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Solutions for America's energy crisis
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By JAMES MOOSE
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Many of us remember the energy crisis in 1979-81, with gasoline rationing and crude oil prices soaring from $14 per barrel in 1978 to $37 per barrel in 1980.
I remember clearly because in 1979, I joined the Carter administration (and later the Reagan administration) to work on the crisis and had difficulty finding enough gasoline to drive part of my family from Boston, where we were living, to Washington D.C.
The 1979-81 energy crisis was primarily due to an oil shortage caused by a drop in Iranian oil production of about 4.5 million barrels per day as a result of the Iranian Revolution. However, the shortage was soon overcome by allowing petroleum price increases to reduce demand and by encouraging production from outside OPEC.
World demand for oil dropped by 10 percent from 1979 to 1983, and non-OPEC production grew by 3.9 million barrels per day including the U.S. bringing on about 1.5 million barrels per day of additional production from Alaska.
By 1986, the average price of a barrel of crude oil was back down to a little over $14. This energy crisis was then largely forgotten by policy makers although it was clear to many analysts that it would reoccur due to declining U.S. oil production and increasing U.S. and world dependence on Middle Eastern oil.
The present crisis or crunch has been building for several years. The average price of crude oil has risen from $28.8 per barrel in 2003, to $72 per barrel last year and probably more than $100 per barrel this year. (It is currently around $125 per barrel). This is largely due to continuing growth in oil demand pressing on a limited supply, although the decline of the dollar makes it worse in dollar terms.
Unlike the 1979-81 crisis, the continuing sharp increase in oil prices has not reduced world oil demand -- which continues to rise, although more slowly. Oil demand rose about 1.4 percent last year and is expected to rise 1.1 percent this year according to the IEA (the International Energy Agency, which is the organization for large oil importing countries).
Why is oil demand continuing to rise now when it fell in 1979-83? The answer is two-fold.
First, demand in Europe and the U.S. has not fallen significantly as it did before, but is essentially flat. Most oil in these countries is used in the form of transport fuels such as gasoline, diesel and jet fuel, and while people complain about gasoline and diesel prices, they find it difficult to cut back on travel in the short run.
Only starting this year has there been any sign of a decrease in oil demand and, it is still very modest.
Second, oil demand continues to rise rapidly in a number of developing countries such as China and India and in the oil producing countries themselves such as Saudi Arabia or Venezuela where gasoline prices are kept very low. (Gasoline prices are around 12 cents per gallon in Venezuela -- not providing much incentive to economize.)
The second difference with 1979-81, is that non-OPEC oil production is fairly stagnant. Russia, which is the world’s second largest oil producer, may have peaked due to underinvestment and its deteriorating relations with major oil companies.
U.S. production is declining, and the many potential areas in the U.S. which may contain reserves such as the Arctic National Wildlife Refuge (ANWR) in Alaska, the U.S. East Coast or offshore Florida are off limits to development. Mexican production is declining as is that of the UK and Norway.
Even within OPEC, there are problems with Venezuela allowing its capacity to deteriorate, Nigeria facing considerable civil strife which is reducing production, Iraq which has yet to regain the level of production it had under Saddam Hussein, and Saudi Arabia which is slowing down development of its reserves in order to save oil for future generations.
What should the U.S. government be doing about this?
The answer is fairly simple although not easy. We need to reduce our consumption of oil while increasing our domestic oil production and production from secure sources such as Canada and Mexico. This will involve more efficient cars, opening up new areas for exploration, developing oil shale, developing cellulosic ethanol, etc.
There is no single silver bullet but rather a number of steps that need to be taken. What serves no purpose is to look for scapegoats such as “speculators” or large oil companies. While speculators can have a short term impact on oil prices, in the long run, their impact is minimal as they deal only with “paper barrels,” contracts to buy and sell oil, and ultimately have to sell the contracts they buy.
The large oil companies also now have a very limited impact since their role is greatly diminished. In fact, some of the large oil companies appear to be liquidating themselves as they produce more oil than they find.
If we do nothing, in the longer term the crisis will worsen as oil production stagnates and rising demand pushes up prices. However, the problem can be resolved if we are willing to deal with it aggressively and seriously. The sooner we take serious action the more rapidly the situation will improve.
(EDITOR'S NOTE -- Jim Moose is a retired lead energy economist for the World Bank. A native of Maysville, he attended school here and in the Middle East where his father was U.S. Ambassador to various countries and the state department's top Arabist. Moose has a PH.D. in economics from Harvard, an MA from Oxford University and a CFA degree. He had a varied career which included serving as deputy assistant secretary in the U.S. Department of Energy, head of planning and analysis at Standard Oil of Ohio and lead economist in the World Bank. Moose continues to consult for the World Bank on Turkey and other countries. He and his wife, Claudia, and daughter, Rachel, returned to Maysville to the family house in Washington in 2006. Rachel graduated from St. Patrick in May.) |
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Reader Comments
Comments are limited to 200 words or less.
canada wrote on Jun 10, 2008 12:26 PM: " canada will be the new saudi arabia soon. we should keep that in mind when dealing with our friends to the north. the united states doesnt need to drill more. they need to refine more. refinerys in america dont run at full capacity. its like 80% or something. "
BJA wrote on Jun 8, 2008 9:53 PM: " Why not explain the Bakken reserve, Utah Tar Sands, and Colorado shale oil in more detail. There are supposed to be trillions of barrels stored for possible development, even if at a high cost. "
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