Yes, There Is An Energy Crisis

By Christopher Byron

Six months have passed since President Carter unwrapped his national energy plan, and the energy crisis has become a confusion crisis. Indeed, three Presidents, including Carter, have produced three separate energy programs, yet the nation remains as perplexed as ever by the fundamental question: Is there really an energy shortage?

More precisely, since no one contends that coal and uranium supplies are running out, is there a shortage of oil and gas?

At one extreme, analysts like M.I.T. Professor of Technology Carroll Wilson argue that, given the wrong set of bad-luck breaks (for instance, a Saudi decision to hold back production), world oil supply could run short of meeting needs in as little as ten years. That agrees with Carter's warning last April that demand could begin to exhaust "all the proven reserves in the entire world by the end of the next decade."

At the other extreme, the United Nations Institute for Training and Research contends that there is enough oil and gas in the world to last 100 years or more--provided that industrial nations are willing to pay the price of developing it. Former Defense Secretary Melvin Laird says that there is no energy shortage, only a production shortage brought about by unwise Government policy. Says Economist Morris A. Adelman, an M.I.T. colleague of Wilson's: "The gap is like the horizon, always receding as you walk, ride, or fly toward it."

Getting the experts to describe the "crisis" often seems like asking them to analyze a Rorschach ink blot: each responds in terms of his own specialty. Most economists feel that the problem is not one of supply but of price--the cost of getting oil and gas to market. Specialists in international finance say that price as such is less important than the fact that consuming countries cannot keep handing over more and more money to the OPEC cartel members without imperiling global financial stability. By year's end the import bill for the U.S. alone will total $45 billion.

Meanwhile, national security analysts say the real problem is what will happen if the U.S. continues importing half its oil, and producing nations decide one day to turn off the tap.

The CIA finds the ultimate X factor to be the Soviet Union. In an analysis that Carter drew on heavily in shaping his national energy plan, the CIA predicted that the U.S.S.R. some time in the mid-1980s would switch from being an oil exporter to a major importer, swallowing enough OPEC supplies to spread shortages throughout the West.

Making confusion worse, the experts nearly all use the same numbers--but confess that those numbers are far from fully reliable. Obviously, a key figure is the size of the world's pumpable oil reserves. Yet the most widely quoted data on global proven reserves come from trade journals, notably the Tulsa-based Oil and Gas Journal. The magazines get their figures from a hodgepodge of sources, particularly the governments of producing countries and the oil companies that operate there. Sometimes the sources give out widely divergent numbers, and an embarrassing amount of guesstimating goes on. On balance, the numbers show a gentle decline in proven reserves over the past five years, but no one knows for sure if that is really what is happening. Says Oil Economist John Lichtblau: "I find it a little frightening that world oil policy is made on the basis of the figures these magazines put out. The numbers are speculative, especially for countries in the Middle East and Africa, yet everyone uses them."

The slippery statistics impress the public far less than do the headlines that new production from Alaska, Mexico and the North Sea has created an oil glut, forcing Saudi Arabia and Kuwait to make small discounts in prices (TIME, Sept. 26). Small wonder that a recent New York Times/CBS poll showed that 57% of those questioned thought the energy situation less serious than the Administration says.

That is a bad misjudgment. The situation is indeed serious, but not in quite the way that the Administration believes. The Carter program seems to assume that there is little margin to increase oil and gas production, especially in the U.S.--but if that is the assumption, it is wrong. If there are painful oil and gas shortages in the future--and there may well be--it will not be because the fuels are not there to be found. A shortage might strike because producers have not developed ways of bringing potential supplies to consumers at an affordable price. The Government is not giving them enough incentive to do so.

It may be, as Secretary of Energy James Schlesinger says, that there are no more than 120 billion bbl. of potentially recoverable crude in the U.S. at present prices--roughly an 18-year supply at current consumption rates. And though drilling activity has accelerated dramatically around the world since the quintupling of OPEC prices that began in 1973, new finds have been disappointing. But many promising sites have yet to be drilled--the outer continental shelf off the U.S. coast, for example, or much of the northern Norwegian coast. Oil geologists generally think there are no Saudi-size deposits waiting to be discovered, but there might be a few more North Slopes and North Seas.

Besides that, oceans of unpumped oil are known to exist in the U.S. Only about a third of the oil in a well is ever brought to the surface by present methods--primarily, letting it gush out under its own pressure. The remaining two-thirds is usually written off as "unrecoverable." Sophisticated secondary and tertiary recovery methods exist to get that oil out: injecting high-pressure steam or liquid chemical solvents to dissolve the crude from tiny fissures in the rock. Some drilling experts calculate that the recovery rate could be increased to 60%, which would almost double U.S. recoverable reserves. The market price would be high--$14 to $20 per bbl.--but it might be reduced by technological breakthroughs.

The U.S. also has by present estimates more than 1.8 trillion bbl. of oil locked in shale in the Rocky Mountain states--about 15 times the nation's estimated potential reserves from conventional sources. Burning the oil out of the shale--the most promising method--would require a market price of perhaps as much as $25 per bbl. to make it profitable. Yet even at the present average U.S. price of $11.50 per bbl. for newly discovered domestic oil, Ashland Oil and Occidental Petroleum last month were given federal approval to begin development of a joint shale-oil project in western Colorado.

Perhaps another 2 trillion bbl. of oil is thought to lie in the great deposits of goo known as tar sands, much of which are in Canada. At present world prices, they are on the verge of becoming economical to develop. Two plants are already extracting oil from tar sands in Alberta's Athabasca fields, and Shell Canada plans to spend $4 billion for a third plant, which will start producing in the early 1980s.

The trouble with Carter's energy plan is that it does not provide for Government incentives that could help private industry bring petroleum from unconventional sources to market at a price the economy could afford. Instead, the program focuses on conservation--inducing the U.S. to use up more slowly the oil and gas that the nation knows it can count on producing. Conservation is necessary, but not sufficient: at best it only postpones the ultimate day of reckoning. As Laird observes: "Conservation alone is a slow walk down a dead-end street."

The centerpiece of the Carter program is a plan to raise U.S. oil prices, presently averaging $8.52 per bbl. at the wellhead for domestic oil of all price categories, up to the OPEC-set world level of about $13.50. This would be done by imposing a tax on producers at the well. Then to soften the blow to the economy, the Government would give back most of the money to consumers in the form of rebates.

The scheme is intended to discourage consumption, but it is doubtful how effective a deterrent it would be. Nearly 40% of all petroleum consumption in the U.S. on any given day is used to run the country's automobiles, and though the price of gasoline has all but doubled in the U.S. since the days of the Arab oil embargo, Americans are today consuming about 7% more gasoline than they were before the price shot up at the pump. Carter's wellhead tax would only add about 60 to 80 to the price of a gallon of gasoline by 1985, and who seriously thinks this will discourage Sunday driving by anyone?

Worse still, the oil companies would not get a cent of the revenues to invest in exploration and development of new energy sources; they would have to finance R. and D. on their own. A far better idea would be to channel the wellhead taxes into R. and D.--perhaps by setting up a federal corporation to underwrite the efforts of companies struggling to find economical ways of coaxing oil out of otherwise exhausted wells, burning it out of shale or extracting it out of tar sands. Russell Long, the Louisiana Democrat who heads the Senate Finance Committee, has threatened to eliminate the wellhead tax from the Carter program unless the revenues are used to help expand production. He has a powerful point. Politically, it would be improper to let the oil companies reap "windfall" profits from raising the domestic price to OPEC levels, and adequate safeguards can be drafted to ensure that R. and D. aid to the companies is used for only that.

The Senate could wisely take several other steps to improve the energy program that sailed through the House almost intact. One would be to phase out controls on natural gas, leaving prices to find their own level in a free market. The present controlled price of $1.47 per 1,000 cu. ft. is too low to lure enough gas out of the ground--as witness last winter's factory and school closings. A move to deregulate has run afoul of an on-again, off-again filibuster by Senators from states that rely heavily on low gas prices. The most likely compromise will be an increase in the regulated price, perhaps to just over $2 per 1,000 cu. ft.

That might be enough at present, and abrupt deregulation might be too great a shock to consumers. But drillers searching for hard-to-get gas need the assurance that perhaps two or three years from now the market rather than the regulators will set the price.

Also, the Administration and Congress need to rethink what must be done to increase the use of coal. Carter and Energy Secretary Schlesinger plan on a 65% increase in coal use by 1985, but they assume that this will happen as an automatic consequence of forcing power plants and factories to switch from oil and gas to coal as boiler fuel. This may be too ambitious a target, since it could be achieved only if that segment of U.S. industry that is capable of using coal as fuel multiplies its consumption four or five times above present levels in less than a decade. The Senate has voted the Administration less authority than it wanted to order plants to switch to coal, and Carter's plan to grant tax breaks to industry in order to spur conversion to coal use may not prove to be sufficient; the legislators would do well to vote more financial aid.

Most of all, the energy program needs basic reassessment.

And that must begin with the old question: Will there be "energy shortage in the future? The answer: Only if we let it occur. There may be more shortages of natural gas, but they would be the consequence of inadequate price rather than nonexistent supply. There could well be a severe shortage of oil, but the scarcity would be less of physical quantity than of imaginative ways of bringing crude to market at an acceptable cost.

There is no shortage of coal or nuclear power, but there are bottlenecks to be broken. In the case of the atom, the time is at hand to take a fresh, hard look at the wisdom of the Administration's opposition to breeder reactors, which produce more fuel than they consume. It is urgent to get started on a comprehensive plan for the development of alternative energy sources. Says Milton Russell of the Washington-based research house Resources for the Future: "If by 1985 alternative sources are in proper development, there will be no cause for alarm. You don't have to have them in place. You have to have them in train." To meet even that deadline, time is running out.

A major rewrite of the energy program is too much to ask of Congress in the few weeks remaining in this session. Whatever happens to this year's national energy plan, the nation will need another in 1978. In promoting it, the Administration should summon the nation to a long, patient effort both to conserve energy and to increase production --and instead of picturing the struggle as the "moral equivalent of war," should make it as plain as an oil rig in the desert that if the U.S. wants to avoid shortages, it has to pay the price. --Christopher Byron

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