Harper May Slip on Oil

Not one in a thousand has read the equalization agreement and not one in a million understands it. I have read it.

This past week, Premier Ralph Klein of Alberta has set his hair on fire, threatening to pull out of the agreement if the feds monkey with it to Alberta's disadvantage. He will go to court. And whatever else he can think of.

Well, he can't pull out, because it is a federal scheme through which "have" and "have not" provinces are determined and equalization payments calculated.

And he knows that the Supreme Court of Canada is packed with "federalists," so he'll get second prize if he sues.

What is Mr. Klein on about -- apart from pulling himself out of the lame duck position he finds himself in? He senses a fed grab on oil revenues. (Oil, like other natural resources, is a provincial matter under the Constitution Act. Had the Fathers of Confederation known what oil and natural gas would later become, the constitution might have been written differently. But they didn't and it wasn't.)

Ancient history?

In this context one must look back to 1879 when Sir John A. Macdonald regained the power he lost in the wake of the Pacific Scandal. According to the National Archives:

"In order to rebuild the Conservative party's fortunes, Macdonald began promoting the protection of Canadian goods through high tariffs on imported items, particularly those from the United States. This so-called National Policy played to anti-American sentiment throughout Canada. It resulted in the resurrection of Macdonald's political career, and of the Conservative party, in the general election of 1878."

Why this bit of ancient history? Because it established the highly protected Ontario industry as the engine of the Canadian economy and made the western provinces into "the hewers of wood and the carriers of water" with the obligation of providing raw materials to Ontario cheaply and buying back their finished products dearly. This bred a deep-seated resentment in western provinces, which manifests itself today in an unshakeable belief that western resources cannot be touched by Ottawa. It's through this glass one must look at what Premier Klein is saying.

Fast-forward to the equalization formula, which decides, God only knows how, who pays and who doesn't. Hitherto, in calculating the position of the provinces, revenues from natural resources didn't count. The reason that the covetous eyes of Ontario haven't been directed more at Alberta oil revenues is that Ontario has natural resources of its own.

Harper's pickle

Prime Minister Stephen Harper finds himself in quite a pickle. Everything seems so smooth as he consolidates his position by cool but very firm handling of the vagaries of power in a minority government. But the PM knows that just around the corner is the problem of all problems waiting to consume him.

On the horizon: $100-a-barrel oil. While supply is still almost able to meet demand, that must end. This makes oil that is expensive to extract and deliver, such as Alberta tar sands, look attractive. And it is why Canada and B.C. will permit oil and gas exploration off the Queen Charlottes.

This is also why George Bush is in Iraq and is spoiling for a fight with Iran.

High oil prices will have a huge, adverse impact on Ontario while creating a huge windfall for Alberta, which isn't at all interested in giving a break to Ontario industry, already in trouble with the rising Canadian dollar and the ravages of globalization.

Déjà vu all over again

We've seen this movie before. Back in the '70s oil costs suddenly soared under the friendly eyes of Sheikh Yamani and the OPEC cartel, which brought about this bit of irony. When the world oil market went in the dumper in the '60s, Ottawa forced consumers, especially in Ontario, to pay Alberta more than the world market value. This federal generosity was quickly forgotten when prices ballooned and Alberta could charge Ontario world prices again.

As the price soared, the Trudeau government was under tremendous pressure from Ontario to lower oil bills. Energy Minister Marc Lalonde brought in the National Energy Program (NEP) in 1980, which had as its stated purpose to increase both Canadian control and Canadian ownership of the energy industry while piously declaring that it sought to protect all Canadians from surging oil prices.

Lalonde proposed measures such as price controls and federal taxes on oil and gas production, which would increase federal government control of petroleum.

Unsurprisingly, Alberta and B.C. saw this as a federal takeover of a natural resource through the back door. Which it was. The bumper sticker of the day in the far west was "Let those eastern bastards freeze in the dark."

To make matters worse, Lalonde and Trudeau were clearly enjoying sticking it to Alberta and B.C., which have never been much loved by Liberal governments and didn't matter politically anyway.

The NEP was abandoned by the Mulroney Tories but by that time the world price of oil had fallen so much it didn't matter anymore.

Today, as the world price of oil rises, Mr. Harper will face precisely the same problem Pierre Trudeau did. With this added wrinkle: his Liberal predecessors didn't grab at all resources in all provinces -- just oil and gas. Ottawa would never get away with that today and the PM knows it.

Bigger grab this time

But what can't be done up front, must be done by stealth. Thus the trial balloon that defines provincial wealth under the equalization formula by including the value of natural resources, something not hitherto done. And that indeed does amount to taxing oil and gas by the back door. But if, unlike the NEP which only grabbed oil resources, the feds nail "resources" period, Ontario Premier Dalton McGuinty, unlike his predecessor Premier Bill Davis at the time of the NEP, will find his province considered richer, thus liable to pay more towards equalization.

Mr. Harper is in a bind. His power base is in Alberta and British Columbia and he doesn't want to alienate them by grabbing at resource revenues. On the other hand, he can't win an election without Ontario, which will be alienated if he doesn't help them.

As John Kennedy said, "there are days when leaders earn their salary."

Rafe Mair writes a Monday column for The Tyee. His website is www.rafeonline.com.