Prime Minister Pierre Trudeau's Liberal government has cancelled a 1976 agreement that secured world prices for synthetic crude oil produced from tar sands in the western Canadian province of Alberta.
The cancellation seems to set the oil-rich western provinces, particularly Alberta, on a collision course with the federal government in the period leading up to negotiations on energy pricing scheduled later this month.
Trudeau's tough stand on energy appears to have increased frustrations in the west, which voted solidly against him in the last February elections. Alberta Premier Peter Lougheed has warned of the possibility of "extreme" backlash, suggesting that discontent, in the west has grown to the point where agitation for separation from the rest of Canada could become widespread.
"It deeply concerns me that the people in Ottawa are not aware of the depth of the feelings of the people in western Canada and that they might make a miscalculation and underestimate the depth of that feeling," Lougheed said.
Former Conservative prime ministr Joe Clark had agreed to western demands that Canadian oil prices he gradually boosted to the level set by the Organization of Petroleum Exporting Countries. By contrast, Trudeau campaigned for a strong central government which would protect Canada's populous industrial east from the western drive for higher oil prices.
Trudeau's majority victory, in which the Liberals drew their strength almost entirely from the eastern half of the country, underscored the intensity of concern about higher oil prices in the consuming region.
Alberta had reached an agreement with the former Clark government for increases in oil prices to the world level over a two-year period. Trudeau had said he had no intention of accepting that agreement because it would produce sharp increases at the pump.
Trudeau's cancellation of the tar sands pricing agreement before the energy talks places Alberta and the big oil companies on a defensive. Trudeau himself had favored giving tax and other incentives to companies engaged in the pioneering extraction of oil from Alberta's tar sands. The vast untapped reserves of the oil-laden sands in Western Canada may be of Crucial importance for Canada's future energy policy.
Because of the difficult technology and high cost required to extract the heavy oil from the sands and upgrade it to crude, many consider a guarantee of world price essential to the success of the two plants now in opertion and to the future construction of similar, billion-dollar plants. The two plants are still losing money, although their crude brings a pride of about $30 per barrel compared to the government-controlled price of $12.55 per barrel of conventional oil.
Alberta produces 1.2 million barrels per day, or 90 percent of Canada's output. The two conversion plants will eventually be able to extract about 160,000 barrels of crude per day from tar sands, but their production levels have been well below that figure because of technical problems.
A third conversion plant currently under construction will involve investments totalling more than $5 billion, and a fourth plant is being planned.
Trudeau's stand indicated that the upcoming energy negotiations hold the potential for a major conflict between the federal government and the western provinces. Alberta, which won Clark's promise for a $3.50 per barrel price increase this year, has balked at Trudeau's proposal for a considerably lower increase.
Under Canada's constitution, the provinces have legal ownership of their resources. Ottawa's drive to keep domestic oil prices well below the world price touches on a sensitive area because the resources-rich west contends it is unfairly exploited by the industrialized east.