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Globe and Mail, 12 June, 2003

NAFTA lets the gas out of Canada

by Eric Reguly

Free trade is back in the news and the news isn't all cheery for those who consider NAFTA Western civilization's crowning achievement. David Orchard distinguished himself at the Tory leadership convention with his unToryish stance, notably his call for a NAFTA review. Free trade doesn't mean protectionism, he said, referring to the punitive U.S. tariffs and duties on Canadian softwood lumber and wheat.

That was two weeks ago. This week, the trade issue is natural gas. Prices for gas have doubled in the past year, to about $6.25 (U.S.) for 1,000 cubic feet, and the United States fears shortages will keep them high for some time. Fed chairman Alan Greenspan has warned that Canada has no capacity to increase gas exports and that low gas inventories are a "very serious problem."

In fact, no gas user in the United States or Canada will get a break. Before the Canada-U.S. free-trade agreement, gas came at different prices, a fairly low one for the domestic market and a fairly high one for the export market.

Now, everyone in both countries pays the same (high) price. The good news is that the deregulated price and the single North American energy market created an investment bonanza in Western Canada.

Gas, not conventional oil, was the driving force behind Alberta's success. The Alberta government tapped into this endless river of cash by ensuring gas royalties were higher than those on oil.

The bad news is that gas reserves in the West are depleting rapidly.

What happens when they run dry?

Thanks to the North American free-trade agreement, the export tap can't be turned off. If the Americans think they have a problem with gas shortages, think what Canadians face. In countries with extremely cold climates, cheap energy and lots of it are necessities, not luxuries.

Under NAFTA, Canada does have the right, sort of, to reduce energy exports. But the "proportionality" clauses in the trade agreement mean Canada can reduce deliveries to the United States by, say, 10 per cent, only if it reduces domestic deliveries by the same amount. In other words, the pain has to be shared equally. Mexico does not have the same restriction. When it entered NAFTA, it argued that, for constitutional reasons, its oil and gas reserves were to be excluded from the deal (Pemex, Mexico's largest company and main energy producer, is state-controlled). This means Mexico can squeeze the export tap shut should a domestic energy crisis arise.

Why didn't Canada do the same? Canada, in effect, paid the price for NAFTA admission by giving up energy sovereignty, making it one of the few countries in the world to have done so. In exchange, Canada got guaranteed access to the U.S. energy market and the market for most other goodies, from car parts to steel (but not wheat and lumber). Note that Dofasco and Stelco, the biggest companies in Hamilton, are among the few big North American steel makers not in bankruptcy protection. If they had been denied unfettered access to the American steel market, Hamilton would be a ghost town.

When NAFTA was under negotiation, energy shortages, notably gas shortages -- gas wells in Alberta are now depleting, on average, 25 per cent a year -- were not an issue; the spectre of energy gluts was more worrisome. Now shortages are an issue and most Canadians would feel better if they knew that gas used to heat American swimming pools had lower priority than gas used to keep the kids unfrozen in Thunder Bay or Trois-Rivières. David Orchard knows that NAFTA needs an overhaul, and it does.

Trade patterns and priorities have shifted in the decade since NAFTA's birth and Canada made the grave mistake of not figuring out its own energy needs before it handed the entire industry to NAFTA. But good luck. The Americans are in no mood to renegotiate because NAFTA a) is working for them, b) in a security-obsessed country, it's at the very bottom of the multilateral issues pile and, c) Canadians are personae non grata in Washington because of their antiwar stance.

Even if Canada somehow convinced the United States to open the NAFTA file, it would come at an extremely heavy price. The United States wants greater access to Canadian energy developments, not less. So what would it demand in exchange for less? Shutting Canadian steel out of the U.S. market would no doubt be the first demand. Car parts and agricultural products might be the second and third.

At the same time, the United States might lunge at Canadian water, a resource that federal politicians say, unconvincingly, is exempt from NAFTA.

The bottom line is that gas is in short supply in the United States. It's in short supply in Canada too, but there's nothing Canada can do about it. Canada did its NAFTA deal and now it's stuck with it. David Orchard is dreaming.

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