The Kandahar Connection (Paul Trueman)

Canadians interested in peak oil will sooner or later eventually discover the proportionality clauses of the North American Free Trade Agreement. Unfortunately, if you want to research them and google “Nafta Proportionality” you will quickly be inundated by numerous alarming links with titles such as If our NAFTA Partners Can Have National Energy Programs, Why Can’t We?” or “Over a Barrel: Exiting NAFTA’s Proportionality Clause,” etc. This issue is a major feature of Canadian peakists lore, and it generates intense anti-NAFTA discussions whenever the topic is considered. Anyone who has attended a meeting on NAFTA and proportionality will be familiar with the theme of those meetings.

There is one important problem with these beliefs – they are based on a complete misunderstanding of the treaty’s terms. Most peakists ‘know’ that NAFTA’s proportionality clause means “Canada is prohibited from reducing oil, gas and bitumen exports to the US”…. except that the treaty doesn’t say that at all.

Canadians are not prohibited from reducing energy exports to the United States; it is only the Canadian federal government that is subject to restraints on its freedom to regulate energy issues, and only if it proceeds by fiat.

Moreover, the proportionality clauses don’t apply to the provincial governments; nor to federal crown corporations; nor to Canadian energy companies. Additionally, there are even some escape hatches available to the federal government (without it being necessary to withdraw from NAFTA).

One of those escape hatches is national security – but a form of perceptual blindness within the peak oil activist community (which frequently seems predominantly left wing) make this obvious exemption invisible. It may be that the dominant belief system of many peakists prevent them from finding any positive benefits from the war in Afghanistan, but that doesn’t mean those benefits don’t exist. The fact is, participation in the war in Afghanistan provides Canada with its best opportunity to exercise energy independence since the first free trade treaty with the US was signed in 1988.

The road to Canadian energy independence runs through Kandahar.

“RTFF!”

Canadian peakists should be aware of every aspect of proportionality, yet often during discussions on NAFTA it appears that many are not familiar with the relevant texts. Below is a précis of some of the crucial treaty clauses:

604) No Party may adopt or maintain any duty, tax or other charge on the export… unless such duty, tax or charge is adopted or maintained on… any such good when destined for domestic consumption.

605) …a Party may adopt or maintain a restriction…only if

1.the restriction does not reduce the proportion of the total export shipments… prevailing in the most recent 36-month period… the Party does not impose a higher price for exports… than the price charged for such good when consumed domestically…

As mentioned above, Canadians who recoil in horror at discovering proportionality often react by adopting a ‘we have to leave NAFTA’ attitude. This reaction contributes little – for one thing, supporters of withdrawal from the treaty should consider both the power and the number, of interest groups whose opposition would have to be overcome before any Canadian government would withdraw from the agreement. Anti-NAFTA slogans do not lead to any practical policy options, and campaigning for Canadian withdrawal from the treaty wastes time and energy better invested in developing real solutions.

The proportionality clauses date from the mid-1980s, when Mulroney was attempting to undo the Trudeau era National Energy Program with its collection of policy tools, such as punitive taxes on oil exports. One of the intended end results of NAFTA was creation of a free market in energy, and that has been accomplished.

Under NAFTA, it is solely the federal government which is subject to proportionality provisions; no NAFTA provisions apply to the provincial governments. This situation seems widely misunderstood in peakists circles, but the limitation on NAFTA’s applicability was most recently restated by no less authority than the American President. During debate over the “Buy America” provisions of the US stimulus plan, US President Obama reiterated that NAFTA provisions only apply to the respective national governments. State and local governments were exempt from the treaty’s trade conditions, and so were not prevented by NAFTA from barring Canadian companies from bidding on local procurement contracts.

Indeed, it was essential to craft a new agreement (announced in February 2010) to bring Canadian provinces and the US states into a cross-border free trade agreement on government procurement. That such a new agreement was necessary is further confirmation of the non-application of NAFTA to the provinces.

Unfortunately, the free hand available to the provinces on energy matters appears to be of limited utility, as it is the provinces which have been conducting the ‘fire sale’ of our energy resources.

A  federal government (with sufficient political will) could ‘hold the line’ and prevent the situation from getting worse by instructing the National Energy Board not to approve any new energy export applications. Aside from the fact that this wouldn’t get us out of our current energy situation, even this would be at the outer limits of the possible – not only could such an initiative trigger federal/provincial confrontations, but opposition from individuals, Canadian corporations, and foreign corporations expecting to profit from the exports could be anticipated.  NAFTA provides American and Mexican corporations with the possibility of suing the Canadian governments to compensate for lost profit opportunities[i] (a corporate privilege which is not unique to NAFTA). A strong possibility exists that the main result of an NEB restraint policy would be a federal/provincial crisis accompanied by expensive litigation.

A second option is apparent from the nature of Section 605; it limits the federal government from taking action, but does not preclude it, nor a crown corporation from operating within the open market and simply outbidding American customers to buy up energy contracts. Unfortunately, resurrection of Petro-Canada or anything similar appears contrary to the ideological beliefs of the Conservatives, as well as to the electoral calculations of the Liberals.

There’s No Life Like It…

However, there is one clause which does permit the federal government to impose its national will on energy exports – Section 607the national security exemption. That section reads:

Article 607: National Security Measures

Subject to Annex 607, no Party may adopt or maintain a measure restricting imports of an energy or basic petrochemical good from, or exports of an energy or basic petrochemical good… except to the extent necessary to:

1. supply a military establishment of a Party or enable fulfillment of a critical defense contract of a Party;

2. respond to a situation of armed conflict involving the Party taking the measure;

3. implement national policies or international agreements relating to the non-proliferation of nuclear weapons or other nuclear explosive devices; or

4. respond to direct threats of disruption in the supply of nuclear materials for defense purposes.

With Canadian troops engaged since 2002 in “a situation of armed conflict” in the Afghanistan civil war, the federal government has an opportunity to invoke Section 607 to limit energy exports. As a NATO state fighting in a Moslem country against an Islamic jihadist foe, the Canadian government could plausibly argue that a consequence might be that Canada could be targeted for a petroleum embargo by Moslem source countries. Currently,  Canada receives almost half of the petroleum imported into comes from three Moslem countries – Algeria, Iraq and Saudi Arabia – each of which participated in the 1973 oil embargo.

Given the present threat of another major war in the Middle East, this time involving an attack on Iran by the United States, or Israel (or both) could well trigger a crisis of unknowable extent.  The reactions of the source countries supplying Canada is also unknowable.

Algeria’s 1991-2002 civil war was triggered when the army intervened to prevent a Muslim fundamentalist party from winning  the national elections. The Algerian army declared itself victorious in 2002, but did so without completely eliminating the enemy; the surviving jihadists escaped across the border, regrouped and began operations in neighbouring countries. They have now established an association with Al Qaida, and continue to act against western interests[ii] across Northern Africa. Should full democracy ever return to Algeria (Islamic religious parties are currently banned), the possibility exists that an extremely anti-Western Islamic government could take power.

The situation in Iraq remains fluid, but present trends do not favour Western interests. In December 2009, the Iraqi government awarded multi-billion dollar contracts for development of its oil fields to Russian and Chinese firms. Further, it appears that Iraqi Shiites, serving Iranian interests have, in effect taken over the southern third of Iraq (through which oil exports flow). Following the planned withdrawal of American forces, the stability of Iraq is a large question mark – civil war between the Kurds, the Sunnis, and the Shiites? A majority Shiite government moving the country closer to the policies of Iran? Invasion by neighbouring countries? Many possibilities exist, few of which provide any supply security for continued oil exports to Canada.

Saudi Arabian political stability rests on an arrangement between the United States and the Saud family – the Americans are committed to guaranteeing the Saud dynasty’s rule over the country, and the Saudis in turn ‘man the pumps’ and maintain levels of oil exports to the West. It can be debated whether or not the United States achieved its war aims following the invasion of Iraq, but one effect that seems indisputable is that American prestige and the value of American commitments have been reduced in the Middle East. The US guarantee to the Saud family implies that the United States would deploy the military and become involved in a civil war in Saudi Arabia if any opposition groups attempted violent regime change. After the Iraq debacle, American willingness to become involved in another civil war in the Middle East seems questionable. This development has occurred just as a new suitor for Saudi oil has arisen – China – and the possibility of Canada and other Western countries being outbid for Saudi Arabia’s declining oil exports cannot be discounted.

The wild card in all of these calculations is the threat of an attack on Iran by Western forces. The threat of war between the USA and Iran was expected to decrease following the election of Barack Obama, but that does not seem to have been the case. Reports out of the United Kingdom indicate that the Americans have shipped up to 387 ‘bunker busting’ bombs to the US base on Diego Garcia continue; only an attack on the suspected underground nuclear facilities of Iran would require such munitions.[iii] Of course, any attack on Iran would probably result in closure of the 54 kilometer wide Straits of Hormuz, through which 20% of the all the oil shipped in the world passes.

Paranoid reasoning is the sine qua non of intelligence forecasting – the main principle applied when assessing national security threats is to base your forecasts on your assessments of the  capabilities of other countries, not on your estimates of their intentions. Capability can be observed and measured, whereas intentions can never been known in advance.

Consequently, the possibility of an embargo, or an interruption in global oil supplies, is sufficient for measures to be justified on Canadian national security grounds. National defence makes it essential that Canada be self sufficient in energy. Federal government intervention in the energy market for national security purposes is specifically provided for in Section 607 of NAFTA, and would not constitute a violation of the treaty.

Fill ‘Er Up

The essential national security goal for Canadians is to ensure that all petroleum consumed in Canada come from Canadian sources; given federal government action this goal could be accomplished with only a minor degree of disruption. At present, the Canadian figures are as follows:[iv]

Petroleum extracted per day                    =       3.35 million bbl/day

Petroleum consumed per day         =       2.26 million bbl/day

Petroleum exported per day                     =       2.421 million bbl/day

Petroleum imported per day           =       1.165 million bbl/day[v]

With federal intervention (and direction), the oil currently imported into Canada from overseas could be immediately re-exported to the United States.

Establishment of an entrepôt trade pattern in energy would ensure the American markets dependant on Canadian oil would continue to be supplied – for this effort to be successful, it is absolutely essential that the Americans not experience any shortages as a consequence. It would probably be desirable for the multinationals to eventually eliminate the middle man (Canada) and import the petroleum directly into the United States. Federal government intervention would be essential to insure that these arrangements are maintained for 36 months (to reset the NAFTA benchmark).

This is because (as it bears repeating) that the essential provisions of NAFTA are not so much to impose an obligation on Canada to export a particular level of petroleum production to the USA as they are to create a free market in energy. American energy importers are not obligated to import a particular level of Canadian oil, so if the market able to satisfactorily supply their customers with oil from the OPEC states, they will not be seeking additional supplies from Canada.

Rearrangement of petroleum distribution would present challenges, and the problems would be significant enough that it could not be accomplished without government direction.

In restructuring oil distribution in Canada, shipment would be one problem. The current pipeline configuration is not laid out to move Alberta oil to other parts of Canada, and so it would be a challenge to supply eastern Canada with western oil. There is pipeline from Sarnia that could be used to supply Ontario but the route does pass partially through the USA; an all-Canadian pipeline would be preferable, but that will take time to build. Quebec and the rest of eastern Canada could be supplied from Hibernia, but any shortfalls for Ontario or Quebec may have to be supplemented by rail. It might be necessary to secure tanker cars rolling stock from the United States.

Of course, one aspect of this change would be that Canadians would be consuming tar sands oil, and many ‘greens’ have ceaselessly campaigned against the processed bitumen, demanding that the tar sands be shut down rather than exploited. Canadian ‘greens’ may well object to the country becoming dependant on oil from the tar sands, however an injection of reality is essential here – with $200 billion invested in the various projects (equal to 10% of the Gross National Product of Canada) and approximately 500,000 voters employed in the various companies, hopes by various Canadian ‘greens’ that the tar sands will be shut down is pure fantasy.

One problem could be the American assessment of their national security situation. For many American strategic theorists, the big advantage of Canadian oil is that it is a secure supply – it is delivered by a land route, available from a friendly foreign power, and immune from disruption. They might be expected to oppose Canadian energy sovereignty.

One telling account was provided by former Alberta Premier Peter Lougheed. In the book ‘Stupid to the Last Drop,’ there’s an account of a meeting Lougheed had with an American Cabinet Secretary, during which the conversation turned to NAFTA. The American confidently told Lougheed that the free trade agreement meant Canada “had” to sell its oil to the United States. Lougheed replied by pointing out that he was one of the authors of  the agreement, and that it said nothing of the sort; Canadians were free to sell Canadian oil to “whomever they wished.v

However, it should be noted that, regardless of what arrangements are made in Canada, to be successful the effort cannot result in oil shortages in the United States. The Americans are very aware of the absolute necessity of petroleum in the operation of their society, and it is necessary that Canadian actions not trigger a defensive response by US interests. To do so would court disaster.[vi]

Introduction of energy nationalist could be of significant political advantage to the political party which champions the program. In the western provinces, there is some concern over growing American objections to our so-called “dirty” oil; some American states are threatening to eliminate tar sands oil from their energy mix, and recently the US corporation Whole Foods announced it would boycott fuel from the tar sands. Canadian energy nationalism could provide a guaranteed market for the tar sands product. In the eastern provinces, the energy security might have a beneficial effect on voter intentions (although addressing future problems not immediately effecting the voters doesn’t usually generate an electoral gain) but easing the upward pressure on the Canadian dollar resulting from reducing the petro-currency effect could result in higher levels of employment. That would have an electoral impact.

Whether or not either of the two major parties uses the opportunity of the Afghan War to adopt a nationalist energy program, the possibility of significant domestic political gains, perhaps even a majority government, are one benefit. We shall have to see if either party sees the opportunity.


[i]) For example, when the Canadian government banned the neuro-toxic gasoline additive MMT, the manufacturer sued on the grounds of lost potential profit and the dispute ended with the federal government paying the company $19 million in damages.

[ii]) As quoted in the Malian news service “Al-Qaeda in the Islamic Maghreb said in an audio recording that it was holding the four Europeans — two Swiss, one German and a Briton — seized in late January in Mali’s southeastern Gao region, near the border with Niger.

Al-Qaeda… said it also was holding two Canadian diplomats — Robert Fowler, UN envoy to Niger, and UN aide Robert Guay, both of whom vanished in December in Niger, Mali’s eastern neighbour.”

[iii]) http://www.heraldscotland.com/news/world-news/final-destination-iran-1.1013151

[iv]) it is a sad commentary on the Harper’s governments interest in keeping Canadians informed, that the most accessible source for statistics on the Canadian oil situation is in the CIA World Factbook

v) see “Stupid to the Last Drop,” by William Marsden, Knopf Canada, 2007, page 73

iv) see “Confessions of an Economic Hitman,” by John Perkins, Berrett-Koehler, 2004

1 comment to The Kandahar Connection (Paul Trueman)

  • GoinFawr

    Great article, you really crammed that whole Proportionality clause thing into a certain perspective. But ‘Prohibit’ is such an ugly word; I think the phrase ‘discourage litigiously’ might be more apt.

    Meiico wouldn’t ratify NAFTA with a proportionality clause that applied to their nonrenewable energy resources. It seems that unlike you their leaders must not have realized just how innocuous such boilerplate is.

    But you’re absolutely correct, if disingenuous, in stating both that Canada can sell its hydrocarbons to whomever it likes and that any local, regional, provincial, or national gov’t can reduce exports to the US if it so chooses,for whatever reason floats its boat; just so long as it does it PROPORTIONALLY. And can convince an unelected, unaccountable, secretive, industry-appointed self-interested tribunal that it deserves the privilege, or pay a hefty price.

    That’s hardly what I would call the creation of a ‘free market’. More like ‘loss of sovereignty’ to a handful of plutocrats.

    One other note: Western Canada Select, the price oil companies operating in Alberta receive from the US for their product, is far less than what they are getting for shipping their stuff by rail to the east coast and selling it internationally there(receiving actual market prices, instead of the ‘captive supplier’ prices they receive from the US).

    GF