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A quantitative analysis of some policy alternatives affecting Canadian natural gas and crude oil demand and supply McRae, Robert N.

Abstract

Only recently has the Canadian federal government become involved in the regulation of energy prices. Since 1973 the federal government has imposed an export tax on crude oil, set the wellhead price of crude oil, implemented a one-price policy for domestic crude oil, regulated the Toronto city-gate price of natural gas, and increased the export price of natural gas. The federal government has also been involved in restricting the flow of energy quantities, mostly in the export market. The lack of rigorous economic analysis of the implications of these and other policy recommendations, as contained in various reports by the Department of Energy Mines and Resources and the National Energy Board, motivated me to build an economic policy-oriented model describing some aspects of Canadian energy demand and supply. The demand part of the model contains a set of estimated equations that describe the demand for crude oil, natural gas, electricity and coal within each of the five major consuming regions - Atlantic, Quebec, Ontario, Prairies, and B.C. A change in any energy price through government regulation will induce interfuel substitution and alter the mix of energy fuels demanded. To forecast future energy demand, the parameters estimated from historical experience are used in conjunction with forecasts of the exogenous variables, the latter usually obtained from government sources. The resulting "base-case" forecast of energy demand is compared with the forecasts by the National Energy Board and the Department of Energy, Mines and Resources. The supply side of the model considers only the supply of crude oil and natural gas. The output of these fuels can be affected through any policy which affects either the amount of fuel demanded by Canadians or the amount of fuel demanded in the export market. An interesting component embedded in the supply -model for crude oil is the Sarnia-Montreal pipeline. The flow through the Sarnia-Montreal oil pipeline can be altered in the model to examine certain trade-off possibilities between imports and exports of crude oil. The supply model for both crude oil and natural gas contains details relating to production, exploration, development, costs, taxes, royalties, and the distribution of economic rents among producers, consumers and governments. The complete model is used to provide results of some sensitivity experiments and some policy experiments. The sensitivity experiments Involve altering the basic assumptions with regard to the growth of real gross national expenditure, the offshore oil price and the efficiency factors for oil and gas use. The policy experiments focus on three main areas: the pricing of oil and gas, the trading of oil and gas, and the eastward flow through the Sarnia-Montreal oil pipeline. I believe that the dissertation provides three main contributions I believe that the specification and estimation of the aggregate demand system is a useful contribution. I believe that the process of building a model which, integrates the supply and demand relationships, and details the costs, rents and trade flows for both crude oil and natural gas has been successful. And I have been successful in using the integrated energy system to generate quantitative results under alternative policies.

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