Canada's Barrel of Troubles

By Christopher Byron

Inflation leaps, the dollar sags and U.S. oilmen scream

It was billed at the time as a bold stroke to free Canada's $40 billion oil and gas industry from foreign domination. In fact, seldom has a single governmental action more thoroughly disrupted a country's economy than has the National Energy Program put forth last October by the government of Canadian Prime Minister Pierre Trudeau.

Though the program's various tax and subsidy provisions were intended to encourage giant foreign multinationals like Shell, Exxon and Mobil to sell at least some of their Canadian operations to local companies, the effect has been to aggravate a host of economic difficulties. Inflation has surged to an annual rate of 13%, the Canadian dollar has slumped to 800 in American currency, its lowest point in 50 years, and investment capital has been fleeing Canada.

In the past nine months alone, Canada's battered economy has sustained capital outflows of more than $10 billion, compared with an average outflow of about $2 billion annually during the 1970s. Much of the money is leaving not just because of current economic upset but because of a perceived sense of increasing intervention in the Canadian private sector by the Ottawa government.

The cheap Canadian dollar has proved a bonanza for U.S. tourists heading north for summer vacations. But for Canadians, the drop means further deterioration in their economy. Canada and the U.S. trade more with each other than with any other country, and the sagging currency threatens new rises in the cost of Canadian imports of clothes, food, electronic equipment and other goods from the U.S.

Renewed inflation is certain to bring escalating demands for wage increases by Canadian workers and more labor unrest. Just last week the nation's postal system resumed operations after a six-week strike by 23,000 postal clerks. Mail delivery was brought to a halt, and the economy suffered an estimated $350 million in business-related losses. A key issue in the strike: a union demand for 17 weeks of maternity leave at 93% of full pay.

In an effort to keep the Canadian dollar from slumping further, the Bank of Canada two weeks ago boosted its official bank lending rate to 21.24%, the highest such interest rate of any central bank in a major industrial country. Last week Finance Minister Allan MacEachen disclosed that the government is considering a new package of foreign borrowings beyond the $5.5 billion in standby credits now available. The funds would be used to help bolster the Canadian dollar on international markets.

Canada's multiplying miseries are as much political as economic. Power sharing between the ten provinces and the central government in Ottawa has often been difficult, and separatist pressures in French-speaking Quebec have been especially troublesome. The most recent difficulty involves the burgeoning oil wealth of Alberta and other energy-rich western provinces, which have been waging a tug-of-war with Ottawa over energy pricing, taxes and revenues.

Trudeau had hoped that his National Energy Program would tip the economic balance away from the provinces by sharply raising federal taxes on existing oil and gas production. Some of the resulting revenues would then be used by the federal government to help finance generous tax breaks for Canadian-controlled energy companies so that they could explore for oil on federally owned frontier lands such as the Northwest Territories and the Yukon. The plan would put foreign companies operating in those regions at a severe disadvantage, but it would help shore up a sense of Canadian national identity throughout the country.

The real victims of the program, of course, are the U.S.-owned oil and gas companies that have invested approximately $10 billion in Canadian petroleum, gas and other energy enterprises. Complains Charles J. Waidelich, president of the Tulsa-based Cities Service Company:

"I think that it is natural that Canadians want to control their own resources. But the way that the Trudeau government is going about this is totally wrong and does not promote good neighbor relations."

American oilmen argue that the Trudeau policy has depressed the stock prices of U.S.-owned Canadian companies, including Gulf Canada Ltd. and Texaco Canada Ltd., forcing down their values by an average of 15% during the first month alone after the program was announced. Moreover, Canadian companies, in cooperation with Canadian banks, have hit upon a technique for forcing the U.S. companies to sell out at the depressed market prices. Flush with seemingly inexhaustible credit from the banks, the Canadian companies have been buying up big blocks of stock in American firms, then offering them back to the U.S. companies in return for their Canadian oil and gas holdings.

That tactic was used two months ago by Canada's Dome Petroleum to acquire a 52.9% interest in Hudson's Bay Oil and Gas, a Canadian firm controlled by Conoco. Stripped of its Canadian holdings, Conoco became a takeover target and wound up being acquired by Du Pont.

Canada's investments in U.S. energy companies have been a major cause of weakness in the Canadian dollar because Canadian investors buying American stocks must first sell their own currency for American money. Finance Minister MacEachen last week again asked Canadian banks to stop shoveling out the financing loans so freely, but stronger action than that may eventually be needed to slow the takeover drive.

The problem now facing the Reagan Administration is how to keep demands for U.S. countermeasures from boiling over in Congress, where Canada's attitude toward cross-border investment is much resented. A Congressional move to impose a moratorium on large-scale Canadian stock investments in the U.S. was sidetracked prior to the summer recess earlier this month. But a bill that would subject foreign corporate borrowers to the same requirements that apply to U.S. firms is expected to pass easily when the House and Senate reconvene in September.

Such tit-for-tat behavior benefits neither country. Says a top Reagan Administration official soberly: "We'd like to see this thing fall of its own weight. What Canada is doing is very expensive to itself.

If left alone, the Canadians may be smart enough to stop it by themselves." The alternative is worsening relations with Washington and still more Canadian economic troubles. --By Christopher Byron.

Reported by David Beckwith/Washington and Peter Ward/Ottawa

With reporting by David Beckwith, Peter Ward

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