How Might North American Oil and Gas Markets Have Performed with a Free Trade Agreement in 1970? *

Abstract

Deregulation on both sides of the U.S.-Canadian border has made certain aspects of trade agreements largely superfluous in the near term. It is over the longer term that the impact of the NAFTA will become apparent. To grapple with this issue, simulations are attempted of oil and gas trade between the United States and Canada as if the NAFTA had been in place before the first oil price shock of 1973. The simulations suggest substantial additional exports of Canadian oil and gas would have enabled the United States to back out volumes of OPEC oil during the critical years of the late 1970s and early 1980s. This would have served to dampen world oil markets during the years of OPEC ascendency—not dramatically, but not negligibly either. By promoting closer integration of energy markets, the NAFTA should lead to more cohesive North American responses to any future world oil shocks.