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Canada-U.S. oil and gas relations, 1958 to 1974 Nemeth, Tammy Lynn 2007

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CANADA-U.S . OIL A N D GAS RELATIONS, 1958 TO 1974 by T A M M Y L Y N N NEMETH B.A., Honours, The University of Regina, 1994 M A . , The University of Alberta, 1997 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY in THE FACULTY OF GRADUATE STUDIES (History) THE UNIVERSITY OF BRITISH COLUMBIA May 2007 © Tammy Lynn Nem'eth, 2007 ABSTRACT While there were overtures from each country to develop a more formal accord to govern the trade of oil and natural gas at different times since 1958, Canada rejected that option in 1974 when it decided to phase out oil exports to the U.S. The main purpose of this research is to trace the development and evolution of Canada-U.S. oil and gas relations from the beginning of the informal continental relationship in 1959, through attempts to formalize a continental oil and gas agreement in the late 1960s, to the initial reversal of continentalism by Canada in 1974. This study examines and compares the changing influence of the explanatory variables of interest groups, international forces, national security, economics, ideas, and personalities on the energy decision- and policy-making processes of Canada and the U.S. between 1958 and 1974. Four key decisions or events that can be considered turning points in the Canada-U.S. oil and gas relationship are analysed and include: Canada's exemption to the American Mandatory Oil Import Program (MOIP); Canada's National Oil Policy (NOP); the near revocation of Canada's MOIP exemption; and Canada's decision to phase out oil exports. These events and relationships are situated in the larger context of interdependence, intergovernmental and transgovernmental relations, and the altered bureaucratic structures of governments in both countries over this period of time. Although decisions concerning Canada-U.S. oil and gas relations, and the pursuit and reversal of continentalist policies, were influenced by concerns regarding the pressure of various interest groups, international forces, national security, and changing economic and ideological circumstances; in the period examined here, the personalities of and personal relationships between Presidents and Prime Ministers, and the actions of key officials, as well as their transgovernmental networks across the border, often made the difference in determining what policy or approach was chosen when and why. ii TABLE OF CONTENTS Abstract ii Table of Contents iii List of Tables : iv List of Maps , v Abbreviations vi Acknowledgements viii INTRODUCTION 1 CHAPTER 1 Historical Context 31 CHAPTER 2 Continental Emergence, 1958 to 1961 47 CHAPTER 3 Continentalism Stalled, 1961 to 1968. 162 CHAPTER 4 Continentalism Thwarted, 1968 to 1974 248 CHAPTER 5 Conclusion 346 Bibliography '. .. .359 iii LIST OF TABLES Table 1 Canadian Crude Oil Production and Trade 1948 to 1958 37 Table 2 Canadian Crude Oil Production and Trade 1954 to 1961 130 Table 3 Comparative Select Crude Oil Prices, 1960 to 1976 337 iv LIST OF MAPS Map 1 U.S. Petroleum Administration for Defense Districts 42 Map 2 U.S. Petroleum Administration for Defense Districts : 173 v ABBREVIATIONS A D M Assistant Deputy Minister B O B Bureau o f the Budget C D A Canada C E A Counci l o f Economic Advisors C F E P Counci l on Foreign Economic Pol icy D D E L Dwight D . Eisenhower Library D D P Department o f Defence Production D M Deputy Minister D O E Department o f Energy D O I Department o f Interior E M R Energy, Mines and Resources E S B Energy Studies Board F P C Federal Power Commiss ion F R U S Foreign Relations o f the United States G A T T General Agreement on Tariffs and Trade G R F L Gerald R. Ford Library I O C C Interstate O i l Compact Commiss ion I P A A Independent Petroleum Association o f Amer ica J C T E A Joint Committee on Trade and Economic Affairs (Canada-U.S.) J E C L James Ear l Carter Library J F K L John F . Kennedy Library L B J L Lyndon Baines Johnson Library M e m C o n Memorandum o f Conversation M O I P Mandatory O i l Import Program N A C National Archives (Canada) N A R A National Archives and Records Administration (U.S.) N A T O North Atlantic Treaty Organization N E B National Energy Board N E P National Energy Program N O P National O i l Pol icy N P Richard R. N i x o n Project N P C National Petroleum Counci l N S C National Security Counci l N S F National Security Files O C D M Office o f C i v i l and Defense Mobil izat ion O D M Office o f Defense Mobil izat ion O E P Office o f Emergency Planning (Kennedy); Office o f Emergency Preparedness (Nixon) O I A O i l Import Administration O O G Office o f O i l and Gas O P E C Organization o f Petroleum Exporting Countries P S C Petroleum Study Committee R R L Ronald Reagan Library S P R Strategic Petroleum Reserve vi TEA Trade Extension Act Telcon Telephone Conversation TIPRO Texas Independent Producers and Royalty Owners TRC Texas Railroad Commission UN United Nations USNA United States National Archives VOIP Voluntary Oil Import Program WHCF White House Central Files WHSF White House Staff Files vii ACKNOWLEDGEMENTS I wish to express my appreciation and gratitude for my husband Dan's support during this project. His unflinching confidence in my abilities and ideas was invaluable. My warmest thanks and appreciation also goes out to my dissertation advisor Dr. David H. Breen, whose patience, understanding, steadfastness, intellectual rigour, guidance, advice, and feedback helped to strengthen my skills as a writer and historian. Additionally, my dissertation committee members Dr. Allan Smith and Dr. Steven H. Lee provided thoughtful and insightful comments and questions that enhanced the final result here. I gratefully commend all three professors for reading and commenting on the final drafts of this dissertation in a timely fashion during busy term time. Thanks are also due to the historians at the U.S. Department of Energy, Skip Gosling, Terry Fehner, and Cliff Scroger for their tremendous assistance in locating records and providing me space to review the documents. My appreciation also goes out to Senator Pat Carney who allowed me access to her pre-government archival records, and provided much insight into events surrounding the negotiation of the Canada-U.S. Free Trade Agreement. Lastly, I would like to thank the following organizations for financial assistance in pursuing this research, without whose support this dissertation would have been impossible: the University of British Columbia for a University Graduate Fellowship and travel grant, the Eisenhower Library for a research travel grant, the John F. Kennedy Library for the Theodore C. Sorensen fellowship, the Lyndon B. Johnson Library for the Moody grant, the Gerald R. Ford Library for a research travel grant, and the Society for Historians of American Foreign Relations for the Georgetown research travel grant. INTRODUCTION Whoso writes the history of his own time must expect to be afl has said, and for everything he has not said: but those little drawbacks should not discourage a man who loves truth and liberty, expects nothing, fears nothing, asks nothing, and limits his ambition to the cultivation of letters. Voltaire, Letter to M. Bertin de Rocheret Thirty plus years after the first energy crisis, the world is again faced with a record rise in oil prices. In 2005, after a series of hurricanes ravaged the American east coast, along with production uncertainties in the Middle East because of the second Iraq War, increased demand in China, and low refinery inventories around the world, oil prices surged to record highs from approximately $45 per barrel to a peak of around $70 per barrel for West Texas Intermediate crude oil. With a sense of deja vu, the President of the United States (U.S.) announced in two. separate State of the Union addresses, four years apart, that America's priority was to become less dependent on overseas oil by replacing 75 percent of Middle East oil imports by 2025.1 American policy-makers look to Canada as a safe and secure supplier of oil and natural gas to help reduce dependence on overseas oil. Concurrently, echoing sentiments from the 1970s, consumers in Canada bemoan high fuel prices; regional envy motivates Ontario and Quebec politicians at various levels to advocate forcible wealth redistribution from the main oil producing province of Alberta to the rest of Canada; and other federal politicians suggest that Canada should drastically cut exports of oil and natural gas to the U.S. in order to preserve Canada's resources for itself, or at least reduce domestic prices of oil and gas while charging ' See President George W. Bush State of the Union Address, 29 January 2002, and the State of the Union Address, 31 January 2006. Available from, http://www.whitehouse.gov/new/releases/2002/01/20020129-l 1 .html and http://www. whitehouse.eov/news/releases/2006/01/20060131-10.html: Internet; accessed 2 February 2006. In both addresses, emphasis was put on technological development of alternative energy as well as conservation, infrastructure, and increased domestic energy production.. See also President Bush's Advanced Energy Initiative of 2005. 1 world prices for exports. Yet, despite these ominous rumblings, Canada's policy options with respect to the bilateral trade of oil and natural gas are constrained by its obligations in the Canada-U.S. Free Trade Agreement (FTA), now the North American Free Trade Agreement (NAFTA). A half-century earlier, in the 1950s and 1960s, the situation was reversed and low oil prices threatened the viability of the Canadian and American oil and gas industries. Consequently, Canada and the U.S. entered into an informal continental arrangement for trade in oil. But by the late 1960s this informal relationship began to break down, and, despite numerous discussions through 1972, a more formal sectoral agreement failed to emerge. Then in the 1970s increased oil prices sharpened the politicization of oil and gas issues, and Canada embarked upon a course that thwarted and reversed the pursuit of a continental oil agreement by making the dramatic decision to phase out all oil exports to the U.S. 2 See for example, Patrick Brethour and Katherine Harding, "Alberta may get $7-billion surplus," Globe and Mail . 22 August 2005; Karen Howlett, "Ontario fears 'have-not' status," Globe and Mail. 24 August 2005, A l ; Patrick Brethour and Katherine Harding, "Klein steps up sabre-rattling on oil revenue," Globe and Mail . 26 August 2005, A l ; editorial "Alberta's wealth and Klein's stand." Globe and Mail. 27 August 2005, A l 8 ; "Saskatchewan politicians join Alta. in demanding feds keep hands off oil revenues," Globe and Mail . 1 September 2005; "Consumers voice anger, advice as gas price skyrockets," CBC Business news, 1 September 2005. Available from, http://www.cbc.ca/storv/busniess/national/2005/09/01/gas_prices 20050901 .html: Internet; accessed 1 September 2005. Some of that 'advice', given by a Timmins, Ontario city councillor, was to reactivate the 1980 National Energy Program, or reintroduce a 'made-in-Canada' pricing system. "Battle may be brewing over Alberta oil riches," Toronto Star. 28 October 2005, F01. Ontario Premier Dalton McGuinty spoke out about Alberta's oil wealth and the need for its redistribution, as did the Federal Transport Minister of the day Liberal Jean Lapierre, and economist Thomas Courchene. See also, Ralph Klein, "Alberta is carrying its weight," National Post 2 September 2005; "Poll: Almost half of Canadians want oil industry nationalized," CBC Canada News, 5 September 2005. Available from, http://www.cbc.ca/storv/canada/hational/2005/09/05/leser sas poll20050905.html: Internet; accessed 5 September 2005; Brian Laghi, "'Conflict' looms over Alberta's oil wealth," Globe and Mail. 16 September 2005, A l ; "Hands off Alberta's oil wealth, Klein savs." Globe and Mail. 17 September 2005; and Andrew Coyne, "Rich Province, Poor Province," Western Standard. 3 October 2005. A more honest and direct contribution to the discussion on redistributing Alberta's oil and gas resource wealth is by Eric Reguly a regular columnist for the Globe and Mail in his article, "Getting a piece of Ralph's booty," Globe and Mail . 2 March 2006, B2 in which he states, "Today's question . . . is how the rest of Canada can extract some of the riches from Alberta without the undeserving bastards noticing. Or noticing and not squawking about it." Reguly's solution to the redistribution problem is to use a carbon emissions trading scheme where Alberta would pay Ontario carbon credits to meet Canada's Kyoto Accord environmental commitments. Although Reguly may have been sarcastic in his comments, it is somewhat unusual for such language to be employed in a serious newspaper such as the Globe and Mail. 2 While there had been overtures from each country to develop a more formal accord to govern the trade of oil and natural gas at different times since 1958, Canada rejected that option in 1974 when it decided to phase out oil exports to the U.S. How and why did Canada and the U.S. initiate closer continental co-operation in the trade of oil and gas in the 1950s and 1960s? Why did a formal continental oil agreement not come to fruition in the late 1960s/earlyl 1970s? Why did Canada reverse the trend of closer continental co-operation by deciding to phase out oil exports to the U.S.? Although decisions concerning Canada-U.S. oil and gas relations, in particular the pursuit and rejection of continentalist policies, were influenced by concerns regarding national security, the pressure of various interest groups, international forces, and changing ideological and economic circumstances; in the period examined here, the personalities of and personal relationships between Presidents and Prime Ministers, and the actions of key officials, as well as their transgovernmental networks across the border, was more important than has been recognized in determining what policy or approach was chosen when and why. The main purpose of this research is to trace the development and evolution of Canada-U.S. oil and gas relations from the beginning of the informal continental relationship in 1959, through attempts to formalize a continental oil and gas agreement in the late 1960s/early 1970s, to the initial reversal of continentalism by Canada in 1974.3 Four key decisions are examined in detail in order to understand how and why continentalism was accepted and then rejected, with a brief discussion of events before and between the decisions. These decisions include: the American decision to exempt Canada from its American Mandatory Oil Import Program (MOIP) 3 While it might seem logical to extend the analysis and discussion to the creation of Canada's controversial National Energy Program in 1980 and the decision to include the energy chapter in the Canada-U.S. Free Trade Agreement in 1988, as the former is a firm rejection of continentalism and the latter comprised a formal continental oil and gas agreement, it was decided that there were not enough primary documents declassified and available, nor the time and financial resources to conduct extensive interviews with the people involved in those two events, to do a history dissertation justice. Therefore, the analysis is limited to developments up until 1974. • 3 in 1959; the Canadian decision to create the National Oil Policy (NOP) in 1961; the near decision by President John F. Kennedy to revoke Canada's MOIP exemption in 1962/63; and Canada's decision to phase out oil exports in 1974. In addition, the discussion of the development and evolution of Canada-U.S. oil and gas relations is set within the larger context of interdependence, transgovernmental relations, and the increased bureaucratization of governments in both countries over this period of time.4 Significantly, the documentary evidence uncovered during the research for this project reveals that the roles and interactions of the country leaders and the varying levels of government officials—how they worked together, their personal attributes, and how and why they generated, welcomed, or discarded certain ideas—often made the difference not only in the development and implementation of national policies, but also in the type of bilateral oil and gas policies that were embraced or rejected. In brief, the examination of the internal actions and interactions of the people within both governments, and the role and impact of personal dynamics particularly, matters because they were critical factors that shaped oil and gas policy within the Canada-U.S. relationship. In order to understand why a continental oil and gas policy was tentatively approached and then rejected, it is necessary to explore how each country developed their respective oil and gas policies during this time period, and examine the importance and influence of key people on the process, institutions, and policies that emerged. The oil and gas policy-making process that evolved in each country reflected broader trends in how each country perceived its role as a federal state, and the growing bureaucratization of government. It can also I employ Transgovernmental in the manner of Keohane and Nye: "direct interaction between agencies ' (governmental and subunits) of different governments where those agencies act relatively autonomously from central government control." Robert O. Keohane and Joseph S. Nye. "The Complex Politics of Canadian-American Interdependence." International Organization. Vol . 28, Issue 4, Canada and the United States: Transnational and Transgovernmental Relations (Autumn 1974): 596. 4 be seen as a microcosm of Canadian-American interdependence and the larger long-term trend of economic competitiveness within the global community. Indeed, both domestic and international factors affected how oil and gas policy was developed, considered, implemented, and evaluated. I. Literature Review This investigation differs in two significant ways from previous studies of this period: first, the focus is on both countries: how Canadian and American policy processes and decisions influenced each other and changed over a thirty-year period of time. This is in contrast to the single country approach that some scholars, such as Canadians John N. McDougall, Bruce Doern and Glen Toner, and American Richard Vie tor have taken. The single country approach has its benefits. It enables the researcher to focus on specific actions, problems and policies of one state. For example, McDougall argues in Fuels and the National Policy, that, contrary to popular belief, the promotion and provision of national self-sufficiency in fuels so that the entire Canadian fuel market would be served exclusively from Canadian fuel sources, has been with us since Confederation.5 Further, in the case of a national fuels policy there continues to be a fundamental tension within the Canadian public, and among policy makers, between the pull of continentalism and the push of nationalist impulses (national unity and national independence). These ideas are addressed by McDougall through the examination of the major issues and debates between 1867 and 1981 which compelled policy-makers to consider a National Fuel Policy at various times and for various reasons. Although McDougall briefly mentions the importance of the United States as a market for Canadian fuels, his primary concern is with Canadian'policy, and the U.S. is considered only in the background. A major weakness in his 5 John N . McDougall, Fuels and the National Policy (Toronto: Butterworth & Co., 1982). • 5 . approach is that he relies mostly on secondary and published primary sources such as Royal Commissions and House of Commons debates. One of the better overviews of recent Canadian energy policy developments is Doem and Toner's The Politics of Energy.6 Although this book is largely about the development of the National Energy Program (NEP) of 1980, Doern and Toner spend the first part of the work explaining the Pre-NEP context and how Canada came to a position where such an interventionist and controversial policy was perceived to be desirable. The main strength in Politics of Energy is the discussion of public policy and the policy-making process and its intersection with politics. The book was written in 1984-1985, soon after the NEP was implemented. Therefore, given the immediacy of the issue, several hundred interviews were undertaken with industry and government officials in order to gain as clear a picture as possible of how the policy was developed and implemented. The major weakness of the book is in the lack of access to unpublished government records. Doern and Toner apparently tried to gain access to as many unpublished records as possible, but the recorded details of how the federal policy-making and decision-making took place were sealed, and are only now being made accessible to researchers. American Richard Vietor's Energy Policy in America Since 1945 pr