This remarkable letter demonstrates how falling oil prices rang alarm bells in the Alberta government and was very much the result the effect of very high interest
rates in North America driven by the U.S. Federal Reserve board and not the National Energy Program.. https://fred.stlouisfed.org/series/FEDFUNDS
fredgraph-1-1-81-1-1-83The above graph shows what governments and corporations were watching with alarm as the Fed would move rates up and down with rates nearing 20 per cent followed by a harsh recession which crippled America’s auto business, At that time the auto business, like it still is today, is really a financing business based on lending on the security of these American cars. Crippling interest rates discouraged buyers and therefore oil prices. In addition, discerning American drivers were turning more to Europe and Asia.
According to a Federal Reserve history
The policies ultimately proved successful in breaking the cycle of stagflation in the United States. Volcker guided the Fed in raising the federal funds rate from 11 percent at the time he took office to a peak of 19 percent in 1981, and the policy moves successfully lowered the rate of twelve-month inflation from a peak of nearly 15 percent to 4 percent by the end of 1982. Though the Fed’s resolve under Volcker was effective in reducing inflation, the monetary contraction—combined with the impact from the oil price shock—pushed the economy into the most severe recession since the Great Depression and spurred strong popular opposition.
Trusted friends- Energy Minister Merv Leitch and Premier E. Peter Lougheed
Oil prices began their descent from $35 U.S./bbl level driven mainly by the Iranian revolution in 1979 to the $27 U.S./bbl level in 1982. According to the U.S. Energy Information Agency monthly oil price data, U.S. Crude Oil First Purchase prices peaked at $34.59 U.S/bbl in March 1981 or 5 months after the National Energy Program was announced. By March 1982 the oil price had dropped to $27.66 and in June when Lougheed wrote the letter oil traded at $28.12 U.S./bbl. This process reached its bottom in December 1988 with prices at $11.88 U.S./bbl.
The fear driving the $5.4 billion Alberta Oil and Gas Activity Plan was of a coming recession driving global gasoline consumption down- a key source of demand. At this point, Lougheed and his ministers faced the realization that to ensure re-election that November, an extraordinary boost to the energy industry to keep drilling was necessary. The $5.3-billion price tag represented an astonishing 50 per cent of total revenue booked by the Alberta government in 1981-82. During this pre-election year spending rose by nearly 27 per cent well above the inflation rate.
The other realization which must have dawned on Lougheed was that Alberta’s fiscal fortunes and re-election chances rose and fell with oil prices. This was also the very period when the Government decided to reduce transfers to the Heritage Fund and send all investment income to the province’s General Revenue Fund. Thus began the long-term connection between the province’s fiscal policy, energy policy and now environmental policies.
Whether Lougheed would have won 60 or 70 seats without the program, we will never know. But Lougheed was taking no chances. After a bitter year-old fight with the federal government over the division of industry rents resolved in November 1981 (referenced in letter), Lougheed wanted to demonstrate to the federal government Alberta meant business in protecting its oilpatch. A early call (the last election was in March 1979) meant a fall election. A decisive win would tell the federal government that the province’s interests were the same as the oil industry’s. With a 79 seat house, Lougheed won 74 seats with Social Credit taking four seats and the NDP with one.
Lougheed to McArthur
The letter below was written to Peter Douglas MacArthur, a lawyer who left the law to join the premier’s southern Alberta office and then to head up Knee Hill Energy. According to a Calgary Herald obituary “He was a lifelong PC and worked tirelessly for individual candidates and the party, becoming the Director of the Premier’s Office in Southern Alberta at the McDougall Centre.” It would not be a stretch to say that McArthur was a “friend: of Lougheed, even a close friend who decided to jump into the energy industry from the safer confines of the law.
P. Douglas McArthur Source: Calgary Herald
The Premier of Alberta
June 24th, 1982
Knee Hill Energy Ltd.
400, 505- 8th Avenue S.W.
CALGARY, Alberta
T2P 1G2
P. Douglas McArthur Source: Calgary Herald
Dear
As you know, Merv Leitch and I recently announced the $5.4 billion Alberta Oil and Gas Activity Plan, designed to enhance the cashflow of the petroleum industry in a significant way.
The 1981 energy negotiations resulted in substantially higher prices for Alberta’s oil and gas production, which has effectively provided us the fiscal leeway to implement these important royalty reductions. I believe that this program will accomplish the same goals outlined in your March letter, that is to stimulate the drilling and servicing sectors. in addition to the royalty rate reductions and the well servicing grant, you will be particularly interested in the enrichment of the Royalty Tax Credit. Effective September 1, 1981, the Royalty Tax Credit will equal 75% of Alberta Crown royalties to a maximum credit of $4 million in one year. Beginning this month the Credit is refundable on a monthly basis for corporations. After December 31, 1983 the Credit will revert back to the existing 50%/$ 2 million levels which were announced last October.
Doug, I hope this new program will have a beneficial impact on Knee Hill. I certainly would be pleased to hear any comments or reactions you might have.
Kindest regards
Yours sincerely,
Peter Lougheed
PL/teb
SOURCE: Provincial Archives of Alberta PR1986.0245 (Hyndman Papers), Box #71, File #996.