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. ii iii 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 iv v 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. vi 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 vii 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 viii 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. ix 1 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. 2 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. 3 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) 5 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.