If you take the $38/bbl, and escalate it at the rate of inflation implied by the consumer price index, you get the green curve below. If you take WTI prices at Cushing, and adjust them to Canadian dollars, you get the red line. As you can see, the National Energy Program offered what, in hindsight, would have been a boom-inducing price for oil sands products.
I took the calculation one step further – assuming that 1) the program was maintained through today with the same conditions; 2) synthetic crude oil would otherwise sell at WTI in Canadian dollars; and 3) production would be unaffected from what actually happened, the difference in these two revenue streams would be approximately $160 billion in today’s dollars.
Maybe this is common knowledge to everyone, but it was news to me, and I find it an interesting historical anecdote.
I recall reading a few years ago that had the NEP been allowed to continue until the original proposed expiry date, rather than having been prematurely terminated, the Alberta government would have recouped between $375 and $650 million more in royalties during that period.
I wish I had kept the link – it might have been an analysis by the Pembina Institute.
That’s quite interesting…of course, since the reference price is set by politicians and not the market, there’s no way the reference price would stay above the market. That promise of sticking to CPI would have been very short lived as making people pay more for gas is a surefire way for a politician to hit the unemployment line.
I am only aware of countries that set oil price by fiat lower than the market (price ceilings); taxes are used to set it higher (not price floors).
Hi Chris,
Thanks for reading. The reference price was designed as an incentive price, and was supposed to be higher than prices offered to other domestic production – that’s what makes it interesting. It would have, effectively, been a less onerous tax if you like at times of high global prices, and at times of low global prices, as written, it would be a subsidy paid out of the revenues from the NEP as a whole, or from general revenues. This was not the prevailing price for all oil, which was a blended price based on world prices and capped at 85% of world prices, but rather a special incentive price offered to oil sands.
Andrew
Ah, so most likely the revenue would be pulled out of the NEP, further depressing the prices for conventional. Bitumen production was very small percentage of total production in 1980. This subsidy would have produced some interested changes, as Syncrude was the only really big player and it was formed by a consortium of industry…it might have broken it apart.