How Uncle Sam Keeps Us All Energy Poor

It is time someone said it in so many words: the energy crisis which has afflicted all of us unceasingly—indeed, at an ever-accelerating pace—for the past two years is, fundamentally, a government-created crisis of domestic energy production. For, notwithstanding the ritualistic incantations to the contrary of various federal officials, the U.S. is not running out of energy. Five years ago, the U.S. Geological Survey estimated the “identified, recoverable [oil] reserves” in this country at 62 billion barrels, the “identified, subeconomic resources”—those likely to become recoverable because of technological or economic changes—at another 120 billion to 140 billion barrels, the “undiscovered recoverable resources”—those considered likely to exist because of favorable geological settings—at another 50 billion to 127 billion barrels, and the “subeconomic portions of undiscovered resources” at another 44 billion to 111 billion barrels.

This totals between 276 billion and 440 billion barrels of oil—enough to last us a minimum of 46 years at our current consumption rate of roughly 6 billion barrels a year. Supplies of oil are also ample throughout the rest of the world (though gross mismanagement of our foreign policy and unnecessary politicization of foreign economic relationships have made our access to much of this foreign oil unreliable).

And natural gas is even more plentiful—even if we say nothing about the large, previously untapped reserves now believed to exist in the Devonian Shale in Appalachia, in Western “tight sands,” in coal seams, and in the Gulf of Mexico.

Federal energy officials almost never talk about these vast domestic reserves. They seem to find the topic of energy conservation more interesting. Yet they pursue policies which actually discourage conservation: for one example, they forbid private utilities from financing and installing home insulation for their customers; for another, they prohibit cogeneration, the production of electrical power as a byproduct by industries not licensed to serve as utility companies. It is only in the face of such disincentives that Americans have been conserving energy. Yet they indisputably have been: total U.S. energy efficiency has improved 12 percent since 1970.

Conservation, however, is not enough. As an NAACP spokesperson put it in 1978, “we cannot accept the notion that our people are best served by a policy based upon the inevitability of energy shortages and the need for government to allocate an ever-diminishing supply among competing interests.” Instead, our goal must be increased supplies of energy.

Intentionally or not, however, the federal government has actively—and successfully—promoted shortages of oil and natural gas in the United States for the past decade and more. And this is no mean feat in a nation so rich as ours in oil and natural gas deposits. How has the government done it? How exactly is Uncle Sam keeping us energy-poor?

Price controls

As Thomas Gale Moore of the Hoover Institution has observed, “whenever prices in a competitive market are held down, shortages develop. This is one of the most fundamental laws of economics and no appeals to patriotism, oratory about inequities, or claims about injustice to the poor and elderly can change this fundamental truth.”

The reason for this is obvious. Price controls deny money to those who have earned it, leaving them with both less incentive to produce and less money available with which to finance further production. Price controls cost oil producers $11 billion in 1974. And that figure has only gone up in the past seven years.

And even without such needless costs, oil exploration and production are not cheap. An onshore well that might have cost $51,200 in 1967 is now likely to cost more than $250,000 in the continental U.S., and several million dollars in Alaska. An offshore platform may run $10 million. A catalytic cracking unit to increase the yield of gasoline for a refinery may run $50 million. Enhanced recovery techniques, such as those necessary to pump out and refine “heavy” oil, and to increase the recovery from existing wells, may increase costs from 25 to 30 cents per barrel for steam and hot water injection, to $6 per barrel for carbon dioxide injection, to far more for chemical injection.

All of these costs can be undertaken only if the price justifies the total investment, including the cost of unsuccessful exploration. Out of 100 wildcat wells drilled by Conoco, one in six will contain some oil or gas, and only one in 55 will be a significant discovery.

Because price controls on domestic crude oil thus give a significant advantage to refiners who already have access to domestic oil, the federal government has set up a system of “entitlements,” under which refiners with greater than average access to domestic oil write checks to those with less than average access. This effectively taxes domestic production and subsidizes foreign production. The result, according to two M.I.T. economists, is that by 1977, only a few years after implementation of the system, oil imports were three and one-half times greater than they would have been without price controls. Robert Stobaugh and Daniel Yergin, of the Harvard Energy Project, conclude that by thus encouraging imports and discouraging domestic production,

Oil exploration and production are not cheap. An offshore well that might have cost $51,200 in 1967 will now cost more than $250,000. An offshore platform may now run 10 million dollars. the “irrational American pricing system could be one of the main causes of much higher oil prices in the years ahead.” Abandoning controls and letting prices rise, on the other hand, increases the amount of economically recoverable reserves. The M.I.T. Energy Laboratory Policy Study Group estimated in 1974 that price increases from $7 to $11 per barrel in real terms had increased discoveries some 25 percent; University of Chicago economist Yale Brozen estimates that price increases of 50 percent would more than double recoverable reserves.

Higher prices also make possible the secondary and tertiary recovery of the two-thirds of all oil normally left behind in existing wells. A 1978 study by the Congressional Office of Technological Assessment found that use of high-cost enhanced recovery techniques would yield 2 billion barrels a year at the pre-1973 embargo price, but 15 to 30 billion barrels a year at $13 per barrel. The Department of Energy now believes that some 25 billion to 30 billion barrels a year is now economically recoverable from exisiting wells through such higher-cost techniques.

Higher prices also open up lower-grade, but related, resources such as coal (liquified coal could provide up to one trillion barrels of oil), oil shale (up to 1.8 trillion barrels), and tar sands (billions of barrels). Artificially low prices, on the other hand, encourage waste and discourage conservation—by literally making petroleum seem cheap.

Natural gas price controls, in effect since 1954, have had a similar effect. A 1977 study by Congressman Dave Stockman and Garry Brown estimated that continued regulation would result in production of at least 25 trillion cubic feet (tcf) less natural gas by 1990 than would otherwise be produced. Also in 1977, the Energy Research and Development Administration estimated that potential reserves could double as the price increased from $1.75 per million cubic feet (mcf) to $3.25 per mcf.

A 1974 evaluation by the M.I.T. Energy Laboratory Policy Study Group estimated that phased decontrol could increase annual production by roughly 17 percent, and reserve additions by 70 percent, within six years. Several other studies—academic and industry—have found that decontrol could increase natural gas production by the equivalent of 5.5 million to 10.7 million barrels of oil a day by 1985. We now import roughly 6 million barrels of oil a day.

Even a July 1980 overview of the Department of Energy published by the Energy Information Administration concluded that natural gas production would be roughly 5 percent higher by 1990 if there were less federal control.

And our experience since the gradual lessening of controls began in 1978 is of an upsurge in drilling activity, reserve additions, and discovery of new reserves of “deep” gas—which would have not been profitable without decontrol.

The windfall profits tax

Phased decontrol of oil prices will eventually eliminate that production disincentive, but the so-called “windfall profits tax” (which has nothing to do with profits, being in fact a roughly 70 percent excise tax) will effectively recontrol the price of oil. More important, the loss of revenue—and thus much of the incentive to produce domestic oil—will be felt hardest by the 10,000 independents who drill 90 percent of the wildcat wells. Estimates of the oil production which will have been lost as a result by 1990 range from 415,000 barrels per day (the Congressional Budget Office) to 800,000 barrels per day (the U.S. Chamber of Commerce) to

850,000 barrels per day (the American Petroleum Institute). Even DOE’s Energy Information Administration admitted in its July 1980 report that the effect of the windfall profits tax “is to increase oil imports.”

Energy regulations

The 10,000 independents in the energy industry who drill 90 percent of the wildcat wells also find 75 percent of the new fields, and discover 53.8 percent of the new oil and gas reserves. But the federal leviathan has managed, through various regulations, to make it nearly impossible for them to go on doing these things. For example, the Natural Gas Policy Act of 1978 extended federal regulation from interstate gas to intrastate gas and created 26 new and different pricing categories. The then Director of the Federal Energy Regulatory Commission himself admitted that it “would be virtually impossible . . . to enforce [the Act] in a conscientious and equitable manner.” Such complexity is burdensome for even an Exxon; it is disastrous for a small firm.

The effect of these and other regulations has thus been to help cartelize the industry. William C. Lane, Jr., Director of DOE’s Office of Competition, has admitted that “everybody from the Senate antitrust subcommittee to the Federal Trade Commission to the Department of Justice to the House Antitrust Subcommittee who has looked at this issue from the competitive point of view has said that pricing-allocation regulations don’t work in this industry. Period.”

Federal leasing restrictions

The federal government owns the mineral rights to 52 percent of U.S. land, on-and offshore, and controls 95 percent of our oil resources, 85 percent of our high-grade tar sands, 76 percent of our oil shale, and 40 percent of our natural gas. It also controls 840 million acres of offshore which contain at least 32 billion barrels of oil and 116 tcf of natural gas, and may contain up to one-half of the oil yet to be found in the world. Finally, Alaska, the subject of much controversy, likely contains, according to the U.S. Geological Survey, between 47.9 billion and 123.9 billion barrels of oil—enough to supply our current annual needs by itself for between 8 and 20 years. Moreover, Alaska’s potential is yet undetermined; only two of its 23 basinal areas have been intensively explored, and 12 have not been explored at all.

Despite this great wealth of resources, the federal government has been steadily making federal land less accessible for development. Roughly half of the land has been withdrawn for parks or wilderness areas, and many of the mineral leases granted contain unnecessary restrictions. Only 4 percent of the federal government’s offshore resources have even been offered for lease, and only 2.5 percent is currently under lease. Few of the other high potential areas have been offered for lease at all. Finally, just before he was run out of office, President Carter locked up some 100 million acres in Alaska where even exploration will be forbidden.

Taken together, these actions have helped to severely restrict our domestic energy production. Even the Energy Information Administration report identifies such restrictive leasing practices as an important factor in the growth of our dependence on imported oil.

Environmental regulations

Even where exploration and development are allowed, other federal regulations may render them infeasible. Early in 1980, for example, the Interior Department was forced to halt its oil and gas leasing of a half-million acres in Alaska’s Beaufort Sea because of a potential threat to the Bowhead whale. Air pollution regulations are impeding necessary investment in refineries to process California heavy crude oil. And a dispute between state and federal agencies over regulations has prevented an additional 500,000 barrels per day of heavy oil production in Kern County, California alone. And then there are the drilling permits. Phil Oxley, executive vice president of Tenneco, recently complained to the Washington Star about the usual 20-month delay between lease sale and drilling—much of it necessitated by “the very complex system of approvals and reviews which must precede the issuing of drilling permits.” Milton R. Copulos of the Heritage Foundation recounts in Domestic Oil the horror story of the Santa Ynez Unit in California, where Exxon struck oil in 1969. The firm filed an application to develop the strike in 1970. But the 1,800-page Environmental Impact Statement was not completed until 1974; approvals from various federal, state, and local entities were not garnered until 1975; and a struggle with the California Coastal Commission developed in 1976. Then, after Exxon solved that problem, the EPA reversed itself and issued new restrictions, and the California Air Quality Board filed a lawsuit to enjoin the project. The suit was dismissed in 1978, and in 1979, the same court held that the EPA did not have jurisdiction over the project.

The final approvals are now in hand, but oil will not begin to flow until 1981, twelve years after oil was discovered.

Such bureaucratic mindlessness increases the cost of the oil which is produced, reduces the amount of oil which is produced, and discourages anyone from even trying to find or produce any more. It also inhibits the production of other fuels, such as coal. Coal makes up about 80 percent of our fossil fuel reserves, but currently supplies only about one-fifth of our energy needs. Restrictive federal leasing practices, as discussed earlier, are partially responsible. Approximately half of America’s coal reserves are in the West, where the federal government owns 70 percent of the land. And no significant coal leases have been issued since 1970, when a moratorium on such leases was imposed.

Strip mining regulation has also increased, with 1,000 new pages of regulations added during the last four years alone. These standards needlessly increase the cost of mining and discourage the development of new mines—without necessarily benefiting the environment. The provisions of the Clean Air Act and related regulations are too frequently inflexible. Sulfur dioxide standards, for example, are now out of line with current scientific knowledge. Yet they were the basis for the EPA’s announcement in September that it intended to deny the Nevada Power Company’s proposal to build a coal-fired plant in Southern Utah—a loss of 2,500 megawatts.

The alternative fuels of the future, such as solar, geothermal, and synthetics, have also suffered from federal involvement. For example, by artificially keeping the prices of oil and natural gas low, the federal government has made it difficult for alternative fuels to compete in the marketplace. Again, federal economic bungling has created an economic environment in which capital is hard to accumulate and profits difficult to earn; and until new investments and technologies can flourish in a strong economy, the full potential of alternative fuels cannot be realized.

Moreover, massive subsidies of particular technologies, such as synthetic fuels (the $20 billion Synthetic Fuels Corporation) and nuclear power (the Price-Anderson liability limitation, research funding, and waste disposal assistance) make it even more difficult for alternative fuels to compete. And government subsidies of the alternative fuels themselves are often wasted, since federal bureaucrats cannot effectively choose the best techniques; instead, they are much more likely to lock us into costly and obsolete technologies, while destroying the others. Not one successful commercial development has come out of four years of DOE “commercialization” programs—just as not one successful answer of any kind for our energy crisis has come out of decades of Washington meddling.

As University of Michigan business economist Edward J. Mitchell has observed, “the energy crisis is a crisis of public policy. It is the consequence of shortage policies adopted without reference to the public interest. There is no evidence that in a free energy market anything resembling a crisis, or even a problem, would have occurred.” The energy crisis is the result not of a shortage of energy resources, but of a shortage of common sense. It has taken a government energy policy to give us an energy crisis.

“Robert James Lee” is the nom de plume of a Washington attorney who wishes to retain his sources of information within the federal energy bureaucracy.