Behind the Energy Crisis

The nationwide energy crisis arises from an extraordinary coincidence of events involving each particular form of commercial energy—factors as diverse as problems with nuclear technology, Middle Eastern politics, the quest for a cleaner environment, the health and safety of mine workers, and the federal government's policies toward natural gas prices and oil imports. All of these strands are so interwoven that it is difficult to tag this or that factor as contributing this or that much to the overall problem. But at least we can identify the major sources of the dilemma or difficulty.

Thus far, the only physical hardship (leaving aside, perhaps cavalierly, the environmental risks which we have had to continue to assume) stems from electric power blackouts or brownouts. Most other aspects of the energy crisis relate (1) to the economic costs incurred—for example, the doubling, in certain cases and within a single year, of prices for residual fuel oil (used principally in power stations); or (2) to those hardships which threaten over the next few months or years—example, the nonavailability of natural gas supplies in new or expanding nonresidential use and perhaps even in household markets.

The first thing to keep in mind is the growth in the nation's consumption of fuels and power. Aggregate use of the primary fuels (coal, oil, gas, nuclear, or hydroelectricity) has in recent years risen by about 4 percent a year—as fast as, or even faster than the gross national product. This has come as a surprise. In recent years energy projections tended to assume that an advanced nation such as the United States, with the service sector and certain governmental activities rising faster than the hard-goods part of the economy, tended to expand its energy consumption noticeably less than its additions to overall output, and this had in fact been the record of the years 1920-60. This leads one to speculate that what we have been witnessing may be a transitory phenomenon, so that this earlier conjecture may still materialize within a few years.

In the meantime, however, demand for energy expands vigorously due largely to the rapid growth of demand for electricity, which in the past few years has risen by close to 9 percent annually (a growth rate of 6 and a half percent had been projected by the Federal Power Commission in its National Power Survey back in 1964), and which constitutes a major market for primary energy sources. In 1970 roughly a quarter of primary energy consumption represents inputs into the electric utility sector of the economy; as recently as 1960 the share had been under 19 percent. Within the growth of electric-power deliveries, disproportionately rapid advance has occurred in sales to households and other nonindustrial consumers, particularly for residential air conditioning.

Electric power is quantitatively a significant element within total energy, and its contribution to private comfort and industrial activity is indispensable. What caused the electric-power supply interruptions of the 1970 summer was not scarcity of fuel needed to generate electricity (that is a more recent problem), but, rather, a shortfall in generating capacity needed to meet peak demand. One factor in this deficiency is the unanticipated lag in nuclear power plant completion, depriving the economy of electric power equivalent to half the forecast nuclear capacity, or about 2 percent of all installed generating capacity.

By the mid-1960s, the nuclear foothold in electric power seemed to be clearly established. Completion of the atomic installation at Oyster Creek, New Jersey—regarded as the first truly commercially competitive nuclear plant—appeared to be at hand (several years' delay was not anticipated); moreover, the progressively stepped-up rate of new nuclear power plant orders, culminating in a nuclear share of more than 50 percent of all new power plant orders in 1967, was taken as solid evidence of nuclear power's arrival. In consequence, the Atomic Energy Commission's 1967 forecast, implying around 11,500 mw of installed nuclear generating capacity by 1970, did not appear to be over-optimistic. But only about half that amount of capacity existed in mid-1970, and the AEC's continuing expectation that 150,000 mw (around 30 percent of total electric generating capacity in the United States) would be nuclear by 1980 seems perhaps suspect, especially considering the fact that the capital costs of a large nuclear plant have risen drastically in the last three years: from around $120 per kw to over $200.

Nuclear plant delays, occasioned by a variety of factors ranging from poor workmanship to overextended manufacturing facilities and licensing problems, are not the sole explanation of lagging capacity. The extraordinary growth in demand was unanticipated by the nation's utilities (and everyone else), and capacity has lagged. Also, public interventions have delayed licensing and construction of conventional power sources (of which Consolidated Edison's proposed Storm King plant is the most celebrated but not the only one) as well as of nuclear facilities.

By midyear the problem of tight electric generating capacity had been compounded by a short supply of fuels for utilizing the steam-power capacity which does exist. In one respect, this problem was a consequence of what was happening in the nuclear outlook a few years back. For, with atomic power seemingly firmly established and the prospects for coal correspondingly diminished, investment in expanded coal mine capacity lagged. For example, the number of the nation's operating coal mines, which declined from 7,900 to 7,200 between 1960 and 1965, fell much more precipitously in the next three years, reaching a figure of 5,300 in 1968. One recent manifestation of this development is the fact that U.S. coal production dropped 1 percent from 1967 to 1969, while demand rose by 5 percent. Only a drawdown of stockpiles enabled the industry to meet the demand. The picture became brighter toward the end of the year, but the newly enacted health and safety measures may raise problems for existing and potential capacity.

In the meantime, the need for coal to fill—at least temporarily—the nuclear void has been accompanied by a steeply rising demand for export orders, resulting from coking requirements of foreign iron and steel producers. In addition to reducing domestic availability of coal (metallurgical coal being increasingly sought for steam-raising purposes because of the low sulfur content), export led to a shortage of available freight cars for transporting coal to utilities within the United States. The net result has been an extraordinarily steep rise, in coal prices and, at the onset of winter, uncomfortably low inventories at a number of the nation's power plants, particularly in the Great Lakes region, some South Atlantic states, and the TVA area.

Those plants dependent on oil and gas—whether because of geography, economics, or environmental criteria—are no less handicapped in fuel problems. A great deal of recent attention has focused on the Atlantic coast—particularly on New England where imported residual fuel oil constitutes the major boiler fuel and in addition provides space heating in many commercial and institutional structures. The Eastern Seaboard's reliance on residual fuel oil—over 90 percent of which originates abroad: 80 percent in the Caribbean, roughly 10 percent in the Eastern Hemisphere—has risen spectacularly in the past few years, especially in those locations where it is replacing coal in order to conform to regulations limiting the emission of sulfur oxides and particulates. East Coast utilities' consumption of residual fuel oil increased by 63 percent between 10 and 1969, and by 44 percent between the first three months of 1968 and 1969. The trend has continued into 1970, though at a reduced pace.

A constellation of foreign developments compounded the tightening supply of residual fuel oil supplies; one result of which has been a sharp price rise—of up to 10° percent within a year for spot deliveries which in turn has created particular hardship for organizations, such as New England school districts, operating within strict budgets.

One pervasive element in the supply stringency is the fact that low-sulfur residual fuel oil is more limited than residual fuel oil in general and that desulfurization plants have not as yet expanded their capacity to keep up with demand. Moreover, Libya, a major East Hemisphere source of low-sulfur oil curtailed exports early in 1970, nominally in the interests of conservation, but presumably to strengthen the government's hand in the then pending negotiations over new contract terms with the international oil companies. The shortfall in Libyan supplies, which for all practical purposes ended in the fall of 1970, had to be offset primarily by Persian Gulf oil of higher sulfur content that had to be shipped around the Cape of Good Hope. This could have been absorbed in normal times without major repercussions. But it coincided with Syria's prolonged suspension of oil pipeline flows from Saudi Arabia to the Mediterranean coast, causing 475,000 barrels per day to be diverted around South Africa at a time when there was virtually no spare shipping capacity available.

The combined effect of the Syrian and Libyan embargos was estimated by the Interior Department's Office of Oil and Gas to have increased demand on the world tanker pool by about 7 percent. As a result, worldwide spot rates rose precipitously—a development that radiated outward all the way to the Western Hemisphere where it has meant sharply higher landed costs of both crude and residual fuel oil. Imported residual oil, unlike imported crude oil and higher distillate products for which there are strict quotas, enters the country without restriction. U.S. refineries have had no incentive to produce this "bottom-of-the-barrel" product when higher prices made far more profitable the production of such items as gasoline, kerosene, and 18h-quality heating oil.

The crisis surrounding natural gas may be less dramatic but appears more enduring. Attractive because its cleanliness and price, natural gas is also the least polluting of the fossil fuels. Efforts to comply with tightening air-quality standards, therefore, have contributed to an uninterruptedly high growth rate for this primary energy source. At the tame time, new discoveries of gas have fallen steadily, despite the widely accepted judgment that immense gas reserves remain to be discovered. The bare facts are these: (1) the U.S. reserves-to-production ratio has fallen continuously over the last several decades; (2) until 1967, additions to reserves were nonetheless sufficient to add modestly to the reserve total each year; (3) in 1968 and 1969, for the first time, reserves fell absolutely. Reasons for this state of affairs are a subject of intense debate, with the inhibiting effect of federally regulated ceilings on the field price of gas being singled out most often as a contributing, if not responsible, factor. Whatever the cause or causes, deliverable supplies of gas are shrinking, and in a number of areas potential customers have been unable to obtain supply commitments.

There are too many imponderables to tie these assorted strands together into a clear statement of the near- and longer-term fuel and power outlook. Two conclusions suggest themselves nonetheless. First, given the lead time needed to effect fundamental changes, the tightness in fuels and in electric generating capacity will most likely endure over the next year or so. An upsurge in natural gas discoveries, however induced; expanded U.S. and foreign refinery capacity for low sulfur liquids; the opening of new mine capacity; accelerated progress on power plant construction and licensing—all take time. And even though the Libyans have recently cancelled their production cutback, no one is bold enough to rule out future restrictive actions by Middle East oil-producing countries. Libya's permission for resumption of deliveries coincided with company-government settlements embodying both an increase in posted prices—essentially frozen during the past decade—and a government tax-take exceeding the 50 percent share in effect since the early 1950s. Second, when supply stringency eases, it will most likely be at higher levels of cost and prices of all energy sources.

Thus far, the U.S. government has acted marginally to deal with some of the critical elements in the current situation, permitting a greater flow in the controlled volume of oil from Canada, and imposing greater cost-penalties for loaded coal hopper cars standing idle at ports. Although unlikely to augment oil supplies in the short run, the government's announcement late in the year removing oil from federal offshore leases from state prorationing authority represents an important policy change. In addition, the suddenly higher landed cost of imported residual fuel oil has encouraged domestic refineries to divert some of their output to this product. Finally, there are suggestions—perhaps reasonable but certain to be fought vigorously by environmental groups—that air pollution standards may have to be relaxed until the supply of acceptable fuels catches up with demand.

For the more distant future, it seems clear to many people that new policy directions are required.

One of these is more orderly advance planning for needed electric generating capacity. This would include better long-term projections; more effective and less time-consuming ways of resolving environmental issues; and more expeditious procedures for licensing power plants, including a reduction in the present number of multilayered political entities involved. Both the Administration and Congress have made suggestions on how to effect improvements.

It may turn out to be appropriate to strengthen incentives for developing natural gas resources by offering producers higher prices. Natural gas is an ideal fuel from a number of points of view—not least that of environmental purity—and consumers may be faced with the inescapable recognition that the days of low-cost energy are limited. In other fuels as well, environmental costs will have to be accepted as a legitimate component of (undoubtedly higher) prices.

The federal government may see fit to reexamine its R&D priorities in the energy field. In the past two decades nuclear energy has been the overwhelming beneficiary of the federal purse. New issues—shortages, the environment, technological potentialities regarding other energy sources—may dictate new approaches.

On one issue, however, no fundamental change is contemplated —at least for the time being. And that is the policy of U.S. oil import quotas. In February 1970 a majority of President Nixon's Cabinet Task Force on Oil Import Control recommended a phased transition to a tariff system for controlling imports, one major result (and purpose) of which was said to be a reduction in the cost of petroleum in the United States. The national security objective, which the quota system was designed to serve, was to be protected by strictly limiting that portion of imports originating in the Middle East and Africa.

For some months the President did not act upon these majority recommendations of his Task Force. By midyear, however, it became known that Mr. Nixon had decided to reject the essence of the Task Force proposals, but that an improvement of the existing system was to be sought. The arguments for abandoning oil import quotas had long been based on the relatively low price of Eastern Hemisphere oil. As noted above, events in the world petroleum market during 1970 forced the price of imported oil up to a level approximating that prevailing in the United States, so that, for the moment at any rate, this basis for the import reform argument lost some of its force. Moreover, recurrent upheavals in the Middle East and North Africa—whose disruptive impact on world oil was once again demonstrated during the year—may have persuaded the U.S. leadership that, other aspects notwithstanding, the national security rationale for oil import quotas retains much of its validity.