In a large, sparsely populated and often cold country like ours, products such as crude oil and natural gas, which supply energy for heat and transportation, have understandably been viewed as necessities. Canadian governments have responded to this view by introducing regulations intended to ensure that adequate supplies would be available. One of the first such regulations was the federal Electricity and Fluid Exportation Act of 1907, which set limits on the amount of hydroelectric power that could be exported.

The second major reason for intervention in crude oil and natural gas markets is to provide stability (or at least the appearance of stability), something that both producers and consumers often crave. Even in the early days of the Canadian petroleum industry, which started with James Miller Williams's 1857 discovery near Oil Springs in southwestern Ontario, prices were wildly unstable. From $8.75 a barrel in 1860, the price of crude oil plunged to 75 cents a barrel in 1862, following a rush of new supply from the recently discovered oilfields of Pennsylvania. By 1865, crude oil was back up to $11 a barrel. But after another spate of discoveries, the price fell to 50 cents a barrel the following year.

That's a very difficult environment in which to conduct business. In an effort to obviate this price instability, various government bodies and producer groups have, since the early days of the petroleum industry, undertaken to manage production, creating either low stable prices that would increase the demand for crude oil and natural gas (which happened in the 1960s) or high stable prices that would increase producer revenues (which OPEC has been attempting to do with varying degrees of success since its founding in 1961).

The final reason for regulation in energy markets was the apparent efficient use of capital. And here I'm thinking in particular of markets for natural gas.

In the early days of the North American petroleum industry, natural gas was not a welcome discovery. Petroleum explorers would often refer to a gas discovery as a "dry hole." Unless the discovery was near a centre of population and could therefore be easily used (as was the case in Medicine Hat, Alta., where the streets were illuminated by gaslight from the early years of the last century), the discovery was of no commercial value. Delivering natural gas to consumers requires a great deal of infrastructure (trunk pipelines, compressor stations, feeder pipelines and so on). That infrastructure costs a lot of money, particularly because most of the natural gas has been found in the western part of North America, while most of the consumers live in the eastern part. Rather than having a number of pipelines transporting natural gas across the country, one pipeline company would be given a shipping monopoly and, in return, would be subject to substantial government regulation of tariffs and operations. This same rationale guided the operation of telephone systems, hydroelectric grids and other public utilities.

However, during the past 15 years or so, Canada has opened up energy markets to a greater degree of competition than exists in many other areas of our economy. What is particularly remarkable is that this change was initiated immediately after the demise of the National Energy Program (NEP) – one of the most complex and pervasive sets of regulations this country has ever known outside of wartime.

The roots of the NEP were in the energy crisis of 1973, when the world's major oil exporters raised prices by more than 400 percent within a span of six months. Crude oil, which had seemed to be in plentiful supply just a few years earlier, was suddenly perceived to be a scarce commodity.

The Canadian government of the day stepped in to fulfill its role of providing security and stability. Exports of crude oil to the United States, which just a few years before had seemed like a promising market for Canada's surplus production capacity, were phased out. A "made-in-Canada" pricing regime was established, pegging domestic prices for crude oil well below world prices. Unfortunately, those actions sent the wrong pricing signals to both consumers and producers, who were not being given appropriate encouragement either to use less crude oil or to find more. To compensate for the artificially low prices, the government introduced a bewilderingly complex set of incentives, disincentives and regulations that few – including many of us in the petroleum business – could understand.

Outside Canada, the pricing signals were not being muted. As I've often said, the cure for high prices is high prices. And sure enough, when international prices doubled again in 1979, demand began to soften, a trend accelerated by the recession of the early 1980s. World oil prices began to weaken, and suddenly, the Canadian government's scheduled prices looked as though they would exceed international prices. It became clear that deregulating Canadian oil prices not only would benefit consumers but would eliminate a complex and unwieldy morass of regulations as well. In 1985, the federal government and the governments of Saskatchewan, Alberta and British Columbia signed the Western Accord, effectively deregulating prices for crude oil and natural gas in this country by allowing them to mirror prices on international markets. The following year, world oil prices collapsed from about $31 a barrel to about $11 a barrel, and in the newly deregulated environment, the full benefit flowed through to consumers.

It may be that the success of deregulation of Canadian oil and gas prices helped lay the groundwork for the free trade agreements the Government of Canada signed during the late 1980s and early 1990s. In many ways, the free trade agreements were much harder to sell than deregulation of energy prices – the specific benefits were more difficult to define, and the potential costs, in some industrial sectors, were reasonably easy to predict. However, it appears that free trade, despite the rhetoric at the time, is delivering benefits in terms of lower consumer prices and a more productive economy. A recent study by Statistics Canada indicates that Canadian manufacturing industries are becoming much more specialized than they were before the advent of free trade. We have certainly seen this trend in our company. Prior to the free trade agreements, Imperial's polyethylene plant in Sarnia, Ont., produced many different grades of plastic resin in small batches to serve a fragmented Canadian market. With the advent of the Canada-U.S. Free Trade Agreement, tariffs on imports and exports of polyethylene resins were dropped, and our Sarnia plant could concentrate on longer production runs of fewer resins for much larger customers in nearby areas of the United States. Productivity improved, and our plant, following a series of relatively inexpensive expansions, has emerged as one of the lowest-cost producers of polyethylene in North America. This type of productivity improvement not only makes our company and the Canadian economy much stronger and more competitive, but is also the only basis for real growth in income over the long term.

Despite those recent affirmations of the benefits of open and competitive markets, I suspect there will continue to be a constant tug in our society between those who believe that we need more rules and intervention and those who believe that greater freedom is the path to follow. And even those of us who are staunch boosters of open markets understand they have characteristics that trouble a number of people.

For example, one of the hallmarks of open markets is that prices change in response to changing market conditions – sometimes in dramatic fashion. That is quite the opposite of the stability individuals and societies often crave. A recent example of this is the "irrational exuberance" in the market for shares of many technology companies, which caused share prices to rise and fall dramatically.

And take the price of retail gasoline, which has also been known to change frequently as retailers compete for market share in an environment where consumers will cross three lanes of busy traffic to save half a cent a litre. Put these forces together and you have a situation where prices can change at a frequency that consumers have told us they find upsetting. Some consumers would prefer stable prices, even if those prices are higher than the average prices that competitive markets can deliver.

Another characteristic of open markets is that they do not allocate rewards equally to all participants. This criticism of the capitalist system is one of the reasons why alternatives such as communism and socialism have been attempted. Yet an open-market economy is not a zero-sum game. Those at the top of the income scale do not earn more at the expense of those at the bottom. Everyone in an open-market economy has the opportunity to earn higher real incomes over time. Open, flexible markets are the most efficient and effective manager of economic activity, reflecting as they do the thousands of decisions individuals make every day concerning the direction of investment, new development, consumption and production.

Forty years ago, if you were shopping for a new car, there was a relatively small number of models to choose from. Most of them were built in North America and showed up at the local dealership in September. Today you can choose from hundreds of models, from a dozen or so countries, that are introduced on a year-round basis. When people experience the range of choice and selection that open markets make available to them, they want to continue making their own decisions rather than have those decisions made by regulators.

Canada, as both an importer and exporter of a wide range of goods and services, has been well served by policy that supports open competitive markets. Canadian consumers have a level of education, income, freedom, mobility and technological prowess that makes them confident and secure about the choices they make. Immigration and travel have made us an increasingly diverse and discriminating group of consumers who demand the value and choice that only open markets can deliver.

If market forces are allowed to prevail, I see no reason why crude oil and natural gas, which now supply more than 60 percent of the total energy consumed in this country, should not continue to be major contributors to Canadian energy supply. Fuels made from crude oil deliver concentrated energy, which makes them the logical choice as a source of transportation energy and virtually irreplaceable for air travel. Natural gas is an excellent source of clean-burning energy. Both these commodities provide the raw material for thousands of useful and essential chemical products.

IN CLOSING (as it's customary to say in this publication), I would like to state how confident I am about the future of the Canadian petroleum industry. During the past four decades, the industry has made some amazing strides. Back in the 1960s, because of market constraints, about one half of this country's capacity for producing crude oil was not being used. That made it very difficult for smaller companies to enter the industry and, in fact, there was really very little incentive for them to do so. Now, largely as a result of the deregulation of North American energy markets that has occurred since the mid-1980s, the Canadian oil patch has become a bazaar of hundreds of smaller companies pursuing a diverse range of ideas to develop resources for tomorrow.

Another major breakthrough for our industry during the past 40 years has been the development of commercial production from the oil sands of Alberta. There are now dozens of commercial ventures (ranging from the largest earth-moving operation on the planet to small companies with just a few horizontally drilled wells), tapping a huge resource that could provide this country with affordable hydrocarbon energy for generations to come.

Imperial, I'm proud to say, has played a pivotal role in the development of the oil sands. A predecessor of mine, Jack Armstrong, was instrumental in breaking the log jam that enabled the Syncrude oil-sands project, in which Imperial is still the largest single participant, to proceed. Earlier in my career, I was assigned responsibility for developing commercial production from the company's bitumen deposits at Cold Lake. Today, our Cold Lake plant accounts for almost 50 percent of Canada's total bitumen output.

Other major developments have included the opening up of our East Coast offshore regions to large-scale production of crude oil and natural gas. And we appear to be nearer than ever to realizing the promise of delivering energy from the Far North.

I feel particularly confident about the future of Imperial. Our company has enjoyed considerable success and created a lot of value for shareholders over the past 120 years, supplying the market for useful, affordable energy. I see no reason to believe that it won't enjoy even greater success in the 120 years to come.

Illustrations: David Moore