The Parkland Institute

Energy

OPEC and the Alberta Advantage

Excerpt from No Free Lunch and Other Myths

In March, 1975, in the Palace of Nations near Algiers, a group of men assembled to do a piece of business that would affect the fortunes of the entire world. The meeting was hosted by the President of Algeria, Houari Boumédienne. Among the assembled elite were the Shah of Iran, Saddam Hussein of Iraq, Carlos Pérez, president of Venezuela, and the sheikhs of Abu Dhabi and Kuwait. These were the leaders of the Organization of Petroleum Exporting Countries (OPEC) and they controlled the life blood of the industrial age: oil. The crowd applauded as the Shah of Iran embraced and kissed Saddam Hussein. It was an ecstatic moment.

The oil men had much to celebrate. The price of oil, under US$3 per barrel only two years earlier was now four times that, and would go very much higher. It might seem they had achieved a victory of a cartel over the free market, but that was not the case. What OPEC had achieved was the victory of one cartel over another. Oil and the free market are not well acquainted. Few industries have produced more vocal advocates of the free market, and few industries have seen less of it.

John D. Rockefeller had seen to that early in the game. While others toiled in the oil fields of Pennsylvania, the first great oil state, the ex-bookkeeper bought a refinery business and conspired with other refiners and the railroads to undercut the producers with cheap transport. He bought up oilfields to integrate his company from production to marketing. Establishing the Standard Oil Trust to get around investment laws, hiring teams of lawyers to defend his actions while befriending and bribing legislators, he monopolized oil.

Ultimately the United States Supreme Court broke up Standard Oil, but that did not end monopoly. It merely set the stage for the cartel christened the “seven sisters.” Three of the sisters, Standard Oil of New Jersey, Standard Oil of New York and Standard Oil of California (ultimately Exxon, Mobil and Socal), were daughters of Rockefeller’s empire. The other major players were two American companies, Gulf and Texaco, and two European companies, Shell and British Petroleum.

With new supplies coming onto world markets after the First World War, the sisters were faced with an oil glut. Consequently, in 1928, the heads of Exxon, Shell and British Petroleum formed a cartel. The conspirators agreed to fix market share, tailor growth in supply to avoid gluts, and rig prices. The agreement was accepted by the other sisters and most other American companies that operated internationally. It couldn’t be rigidly enforced – it was after all, secret – nonetheless, it guided the behaviour of the international oil industry well into the 1960s.

But by the early ‘70s, big change was afoot. In 1969, King Idris of Libya was overthrown by a group of army officers headed by a young colonel, Muammar al-Qadhafi. Qadhafi took on the companies, broke their solidarity, and bullied them into accepting increased prices for his Libyan crude. Then, led by Sheik Zaki Yamani, Saudi Arabia’s oil minister, the producers began to demand part ownership of the concessions.

In late 1973, the oil companies met with OPEC to negotiate a price, as had been the practice. Yamani asked for $5 per barrel but the companies refused. In the meantime, war had broken out as Egypt and Syria invaded Israeli-occupied territory, and the Arabs were threatening an oil embargo of Israel’s supporters. Yamani declared they would no longer negotiate prices with the companies. OPEC set the price of oil on its own, and its Arab members began their embargo. In a few months the price of a barrel of oil was $12. The cartel had passed into new hands.

The OPEC cartel is by no means perfect. With differing amounts of reserves, and differing interests, the oil states do not always agree. The price of oil rises and falls with their solidarity. Nonetheless, OPEC has brought the oil kings of the Middle East the biggest free lunch in history.

What does this story of cartels and government interference in the marketplace have to do with Alberta? Merely everything. These are the forces that created modern Alberta. Just as OPEC created one of the great wealth and power shifts in the modern world, it created the greatest wealth and power shift in Canadian history. Peter Foster, in The Blue-Eyed Sheiks, referred to it as “the most significant turnabout in political relationships since the birth of Confederation."

Alberta’s oil industry did not always show such potential. It didn’t get really serious until 1947 when Imperial Oil, following a discouraging series of dry holes, drilled into an ancient reef near the small town of Leduc in central Alberta, and the well gushed oil. Alberta crude began to flow west into British Columbia and into the north-western states and east into Ontario.

And there it ran headlong into a competitor too powerful to challenge on its own - imported oil. Foreign oil could be offloaded from tankers in Montreal cheaper than it could be shipped by pipeline from Western Canada, yet it was in Eastern Canada that producers were obliged to look for a large and secure market. The major companies, subsidiaries of the Seven Sisters, were not concerned. They bought foreign crude from their parent companies, refined it in their eastern refineries and marketed it through their stations. Independent Alberta companies, on the other hand, desperately wanted secure access to the eastern markets. They begged the federal government to protect them from the foreigners. In their favour was the election in 1957 of a Conservative government headed by the westerner John Diefenbaker.

“The Chief” came through for his western brothers and sisters. Like his predecessor, John A. Macdonald, he instituted a national policy to facilitate east-west trade, in this case a national oil policy that, among other things, established the Ottawa Valley Line. All markets west of the Ottawa Valley were to be reserved for western crude; markets to the east could continue to enjoy cheaper foreign imports. Ontario consumers were to pay higher-than-market prices to subsidize the Alberta oil industry including, of course, its royalties to the Alberta government. The national oil policy was pronounced in 1960, coincidentally the same year OPEC was formed. The policy served western independent producers well until the dramatic events of 1973 after which it was redundant. As the OPEC cartel flexed its muscles, driving international oil prices sky-high, immense riches accrued not only to its members but also to non-members like Alberta, which, no longer having to compete with cheap imports, rode its golden coattails to enviable prosperity.

The federal government, fearing the effect of rapidly escalating oil prices on the Canadian economy and feeling also that the windfall should be shared by all Canadians - and led now by an easterner, Pierre Elliott Trudeau - tried to simultaneously keep a lid on the price of crude while capturing its share of the bonanza and expanding its influence in the industry. Its efforts, culminating in a new national oil policy, the National Energy Program (NEP), sparked the most bitter federal/provincial feud in Canadian history.

When it was over, Alberta wasn’t as rich as it thought it deserved to be, but it was filthy rich, nonetheless. Oil prices were temporarily maintained below the world price but still managed to triple in two years and quadruple in five, and Alberta would take half the increase in royalties. The province’s royalties from oil and gas production rose from $214 million in 1972-3 to $3.4 billion in 1979-80. Billions more accrued from lease sales. Alberta boomed, its cities and towns exploded with growth, attracting migrants from British Columbia to Newfoundland, seeking a piece of the action. Its political clout increased accordingly. Without OPEC aggression, the NEP and the provincial/federal wrangling that followed, there would have been no Reform/Alliance Party and Canada’s politics would be very different. OPEC made many of Alberta’s most successful companies and businessmen, including a large slice of its economic oligarchy.

OPEC’s influence is no longer what it was, and the major energy earner in Alberta today is natural gas, but tar sands revenues are increasing rapidly. Energy revenues of $11.8 billion flowed into Alberta’s coffers in 2006-07.

Albertans are inclined to believe their unique prosperity was built on free-market principles, a comforting myth for the conservative-minded, but a myth nonetheless, more fable than fact. That anathema of free-marketers, government interference in the marketplace, has, from Diefenbaker to OPEC, been the best thing that ever happened to Alberta, providing the province with a free banquet of sumptuous proportions. Albertans should genuflect in gratitude to Muammar al-Qadhafi, catalyst of the shift in power from the cartel of oil companies to the cartel of oil countries, or perhaps to Sheik Yamani of Saudi Arabia, prime mover behind OPEC’s 1973 machinations. These men, not Peter Lougheed, nor Ralph Klein, nor the CEOs of the oil companies, were the architects of Alberta’s fortunes and affluence.

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