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Global Oil Supply and United States Energy Policy
(Released June 2005)



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After years of inexpensive oil, America suffered a case of déjà vu harking back to the 1970s when, in late 2004, crude oil prices surged above $50 a barrel. At the start of 2005, prices relaxed briefly before returning to their new high. Will we again see the long gas lines and economic stagnation that followed the original oil crisis?

In the short term the answer is almost certainly no. Both the causes and impact of the price shocks differ from 1973. Prior to 1999, oil prices had spent a quarter century either stable or shrinking, and, adjusted for inflation, prices remain lower than their 1981 high, according to Congressional Research Service (CRS) Issue Brief for Congress RL31849 - Energy: Useful Facts and Numbers. The triggers of this price rise also seem more short-term than those of the 1970s; then, a small group of countries that controlled much of global oil production colluded to increase prices. Today's rise is caused by an amorphous collection of events, including declining U.S. refinery capacity, instability in the Middle East and other oil-producing countries such as Venezuela and Russia; speculation in the oil markets; and increased global demand.

soldiers survey damaged pipeline
Sporadic attacks on Iraq pipelines are one source of oil price instability

Some volatility is a fact of life in the oil industry, although long-term trends have been more predictable. According to RL31720 - Energy Policy: Historical Overview, following "the time of the Arab oil embargo and first oil price shock in 1973" we have had a 30-year period "of general price and supply stability that is periodically broken by shorter episodes of supply disruption and price volatility."

We cannot know, then, the short-term course of oil prices, which may swing tremendously, may return to their previous lows, or may settle in to relative stability at their current price. In the very long term, certainly, current patterns are not tenable, as ever-increasing global demand will eventually run into the reality of a finite oil supply. "The very long term," however, can mean many different things, over which there is little agreement.

Energy Policy

The United States' reaction to oil shortages has tended to be short-term. During each of four periods of price spike-the 1973 embargo, the 1979 crisis in Iran, the 1991 Gulf War, and today-policy adjustment has ensued on such issues as "conservation, more efficient use of energy, and development of alternative energy sources" (RL31720). Overall, however, the stability and low price of oil has obscured enduring follow-through.

Kuwaiti stockbrokers
Kuwaiti stockbrokers watch trading monitors, May 10, 2005

The danger of a permanent oil supply shrinkage crisis has seemed remote only partially because of U.S. influence on oil producers. Certainly, American diplomatic relations affect decisions that influence the price of oil, and we are constantly walking a fine diplomatic line, for instance in Saudi Arabia.

Perhaps even more important is the interests of the producer nations, which want to keep us dependent on oil. Energy conservation and lowered demand have followed price spikes, so that, "by the late 1980s, recognition had grown of the interdependence of oil-producing and oil consuming nations; the OPEC nations had come to recognize that long-term demand for their oil was jeopardized by any prolonged period of high oil prices" (RL31720).

Circumstances have diminished attempts to develop a comprehensive U.S. energy policy; furthermore, the nature of such policy has changed. While the initial oil crisis spurred conservation under an inflexible set of regulations, such as a 55 miles-per-hour speed limit, beginning in the 1980s policy moved toward a more market-oriented approach.

Perhaps the best way to analyze energy policy is by dividing it into three major areas: increasing supply, conservation, and alternative energy.

Increasing supply:
There are two ways to increase oil supply-getting more oil out of existing wells, and finding new sources. Extraction from existing wells has been getting steadily more efficient; according to the Economist, "A few decades ago, the average oil recovery rate from reservoirs was 20%; thanks to remarkable advances in technology, this has risen to about 35%," with future increases expected (19). Methods for recovering oil from shale are notable for continuing to improvement. Furthermore new sources, including the ocean, continue to be opened for exploration. The question of drilling in ecologically protected areas has generated much debate, particularly around Alaskan preserves (see CSA's Arctic National Wildlife Refuge Development Issues), the use of which the U.S. Congress has recently approved.

oil platform at sunset
An oil platform in Alabama offshore waters

Taxation is perhaps the bluntest government instrument enforcing conservation. Overseas, gas taxes are far higher overseas than in the United States, partially due to economic policy, partially for environmental reasons. According to the American Petroleum Institute, the average American pays 42 cents tax on a gallon of gas, of which the federal portion is 18.4 cents. The United Kingdom, by contrast, has a tax equivalent to $3.40 per gallon, the highest in the world (Parry). Another blunt policy instrument is simply placing a cap on fuel efficiency. In the United States, Corporate Average Fuel Economy, or CAFÉ, standards began in 1975, giving a minimum efficiency requirement on automobiles, currently 27.5 miles-per-gallon (see CSA's Cars, Light Trucks and CAFE Standards). The light truck exception, however, gives heavy vehicles a 20.7 mpg efficiency, a loophole which allowed the SUV explosion of the 1990s.

In general, economists prefer flexible instruments more than absolute ceilings; cap and trade schemes, for instance, allow those companies that can easily cut energy use to do so, while others can pay their way out. Just letting prices find their natural level is the ultimate free-market conservation scheme. If a good is scarce, prices will rise on their own, encouraging conservation.

Taxation incentives are often used to encourage new technology and other conservation methods. Hybrid automobiles are the current vogue; they trap and use excess energy from braking friction. Still relatively expensive, they are not yet widely used. They may turn out to be an intermediary technology, however, as other alternative energies, including diesel, solar, electric, or biomass, alone or in combination, come to power our automobiles. Undoubtedly some technologies that seem promising today will fall by the wayside, while, due to the demands of infrastructure, one scheme will likely come to dominate.

green building with trees
A green building in the Netherlands

Automobiles, however, are only one source of energy use. Buildings consume 1/3 of all energy used in the United States. The term "Green Buildings" applies to a variety of alternative technology, including shading, vegetation, materials use, photo cells, wind turbines, and other energy saving devices. The very architecture of a building can be green, as with traditional Mexican courtyards, which stay cool and shaded. Indeed much traditional architecture employed Green technology that has been forgotten during the great age of the air conditioner.

Alternative energy:
In the long run, alternative energy is the only answer to the eventual diminution of oil supplies. Currently there is no panacea, however; each source has its disadvantages. Regarding transportation, oil remains the indisputably cheapest source of fuel. Many alternative fuels are also nonrenewable and will eventually run out. With the exception of nuclear, nonrenewable sources represent sequestration of millions of years of energy from the sun. In the extremely long run, the human race is dependent upon renewable energy sources.

Nonrenewable Sources
Coal is an abundant energy source, but also one of the dirtiest regarding both extraction and operation. Technology advances are mitigating this, however, for instance in finding ways to sequester coal's CO2 emissions. Diesel fuel might work well for automobiles, while Natural Gas is the current standard for heating homes. Lastly, Nuclear power might seem the magic bullet for solving energy products, but remains extremely controversial. While fears of nuclear explosions and radiation leaks are probably exaggerated, disposal of nuclear waste remains an enormous problem, as does the danger of terrorist hijacking. Because the supply of Uranium is limited, nuclear energy will eventually run out.

Renewable Sources
Solar power may be the most commonly discussed renewable energy source, but remains dependent upon expensive, and easily breakable, solar panels. Energy storage is probably the biggest problem remaining with solar power. Wind is cheap and abundant, and European technology has made for far more efficient windmills. Energy storage, again, is a problem. Windmills also tend to kill birds and bats that provide important ecosystem services pollinating crops.

closeup of geysers
Geysers power Iceland's geothermal plants

Hydrogen, which CSA's Hydrogen Storage calls "the most abundant element in the universe", has great potential as a renewable resource. In January of 2003, the Bush administration announced a $1.8 billion hydrogen and fuel cells initiative, according to RL30758 - Alternative Transportation Fuels and Vehicles: Energy, Environment, and Development Issues. Most current forms of hydrogen storage, however, have extreme explosive potential. Furthermore, if hydrogen fuel is produced using nonrenewable energy, "total emissions could equal or even exceed those of efficient gasoline and diesel vehicles" (RL30758). However, according to environmental analyst Lester Brown, "if the electricity comes from a wind farm, hydropower station, geothermal power station, or solar cells, the hydrogen will be clean-produced without carbon emissions or air pollutants" (168).

Biomass fuels might seem cheap and easily available, particularly when made from agricultural and other residue. However much biomass requires energy input, such as fertilizer, to create the eventual output. Geothermal energy from the earth is a clean source already being used extensively in Iceland, which has an abundant supply of geysers.

ethanol fueling station
Ethanol fueling station

Currently none of these technologies is at a level of technological or infrastructure development to realistically replace oil-based fuels, particularly for the automobile. For one to become widespread would require a dense network of fueling stations. According to "Alternative Transportation Fuels and Vehicles," most of the fuels remain significantly more expensive than gasoline, and have relatively poor "performance in terms of range, cargo capacity, and ease of fueling." The report concludes that, "without considerable advances in alternative fuel and vehicle technology, or significant petroleum price increases, it is unlikely that any fuel or fuels will replace petroleum-based fuels in the near future."

In the very long term, a combination of such renewable sources as wind with better storage-perhaps through solid oxide fuel cells (see CSA's Solid Oxide Fuel Cells) may be the ultimate energy solution.

Questions for the Future

Is oil running out globally?
Projections differ radically as to remaining oil reserves. One measure of oil reserves is via Hubbert's Peak (, essentially a bell curve with the midpoint the time at which we have used 50% of total oil stored underground when the age of oil began. In 1956, geologist M. King Hubbert predicted accurately "that America's oil production would peak and begin to decline in the early 1970s" (17). Using similar techniques, Princeton professor Kenneth Deffeyes predicts a global Hubbert's peak of around 2005, which would auger continuing price rises and the need for crash programs in conservation and alternative energy.

Deffreyes' claim is strongly contested. Many analysts, notably the United States Geological Survey, believe that, due to continuing exploration, as well as technology that allows more efficient oil extraction, we are at least twenty years from Hubbert's Peak. The number of unknowns, though, is great. Both corporations and nations carefully shield their oil data so that, according to investment banker Matt Simmons, "We are now flying totally blind" (Economist 11).

Still, accounts that oil production is about to decline seem exaggerated. According to Energy: Useful Facts and Numbers, "proven reserves actually increased by about 50% between 1973 and 1990." Even with a slowed search for oil, "by 2003 improved technology for retrieving petroleum from oil sands in Canada, and to a lesser extent heavy oil in Venezuela, led to the addition to proven world reserves of approximately 200 billion barrels, or 20% of the total 1991 figure."

Increased demand: the China factor?
In 2004, according to the Economist, global oil consumption "increased by 3.4% instead of the usual 1-2%. Nearly a third of that growth came from China, where oil consumption rocketed by perhaps 16%" (4). Yet, "China's share of world oil consumption is still under 8%," while their growth is unlikely to continue at this stellar rate. Nevertheless, China's plans for an interstate highway system signal continuous long-term growth in demand for oil. India, too, is dramatically increasing energy demand. As the global economy changes, developing countries want a standard of living like the West, and particularly the United States. The full effects of this new demand on oil usage cannot be predicted. Energy supply, however, may not be the final limiting factor here. Both India and China have over a billion people; they, along with other developing nations, face desertification, pollution, exhaustion of water and soil, and other environmental stresses. In such densely populated areas, the United States model may prove unworkable. And global environmental factors, too, may make such growth untenable.

Global Warming?
Exhaustion of oil reserves might not prove to be the limiting factor on an oil-driven economy. If the current consensus of climatologists proves true, and CO2 from automobile and other emissions is a driving force behind global warming, environmental pressure may force greatly reduced reliance on oil (see CSA's Global Warming and the Kyoto Protocol). Historically, however, economic forces rather than environmental conditions have been the driving force behind energy use, so a major change in economic structure based on global warming would be surprising. And, despite a successful response to the lesser threat of ozone depletion, an integrated global change in economic habits is unprecedented. Rather, we shall likely muddle along with greatly differentiated local and national responses, prompted at various times by various conditions.

Written by Ethan Goffman