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Long-Run Effects of the Canadian National Energy Agreements

Abstract:
For the last decade Canadian energy policy and oil pricing policy have been subjects of heated debate, dividing the country into several interest groups. The debate began when the federal government shielded the Canadian consumer from rapid world oil price increases by freezing domestic wellhead prices and subsidizing oil imports. This created a single price for oil across the entire country (except for transportation cost differences). The subsidy was to be paid by an export tax equivalent to the difference between domestic price and the world price. This policy was seen as an immediate response to a short-term problem: either world prices would return to lower levels or domestic prices could slowly adjust to the higher level without creating a price shock. Once a subsidy is established, however, it is hard to withdraw. Industries and consumers that rely on low-cost oil can be expected to lobby for continued subsidies. By observing real costs, moreover, the Canadian subsidy destroyed incentives to conserve costly fuels (e.g., imported oil). And there was no incentive to increase domestic production of such valuable commodities. By intervening, the federal government appeared to take on the responsibility of maintaining a status quo with respect to regional income distribution. Thus the scene was set.

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Energy Specializations: Energy Security and Geopolitics – Geopolitics of Energy; Energy and the Economy – Energy as a Productive Input; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance; Energy and the Economy – Energy Shocks and Business Cycles

JEL Codes:
Q48 - Energy: Government Policy
O13 - Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
Q34 - Natural Resources and Domestic and International Conflicts
F44 - International Business Cycles

Keywords: National energy agreements, Canada, Energy policy, subsidies

DOI: 10.5547/ISSN0195-6574-EJ-Vol6-No1-7


Published in Volume 6, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.