Monday, November 19, 2007

Politicians Promote Policies That Increase Dependence

At CARE we believe that all (well, almost all) energy sources will need to be part of the mix for America’s future energy needs—but we also believe they need to work economically. With the current high energy prices, previously unaffordable supplies become almost doable—which could increase the inventory and therefore lower the prices. Long-term, this is good. Short-term, however, no one wants to pay more than three dollars a gallon to drive to grandma’s for Thanksgiving. Angered over the high prices, we look for someone to blame. With such a high percentage of America’s oil coming from overseas, the falling value of the dollar certainly has a part in the pricing, as does the reduced inventory and the pending conversion to the winter fuel mix. But Congress needs to take a big portion of the blame as well. If they wanted to, they could make going to grandma’s more cost effective. Read on and add this information to your energy arsenal. Next time you hear the cost of gasoline being bantered back and forth, throw this into the mix.

With the futures price for a barrel of oil hovering around $100 and the price of gasoline averaging $3 a gallon, people are panicking and looking for answers. While Politicians complain about the U.S.'s increasing dependence on foreign oil, they continue to promote policies that increase that dependence. While they talk, we've nearly doubled our dependence on gasoline refined and imported from other nations.

Gasoline demand has increasingly outstripped domestic supply:

  • In 1981, the 18.6 million barrels per day (b/d) capacity of U.S. refineries exceeded the nation's daily consumption of slightly more than 16 million barrels.
  • Between 1981 and 2005, U.S. oil consumption grew 29.7 percent to nearly 21 million b/d.
  • But refinery capacity in 2005 was 17.1 million b/d - 8.1 percent less than in 1981.

There are only two ways to reduce high oil and gas prices: a reduction in demand or an increase in supply. Since world demand is increasing, we cannot appreciably affect demand in the short or mid-term without the technology to separate economic growth from fossil fuel energy growth—something we just don’t have yet.

By reducing refining capacity Government policies have contributed to high gas prices and created a smaller inventory. National policy should focus on increasing supply. Yet instead of seeking to alleviate the problem, Congress is debating ways to make matters even worse—missing opportunities to utilize the billions of barrels of oil locked off-shore in Alaska.

Building new oil refineries or expanding existing ones is among the most affordable, effective and reliable ways to increase supplies and lower prices. However, no new refineries have been built in the U.S. in almost 30 years due to clean air regulations, boutique fuel mandates and mandates for ethanol that have raised the cost of building new refineries.

  • Amendments to the Clean Air Act in 1990 and 1997 required refineries to limit emissions of air pollutants and to make cleaner reformulated fuel. This forced refiners to install expensive pollution-control technology. This high price tag led to the closure of additional refineries.
  • Gasoline sold in the US has been fractionated into about 17 different boutique fuels in order to fulfill various air pollution reduction plans. With three grades of gasoline per fuel, refiners are producing over 50 separate blends. The Government Accountability Office notes that producing these gasoline blends requires the installation of expensive equipment and the different blends must be transported separately. As a result, refinery capacity becomes severely constrained seasonally, resulting in gas price spikes.
  • The 2005 energy bill mandated the annual use of 8 billion gallons of ethanol in gasoline blends, and an energy bill recently passed by the U.S. Senate would increase the mandate to 36 billion gallons. Petroleum refiners have responded to existing and proposed expanded ethanol mandates by canceling 40 percent of planned expansions in capacity, reducing potential new output from 1.6 million b/d to less than 1 million b/d.

“Absent government intervention in the market, refinery capacity would be expected to expand, reducing consumer prices,” said D. Sean Shurtleff, an NCPA graduate fellow. “More economical and secure energy supplies are available if government will get out of the way.”

For example, if Congress had:

  • opened the Artic National Wildlife Refuge (ANWR) to oil exploration back in 1990, when the issue was first debated, we would have that oil today.
  • opened ANWR and allowed off-shore drilling as part of the energy legislation debated at the start of the Bush presidency, at least some new production would be coming online now.
  • acted in 2005, when the supply issues were again debated, we would be at least a few years down the road toward lessening energy dependence.

Under the crust of the Outer Continental Shelf (OCS) and the coastal plain of the Arctic National Wildlife Refuge (ANWR) are vast untapped conventional oil reserves. There is 4 times as much oil under the OCS as all other current U.S. oil reserves. And the ANWR coast contains 6 billion to 16 billion barrels of economically recoverable oil at $20 a barrel—up to double that at $40 a barrel.

Tapping new oil in the U.S. would reduce prices because it would increase supply to world markets, and the location of new oil would reduce uncertainty and price instability. Instead, Congress is pushing ethanol, which is renewable and homegrown. Midwestern farmers, producers and farm state legislators argue increasing U.S. biofuel production and building new bio-refineries could reduce America's dependence on fossil fuel imports while diversifying our fuel supply. Accordingly, the 2005 energy bill mandated use of 8 billion gallons of ethanol in gasoline blends, and an energy bill recently passed by the U.S. Senate would increase the mandate to 36 billion gallons.

In addition to ethanol, though rarely discussed, the United States has abundant reserves of coal, shale oil and conventional oil.

There is a well-developed process to turn coal into oil. South Africa's Sasol Company. produces 150,000 barrels of oil from coal per day. China is also bringing coal-to-oil plants online, with plans to produce as much as a million barrels of oil a day from coal by 2020.

Commercial coal-to-oil plants have not been built in the United States because they require more long-term capital investment than conventional oil. Conventional oil has been relatively abundant and therefore, historically, prices have been far below what would be needed to make synthetic oil competitive. This has changed.

The Energy Department has estimated that coal-to-liquids can compete if the price of conventional oil is above $30 per barrel.

Based on predictions that the era of cheap oil is over, a consortium of companies including General Electric, Rentech and Arch Coal plans to produce low-sulfur diesel from coal mined in Wyoming, and a company in Illinois expects to bring a commercial plant on line by 2010. The potential is substantial. The federal government estimates that production of oil from coal could reach 1.7 million barrels per day by 2030, while the coal industry estimates future production of 2.6 million barrels per day.

Turning coal to oil also has ancillary benefits: It produces natural gas that can be used for heating or electric power generation and it removes more than 30 percent of the pollutants (mercury, sulfur dioxide and heavy metals) released when coal is burned to produce electricity.

Another potentially huge supply of oil and natural gas is trapped in oil shale, largely in the Western states. Geologist David Deming estimates that rocks in Colorado, Utah and Wyoming alone contain 1,500 billion barrels of oil, and worldwide oil-shale could equal more than 500 years of oil.

Previous government efforts to extract oil from shale were very expensive, used a lot of energy and labor and produced relatively little oil. However, research at private companies has produced a technological revolution—a process to heat the rocks in the ground, trap the oil and profitably extract it as long as the price of conventional oil is above $30 per barrel. Based on successful tests, Shell Oil Company estimates it could produce more than 1 million barrels of oil per acre or a billion barrels per square mile. In the Green River Basin of Colorado alone, there are more than 1,000 square miles of oil shale. (Read CARE's special report on Shell's Mahogany Research Project.)

Each of these options has environmental benefits and drawbacks that should be analyzed and debated before ramping up production. However, compared to the net amount of ethanol that can be produced, coal, shale or conventional oil from ANWR and the OCS hold greater promise of reducing America's dependence on foreign oil.

Whether for nontraditional sources of oil or for ethanol, subsidies distort energy prices and investment decisions—reducing the efficiency of supply and production, and therefore the security of America's energy future. Thus, before Congress mandates any expensive program to replace a small portion of the nation's gasoline with ethanol, or lavishes subsidies on the coal and oil industries to produce oil from either coal or shale, it should first allow the market to work.

Both increasing traditional and non traditional supplies are mid-term solutions. In the short-term, if Congress really cared, rather than simply shedding crocodile tears for the plight of the poorest consumers, they could make some changes now. Refineries are about to have to close down to change over to winter fuels—which will reduce inventory and increase the price at the pump. Congress could suspend the Federal gas tax of about $.20 a gallon and remove the regulations demanding boutique fuels. Then costs would go down and production would go up. That would be something to be thankful for!

Sterling Burnett, Senior Fellow for the National Center for Policy Analysis based on the following report: Increasing America’s Domestic Fuel Supply by Building New Oil Refineries

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