THE ROLE OF NATIONAL ENERGY POLICY IN MITIGATING PEAK OIL
A thesis submitted to the Miami University Honors Program in partial fulfillment of the requirements for University Honors with Distinction
by
Anne Smart
May 2007 Oxford, Ohio
ABSTRACT
Petroleum geologist M. King Hubbert correctly predicted that oil production in the United States would peak 1970 and decline thereafter. This event led to a theory that world oil production would follow the same curve with a peak expected to occur within the next decade. This project studies the economic, social, and political effects of a peak oil crisis. The decline in world oil production will cause oil prices to rise, which will force consumers to conserve energy, find alternatives, or suffer in debt. Economies and livelihoods on a global scale are at risk. Tax subsidies from the federal government encourage domestic oil production and reduce the incentive to make capital investments in more abundant, alternative fuels. The United States government has dealt with energy crises in the past by regulating energy consumption, production, and research and development using national energy policy. Analysis of the legislative history of energy policy and public administration shows a progression of agenda-setting dynamics that have contributed to (rather than mitigated) the potential peak oil problem that exists today.
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THE ROLE OF NATIONAL ENERGY POLICY IN MITIGATING PEAK OIL
by Anne Smart
Approved by:
______, Advisor Dr. William Green
______, Reader Dr. William Rauckhorst
______, Reader Dr. Douglas Shumavon
Accepted by:
______, Director, University Honors Program
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ACKNOWLEDGEMENTS
For being my professor, mentor, and advisor, and for alerting me to the issue of peak oil, I want to thank Bill Rauckhorst.
For advising me during my research, I want to thank Bill Green, Bill Newell, Doug Shumavon, and Philip Russo.
For providing funding and support, I want to thank the Miami University Honors Program.
For encouraging my progress and correcting my errors, I want to thank Dan Bernier, Tara Spinelli, Zach Germain, and George Saliba.
For proofreading and for their patience, I want to thank my parents, Jeff and Page Smart.
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Table of Contents
Introduction...... ……………………….1
Chapter 1: The Situation………………………………………………………………..2 Hubbert’s Curve……….2 Peak Predictions……….9 Reserve Data……….11 Domestic Oil Reserves……….12
Chapter 2: The Consumers……………………………………………………………..16 Origins of Oil Dependence……….16 Versatility of Oil……….18 Alternatives to Oil……….20 Consumer Behavior...... 24 World Oil Demand……….28 Consumers and the Government……….31
Chapter 3: The Producers……………………………………………………………….33 Profit and Power……….33 Foreign Oil……….35 Social Costs……….37 Market Failures……….40
Chapter 4: The Government……………………………………………………………44 Conservation……….44 Energy Security……….46 Crisis……….49 Alternative Fuels……….56 Climate Change……….62
Conclusion...... ……………………….……….67
Bibliography...... ……………………69
Appendices……………………………………………………………………………...77
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List of Tables and Figures
Figure 1. United States Oil Production……….3 Figure 2. Ultimate Production of “Exhaustible” Resources……….4 Figure 3. Prediction for World Oil Production……….6 Figure 4. Global Oil Discovery and Production……….8 Figure 5. OPEC and Non-OPEC Total Petroleum Production……….11 Figure 6. Existing and Proposed SPR Sites……….14 Figure 7. U.S. Energy Consumption by Fuel, 1980-2005……….18 Figure 8. Oil Use by Type in the U.S. in 2005……….19 Figure 9. Coal Production in the U.S. ……….21 Figure 10. Seasonal Patterns in U.S. Oil Demand……….27 Figure 11. China’s Energy Consumption……….29 Figure 12. Primary Energy Consumption and Electricity Consumption in 2004……….30 Figure 13. Net Energy Imports by Source, 1973-2005……….36 Figure 14. Negative Externality……….38 Figure 15. Tax-Based Subsidies to the Domestic Oil Industry……….43
Table 1. Energy Density of Common Materials……….17
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Preface
This thesis is a culmination of my undergraduate career. As a double-major, I sought to combine the theoretical perspectives of environmental studies and public administration into one interdisciplinary project. I have been following the issue of peak oil for nearly three years. During an independent study on alternative energy in the spring semester of 2005, Bill Rauckhorst gave me the book Out of Gas by David
Goodstein. This opened my eyes to an issue of grave importance. I have since read books and articles, and attended a conference all dedicated to educating the public about peak oil. With urgency, I ask you to read this project and consider what your future would be like without abundant, cheap oil.
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Introduction
The discovery of oil reservoirs in the late 1800s contributed to the Industrial
Revolution, revolutionized the transportation sector, and contributed to the economic growth of the United States at the turn of the century. The cheap price and convenience of oil relative to other energy sources has contributed to a dangerous dependence on this finite fuel for the majority of our energy needs. Without oil, the wealthiest nations in the world could face a drastic change in the lifestyle to which we have become accustomed.
The world may never run out of oil, but in the near future reservoirs will run low and oil will no longer be economical to produce and extract. Current levels of energy demand encourage producers to supply cheap oil while it is available rather than to invest in other fuels. When global oil production peaks, the market will be unprepared to offer affordable alternatives to consumers.
Government leadership and investment is needed now, before the peak occurs.
The purpose of this project is to outline the political, sociological, and economical issue of peak oil as it relates to national energy policy in the United States.
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Chapter 1: The Situation
We have cried ‘wolf, wolf’ several times in the past but in the parable, you know, the wolf did come. Representative Roscoe Bartlett (Congress, 2005)
Despite more than a century of warnings, the world is unprepared to meet the challenges presented by a decline in global oil production. Ever since the first oil well was drilled, geologists have suggested that this abundant resource will eventually be exhausted. However to this day, these warnings have largely been ignored.
Hubbert’s Curve
M. King Hubbert first presented the peak oil theory at the American Petroleum
Institute Drilling and Production Practice conference in the spring of 1956. As a petroleum geologist employed by Shell Gasoline, Hubbert put his career and reputation on the line by declaring that the timeline of oil production in the lower forty-eight states could be graphed on a curve, with a peak and subsequent decline occurring in 1970.
After the peak, it would become increasingly uneconomical to remove the remaining reserves with available technology. In his presentation, Hubbert showed that the decline in crude oil and coal production in several states had been preceded by a peak in new discoveries (See Appendix A). Domestic oil discoveries had peaked in 1930. According to Hubbert, it was only a matter of time before the oil discoveries and production began to deplete abroad as well.
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Initially, the theory was not well received. Hubbert based his figures for the peak of oil production in the United States on complicated mathematics that were hard to decipher and critics felt that Hubbert was hiding something in his work. Observers were confused as to why an employee of a large oil corporation would claim that his employer’s most valuable asset was eventually going to run out.1
Hubbert predicted in the graph below that if the geologic data were correct and
150 to 200 billion barrels of proven reserves existed, then the U.S. oil production would peak between 1965 and 1970 depending on the probable reserves.
Figure 1. U.S. Oil Production (Hubbert, 1956)
Hubbert’s prediction turned out to be true – just a year after his findings were published in Resources and Man (1969). Oil production in the continental U.S. peaked at nine
1 David Goodstein (2004) wrote that M. King Hubbert made his first presentation “very much against the will of his employer” (p. 23). However, Kenneth Deffeyes (2005), a co-worker and close friend of Hubbert, has stated that the geologist enjoyed “superstar status” at Shell before and after publishing the peak oil theory (p. xi). In any case, Hubbert was not fired after making his claims.
4 billion barrels in 1970. Soon a frightening realization spread amongst geologists and petroleum stakeholders. Hubbert had concluded in his presentation and in the later publication that the peak oil model for the U.S. might also be applicable to other countries and to the whole world. Since the first prediction had been correct, there was reason to fear that Hubbert’s other prediction might also prove true.
Hubbert based his predictions on three assumptions (Goodstein, 2004). The first assumption was that oil is a finite resource. According to the resources production ratio
(known in the resource economics field as the R/P ratio), natural resource production follows a curve that begins at zero when the resource or its modern use is discovered and then peaks at some point before declining as the source runs out faster than the Earth can naturally create it or replace it.
Figure 2. Ultimate Production of “Exhaustible” Resources (Hubbert, 1956)
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Hubbert showed in Figure 2 that the production peak for any finite natural resource could be calculated as a function of quantity, production time, and cumulative production. Oil is a finite resource because it formed under unique conditions; less than 0.1 percent of the
Earth is known to contain petroleum reservoirs.
These reservoirs are found in porous sedimentary rock where petroleum fluid permeated and became trapped between rock layers. Animal remains were fossilized in source rock (hence the name “fossil fuel”) that eventually experienced such significant pressure that the organic material formed a fluid. (The difference between coal and oil is that coal is made from plant material which contains less hydrogen from fats than the marine animal remains from which oil formed.) If conditions are adequate, the petroleum fluid then flows from that source rock to the reservoir rock where it is trapped. The fluid retains its liquid form throughout the process because of the nonreactive properties of its organic, hydrocarbon molecules. The current petroleum supply formed over 500 million years and although the same geological processes can still occur, the amount of oil produced in this lifetime or the next hundred lifetimes will be insignificant in the big picture.
The second assumption was that the rate of oil production is dependent to the rate of oil discovery. According to David Goodstein (2004), Hubbert showed that “once the rate of increase of oil discovery starts to decline, it’s possible to extrapolate the declining rate to find where growth will stop altogether. At that point, all the oil in the ground has been discovered, and the total amount there ever was is equal to the amount that’s already been used plus the known reserves still in ground” (p. 27). The amount of oil that is discovered in an oilfield is known as a reserve. There are two types of oil reserves:
6 proven (or proved) and probable. Proven reserves are the amount of oil in a reservoir that has been discovered by exploration and can be extracted under current economic conditions with the available technology. Probable reserves are unproven reserves that may be unrecoverable due to physical or equipment limitations.
To make a prediction for the world production peak, Hubbert used data from the geologist for Standard Oil Company and another geologist working for the American
Petroleum Institute.
Figure 3. Prediction for World Oil Production (Hubbert, 1956)
Hubbert’s most optimistic prediction was that if 1.25 trillion barrels proven reserves existed, world production would peak around the year 2000. This suggested a forty-year window between the peak of oil discoveries and the peak of oil production.
Conventional oil can be found on land and in the ocean. Oil reservoirs are discovered by creating disturbances in the earth’s crust. On land, the vibrations are
7 caused by dynamite or heavy machinery (often trucks). In the ocean, air guns are used to make underwater bubbles. The seismic activity caused by the disturbances is measured using equipment very similar to what is used to measure earthquakes. The seismic waves are then mapped based on how quickly they move (more slowly through liquid) and where they bounce off or penetrate.
Geologist Kenneth Deffeyes predicted that the remaining discoveries “will look more like change for a hundred-dollar bill: one twenty, two tens, two fives, ten ones, a roll of quarters, two rolls of dimes, five rolls of nickels, and twenty rolls of pennies”
(Deffeyes, 2005, p. 49). The last giant oil field discoveries in non-Organization of
Petroleum Exporting Countries (OPEC) countries were Canatrell off the coast of Mexico in 1976 and Prudhoe Bay, the site of the Arctic National Wildlife Refuge (ANWR), in
1968 (Roberts, 2004, p. 57). Interdisciplinary author Paul Roberts (2004) wrote, “The trend is clear: in places where international companies are allowed to look—that is, places that OPEC does not control—the industry is finding smaller and smaller fields” (p.
57-58). However, even in OPEC-controlled areas, giant oilfields have not been recently discovered.
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Figure 4. Global Oil Discovery and Production (Campbell, 2003)
Figure 4 shows that despite extreme discovery fluctuations between years, discovery clearly peaked and declined in the late 1960s.
Hubbert’s third assumption was that once production begins to decline it will continue to decline forever. Opponents of the peak oil theory argue that despite the
Earth’s physical limitations, oil production will continue indefinitely into the future as technology improves. Michael Lynch, Chief Energy Economist of DRI-WEFA, Inc., stated that “the primary flaw in the model is the assumption that recoverable petroleum resources are fixed, when the amount of oil which can be recovered depends on both the total amount of oil (a geological factor which is fixed), but also dynamic variables like price, infrastructure, and technology” (as cited in Heinberg, 2005, p. 129).
Advancements in drilling technology have allowed oil to be drilled to greater depths and
9 in more locations and directions than ever before.2 Enhanced recovery projects are allowing more oil to be removed from the ground. These projects involve the flooding of reservoirs with water or carbon dioxide to pump out the oil that does not easily flow up the well pipe. However, despite these advancements in technology, only about half of the oil in an oilfield is actually pumped out of the ground (Deffeyes, 2005, p. 27).
Peak Predictions
Global oil production has remained relatively flat over the past three decades (See
Figure 4). Although oil production has peaked in other countries—most recently in
Norway, and in all but two of the OPEC countries—global oil production has yet to conclusively reach its maximum output. Peak oil theorists—including geologists, physicists, and political strategists—are split by varying degrees of optimism (or lack thereof) on the date of the world production peak. The worst-case scenario would be that if Hubbert’s assumptions are correct, then the peak may have already occurred. Deffeyes
(2005) “nominated” Thanksgiving Day, November 24, 2005 as “World Peak Oil Day” based on the fact that world oil production only grew 0.6 percent per year between 1998 and 2003 (p. 3). However, while there would be a slight delay between the actual peak and the moment that it is recognized in world crude oil production data, over a full year has gone by without evidence that a peak occurred.
Peak oil theorists agree that even with national policy safeguards for an energy crisis, a dramatic change in life as we know it will occur shortly after the decline in world oil production occurs and the reserves run out. The remaining oil would be difficult and
2 Directional drilling was first used in an attempt to extract oil from underneath the Oklahoma State Capitol (Deffeyes, 2005). A well was drilled a half-mile away and then a mud-operated turbine was used to drill at a 90-degree angle to the reservoir.
10 damaging to the environment to extract. It would be ethically impossible to distribute without violent competition. Kenneth Deffeyes (2005) predicted a grim future: “Am I now promising war, famine, pestilence, and death? If we can keep the petrochemicals industry healthy, we might avoid the pestilence part. The other three are serious possibilities” (p. 8). Other authors noted that declines in oil production could lead to a reduction in the burning of fossil fuels, which would cause a reduction in greenhouse gas emissions that contribute to global warming. David Goodstein asked in his book Out of
Gas, “Could it be that Hubbert’s peak will save us from destroying our planet?” (p. 18).
Goodstein also made the disheartening suggestion that the rise in oil prices could cause a crippling of the world economy, which would immediately throw the world’s most wealthy countries into depression.
Interdisciplinary author Paul Roberts (2004) sided with those whom he called “oil optimists” that believe the peak will occur between 2015 and 2020 (p. 13-14). In 2015, oil will have peaked in all producing countries outside of OPEC; OPEC would reach a peak by 2025. The most optimistic estimate for the year of the peak comes from the
U.S. Geological Survey (USGS). In 2000, after a five-year study conducted for the federal government, USGS concluded with 95% confidence that there were at least two trillion barrels of oil available prior to start of world oil production. That study also concluded with 50% confidence that there may be as much as 2.7 trillion barrels with new discoveries that would occur during the next thirty years. This would place the peak in the year 2036. But according to Goodstein (2004), “the additional 0.7 trillion barrels to be unearthed would amount to discovering all over again all the oil that’s now known to exist in the Middle East” (p. 29).
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Figure 5. OPEC and Non-OPEC Total Petroleum Production (Energy Information
Administration (EIA), 2006a)
The International Energy Outlook 2006 report published by the Energy Information
Administration (EIA), provider of the official energy statistics of the U.S. government, showed in Figure 5 that energy production globally would continue a steady increase through the next two decades. Although the report ceded that oil production would peak in Norway, the United Kingdom, and Malaysia within this decade, “Peaking of world oil production is not anticipated until after 2030” (p. 29).
Reserve Data
The exact year of the peak is largely based on opinion. Actual reserve data have been clouded by politics. In the mid-1980s, a report issued by the OPEC showed that proven reserves for those countries had doubled in size without any reported new discoveries or new wells being drilled. With careful calculations, peak oil authors Colin
Campbell and Kenneth Deffeyes (2005) concluded that at least 80% of the new data
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“materialized out of thin air” (p. 47). On February 19, 2007, the New York Times reported that Iraq was substantially increasing its estimates of the amount of oil on Sunni lands after “quietly paying foreign oil companies tens of millions of dollars over the past two years to re-examine old seismic data across the country and retrain Iraqi petroleum engineers” (Glanz, 2007). Roberts wrote that “these governments cannot be counted on to bear the best interests of the West in mind in setting pricing policy” (p. 14). An overestimate by any exporting country would leave the United States drastically unprepared for the peak.
One of the reasons that OPEC data can be manipulated is that most of the countries within the organization have nationalized oil companies. The governments of
Venezuela, Saudi Arabia, and Iran control oil operations and profit from the sales
(Deffeyes, 2005). This is not unusual. Petroleum, as a subsurface natural resource, is typically owned by the government that has jurisdiction over the land or continental shelf in which the reservoir is found. These governments may grant oil companies the right to explore or produce oil. In some cases, the government may benefit from receiving a portion of the sale of that oil reserve, in addition to excise or export taxes levied on the oil company.
Domestic Oil Reserves
Petroleum rights in the United States are slightly different than in other nations.
During the settling of the West, the Homestead Act of 1862 allowed private citizens to buy public land, including the rights to surface and subsurface minerals. Landowners then had the option of selling their mineral rights to another party. The Homestead Act
13 also set aside large tracts of land for public (“land grant”) universities. The mineral rights for these properties could be sold to generate education funds. Today, landowners still retain their deeded mineral rights. The federal government owns the mineral rights for all public lands including national parks. Chapter 4 discusses the debate around leasing public land to private producers. In most cases, the mineral rights for Indian reservations are also owned by the government.
Individual states have the rights to petroleum found within three miles of the state’s shoreline. The federal government, through the Mineral Management Service
(MMS), controls petroleum located outside of the three-mile boundary in an area known as the Outer Continental Shelf (OCS). At present there is a moratorium on drilling in the
OCS. This moratorium has prevented offshore oil exploration for the past 25 years, except in Louisiana and Texas where the offshore oil industry continues to thrive. There have been several bills proposed to remove this moratorium, including significant debate as part of the Energy Policy Act of 2005, but as of January 2007, the moratorium has not been lifted. Opponents of the moratorium argue that opening the OCS to drilling would add oil to the U.S. reserves and bring in revenue for the U.S. government. Supporters of the moratorium believe that drilling can be damaging to the ecosystem and some states have argued that oil rigs and ships necessary for exploration would harm coastal tourism.
Even if the moratorium was lifted, new discoveries would not be large enough to cause a delay in the peak of world oil production.
The United States boasts the largest emergency crude oil stockpile in the world.
In 1975, Congress authorized the creation of the Strategic Petroleum Reserve (SPR) as a response to the energy crisis caused by the Arab Oil Embargo of 1973. Chapter 4
14 discusses the history of the SPR in more detail. Today, over 727 million barrels can be stored in the 62 salt caverns located in Texas and Louisiana (Department of Energy,
2007). Oil is added and removed by pumping freshwater into the caverns. The reserves are connected to pipelines that reach almost half of the country’s refineries. The Energy
Policy Act of 2005 required the U.S. Department of Energy to raise the capacity of the
SPR to one billion barrels.
Figure 6. Existing and Proposed Strategic Petroleum Reserve Sites (Department of
Energy (DOE), 2007)
As Figure 6 shows, the Department of Energy (DOE) is in the process of adding new sites and expanding existing sites along the Gulf of Mexico to meet the new SPR capacity requirement.
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As of 2005, Americans consume about 20 million barrels of oil a day. If the country were cut off from all petroleum imports, the SPR would last less than two months at current levels of demand. Politically this may seem unlikely but geologically, when the global production peak occurs, or if OPEC prevents the sale of its supplies after the non-OPEC peak happens, the United States would not be able to live on its own oil for very long. In the State of the Union Address in January 2007, President George W. Bush proposed doubling the current capacity of the SPR to 1.5 billion barrels by 2027. This proposal has not yet been backed by any legislation.
These domestic petroleum reserves are all limited and no amount of policy action or Congressional funding is capable of expanding these reserves infinitely. At a hearing in the House of Representatives titled “Understanding the Peak Oil Theory,”
Representative Roscoe Bartlett (R-MD) said:
If we could pump the offshore oil and ANWR oil tomorrow, what would we do the day after tomorrow? And there will be a day after tomorrow. This may be a rainy day. I think there is going to be a rainier day and I would like to husband these resources for that rainier day. (Congress, 2005)
Energy security for the United States depends on available resources. The next chapter discusses our dependence on oil and patterns of consumer behavior, which has limited the government’s ability to promote alternative fuels.
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Chapter 2: The Consumers
Our economy and way of life is dependent on cheap oil. Representative Tom Udall (U.S. Congress, 2005)
The United States depends on oil. Unfortunately, this high level of demand can be dangerous and may be costly for society if the abundant supply suddenly depletes. An analysis of consumer behavior highlights the difficulties that policy must overcome when encouraging the consumption of an alternative fuel source.
Origins of Oil Dependence
Oil has been a source of energy to humans for several centuries. Ancient Greek civilizations used oil from natural oil springs to make flaming weapons and glue.
Distilled oil was occasionally used for lighting lamps in cultures dating as far back as the
Persians in the first century A.D. Oilfields were first discovered in the early 1800s in
Baku (on the Caspian Sea) and in 1859 in Pennsylvania but engineers did not drill deep enough into these fields to truly understand the enormity of what they had found
(Deffeyes, 2005). At this time, the oil produced was mainly used as kerosene for oil lamps. It was coal, not oil that fueled the Industrial Revolution. Coal-powered mass transit and factories defined city life in the United States in the nineteenth century. By the end of the 1800s, Americans had already become accustomed to using greater amounts of energy than they had in the previous centuries.
The Age of Oil officially began at the turn of the 20th century when a well was drilled into the giant oilfield called Spindletop in Beaumont, Texas on January 10, 1901.
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Nineteenth century oil wells had produced fifty to one hundred barrels a day and Russia had set a few records with wells that produced almost five thousand barrels of oil a day.
To the world’s surprise, Spindletop spouted five thousand barrels of oil during its first hour of operation (Roberts, 2004, p. 32). When oilfields even bigger than Spindletop were discovered in locations spread out all over the globe, oil production took off.
Eventually, oil production became an affordable venture and the industrialized world began switching to the liquid fossil fuel. The invention of the gas-powered internal combustion engine revolutionized the automobile industry and made oil the foremost energy source that it remains today.
Oil is cleaner to burn than coal or wood, which were the leading fuel sources in the 19th century. This made oil attractive for heating homes and businesses. Oil is also a more efficient fuel, which means that it has higher energy content per unit volume than coal or wood.
Table 1. Energy Density of Common Materials (Fanchi, 2004)
Material MJ kg-1
Crude oil 42
Coal 32
Dry wood 12.5
The data in Table 1 show that the energy density or energy-to-mass ratio of crude oil is greater than the energy density of coal. For this reason, gasoline is lighter to carry in a vehicle and lasts for a greater distance per weight than coal. In fact, the use of oil in
18 transportation is perhaps the most important reason for the steady increase of oil consumption during the 20th century.
Versatility of Oil
The United States now ranks first in the world in oil consumption (See Appendix
B).3 This is largely due to the fact that Americans consume more oil than any other fuel source available.
Figure 7. U.S. Energy Consumption by Fuel, 1980-2005 (EIA, 2007)
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40 Petroleum 35
30
25 Natural Gas 20 Coal
Quadrillion Btu Quadrillion 15
10 Renewable 5 Nuclear 0 1980 1990 2005
Figure 7 shows that in 2005, oil was used to produce over 57% more BTUs of energy than coal, which was the next leading fuel source. When measured equivalently by weight, Americans were using 937.6 millions tons of oil and only 564.3 million tons of coal or about 60% less coal (EIA, 2006a).
3 According to the Central Intelligence Agency (CIA) World Factbook, the European Union, as a conglomerate of 25 countries, imports more oil per day than the United States (CIA, 2006).
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Preference for oil can be linked to the fuel’s versatility. Daniel Yergin (1992) wrote that “we are so dependent on oil, and oil is so embedded in our daily doings, that we hardly stop to comprehend its pervasive significance” (p. 14). Figure 8 suggests that oil can be used in nearly all energy sectors.
Figure 8. Oil Use by Type in the United States in 2005 (EIA, 2006b)
Figure 8 indicates that of the 20 million barrels of oil used in the U.S. each day, a total of 9.1 million barrels of gasoline is used to fuel personal vehicles and light trucks or sports utility vehicles. Distillate fuel oil, used mainly as diesel, is burned at 4.1 million barrels per day to fuel large trucks or tractor trailers for shipping. Commercial and military aircraft consume 1.6 million barrels of jet fuel each day. In addition, over
500,000 barrels of oil were used to pave roads and runways in 2005.
Each day, 4.3 million barrels of oil are used for purposes other than transportation and heating. Liquefied petroleum gas (LPG) is a mixture of propane and butane that is
20 made from refined crude oil and used as a refrigerant and as a propellant for aerosol cans.
(LPG is also used a source of heat.) Residual fuel oil is used for generating electricity.
Oil in the form of petrochemicals contributes to the production of plastics, pharmaceuticals, chemicals, synthetic fibers like Plexiglas and Teflon, paints, and fertilizers.
Alternatives to Oil
Alternative fuels can be substituted for oil for most uses. What makes consumers choose oil over these other energy options? Consumer preference depends on a variety of factors including the quality of the energy source and the technology necessary to use it, the relative price of other sources, the ability to switch to other sources in the short term, the security of the supply of the source, and the environmental effects of using that energy source.
Coal is the most abundant fossil fuel available in the continental U.S. The peak for domestic coal production is not expected for several more decades. Coal can be used for heating, electricity generation, and may even be a source of fuel for transportation through the process of coal liquefaction. Burning coal releases sulfur and carbon dioxide, which contributes to acid rain and global warming. Low-sulfur coal is available and the technology exists to remove sulfur inside the smokestacks but both of these options can be expensive. The Department of Energy has invested billions of dollars in carbon sequestration research but the ability to remove CO2 from emissions may still be a few years away.
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Figure 9. Coal Production in the United States (Hubbert, 1956)
Hubbert showed in Figure 9 that domestic coal production will peak around 2150 if probable reserves remain around 9.5 trillion tons. Environmental regulations and increased housing densities may have contributed to increased recoverability since this graph was created.
Natural gas is another relatively abundant fossil fuel that could be used as an alternative to oil or at least in the transition to renewable energy. Natural gas is found in oilfields in a layer above the oil that was formed when the source rock is overcooked. It is easy to extract but transportation of the gas can be dangerous. Natural gas can be burned for heat or chemically converted to a liquid that readily substitutes for gasoline.
Compared to other fossil fuels, natural gas emits less CO2 into the atmosphere when it is burned (Aubrecht, 2006). Unfortunately, the peak for natural gas production is expected to occur only about two decades later than the peak for oil (Goodstein, 2004, p. 33).
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Another possibility for reducing oil dependence would be to expand the nuclear fission industry. The infrastructure for nuclear energy already exists in this country, but the construction of new nuclear power plants ceased in the 1970s due to post-Chernobyl fears of a nuclear disaster and the fact that President Carter cut funding for nuclear waste reprocessing over fears of proliferation (Deutch & Moniz, 2006). The peak for uranium production has not yet been projected. Nuclear energy does not produce greenhouse gas emissions but it does create radioactive waste. Due to political debate and citizen protests, the federal government has yet to find a permanent place to store the waste that has accumulated over time.4
Hydrogen has been speculated to be the panacea for peak oil due to its abundance
(in water) and higher net energy than crude oil and coal. Although this makes hydrogen a very efficient, it is important to note that another fuel source (such as coal) is needed to separate hydrogen from oxygen in water molecules (Goodstein, 2004, p. 39). This means that hydrogen is not actually a fuel source; rather it is a means of transporting or storing Comment [AS1]: Hydrogen is just as another fuel source. flammable as gasoline.
Oil shale is unconventional oil that could contribute to energy needs in the future.
Oil shale is source rock that did not heat or compress enough to produce conventional oil.
It is abundantly available in the United States; there is more oil shale in Colorado,
Wyoming, and Utah then there is conventional oil in the world (Goodstein, 2004, p. 31).
This energy source has not been used significantly yet because extraction is expensive,
4 Radioactive material is currently being stored at 131 temporary sites in 39 states (DOE, Office of Public Affairs, 2007). In 1987, an amendment to the Nuclear Waste Policy Act directed the Department of Energy to set up a permanent site at Yucca Mountain but politics and development setbacks have stalled the project.
23 energy-intensive, and destructive to the environment. Oil shale would not be a viable alternative to conventional oil until extraction and production technology improves.
Solar energy is a renewable resource that does not need to be extracted, imported, or burned. It is currently used passively as a heat source and actively to generate electricity through photovoltaic cells. Carbon dioxide is not a bi-product of either method. Solar energy has a weaker wattage than most other energy sources but that does not make it ineffective. Even in the darkest corners of the country, like New Hampshire in December, solar panels can be used. In many cases, homeowners and business owners that have collected solar energy for their own uses actually generate extra energy that can be put back into the municipal grid. Solar panels are still expensive when compared to the fossil fuels and many households cannot afford to make this purchase. Cities and businesses are capable of investing in solar panels for office roofs and fields that could provide power to neighboring homes as well. In addition, solar paneling is not obtrusive and residents are less likely to oppose this energy source because of NIMBY (“not in my backyard”) syndrome.
Wind is another renewable energy source that is becoming more economical as its popularity and investment increases. There are two categories of wind power. The first category is small wind, which refers to wind turbines that can be placed on rooftops and used to power individual buildings or homes. The second category is the large wind turbines which operate in groups on farm fields or mountaintops and provide power for entire communities. Both types have advantages and disadvantages. Small wind can be beneficial in rural communities where homes and schools are separated by several acres of open space. Unfortunately, small wind cannot work in all parts of the country because
24 it needs a minimum wind speed to function properly. David Goodstein (2004) wrote that
“there are only a limited number of places in the world where the wind blows strongly and steadily enough to be useful. We may inherit the wind, but we won’t be able to live on it” (p. 111).
Large wind, like small wind, has the benefit of being relatively harmless to the environment.5 Farmers can continue to use their land while benefiting from the additional income brought in by hosting a set of wind turbines on their property. Some communities have protested wind energy because the turbines obstruct the horizon and mountaintop views. A proposed coastal wind project in Cape Cod, Massachusetts was protested because of the eyesore that the turbines were feared to be, which could reduce tourism in the area.
Geothermal energy is heat from the ground that can be harnessed and used for space heating. In a few locations around the world, geothermal heat rises close enough to surface to be collected and used for power generation. Like the other renewable energy sources, geothermal energy would never run out but it is unlikely that it can be used for more than space heating in the near future.
Consumer Behavior
Alternatives to oil obviously exist but demand for these fuel sources is lagging behind the demand for oil. Econometricians, who study economic trends and patterns in consumer behavior, have found that there are several patterns that explain large scale energy demand. The first pattern is that when fuel prices increase, the purchasing power
5 Some studies have found that wind turbines interfere with bird migration and that birds may be killed in collision accidents (Pearce, 2005).
25 of consumer’s income decreases (and visa versa) causing consumers to seek alternatives.
According to John Mitchell (2001), “high incomes caused by lower prices will increase energy consumption; the consumer’s allocation of the increased income to energy purchases may reduce as income rises” (p. 25). This is known as “the income effect.”
Increased income is a function of gross national product (GNP). A study from Resources for the Future authored by Douglas R. Bohi (1989) found that “the cost of energy as a share of GNP is too small to account for the large reductions in economic activity” immediately after price shocks such as those following the oil embargoes of 1973 and
1979 (p. 1). Energy consumption tends to gradually react to price changes as the increased expenses add up over time without relief from a change in wage earnings.
However, reducing the price of energy does not necessarily increase the amount of oil purchased when purchasing power has increased.
The second pattern is that an increase in energy costs may lead consumers to purchase energy-saving equipment like new building materials or more efficient cars, which reduce fuel needs and likewise demand. This is known as “an efficiency effect.”
According to John Mitchell (2001), the efficiency effect may actually benefit consumers if it occurs amongst more than one fuel source in a competitive market. The author wrote, “In reality, the development of competitive markets in both gas and electricity in the United States and Europe (now followed by Japan) has tended to ensure that the benefits of such technical advances accrue to the consumer through lower final prices” (p.
26). However, if the price of new equipment rises in response to the increased fuel costs, then a change in demand will not occur.
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The third pattern of energy demand is caused by the cost of retro-fitting buildings to improve energy efficiency. New equipment or an entirely new building may not be economically efficient if a working facility already exists, regardless of the long-term energy savings that could occur. Mitchell wrote, “The need for new capital purchases
(house, car or manufacturing equipment) limits the efficiency option as long as the old capital lasts – that period varying with the age of the equipment and the particular relationship between capital and fuel costs” (p. 27). This effect limits the ability of individual households, businesses, and communities to transition towards alternative fuels.
In a study edited by Paul Stern and Elliot Aronson, the National Research Council
(1984) found that consumer choice to improve efficiency is limited in scope.
Intermediaries often make energy decisions for a consumer, such as builders who choose what type of insulation or air conditioning unit to put in an apartment building.
Household conservation may also be significantly stifled if the home is rented. The manufacturers of consumer products also limit consumer choice. Although consumers may chose to pick a product that is marketed as energy-saving, “energy users have limited control over the assortment of energy-using products from which they can chose”
(Stern et al., 1984, p. 49). The most energy-efficient alternatives to oil may be too expensive or require too large of a capital investment to be viable options for the average consumer. However, communities, municipalities, cities, and states may have the ability to absorb these short-term costs to improve energy efficiency for the entire entity. Cities or states may also offer grants to smaller entities or even households to make capital purchases for energy savings.
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The fourth pattern is known as “the fuel-switching effect” or the substitution effect. This effect occurs when the price of one fuel is affected by the presence of a cheaper substitute. Oil overtook coal as the favored energy source in this way because oil was cheaper to produce and to transport. The competition created by the presence of alternatives in a market causes producers to adjust their prices accordingly, which benefits consumers. Although there may be a significant cost to change equipment when changing fuels, the relative price of the fuels generally accrues savings for users.
Finally, the “seasonal effect” occurs when crude oil prices spike during periods of high demand due to the summer and winter seasons. In March 2005, an article titled
“Fuel’s Gold” in the Economist reported that during a cold weather spell in Europe and
North America prices had “risen by more than 20% in the past month” (p. 71). At the time, OPEC members were worried that raising production would not be economical because energy demand would fall again with the advent of spring.
Figure 10. Seasonal Patterns in U.S. Oil Demand (EIA, 2003)
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Figure 10 shows an increase in domestic demand for high sulfur distillate (heating oil) in winter months and an increase in low sulfur diesel (transportation fuel) in summer months. It may be important to note that this graph is for the entire United States. Since seasonality varies by region, it can be expected that more extreme patterns might be viewed when regions are graphed separately.
Robert Bamberger (2003) described attempts by the administration of President
Bill Clinton to prevent an energy crisis from occurring during a winter when particularly bad weather was forecasted. In this situation, the President considered opening the SPR to elevate oil prices but instead concluded that the problem was regional. Clinton then established a 2 million barrel Northeast Heating Oil Reserve to provide additional oil for the region during that winter and in the future.
World Oil Demand
These short term demand patterns contribute to a long term increase in global energy demand. The U.S. Energy Information Administration (EIA) estimates that world oil demand will increase from 78.0 million barrels per day in 2002 to 119 million barrels per day in 2025 (cited Cordesman & Al-Rodhan, 2006). The Center for Strategic and
International Studies published a study in 2006 that theorized that the rise of new economic powers, especially in Asia, has caused this rise in demand that in turn, is causing a rise in global oil prices. The EIA predicts that the United States and Asia will account for 60 percent of the increase in global oil demand between 2002 and 2025 (cited in Cordesman & Al-Rodhan, 2006).
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China is leading the global rise in energy demand due to rapid economic growth.
With a population of 1.3 billion people, China ranks second to the United States in oil consumption and first in coal consumption.
Figure 11. China’s Energy Consumption (U.S. Dept. of Defense, 2005)
Figure 11 shows an increase in energy consumption in China since 1992 that is projected to continue through 2025. As recently as 1990, the Chinese relied on diesel for transportation fuels, although most citizens were too poor to afford personal vehicles.
Higher incomes are now allowing the Chinese middle class to make such purchases. In
2002, automakers in China produced and sold one million cars for the first time ever
(Roberts, 2004). This increase in driving causes pollution problems; seven of the ten smoggiest cities in the world are in China (Roberts, 2004). By 2020, China is expected to produce one-fifth of all energy-based carbon dioxide emissions (Roberts, 2004).
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Figure 12. Primary Energy Consumption and Electricity Consumption in 2004
(Central Intelligence Agency, 2005)
12000 18,000 16,000 10000 14,000 8000 12,000 Primary Energy 10,000 Consumption (million tonnes) 6000 8,000 Electricity (billion kWh) 4000 6,000 (million tonnes) 4,000 (billion hours) kilowatt 2000 Consumption Electricity
Primary Consumption Energy 2,000 0 0 China United World States
Figure 12 shows that China already accounts for 14.3% of global primary energy consumption. In addition, China is catching up to the United States in electricity usage with 14.1% of global electricity consumption. The United States in comparison is responsible for 24% of global primary energy consumption and 23.7% of global electricity consumption. China’s energy demands will continue to rise in the next two decades at a rate of about 2.5 percent each year. This would more than double the current demand on the world oil supply (Roberts, 2004).
Increases in global energy demand and a decline in world oil production will raise oil prices, which will force consumers to seek alternative fuels. The use of energy improves the standard of living in developing countries; heating and electricity improve the quality of life. John Sheffield (2002) wrote, “Failure to raise energy use per capita can lead to sustained high rates of population growth and to an even higher energy use
31 later” (p. 41). It is therefore necessary to address the increase in energy demand as vital to human development. Sheffield continued: “It is not clear whether cultural changes [in technology and lifestyle] can work rapidly enough to lower the rate and stabilize population without the accompanying improvements in standard of living bound up with increased energy use” (p. 41). The federal government must accept that there will be an increase in energy demand and adjust our own national energy policy accordingly.
Consumers and the Government
The power of American consumers to influence energy policies, and likewise the alternatives available to them in the marketplace, will be a determinant to the outcome of the peak oil issue. One way that the population influences energy policy is by voting in local, state, and national elections. John Kingdon (2003) wrote:
The administration—the president and his political appointees—is central to agenda setting, but has less control over the alternatives that are considered and less control still over implementation. Congress is central to both agenda setting and alternative specification, although the members have more impact on the agenda while the staffers concentrate more on the alternatives (p.42-43).
Constituents can look forward to alternative energy becoming an agenda item if they vote for politicians that feel strongly about alternative fuels and renewable energy. Elected federal representatives also have the ability to gain funding for energy projects in their communities through pork barrel legislation or earmarks in other bills. 6
Kingdon (2003) wrote: “Change is aided by a constituency in favor of it and hampered by the absence of such a constituency or by the active opposition of organized interests” (p. 163). Although elective representatives should be receptive to the interests
6 Pork barrel legislation is an appropriation bill that includes funding intended for one legislator’s constituency, typically as an agreement made to support another legislator’s local project.
32 of their constituency, interest groups are strong outside participants in the policy process.
Rather than influence what gets put on the agenda in a session, interest groups are often better at blocking proposed actions and pushing for alternatives. The next chapter discusses the oil industry as a participant in energy policy development.
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Chapter 3: The Producers
Over the past 100 years, fueled by cheap oil, the United States has led the revolution in the way the world operates. Replacing this resource in a relatively short time is not only an incredible challenge, but also imperative to the survival of our way of life. Representative Tom Udall (Congress, 2005)
The oil industry, and likewise the nation, has profited from the abundance of this fuel source. Even as domestic oil production decreases and social costs increase, government intervention in the form of tax breaks and subsidies has allowed the industry to continue operations. However, this intervention may not be available for international companies if global oil production peaks.
Profit and Power
John D. Rockefeller is credited for founding the modern oil industry in February
1865, when he purchased a successful oil refinery in Cleveland, Ohio at the price of
$72,500 (Yergin, 1992, p. 35). As the kerosene and lubricant market took off during post-Civil War reconstruction, Rockefeller opened several more refineries along the
Atlantic Coast. By 1879, Rockefeller’s company, Standard Oil, controlled 90 percent of
American’s refining capacity (Yergin, 1992, p. 43). Daniel Yergin (1992) in Prize wrote about the character of Rockefeller as an ambitious and frugal man. Yergin wrote:
Rockefeller devoted himself to strengthening his business—by expanding facilities and striving to maintain and improve quality, and yet always controlling costs (p. 37). He was the guiding force of the company, single-minded in his devotion to its growth and the cause of combination, scathing in his disdain for the ‘waste’ of unbridled competition—and with no shortage of self-righteousness about his purpose (p. 47).
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Rockefeller’s disdain for competition drove him to illegal activity. According to Paul
Roberts (2004), Rockefeller would “set up a front company, slash prices so low that most competitors were driven into bankruptcy, then demand that any surviving refiners sell out to Standard” (p. 37). In 1882, the Standard Oil Trust Agreement was signed, creating a monopoly on the industry and opening the doors for judicial and political attacks. New antitrust laws established by Congress eventually led the Supreme Court and the Federal
Trade Commission to force Rockefeller to break his company into dozens of smaller entities.
Despite its demise, Standard Oil Company left a legacy in the oil industry. The smaller companies created by the break-up have grown into international business giants including Exxon-Mobil, Chevron, and BP (Roberts, 2004, p. 37). Rockefeller would be proud of the profit these corporations and their competitors have collected. Out of the top
25 American corporations, oil companies account for the top 9 and for almost a third of the next highest earning (Bacher, 2000, p. 276). These profits have translated into power.
Profits for oil companies perpetuate their growth by allowing for the expansion of production, investment in better equipment, the employment of more knowledgeable engineers and geologists, and a powerful lobby to the government for subsidies and supportive legislation.
Profit is defined as the difference between revenue and costs (Gruber, 2005). Oil producers maximize profit by selling oil at a price above the marginal cost of production.
Economist Alberto Clô (2000) described two theories about oil prices and profit. The first theory is known as “consumer’s logic” because it accuses the producers of gaining
“unjustified profit” if oil prices are above long-term marginal costs (p. x). By this logic,
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OPEC and the multinational oil corporations would be motivated to keep oil prices high in order to maximize profit. In response is the second theory, known as “producer’s logic” because it states that oil prices are not made in reference to production costs as the consumer’s logic suggests. Instead, prices reflect the value of oil as an exhaustible resource with “shortage value,” which is the calculated opportunity cost of not using a more abundant resource.
These theories show the conflict between consumers and producers. However,
Clô (2000) wrote that these logics oversimplify the situation, as do other theories developed by economists to forecast oil prices (Pindyck 1978; Salant 1982; Energy
Modeling Forum, 1982). In reality, oil prices are based on complex factors that make it nearly impossible to write-off price trends as “the mere result of economic rationality” (p. xi). In addition, oil price levels are inconsistent. Clô wrote, “Uncertainty is in fact the core element of the whole history and economy of oil” (p. xi). In one instance, a factor may increase oil prices; in another instance it may have an insignificant effect. These factors are based on a highly complex and unpredictable system of economic, political, technical and environmental values that influence consumer and government preferences.
These values may change in response to interest group dynamics, political leadership, an event or crisis, and protest or violent uprisings (Weimer and Vining, 2005).
Foreign Oil
Government and market decision-making about oil prices is influenced by geopolitical factors. The geopolitical distribution of oil forces the President and major oil companies to make trade agreements that may not seem economically rational. Although
36 the majority of U.S. imports come from neighboring countries and stable political systems, there is reason to be concerned about relying on imports from unstable governments in the Middle East (See Appendix C). As explained in Chapter 1, OPEC countries have been known to adjust reserve data without evidence. In the past, conflict in the Middle East has led to distributions in the oil supply. Chapter 4 discusses these conflicts in detail.
Geopolitical factors are augmented by the fact that the U.S. is becoming more and more dependent on foreign crude oil. Figure 13 shows a steep increase in net petroleum imports since 1985. In fact, more oil is imported into the U.S. than in any other country
(See Appendix C).
Figure 13. Net Energy Imports by Source (mmbpd) 1973-2005 (EIA, 2007)
Crude Oil imports to the U.S. grew from 6.3 mmbpd in 1973 to 7.9 mmbpd in 1992 to
12.9 in 2004 (Cordesman & Al-Rodhan, 2006). Figure 13 also shows that the U.S. can
37 be expected to increase crude oil imports based on the slope of the curve unless an event causes a policy change.
When a political event or crisis occurs in an exporting nation, the United States seeks to increase imports from another source. Cordesman and Al-Rodhan (2000) wrote:
“Oil is a global commodity, which is distributed to meet the needs of a global market based on a bidding process by importers acting in global competition” (p. 52). The First
Fundamental Theorem of Welfare Economics states that in a market where all actors act rationally and in self-interest, competition will cause resources to be allocated efficiently
(Gruber, 2005, p. 49). The competition between exporting and importing countries
(sellers and buyers) keeps marginal prices near equilibrium with marginal demand.
Unfortunately, this balance may be disrupted by exporting countries that do not have enough oil to meet the demand of importing countries. As stated in Chapter 1, the majority of the countries that export to the United States have already peaked in oil production, the one possible exception being Saudi Arabia. Therefore it is possible that the U.S. could run out of options for importing oil during a shortage.
Social Costs
There are exogenous costs and externalities that make it difficult to reduce the costs of production and distribution to a few variables for mathematical and statistical analysis. Externalities occur when a producer imposes a cost on a portion of the population that is not directly benefiting from the product or is not involved in the market transaction (Gruber, 2005, p. 117). The figure below shows that a negative externality makes social costs higher than private costs.
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Figure 14. Negative Externality (Gruber, 2005)
Price Social Marginal Cost Private Marginal Cost
Private Marginal Benefit Quantity Q1 Qsocially optimal
Figure 14 shows that if a good such as oil is being produced at Q1, the marginal cost to society is higher than if a socially optimal quantity was being produced. Therefore the cost to society is higher than the benefit society receives from that good.
The drilling, processing, refining, transportation, and storage of oil release greenhouse gases and air pollutants including carbon dioxide, methane, nitrous oxide, nitrogen oxides, carbon monoxide, reactive organic gases, hydrocarbons, and sulfur dioxide. The production of these gases imposes a negative impact on the environment and human health. Vehicle emissions from the use of gasoline contribute to smog by releasing ground-level ozone when the hydrocarbons react with nitrogen oxide. Smog can cause cancer, asthma, and other health problems for humans. Nitrogen oxide contributes to acid rain. Oil transport accidents can destroy coastal environments, killing wildlife and fish by spreading thick layers of liquid effluent on the water. The synthetic materials made by petroleum, such as plastic, do not break down in landfills, which
39 creates an increased need for landfill space. Fertilizers and pesticides made with petrochemicals are often washed into streams and waterways, causing water pollution and nutrient overload. CO2 contributes to global warming, which causes the earth’s temperature to increase gradually over time in the process known as climate change. The social costs of increased health care, the loss of natural resources, and the depletion of fisheries are not usually included by a utilities company in their production costs, leading to an overproduction and overuse of oil.
The damage caused by pollution is correlated with the type of pollution emitted, local topography, population density, and other physical characteristics of the geography
(Kreith, 1993). There are two ways to calculate the external costs of pollution. One way is to estimate the direct cost of damage in an area of impact. For example, the Pacific
Northwest Power Planning and Conservation Act of 1980 required a cost-effectiveness criterion for resource evaluation that includes the quantification of social and environmental costs. These damages may be hard to trace back to one power plant or heating source. The effects of pollution are also not completely understood by science
(climate change could be an example) and the pathways from source to impact may be quite distant.
Another more-employed way to estimate external costs is to determine the cost of abatement that is necessary to meet emissions regulations that have been imposed by law.
In this case, social costs are determined by an office of government with adequate knowledge of the public’s preference for pollution controls. As of 1993, 27 states required these costs to be factored into utility resource planning (Kreith, 2003).
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Other externalities of oil production include those related to energy security such as frictional or cyclical gross national product losses from rising or falling oil prices, inflation from oil prices, the terms-of-trade effect of transferring wealth from consumers in an exporting country to producers (or the government) in an importing country, and indirectly financing military operations or inhumane government practices in foreign countries.
Market Failures
Oil producers must overcome enormous risks. In the 1960s, when several smaller or “minor” oil companies came into existence, the probability of discovering new oil fields in the United States was about 14% (cited in Clô, 2000, p. 5). This “probability of success” is based not only on geologic data but also the operating risks and exploration investment necessary to make a discovery. More specifically, there are geologic risks and technical risks to overcome at all stages of production, including exploration, extraction, refining, transportation, and distribution. In addition, there are political risks imposed by governments such as changes in property rights or fiscal policy (Clô, 2000, p.
6).
These risks require oil producers to make large capital investments. The technical costs of oil production are difficult to calculate for three reasons (Clô, 2000). First, costs can vary between geographic locations or even within one site due to exploration difficulties, drilling procedure, and well productivity. Second, the instability of the market causes the ratio between fixed costs and variable costs to be very high. Finally,
41 future exploration and development costs will be different from past or current costs because of changes in supply size.
Government intervention is necessary to distribute the high capital costs of oil production amongst the larger population. Energy is not a pure public good; by definition, energy is a private good. Heat, electricity, and fuel are excludable resources due to price. Renewable energy in the form of solar rays, wind, or geothermal heat may be non-rival by nature, but the technology necessary to convert energy into a usable, consumable product is limited and therefore rival. Fossil fuels are finite and rival.
However, energy production and consumption is a public problem because of market failures. The market cannot meet the high demand for a product that is in limited supply and risky to produce without raising prices above the equilibrium value that consumers are willing to pay.
There are several ways that public policy can intervene in oil production. In
March 1999, Senator Pete Domenici (R-NM) proposed an oil and gas loan guarantee program to support domestic oil production (Bamberger, Gelb, Kumins, Lazzari, Pregelj,
& Grimmet, 2001, p. 102). The program was intended to preserve jobs and maintain production capacity during a period of unusually low oil prices by granting loans of $10 million or less and allowing $500 million in outstanding loans at any one time.
Opponents of the program pointed out that a similar program for the steel industry had failed in the late 1970s. Lenders in that case and presumably in this case if the proposal passed, were unmotivated to force collection because the government offered a 100% guaranteed payback for defaulted loans.
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Tax incentives can be used to reduce production costs or increase output. In the past, Congress has proposed reducing tax penalties for domestic oil producers or granting tax exceptions for oil production. There are also three major types of tax incentives that subsidize oil production. First, expensing of intangible drilling costs (IDCs) allows domestic producers to make deductions for fuel, labor, supplies, and repairs (Bamberger et al., 2001, p. 106). As of 2001, independent oil companies were allowed to expense
100% of their IDCs and integrated oil companies were allowed to expense 70%. This allows companies to drill more wells and increase production. Another type of tax policy is the percentage depletion allowance. This subsidy permits independent producers to subtract 15% of sales from a property as a deduction for the deletion of the capital investment in that mineral reserve (Bamberger et al., 2001, p. 107). The third type of tax incentive is in the form of income taxes credits, which are provided for using enhanced oil recovery methods to remove oil from existing wells. These credits encourage producers to remove heavier, more expensive oil from reserves rather than seeking out new sites for production.
As Max Sawicky (2001) wrote, “These subsidies make possible investments that would not otherwise be profitable” (“Corporate welfare for the oil industry.”). President
George W. Bush has been criticized for increasing the percentage depletion allowance higher than necessary. Figure 15 shows the steady rise in these subsidies since 1998.
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Figure 15. Tax-Based Subsidies to the Domestic Oil Industry (Sawicky, 2001)
The Bush administration has defended the use of these subsidies to prevent energy crisis due to conflicts in the Middle East (quoted in Sawicky, 2001). In January 2007,
Democrats in the House of Representatives passed a new bill that will recoup royalities from oil companies and reduce tax breaks available for the industry (Tollefson, 2007).
The Congressional Budget Office has estimated that this action will “fetch $14 billion over 10 years” (quoted in Goode, 2007).
Tax subsidies encourage domestic oil production and reduce the incentive to make capital investments in more abundant, alternative fuels. As domestic production continues to decline, the government will need to provide even larger subsidies to keep the industry afloat. These tax dollars could be used instead to increase tax credits for the development of alternative energy and the use of more efficient technology.
The next chapter outlines the legislative history of government intervention into energy production.
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Chapter 4: The Federal Government
Whether or not we are reaching our peak, it seems responsible to continue in the vain we are going in by continuing to work on ways to conserve energy while increasing our domestic supply of oil and using research to develop substitutes for conventional oil. Representative Ralph Hall (U.S. Congress, 2005)
Energy policy has had over a century to evolve into the strategy that is employed by the current administration. However, as the quote above suggests, presidents tend to follow precedent. Peak oil has existed as an old agenda item since the 1890s but very little has been done to directly address the issue. The legislative history of energy policy shows a progression of agenda-setting dynamics that have contributed to the potential peak oil problem that exists today.
Conservation
As early as the 1880s, geologists suggested that petroleum reserves were exhaustible, even in Pennsylvania where the industry had just started to boom.
Pennsylvania state geologist John F. Carll said that he “felt that Pennsylvania oil fields had been wastefully depleted as the state supplied the world with cheap light” (Olein and
Olein, 2000, p. 121). Progressive President Theodore Roosevelt worried that the desire for wealth could cause monopolistic oil producers to exhaust energy resources.
Roosevelt worked with George Otis Smith, head of the USGS to identify public lands with fossil fuel reserves in order to protect these resources from private interests. After
USGS geologists classified public lands in terms of petroleum potential, Roosevelt faced
45 the difficult political issue of determining which land to close to agriculture and oil production and which to open for leasing. Smith pushed for the public ownership of several large tracks of land in order to keep the petroleum for its value to the U.S. Navy and to protect the resources from what he claimed was the “wanton waste” of the private industry (as cited in Olein and Olein, 2000, p. 124). Conversationalists were split on the issue because keeping oil out of production could prevent consumers from receiving convenient and inexpensive petroleum productions (Olien and Oliein, 2000, p. 120).
After William Howard Taft was elected president, USGS experts that had worked under Roosevelt completed a joint study with the Bureau of Mines that examined the wasteful procedures of the fossil fuel industry. Six technical papers were produced which concluded that the industry was wasting fuel, mainly natural gas, by failing to cap wells or by depriving communities of valuable fuel by selling it at a cheap price or using it free of charge for production operations. The report caught the attention of the Secretary of the Interior who was able to convince President Taft to withdraw 2.87 million acres of public lands in California and 170,000 acres in Wyoming from all forms of energy exploration and production (Olien and Olien, 2000).
In 1915, Woodrow Wilson set aside a tract of land called Teapot Dome as the
Naval Oil Reserve Number 3 (Noggle, 1962, p. 16). Political friends of former president
Roosevelt, including Senator Robert M. La Follette and Gifford Pinchot, and the
Secretary of Navy Josephus Daniels urged Wilson to completely close the reserve to leasing. Secretary of Interior Franklin K. Lane argued that individual claims filed on the land before it was made an oil reserve should be given consideration. Daniels eventually
46 won the debate when Congress made an amendment to the 1920 appropriations bill that gave the Secretary of Navy control over the reserves.
The administration of Warren Harding put an end to the period of conservation energy policy by transferring the naval oil reserves from the Navy Department to the
Department of Interior (Noggle, 1962, p. 18). Although there was significant interdepartmental debate over the issue, Harding and the Secretary of Interior agreed to allow several reserves in both California and Wyoming to be opened for leasing from private oil companies. Controversy erupted when it was discovered that leases of the reserves at Teapot Dome had been “executed under circumstances indicating fraud and corruption” (Desmarais & McGovern, 1997). The scandal led to a reevaluation of the policy to conserve exhaustible domestic oil reserves for national security.
Energy Security
At the onset of World War II, the administration of Franklin D. Roosevelt realized that imported oil for civilian use might also pose a threat to national security. Ironically, the policy implemented by Congress to address this issue encouraged domestic production rather than the conservation of domestic resources. This may have actually allowed future security threats caused by oil embargoes to become energy crises.
Early in his presidency, Roosevelt included progressive energy polices in his New
Deal that served as a basis for future energy strategies. The Natural Resources Board was created in 1934 to manage natural resources including petroleum. In 1939, the Board was renamed the National Resources Planning Board and given opportunities to promote government activism in a convergence of public interest referred to by historian Arthur
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Schlesinger as “dams, power, poverty, politics” (quoted in Stagliano, 2001, p. 2). The
Board planned several large hydroelectric projects including the Tennessee Valley
Authority (TVA), the Bonneville Power Administration, and California’s Central Valley
Project. In 1935, Congress enacted the Federal Power Act, which created the Federal
Power Commission (FPC) to regulate the generation, transmission, and distribution of electricity.
Roosevelt and his Secretary of the Interior, Harold Ickes, should be remembered most in the field of energy policy for creating the Federal Petroleum Reserve Corporation to purchase oil from foreign countries. At the urging of his Secretary of the Interior,
Harold Ickes, Roosevelt initiated a policy to provide the United States with foreign oil supplies for emergencies, such as the oil supply shortage feared during World War II.
Policy analyst Vito A. Stagliano (2001) wrote: “The war effort was viewed as ample justification for government’s pervasive presence in the oil market. Ickes thus cemented the policy view that energy generally, and oil in particular, were strategic assets, access to which was a matter of national security” (p. 4).
The first major threat to national security during a time of peace occurred during
Harry S. Truman’s presidency. The largest oil refinery in the Middle East was shut down due to a wage dispute. Although Europe, not the United States, received oil from this refinery, the event forced the President to investigate possible actions that could be taken to mitigate and oil shortage. The U.S. Department of the Interior created a Foreign
Petroleum Supply Committee of oil industry representatives to complete this investigation. The Committee was granted antitrust immunity from Congress, which allowed it to assume “virtual control” over the international oil market (Stagliano, 2001,
48 p. 6). A voluntary agreement was devised to allocate oil supplies to the committee members, which would in turn benefit consumers in the United States and Europe. The agreement was used to “reward and punish” Middle Eastern governments for failing to provide oil to the Committee members. In addition, the Committee increased oil prices for U.S. and European consumers in order to balance the shortfall caused the crisis.
Despite its antitrust immunity, the Committee was attacked by Congress and the media for using a “political crisis for the purpose of self-enrichment” (Stagliano, 2001, p.
7). An investigation by the Federal Trade Commission recommended that the Committee members be prosecuted for criminal wrongdoings. President Truman dropped the criminal proceedings and directed the Justice Department to collect civil damages instead.
As a result of that event, Truman was asked by a delegation of congressmen from oil-producing states to raise the tariff on oil imports from 10.5 cents to $1.05 per barrel and to limit oil imports to 5 percent of domestic consumption (Yergin, 1992, p. 536).
Truman did not honor this request. By the early 1950s, cheaper oil imports accounted for
10% of the oil consumed in the United States (Stagliano, 2001, p. 10). This represented a doubling in oil imports over the previous decade.
In 1955, the oil-producing states joined together in Congress and passed the Trade
Agreement Extension Act, which included a fundamental change in energy policy. For the first time, the president was granted the power to restrict oil imports for national security. President Dwight D. Eisenhower was reluctant to exercise this new power and instead opted to implement a voluntary program for importing companies.
Unfortunately, “moral persuasion” proved to be an ineffective incentive for reducing oil
49 imports (Yergin, 1992, p. 536). Several major oil companies refused to participate because of what they felt was a disproportionate disadvantage to having a larger commitment to foreign oil. The voluntary program was eventually killed by a recession in 1958 that reduced oil demand to a level that domestic producers could not afford to supply, which forced the government to intervene (Yergin, 1992).
On March 10, 1959, Eisenhower proclaimed a mandatory quota on oil imports.
The chairman of the Council on Foreign Economic Policy warned Eisenhower’s administration that “the controls would have the effect of raising domestic consumer prices while concurrently accelerating the depletion of domestic resources” (Stagliano,
2001, p. 12). By 1970, economists were able to calculate that the quota had done just that; American consumers paid “$5 billion more for petroleum products than would have been the case without the program” (Federal Energy Administration, 1974). The quotas also had another unintended consequence. Oil exporting nations saw import controls as a threat to their economies. Led by Venezuela, the world’s major oil producers met together and created what would later be known as the Organization of Petroleum
Exporting Countries (OPEC).
Crisis
Despite these efforts to protect national security, political events caused four energy crises for the United States. For better or worse, the presidents that dealt with these events created the precedent for crisis mitigation, which may be used in the future if the peak of world oil production leads to a similarly threatening event.
50
The first major event to push crisis mitigation into national energy policy occurred during the Third Arab-Israeli War, known as the Six-Day War. Arab oil ministers called for an oil embargo against all countries that were “friendly” to Israel, including the United States. By June 8, 1967, Arab countries were withholding six million barrels of oil per day (Yergin, 1992, p. 555). In addition, a civil war had coincidentally broken out in Nigeria, reducing world oil supplies by another 500,000 barrels per day. President Lyndon B. Johnson ordered an increase in domestic production and a redistribution of world oil supplies amongst the embargoed countries through the international Organization for Economic Cooperation and Development (OECD).
American output, mainly from Texas, grew by almost one million barrels per day and the crisis was averted (Yergin, 1992, p. 557).
Unfortunately, the next oil embargo in American history proved to be far more damaging to the nation’s economy. Nixon was in office when war broke out in the
Middle East. The U.S. supplied weapons to Israel during the conflict, an action which of course infuriated other Middle Eastern nations that supplied the U.S. with oil. On
October 20, 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC) announced an embargo on oil shipments to the United States, as well as Canada, and the
Netherlands. OAPEC also reduced oil production levels and closed the Suez Canal.
These actions were very successful; the Department of Energy (DOE) reported that world oil prices quadrupled in response to the reduction of oil supplies (cited in Stagliano, 2001, p. 23).
Several events caused the oil embargo to become an energy crisis. Nixon removed Eisenhower’s quota on oil imports at the beginning of his term in office but
51 proceeded to place federal controls on price and production, which proved to be equally damaging to the nation’s economy. U.S. dependence on foreign oil had risen dramatically after the peak of domestic production was reached in 1970 (Deffeyes, 2005, p. 44). Americans had already dealt with electricity brownouts during the summer of that year and shortages of gasoline and kerosene for heating during the previous winter
(Yergin, 1992, p. 599). According to the Federal Energy Regulatory Commission, the brownouts were caused by the inability of the FPC to handle its expanded jurisdiction and
“a colossal backlog of applications for natural gas permits” lingering from the late 1960s
(Federal Energy Regulatory Commission, n.d.). The gasoline shortages were linked to limits placed by Congress on domestic production. These limits were a part of the
Connolly Hot Oil Act of 1933 that required state production to not exceed an allowance equal to the consumer demand that was estimated at a certain price (Stagliano, 2001, p.
21).
In order to keep prices from rising during the crisis, Nixon was authorized by
Congress to restrict private and public consumption of energy using rations. However, with domestic and world oil production already restricted by government regulation, the market was unable to fix itself during the crisis. A report by D.R. Bohi and Resources for the Future (1989) found that “macroeconomic stabilization policies implemented in key countries after each energy price shock were responsible for worldwide recession” (p. 1).
The report suggests that “a change in monetary and fiscal policy could have avoided the economic debacle of the 1970s” (p. 1). The restrictive policy actions of Congress during the embargo may have actually caused the energy crisis.
52
Gerald Ford intended to change policy through deregulation. Unfortunately, as an unelected Republican president with a Democrat majority in Congress, Ford’s proposals for post-crisis change never materialized into action. In his State of the Union address on
January 13, 1975, Ford stated that he intended to reduce oil imports by 1 million barrels per day by the end of that year and to develop domestic energy resources to reduce foreign oil dependence (Ford, 1975). Ford declared to Congress that he hoped to have these actions passed into law within 90 days of the speech. However, Congress failed to enact any policy requested by Ford until October of that year, when the Energy Policy and Conservation Act (EPCA) passed. Ford expressed dissatisfaction with the bill but signed it anyway. Among other things, the EPCA authorized the creation of the Strategic
Petroleum Reserve (SPR), which later helped to mitigate another oil crisis.
In November 1978, a revolution in Iran caused oil fields to shut down. The DOE reported that the reduction in foreign oil supply caused oil prices to rise 82% in the
United States (cited in Stagliano, 2001, p. 38). Jimmy Carter created the National Energy
Plan II (see below for the first NEP) with provisions for increased availability of natural gas and domestic oil, improved energy conservation, and tax incentives for renewable energy R&D. However, Congress refused to consider the new plan while representatives were dealing with the stress of high gasoline prices and the demands of their angry constituencies.
Carter’s last attempt to mitigate the crisis involved stand-by gasoline rationing.
At first, Carter proposed different rations for rural and urban cities but Congress rejected the plan because of its unequal treatment of citizens. Carter’s final plan included the
53 printing of nearly five billion gasoline rationing coupons. The coupons were printed at a cost of $12 million but were never used (Tugwell, 1988, p. 1).
When Ronald Reagan became president, his first action was the full deregulation of the oil market. On January 28, 1981, Reagan declared: “Ending price controls is a positive first step towards a balanced energy program, a program free of arbitrary and counterproductive constraints, one designed to promote prudent conservation and rigorous domestic production” (quoted in Stagliano, 2001, p. 43). Deregulation had the immediate effect of increasing domestic oil production, reducing oil imports, and removing the oil shortage created by the second oil crisis. Oil producers began to explore for oil outside of the Middle East in places like Alaska (including ANWR), Mexico, and the North Sea. As oil prices began to fall, OPEC was forced in desperation to institute oil production quotas for all of its members.
Reagan made several proposals within his energy plans for crisis mitigation.
Energy producers were encouraged to build dual-fuel capable plants so that in the event that one fuel supply was cut short, the plant could simply switch to the other fuel source.
Reagan also promoted the growth of the SPR while at the same time, recommending that the private sector build its own emergency stockpiles. In addition, domestic energy producers were to be allowed to increase output above the equilibrium supply during a crisis as a form of preventive action.
Reagan declared that energy security should allow the market to reach an equilibrium supply and demand without government intervention. During his term in office, Reagan did not face any direct threats to the nation’s oil supply, but he did have to manage a Cold War battle with the Soviet Union (USSR) over a natural gas pipeline that
54 posed a threat to U.S. trade agreements with Europe. The details of the event are not important to this project; however the action taken by Reagan should be of interest.
Reagan imposed economic sanctions on the USSR and European subsidies of American oil and gas companies, which were held in place for almost 18 months (Stagliano, 2001).
In the end, the pipeline was built without any significant damage to American interests but Reagan had been able to prove that despite historic alliances with Western Europe, the energy needs of his own country would always come first.
The next major crisis occurred in 1990 when Iraq invaded Kuwait. Both countries were exporters of oil to the United States. It was estimated on the day after the invasion that the conflict would cause a decline of about 4.3 million barrels of oil per day in U.S. imports (EIA, 1990). This estimate caused George Bush to declare an embargo on all exports and imports from both Iraq and Kuwait.
In the past, DOE (or the energy agencies before it) was not directly involved in crisis decision-making. This probably caused the unfortunate discrepancies between foreign policy and domestic energy demand. However, during this crisis the strong presence of the Deputy Secretary of Energy at all meetings leading up the embargo created a seat for DOE in the National Security Council. DOE recommended that in the
Iraq-Kuwait conflict, the U.S. government secure a multilateral embargo of Iraqi oil, request that Saudi Arabia and Turkey shut off an Iraqi oil pipeline that ran through those countries, encourage increased production from all other countries capable of doing so, sell crude oil from the SPR, and reduce oil consumption by encouraging conservation and fuel-switching (Stagliano, 2001).
55
The chairmen of several major oil companies including Chevron sent letters to the
President pledging that they would do everything in their power not to transfer higher crude oil costs onto consumers. Unfortunately, oil prices still rose within days of the invasion. Bush maintained that his administration, like that of Reagan, would not interfere with the market. However, under constituent pressure, Congress forced a response to the oil prices from DOE. DOE produced supply and conservation measures that were rejected by the President but were later found by EIA to have contributed to a reduction in consumer demand by as much as 100,000 barrels per day (EIA, 1990). The conservation measures that were proposed encouraged consumers to use lower octane gasoline, tune-up oil-burning equipment, use energy efficient driving techniques, and conserve energy wherever possible (Stagliano, 2001).
The oil shortfall was finally mitigated by the use of the SPR (as previously suggested by DOE). Hearings took place in the House and the Senate before a test draw- down was authorized under an amendment to the Energy Policy and Conservation Act.
President Bush opposed the use of SPR but was criticized by several cabinet members and Congress for failing to provide any domestic policy initiatives during the crisis.
Senate Republic leader Robert Dole wrote to the president:
In August, I wrote to urge that you use the Strategic Petroleum Reserve to ease the burden on the United States. We have committed 150,000 young Americans and billions of dollars to confront the evils of Saddam Hussein…Asking our economy to shoulder the additional burden of unnecessarily high oil prices is not requires. (quoted in Stagliano, 2001, p. 251)
The critics apparently proved their point. On January 17, 1991, the first-ever drawdown of the SPR was authorized by President Bush. Within hours, prices plunged to pre- embargo levels without any taxpayer losses or government profits. Newspapers across
56 the country proclaimed success. The Washington Times wrote: “It took two energy crises to do it, but the globe appears ready to cope with all but the most catastrophic oil consequences of the Gulf War” (Potts, 1991).
Alternative Fuels
The development of alternative fuels and energy crisis mitigation overlap in energy policy. Whenever oil became scarce, the federal government considered ways to encourage the development of alternative energy. Unknowingly, the following administrations set the bar for R&D funding. In the future, these may be the presidents to blame for a lack of alternative fuel infrastructure when a transition away from oil is vitally necessary.
After WWII, the Truman administration pursued the research and development of synthetic fuels, initiated by the Synthetic Liquid Fuels Act of 1944. Although federal funding was cut in 1952, the program did successfully demonstrate that coal liquefaction was possible (although uneconomical). In addition, the success of the atomic bomb during the war led the government to investigate the nonmilitary use of nuclear energy.
The Atomic Energy Commission (AEC) was created by Congress in the Atomic Energy
Act of 1946 to regulate the civilian use and safety of nuclear energy. The act called upon the AEC to ensure “public health and safety from the hazards of nuclear power without imposing excessive requirements that would inhibit the growth of the industry” (Nuclear
Regulatory Commission, n.d.).7
7 The AEC was later split into two separate agencies, the Nuclear Regulatory Commission and the Energy Research and Development Administration, when it was found that safety regulations were impeding the growth of the nuclear industry (Seaborg, 1993, p. 113).
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In 1963, John F. Kennedy established the Interdepartmental Energy Study Group to study the production, consumption, and R&D of energy. The Group commissioned
Northwestern University professor Ali Bulent Cambel to conduct the study. Cambel spent several months collecting technical data of reserves and available technology and in the end, he proposed “major federal support for energy technology development” (quoted in Stagliano, 2001, p. 16). Unfortunately, the report was inundated with critiques from the effected agencies and departments. When Kennedy was assassinated, the report was abandoned.
On November 7, 1973, in response to a pending oil shortage from the Middle
East, Richard Nixon made the following landmark proposal:
Let us unite in committing the resources of this Nation to a major new endeavor, an endeavor that in this bicentennial era we can appropriately call ‘Project Independence.’ Let us set as our national goal, in the spirit of Apollo, with the determination of the Manhattan Project, that by the end of this decade we will have developed the potential to meet our own energy needs without depending on any foreign energy sources. (emphasis added) (quoted in Stagliano, 2001 p. 24)
Unfortunately, Nixon resigned before he could see the start of his project. In 1974,
Congress passed the Energy Reorganization Act, which created the Energy Research and
Development Administration (ERDA) to promote nuclear energy and other alternatives to oil. Later in 1974, Congress established the short-lived Federal Energy Administration
(FEA) in the Federal Energy Administration Act. The FEA was given the authority to plan Project Independence and to promote energy conservation (DOE, 2004).
Two major statutes were approved to define the power of the FEA. First, as previously described, the Energy Policy and Conservation Act created the SPR and also contained authorization for setting fuel efficiency standards for automobiles, federal assistance to state conservation programs, and a “broad” energy R&D program (Energy
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Policy and Conservation Act, 1975). One year later, Congress passed the Energy
Conservation and Production Act (ECPA), which included $2 billion in federal guaranteed loans for conservation investments and a requirement that the President once again reorganize federal energy responsibilities (Energy Conservation and Production
Act, 1976).
Jimmy Carter used the latter part of ECPA to propose a Department of Energy
(DOE) just a month after he was sworn into office. DOE was officially established by
The Department of Energy Organization Act (DEOA) on October 1, 1977 (DOE, n.d.).
At the time, DOE took on all the responsibilities of the Energy Research and
Development Administration, FEA, and FPC. Oversight of the DOE was the Senate
Committee on Energy and Natural Resources, created on February 4, 1977, by the
Committee System Reorganization Amendments of 1977 sponsored by Senator Adlai
Stevenson and Senator Bob Packwood. The Amendments created the Committee to oversee “such energy functions as natural gas pricing and regulation, energy regulation, energy research and development of all forms of energy, coal production, hydroelectric power and non-military development of nuclear energy” (U.S. Senate Energy and Natural
Resources Committee, 1989).
DEOA officially requires presidents to prepare national energy plans on a biennial basis. Therefore the first major task of DOE was to provide oversight for the first
National Energy Plan (NEP). Carter appointed James Schlesinger, a man with an impressive resume as the former secretary of defense, former director of the Central
Intelligence Agency, and the former chairman of AEC, to create NEP. Schlesinger and his staff proposed seven goals that included the reduction of national energy demand,
59 reduction in gasoline consumption, reduction in oil imports, establishment of a one billion-barrel strategic oil reserve, increase of domestic coal production, increased energy efficiency in new homes and buildings, and the use of solar energy in more than 2.5 million homes (quoted in Stagliano, 2001, p. 40). As Stagliano (2001) wrote, “With
NEP’s unveiling, the government of the United States had transformed a temporary, six- month embargo of oil shipments by a group of Arab producers intent on sending a sharp diplomatic signal to the United States into a social, economic, and cold war crusade” (p.
34). Although Carter is credited in history books for laying the foundation of renewable energy R&D, he may never have considered the need for improved energy security if previous administrations had been able to mitigate the crisis with available resources.
NEP was put into law by the National Energy Act of 1978, which included the
National Energy Conservation Policy Act (NECPA), the Powerplant and Industrial Fuel
Use Act (PIFUA), the Public Utilities Regulatory Policy Act (PURPA), the Energy Tax
Act, and the Natural Gas Policy Act (NGPA). Together, these new acts sought to achieve conservation of domestic resources with incentives for improved efficiency as well as regulation on the industrial use of natural gas. DOE was then left with the daunting task of leading the nation into a transition towards reduced energy consumption and the use of clean, renewable energy. This task (and the research and development necessary to achieve the task) has been the primary focus of the DOE ever since.
Congress ensured through the DEOA that all present and future presidents would make energy an agenda item. However, Congress intentionally left the details of the energy plans up to the interpretation and discretion of the Executive branch. Ronald
Reagan’s energy policy strategies involved deregulation and hands-off economic
60 management. Reagan did not agree ideologically with the NEPs but was required under the DEOA to submit national energy plans every two years. Titled National Energy
Policy Plans (NEPPs), Reagan’s plans were quite different from those prepared by Carter and the policies proposed by Ford and Nixon. Abandoning the conservation policy of previous presidents, Reagan chose not to address peak oil or the limits of natural resources. Instead, the first NEPP called for the accelerated leasing of federal lands for petroleum and coal exploration. In the text, Reagan declared:
Consumption of energy is not the sole determinant of a strong economy; we could be consuming primary energy resources at any level and have a weak economy, a less satisfied people, a huge bureaucracy, a damaged environment, and continuing apprehension about our position as the leader of the free world. (DOE, 1981)
With this in mind, Reagan called for the deregulation of electricity production and increased nuclear plant licensing. The private market, rather than the DOE, was encouraged but not required to pursue the development of alternative fuels.
The second NEPP by the Reagan administration was less specific than the first since deregulation had already taken place. This time, Reagan simply urged the adoption of “a flexible energy system that avoids undue dependence on any single source of supply, foreign or domestic, and thereby contributes to our national security” (DOE,
1983). At the same time, DOE’s energy conservation budget was reduced from $1 billion per year in 1980 to less than $400 million. The renewable energy budget was reduced from over $800 million (as implemented by Carter) to $200 million. Although these budget cuts probably did not affect private sector R&D, it can be presumed that DOE lost several valuable years of potential development of alternative fuels without adequate funding to purse such projects.
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Reagan’s third and final NEPP provided even less instruction than the first simply because by this point in his administration, Reagan was no longer concerned with post- crisis reconstruction. In a vague and confusing statute, NEPP-3 declared a balance of conservation, domestic coal production, and nuclear energy. The private sector was once again given the majority of the responsibility to achieve this action; DOE was encouraged to pursue clean coal technology but not conservation or any specific nuclear projects.
When George H. W. Bush became president, Secretary of Energy, James Watkins and the Deputy Secretary of Energy, W. Henson Moore embarked on the creation of the
National Energy Strategy (NES) in part to assert DOE’s legitimacy after Reagan had proposed to dissolve the entire department. Although Congress never required cross- agency agreements for the biannual plans, Watkins and Moore consulted with the
Environmental Protection Agency and a newly formed Economic Policy Council
Working Group on Energy to develop NES.
Additionally, Watkins held 18 public hearings around the country to get the input of American citizens. Each hearing included a panel of witnesses with different interests in energy policy, ranging from state senators to environmental interest groups to oil industry engineers. A total of 379 witnesses gave testimony and statements were submitted by an additional one thousand individuals. Afterwards, Watkins remarked that there appeared to be five completely different subcultures within the country based on energy interests: “Northeast, Southeast, the Midwest, the Northwest, and the Southwest”
(as quoted in Stagliano, 2001, p. 100). However, the hearings did make it clear that almost every type of citizen supported energy conservation and solar energy. This is
62 remarkable since it would suggest much more significant investment into areas than any administration has pursued.
The rest of the NES development process was interrupted by disagreements between DOE and the Working Group, and the possibility of an energy crisis caused by the conflict in Iraq. The final NES was implemented by the Energy Policy Act of 1992.
Highlights of the Act included incentives for electricity production from renewable energy and mandatory efficiency standards for lighting, heating, and cooling equipment
(Energy Policy Act of 1992). In addition, a requirement was made that by 1999, 75 percent of federally purchased cars and light-duty trucks must run on alternative fuels such as natural gas, ethanol, methanol, propane, electricity or hydrogen (“President Signs
Energy Bill,” 1992).
Climate Change
Peak oil author Paul Roberts (2004) wrote:
Though cheap, plentiful fossil fuels have clearly been the key to our industrial success and continued economic vitality, we are discovering that our rosy picture of energy as the Key to Prosperity has omitted a number of serious costs, from geopolitical instability and oil price volatility to, now, rising global temperatures due to centuries of carbon dioxide emissions. (p. 118)
Although the costs of climate change (from rising sea levels and changing weather patterns) are not yet calculable, it is clear that energy policy must focus alternative fuel development towards clean renewable energy.
Less than six months after being elected president, Bill Clinton announced that the United States would attempt to stabilize greenhouse gas emissions to the 1990 levels by 2000. In doing so, Clinton separated himself from previous administrations that had
63 failed to address the relationship between energy production and emissions beyond EPA clean air statutes and broad health policy. Six months after the announcement was made,
Clinton and Vice President Al Gore unveiled the Climate Change Action Plan, which called for the voluntary stabilization of greenhouse gas emissions by energy producers.
Carbon dioxide emissions were to be reduced by DOE outreach programs that encouraged public transportation, telecommunication, and carpooling (Clinton and Gore,
1993).
Environmental interest groups criticized the Action Plan for failing to raise fuel economy standards and for failing to provide tax incentives for conservation (Lemonick and Gup, 1993). Clinton promised to encourage Congress to include these measures in future legislation. In the DOE appropriations bill for fiscal year 1994, Clinton proposed an energy tax, known as the British Thermal Unit (BTU) tax, to reduce emissions and reliance on foreign imports while bringing in government revenue (“Energy Taxes,
Please,” 1993). Fearing that it would reduce domestic production and likewise energy- related jobs, the majority of Congress voted against the tax.
In sharp contrast to Clinton, President George W. Bush did not even accept climate change as a human-caused problem until his State of the Union Address in
January 2007 (Bush, 2007). Congress has been less timid on the issue. Climate change provisions were proposed and often included in the energy policy produced over the past seven years.
Several energy policy bills were introduced to Congress in 2001. First, Senator
Lisa Murkowski (R-AK) introduced the National Energy Security Act, which proposed opening ANWR for oil drilling. In response, Senators Tom Daschle (R-SD) and Jeff
64
Bingaman (D-NM) introduced the Comprehensive and Balanced Energy Policy Act, which focused on “clean energy production” rather than increased domestic oil production (American Geological Institute, 2002). While the Senate was holding hearings on these proposals, the House passed the Securing America’s Future Energy Act
(SAFE). SAFE allowed for exploratory drilling in ANWR and a $2 billion program for the development of cleaner coal technology (AGI, 2002). The policy of the Bush administration supported most of the provisions in SAFE but the events of September
11th prevented the bill from moving through the Senate and to the President for approval.
In December 2001, Senate Democrats introduced a new energy bill that would later be known as the Energy Policy Act of 2002. The bill contained remnants of the
Comprehensive and Balanced Energy Policy Act that was considered at the beginning of the year. The 2002 Act continued the ban on drilling in ANWR and proposed the creation of a National Climate Service with the Department of Commerce to make climate change forecasts.
In order for a bill to become public law, both houses of Congress must agree on one piece of legislation. Attempts to reach a compromise between SAFE and the Energy
Policy Act of 2002 eventually ended in frustration. By the end of 2002, comprehensive energy policy had still not been produced by the Bush administration.
A new bill was produced the following year, known as the Energy Policy Act of
2003, but it died in the Senate. After three months of negotiating and with full support in the House of Representatives, the bill failed to reach the desk of President Bush because of disagreements over regulations of the gas additive methyl tertiary butyl ether (MTBE).
Senators Joe Lieberman and John McCain had proposed a separate climate change bill
65 with a cap on greenhouse gas emissions but this bill also failed to pass. The Coalition for
Affordable and Reliable Energy (2003) opposed the climate change bill for fear that it would “force most power plants to switch from using coal to a more costly alternative, most likely natural gas, which is already in short supply and experiencing skyrocketing prices” (“Senate Defeat of Lieberman-McCain Climate Change Bill”).
Four years later, the 109th Congress was able to overcome the failures of the 107th and 108th Congress and pass the Energy Policy Act of 2005. Although the House and
Senate versions of the bill were very different from each other, a final version of the Act was produced that pleased most legislators and the President. A historic “sense of the
Senate” resolution was adopted that called on Congress to enact comprehensive energy policy that placed limits on greenhouse gas emissions. The final version of the Act included a proposal made by the Senate that created a climate change technology program within the DOE (Energy Policy Act of 2005).
Although the Energy Policy Act of 2005 made significant progress with climate change policy, Congress failed to link the need for clean energy to the issue of peak oil.
During the Congressional debates over the writing of that act, there was a proposal in the
Senate to reduce oil consumption in the United States by 1 million barrels per day from
2015 levels. Senators also proposed a renewable energy portfolio that would have required electric utilities to produce 10% of their electricity from renewable sources by
2020. Unfortunately, neither of these proposals made it into the final version of the Act.
According to the Energy Information Administration (EIA), the Energy Policy Act that passed will actually increase domestic oil production by 858 million barrels, mostly by increasing deep water extraction (cited in Smart, 2005). The Act also requires a 7.5
66 billion gallon renewable fuels standard (RFS) but plans to achieve this with ethanol production, which is derived from gasoline. Additionally, Congress approved $3.7 billion for hydrogen research and development, a process that requires a fuel source such as oil, but appropriated less than $2 billion for renewable energy R&D (Energy Policy
Act of 2005).
On December 7, 2005, Representatives Roscoe Bartlett (R-MD) and Tom Udall
(D-NM) testified at the first House peak oil hearing about the need for new legislation to mitigate peak oil and about the House Peak Oil Caucus which they had formed for this purpose just a few weeks earlier. The resolution for the Caucus (2005) stated:
Now, therefore, be it Resolved, That it is the sense of the House of Representatives that-- (1) in order to keep energy costs affordable, curb our environmental impact, and safeguard economic prosperity, including our trade deficit, the United States must move rapidly to increase the productivity with which it uses fossil fuel, and to accelerate the transition to renewable fuels and a sustainable, clean energy economy; and (2) the United States, in collaboration with other international allies, should establish an energy project with the magnitude, creativity, and sense of urgency of the `Man on the Moon' project to develop a comprehensive plan to address the challenges presented by Peak Oil. (p. 1)
The resolution passed but the comprehensive plan has yet to be written. However, the resolution did not demand anything that was absent from the agenda of previous administrations. The energy plans outlined in this chapter have all attempted to reduce energy costs, prevent further crises, and promote alternative fuel development, yet the resolution shows that these administrative goals have not been reached.
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Conclusion
Precedent and law require each president to address issues of energy security and supply with comprehensive national energy policy. Too often administrations fail to learn from the achievements of their predecessors because of different ideologies or a lack of motivation to bring about change.
As Johnson, Truman, and Nixon learned, crisis can occur without warning. The governments in the Middle East are clearly unstable. If the current situations in Iraq and
Iran are any indication of what the future may hold, Americans should remove their interests from that region of the world as soon as possible. It should be assumed by now that despite previous assertion of Western power, OPEC and its nations will never consider American interests over their own.
In the event of a crisis, the administration of George H. W. Bush discovered that the SPR can be a valuable tool for preventing oil prices from rising. However, the SPR at current capacity cannot provide Americans with crude oil in the event that a conflict continues for a long period of time or indefinitely, which could happen if world oil production declines.
Ford and Reagan found that minimal government intervention allows the market to produce maximum output. George W. Bush has proposed lifting a moratorium on drilling in Alaska in order to increase domestic production and reduce prices.
Unfortunately, these strategies fail to address the fact that the resource being extracted for production is finite.
Almost every president has proposed some form (voluntary or with incentives) of energy conservation or alternative fuel development. These proposals have been in place
68 for almost a century yet energy demand per consumer continues to grow steadily and alternative fuel markets have failed to emerge. More emphasis should be placed on fuel- switching for consumers and businesses, particularly for renewable energy investments.
Conservation is a good habit for citizens to have but in the end it cannot prevent a peak in global oil production. Projects to improve energy efficiency for the burning of fossil fuels may have environmental benefits but the peak will still occur. The private sector should be left alone to develop efficient appliances if the demand exists. Federal funding should be used for larger, renewable energy projects.
The next president, his or her administration, and Congress must come to terms with the fact that oil is a finite resource. The crisis that will occur when global oil production peaks will be far greater in scope and more detrimental to society than any oil shortage experienced in the past century. The private sector has not had the incentive to develop renewable energy on the same scale as fossil fuel technology. Public intervention is necessary to provide grants for this research and to develop large-scale projects for states and municipalities that cannot afford the capital investment. Without policy to mitigate peak oil, citizens in the U.S. and abroad may face serious changes in life as we know it.
69
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Appendix A
Figure A.1. Crude Oil Production in the State of Ohio (Hubbert, 1956)
Figure A.2. Crude Oil Production in the State of Illinois (Hubbert, 1956)
Figure A.1 and A.2 were presented by M. King Hubbert in 1956 as evidence that oil production follows a curve with a peak and subsequent decline. Hubbert used these graphs to show that oil production in the United States would also reach a peak and eventually decline.
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Appendix B
Table B.1. The Top Ten Oil Consuming Countries as of 2006 (Central Intelligence
Agency, 2006)
Rank Country Oil consumption (bbl/day) 1 United States 20,030,000
2 European Union 14,590,000
3 China 6,391,000
4 Japan 5,578,000
5 Russia 2,800,000
6 Germany 2,677,000
7 India 2,320,000
8 Canada 2,300,000
9 Korea, South 2,061,000
10 France 2,060,000
Table B.1 shows that in 2006, the United States consumed more barrels of oil per year than any other country in the world. The U.S. consumes 5,440,000 more barrels per year than the next leading consumer, which is the European Union. However, as the chapter explained, China is expected to increase its demand dramatically within the next few years.
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Appendix C
Table C.1. The Top Ten Crude Oil Producing Countries in 2005 (International Energy Agency, 2006)
Producers Million tons
Saudi Arabia 519
Russia 470
United States 307
Islamic Republic of Iran 205
Mexico 188
People’s Republic of China 183
Venezula 162
Canada 143
Norway 139
Nigeria 133
Rest of the World 1,474
World 3,923
Table C.1 ranks the United States third in world for oil production. According to this data, the U.S. produces 7.8% of the world’s oil. Saudi Arabia, the leader in oil production, produces 13.2% of the world supply. Russia places second by producing 49 metric tons less than Saudi Arabia and 63 metric tons more than United States.
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Table C.2. The top ten crude oil importing countries in 2004 (International Energy Agency, 2006)
Importers Mt
United States 577
Japan 206
People’s Republic of China 123
Korea 114
Germany 110
India 96
Italy 93
France 85
United Kingdom 63
Netherlands 60
Rest of the World 708
World 2,235
According to Table C.2, the United States accounts for more than a quarter of all the world’s oil imports. However, as stated in Chapter 2, China is expected to drastically increase imports in the next few years as oil demand increases in that country.
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Table C.3. Top 15 Crude Oil Exporters to the United States (Energy Information
Administration, 2007)
Country YTD 2006 (thousand barrels per day) Canada 1,778
Mexico 1,606
Saudi Arabia 1,417
Venezuela 1,146
Nigeria 1,046
Iraq 567
Angola 504
Algeria 352
Kuwait 280
Ecuador 274
Brazil 134
United Kingdom 131
Chad 93
Norway 97
Azerbaijan 23
Table C.3 lists the top 15 crude oil exporters to the United States. Note the number of countries located in the Middle East.
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Figure C.1. Projection for U.S. Imports through 2030 (Energy Information
Administration, 2006)
This graph from the Annual Energy Outlook 2006 shows a significant increase in oil imports in the future. The ANWR case refers to the possible opening of the Arctic
National Wildlife Refuge for drilling, which would increase domestic oil production, causing a very slight decrease in imports. However, this projection comes from the U.S.
Energy Information Agency, which has not accepted the idea of peak oil. Therefore, this projection will only hold true while world oil production continues to increase. After the peak in production, a peak in imports will soon follow.