Energy in Crisis

Persons who for the past several years have been predicting an imminent U.S. energy crisis seem to have had their fears borne out by the October outbreak of Middle East fighting and the ensuing restrictions on Arab oil exports. Of course, these precipitous events took a form that even energy alarmists had not foreseen, but without the Mideast flare-up a serious situation probably would still have confronted the nation. The potential winter oil-product shortfall of well over 3 million barrels per day to which public officials were pointing before conservation measures began to take hold represented substantially more petroleum than could reasonably have been obtained at short notice from Arab countries even under "normal" circumstances.

In any case, the convulsive developments of November and December—with the federal government's intrusion into energy-using habits in ways novel to a post-World War II generation of Americans—may have implanted enough unease into the national mood to trigger the search for an enduring and self-reliant approach to our future energy needs. The catch-phrase for this effort is "Project Independence," coined by President Nixon, who expressed the need for the United States to achieve an early and substantial degree of energy self-sufficiency even if a determined effort at a durable Middle Eastern peace should prove successful.

Reasons for concern over the adequacy of U.S. fuel and power supplies long preceded the eruption of the fourth Arab-Israeli conflict in twenty-five years. The nub of the problem is clear enough: this nation's aggregate consumption of energy resources has in recent years continued to grow very rapidly, so much so that the progressively declining ratio between rate of energy growth and rate of GNP growth that had characterized the past quarter century appears, for the moment at least, to have turned around. At the same time, a leveling off in domestic output of oil and gas and partial restrictions against the use of coal led to a need for rapidly rising imports.

To judge the significance of this emerging foreign component of U.S. energy supply, we need to note that oil accounts for around 40 percent of U.S. energy consumption. Gas and oil together make up nearly four-fifths of the total. As domestic production of both oil and gas has flattened out (in the wake of declining levels of exploration and consequently declining reserve levels), demand for oil—the balancing energy source in times of stringency —has accelerated. For example, oil has rapidly supplanted coal as a power-plant fuel. If coal had provided the same share of electric generating fuel in 1972 as it had in the mid-1960s, 1.1 million barrels of oil per day would have been "saved," representing some 7 percent of nationwide oil consumption or 23 percent of oil imports in that year. But environmental restrictions operating against the use of coal foreclosed that possibility.

We have also witnessed a burgeoning demand for motor gasoline. This demand rose at 2.8 percent yearly between 1960 and 1965. In recent years, it has accelerated to more than twice that rate. Continuation of the lower, 1960-65, growth rate would have "freed" another 630,000 barrels of oil per day in 1972—another 4 percent of U.S. oil consumption or 13 percent of oil imports. Reduction of automotive efficiency in connection with pollution control is one of the factors in this development, although as yet probably a minor one. Steadily increasing car weight, larger engine size, and air conditioning are others.
Increased annual mileage per vehicle is still another. Be that as it may, depending on where in history one begins, the high gasoline requirements of large-horsepower cars certainly go far to explain the high level (even if they are only one of the reasons for the high recent growth rate) of U.S. oil consumption.

One could add to these examples still other factors contributing to the tight oil situation. A halt to the expansion of U.S. natural gas output may have added 1.5 million barrels per day to oil demand. The non-availability of oil from the Alaskan North Slope and from the Santa Barbara Channel, as well as the delay in offshore operations in general, may have subtracted about 2 million barrels per day from current production.

All told, various combinations of these possible supply sources could have greatly diminished the level of import dependence we were experiencing when the Middle East war began. Merit aside, we can conclude that both environmental constraints and regulatory policies (such as federal control over natural gas prices) have exerted a marked impact.

Our ability to cope with these problems in the short run through market adjustments is limited. In the case of natural gas for space and process heat, for example, it is not easy to switch quickly to substitute energy forms. On the supply side, controls over natural gas prices have insured sluggish production responses. In general, however, even where the price of an energy commodity rises substantially, as is now the prospect, substitutes are not smoothly obtainable; productive capacity (in this case refineries) is not rapidly expandable; and demand restraint is not assured. This is so even if the energy price increases are of such magnitude that demand is suppressed at the expense of increased unemployment and industrial dislocation, and there are large windfalls accruing to energy suppliers. In short, conventional economic forces, although an important, and probably increasingly necessary, element in longer-term adjustments, cannot realistically be looked to except in minor degree as an equitable and expeditious means of overcoming current problems.

Foreign sources of energy supply began several years ago to loom as a major factor on the U.S. scene. The immediate post-World War II years marked the transition of the nation's energy position from that of a net exporter to a net importer. Despite the oil import controls which lasted until the spring of 1973, the net import share has risen steadily. In the case of oil alone, the country depended upon overseas sources for around 30 percent of its oil in 1972. Prior to the Arab embargo on oil shipments, 1973 had been shaping up to an import-dependency figure of at least 35 percent. Other oil-importing regions of the world, notably Western Europe and Japan, have long lived with far higher degrees of import dependence. For the United States, amidst past assurance that U.S. excess productive capacity could be deployed in times of crisis, the increased reliance on imports signified a unique turn of events. It coincided with suddenly heightened bargaining power on the part of the petroleum-exporting countries, raising the prospect of increasingly stiff terms for imported energy even without upheavals in the Middle East. It was a new, sobering situation.

The events of late 1973 seem to point clearly to the necessity for a two-pronged approach to the energy problem. First, and obviously most urgently, there is the task of dealing with the supply shortfalls facing the country this year and possibly over the next several years (even an end to the Arab embargo provides no assurance of a quick return to energy-supply adequacy). Second, there seems to be a clear need to map and pursue a longer-term strategy, on both the demand and the supply side, aimed at giving the nation a far greater degree of domestic capability for meeting its energy needs.

At the time the Middle East war began, the United States was consuming oil at the rate of about 17.5 million barrels per day, of which approximately 6.5 million barrels per day (or 37 percent) were imported. In estimates that may be somewhat on the high side, imports amounting to perhaps as much as 2.5 million barrels per day (38 percent of all imports or 14 percent of total consumption) were ascribed to the Arab producing countries of the Middle East and North Africa. (This allows for Arab crude oil transformed in European and Caribbean refineries prior to shipment to the United States.) The addition of oil from Iran, a non-Arab producer, would raise the Middle Eastern-North African imports by several hundred thousand additional barrels daily.

Shortly after the outbreak of fighting, the Arab oil producers embargoed shipments to the United States. The embargo was subsequently extended to Holland, avowedly to penalize that country for its stand on the war, but presumably also as a means of choking transshipment from Rotterdam refineries and bringing political pressure on Western Europe. In addition, the Arab exporters imposed successive production cutbacks, intended to aggregate a cumulative 25 percent by year's end, though some relaxation was announced in December, to take effect that month. In the midst of the war, the producing countries unilaterally decreed a 70-percent rise in the posted prices upon which royalty and tax payments to oil producers are based. Before the year ended, they had more than doubled these new figures. The second increase brought prices to a level equivalent to some $8 or $9 per barrel delivered at U.S. East Coast ports.

All told, this was a severe and sudden aggregate of pressures with which to contend. Yet the severity of the situation could be attributed solely to the Arab cutoff only in the assumption that the oil exporters would otherwise have steadily and sharply expanded product to meet U.S. shortages. Such an assumption could have been true, but had no solid basis in fact. For one thing, the producing countries have learned that, under certain circumstances, higher prices rather than higher production may be the more effective way to maximize their revenues. In other words, even an end to politically oriented embargoes might leave the United States sufficiently short for some years to require prolongation of controls over fuel distribution and utilization.

The initial responses to the Arab initiatives were largely defensive: in Europe and Japan, retrenchment on motoring and on fuel deliveries to various end-use sectors; in the United States, a wide-ranging set of restraints which were still taking shape at the end of the year, but whose general thrust had become clear by the time of President Nixon's energy message of November 25th. Prominent features of the government's program, some of which took effect on a voluntary basis or under existing powers while awaiting Congressional enabling legislation, included:

• Mandatory allocation of various distillate fuels to industrial, commercial, and residential users;
• Sunday closing of gasoline stations
• A standby gasoline rationing program
• Reduction of maximum highway speed limits;
• Banning of promotional and ornamental lighting;
• Relaxation of pollution-control standards to permit reversion to coal burning where feasible;
• Introduction of year-round daylight saving time.

The government also mandated shifts in the "refinery mix" which would result in proportionately greater "middle distillate" output at the expense of gasoline.

These actions, it was hoped, would go far toward meeting the initially projected first-quarter 1974 petroleum-product shortfall of 3.5 million barrels per day. However, whether that objective could be reached without more stringent restraints, including the actual institution of gasoline rationing, seemed doubtful, despite successive downward revisions of the shortfall as voluntary responses and initial constraints took hold and as previously unanticipated supplies became visible. At some early point, the decision has to be made whether to burden the private motorist, as well as the household consumer, with a disproportionate share of the shortage in order to avoid the economically disruptive consequences of putting too much of the adjustment burden on trade and industry. At that point, rationing, or disincentive excise taxation, or substantial price rises, or some combination of these adjustments would probably be necessary to maintain order at the gas pumps.

Even while most of the country's attention was riveted on near-term accommodations, the vulnerable situation in which we found ourselves also supported a "we can't let it happen again" posture for the longer run. The standard pre-October representations of U.S. energy demand/supply to 1985 showed overall fuel and power consumption continuing to grow at 4 percent or more per year, a sustained plateau in domestic output capability in oil and gas, and oil imports amounting to possibly as much as 50 or 60 percent of U.S. oil consumption—two-thirds of these imports having to come from the Middle East and North Africa. This was a scenario which discounted the potentiality for dampening demand growth and which neglected, as well, the initiation of policies designed to substantially increase the nation's indigenous energy-producing capability.

Is America inexorably locked into such a scenario? On the demand side, it is probably true that, apart from the forced and hortatory curtailment to which the country is presently being subjected, only modest energy "savings" can quickly be made a permanent feature of the economy. But the initiation of certain vigorous and sustained energy conservation efforts can begin to have significant results after a lapse of years, and would be a prudent course on which to embark. Transportation and architecture are priority candidates for more efficient energy usage. Increases in the real price of energy, which are inevitable, should of themselves provide a strong impetus toward that end.

Appropriate as a policy of demand restraint may be, it is at least as urgent that we adopt a forceful set of measures addressed to long-term domestic supply expansion. RFF recently completed the first draft of a major study for the Ford Foundation's Energy Policy Project, the principal objective of which was to examine the resource, economic, and environmental feasibility of returning the United States to a position of relative self-sufficiency in energy by 1985, maintaining that position until the year 2000. A number of tentative conclusions emerging from that study have direct bearing on longer-term energy strategy in the United States. The fashioning of such a strategy predated, but has been given greater urgency by, the events of late 1973.

There is little question but that, at a price, undeveloped resources in the ground are adequate to support whatever levels of production one might reasonably require for 1985. This conclusion applies individually to natural gas, to crude oil, to coal, and to uranium. The uncertainty increases as one attempts to look further into the future, at least as far as crude oil and natural gas are concerned, although the probability is high that resources of each are adequate to support increasing production for several subsequent decades.

If we consider coal and oil shale, the resources in total are so large compared with current and prospective consumption rates that resource depletion can hardly be a matter of concern for quite a few decades.
There are, however, serious environmental problems in connection with both coal and oil shale (discussed below), such that we might prefer to accommodate ourselves to substantially less energy use rather than to employ these resources on a significant scale. Considering both that our undeveloped resources of oil and natural gas are probably quite large and that resources of oil shale and coal, which are known to be large, can be converted into oil and gas, there should perhaps be less anxiety about the rate at which our resources are being exhausted.

The prices at which future production will be available are quite uncertain and depend significantly on government tax and leasing policies. The production as such depends on the availability of the requisite engineering skills and trained manpower, capital equipment, and productive capacity of the supportive industries servicing the energy sector.

It appears likely that the nation can produce about 16 million barrels per day of liquid fuels in 1985, compared with about 11 million in 1973. This, plus 4 million barrels per day of imports, could meet our oil needs on what most would regard as a reasonably secure basis. The 20 million barrels per day total is not far above the present consumption level of 17 million barrels per day and implies a shift away from oil. The projected range of prices for this volume of output in 1985, measured in 1972 dollars, is from $4 to $7 per barrel. A special analysis made for the RFF study indicates a price of about $5.70 per barrel in 1985, but the methodology is new and untested.

A major conclusion is that the nation should seek large increases in natural gas output. From both an economic and an environmental standpoint, this appears feasible and attractive and would make sense even if there were no concern about imports. Given appropriate policies, domestic natural gas production might increase by about 50 percent by 1985, rising to about 33 trillion cubic feet annually. This would take much of the pressure off oil. Our expectation is that this gas could be available, under favorable federal policies, at from 60 cents to 70 cents per thousand cubic feet at the wellhead. This is a tripling of the present price. Even so, natural gas at the wellhead in 1985 would be no more expensive on an energy-content basis than crude oil was in 1972. Moreover, since transportation costs are by far the major component of natural gas delivered to the point of end use, a tripling at the wellhead need not mean more than, say, a 20 or 25 percent increase in cost to the ultimate consumer.

Policy formulation based on figures like these should take into account that econometric projections into realms of volume and price which have not previously been actually experienced embody considerable margin for error. One projection hazard centers on the question of the rapidity with which oil and gas production can be expanded, especially offshore, where there is the greatest certainty of finding rich new provinces. Another issue is the degree to which price incentives will work toward greater gas production rather than toward oil or toward oil and gas combined. Moreover, there are those who warn against expecting quick results from new ventures in exploration, leasing, developing, and so forth, even if government at all levels were successful in encouraging, subsidizing, or actually undertaking such measures.
In any case, even if the pursuit of expanded domestic oil and gas production is an accepted, major national objective, and even if, as a result, the nation should become 80 percent self-sufficient in oil and natural gas by 1985, coal and nuclear power will still have to make major contributions. Production of coal will need to increase about 50 percent. The output of nuclear power plants will need to increase by some 14 times, from an installed capacity of around 20,000 megawatts today, to 120,000 in 1980, to 285,000 in 1985. As well as one can tell, given the long lead times, at least the 1980 target will be achieved.

It does not appear that new technologies such as shale oil extraction and coal gasification and liquefaction (not to mention less developed possibilities such as solar power, the breeder reactor, nuclear fusion, and deep geothermal energy) can play much of a role in the next decade unless chosen by government as deliberate objects of rapid development, at whatever cost, to provide insurance against surprises along other lines of advance. From an economic and resource standpoint given adequate policy support, oil shale seems to be in the best position among the sources in this group to make a major contribution to the nation's energy supply in a relatively short time period. This presumes solution or resolution of the attendant environmental problems. Such problems also beset the breeder reactor, and nuclear fission in general.

In our preoccupation with the immediate crisis and our concomitant desire to find long-term solutions through research and development, we run considerable risk of overlooking the equally urgent need of dealing with the intermediate, five-to-fifteen-year term. Should we fail to initiate programs toward this end, we may find ourselves proceeding from one ad hoc solution to another, and in the process inviting perhaps even more disruptive domestic and international consequences than we are currently witnessing.

Governmental machinery in the energy field has historically been fragmented among a wide number of federal agencies. Cheap, abundant energy—unconstrained by environmental controls—has dictated a generally somnolent official approach to energy matters. Ad hoc measures and temporary governmental bodies have been created to deal with sudden critical issues but once the "all-clear" was sounded, these went out of business or, at most, receded into the bureaucratic woodwork.

It is impossible, at this stage, to tell whether the somewhat frenzied organizational moves, legislative proposals, and policy credos emanating from Congress and the Executive establishment during the past year or so, particularly at the end of 1973, reflect a more enduring and focused commitment to the management of energy policy in the United States or whether they are a replay of the short-term alerts of years past. It is just possible that the severity of prospective energy shortfalls during the next few years and the anxiety about longer-term problems to which this prospect has given rise may be enough to generate a sustained coherent strategy.

But it is important to emphasize that the new directions in federal energy action did not all originate with the October 1973 Arab oil embargo. Developing problems, if not a full-blown crisis, were officially perceived well before that date. In fact, even the elevation of the problem to an "energy crisis" status dates back to the first Presidential energy Message to Congress in June 1971. The central emphasis in that statement was on technological research and development—e.g., strong federal support for the breeder reactor program and modestly increased support for coal gasification. Overall, however, neither a greatly increased level of support for energy R&D nor a cohesive policy thrust was evident.

In 1973, a wider-ranging set of actions and proposals emerged. In the second Presidential energy message (April 18) the abolition of mandatory oil import quotas (to be replaced by a "fee" or tariff system) gave institutional recognition the evolving dependence of the United States on foreign petroleum. The message also contained some mild steps and exhortation toward energy conservation. (That such messages are fragile things is shown by the fact that the statement also appointed the Secretary of Agriculture, Earl Butz, as National Resources Counselor to the President. Who, amidst the energy turmoil at the end of 1973, can remember his fleeting role?)

The third Presidential energy message came on June 29, calling for a major reorganization of energy activities in the White House and in the Executive agencies. In particular, the President announced the establishment of an Energy Policy Office in the White House and asked Congressional approval for a new cabinet-level Department of Energy and Natural Resources, as well as for an Energy Research and Development Administration (ERDA).

The latter would embrace most of the Interior Department's existing fossil-fuel R&D activity and the Atomic Energy Commission's civilian-reactor and nuclear-fuels research programs. The regulatory and licensing functions of the AEC would reside in a separate entity, thus bringing about a demarcation between the AEC's developmental and its regulatory responsibilities, a long-term cohabitation which many nuclear critics have perceived as a conflict of interest.

Before the year was out, the proposal for a new cabinet-level department had been replaced by one for a Federal Energy Administration (FEA), an entity designed to engage in data gathering and analysis, as well as policy formulation. Pending Congressional approval, this was established as a Federal Energy "Office" in the White House, whose immediate concern was dealing with the fuel emergency situation, but it's FEA successor seemed relatively. certain of eventually receiving Congressional ratification. Prospects for ERDA are somewhat more problematical.

Perhaps of greater interest than the changing organizational landscape are some of the accompanying or related substantive features. The Administration has asked Congress to deregulate natural gas field prices—a step which many deem to be the key to increased natural gas exploration, development, and production, but which is at the same time resisted by numerous consumer-oriented legislators. The Administration also called for substantially scaled-up energy R&D expenditures—$10 billion over five years. A still greater R&D effort is contained in legislation pushed by Senator Henry Jackson and passed by the Senate in December. One way or another, enhanced energy R&D seems certain to be the outcome, with the bias toward nuclear energy, characteristic of past federal funding, likely to be shifted to some degree toward coal and other promising nonnuclear fuel sources.

Long-term energy conservation is another subject on which both the Administration and Congress seemed to be moving toward something resembling a joint resolve. Congress appears to be the more emboldened in this respect, if one is to judge from two bills (one of them passed, the other near passage) in the Senate. Among other things, these measures would initiate procedures, effective with 1978-model cars, looking toward a 50-percent improvement in fuel economy by 1984. They provide federally subsidized incentives for carpooling, call for mandatory "energy-labeling" on household appliances, and set up an energy-conservation research program.

There were, of course, many proposed measures relating to the immediate oil shortage. The most sweeping of these, which narrowly missed Congressional passage just before Christmas, would grant authority to the President to impose mandatory rationing but does not direct him to do so. The bill would also provide for Presidential issuance—subject to an as yet unagreed on degree of Congressional oversight—of directives for energy allocation and conservation and for relaxation of pollution-control standards where scarcity of low-sulfur fuel precluded compliance. Meanwhile the Administration, while protesting its reluctance, seemed to be conditioning the public for the initiation of some form of gasoline rationing by spring.

Events and responses in the energy arena were moving so fast that thoughts expressed in January 1974 cannot be viewed as having a particularly long life expectancy. It is therefore necessary to reach for the "broad picture." In this stance, one cannot help marveling at the fact that in a nation (and world) where there is no demonstrated underlying physical resource scarcity likely to affect us for some years to come, it was possible to have become as beleaguered as the United States felt itself to be in late 1973. It is to be hoped that the package of institutional and policy changes emerging from this experience will succeed in putting us on the right track in the energy field, and not just for the winter heating season of 1973-74.