November 16, 2000

November 16, 2000 | Lecture on Energy and Environment

Energy Shortages In Energy-Rich America--Why?

Now here, you see, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast.

--Lewis Carroll, Through the Looking Glass

The above quote rings in my mind as I view the latest numbers on oil and gas production here in Oklahoma. In spite of the fact that the number of rigs has doubled from a year ago, oil and gas production are actually down since May. Such is the state of affairs America faces as it tries to keep vehicles running, electricity flowing, and furnaces lit. The policies (or lack of same) of the past and present force us to run as hard as we can simply to stay in place. Meanwhile, the time bomb that is the Middle East continues to tick, and the threat of a disruption of the OPEC oil we've come to depend on grows ever greater. With a 17-year-old son, I am watching that situation come unraveled with great trepidation.

Like the grasshopper in the fable of the ant and the grasshopper, we have been given ample warnings of the impending disaster. We have had:

  • two findings in the past eight years of a national security threat to the United States with current levels of oil imports,

  • a recent order from the U.S. Court of International Trade ordering the Department of Commerce to investigate the dumping of oil in the United States by OPEC countries,

  • reports of a ballooning trade deficit from oil, and

  • fear on the part of the Federal Reserve as to what this energy crisis may do to our booming high-tech economy.

Like the grasshopper, America's live-for-today mentality in energy policy has finally caught up with us. We are facing these energy shortages in energy-rich America because we have not made it a national priority to maintain our domestic energy infrastructure and provide reasonable access to our resource base. To compound the problem, the increasing energy demands of our growing economy have been ignored.

In the past year we have faced shortages of fuel oil, gasoline, electricity, and this winter will face one of the tightest gas markets seen since gas was deregulated. All consumers will face higher prices and some may face curtailments.

The situation is clearly a crisis, not easily or quickly solved, that has consequences for our high-tech economy. And with the unrest in the Middle East, this lack of foresight poses a threat to our national security that has been outlined in two separate presidential findings.

Why can't we just continue to stumble along from energy crisis to energy crisis like we have been doing over the last several years? The ill-advised and possibly illegal release from the Strategic Petroleum Reserve doesn't address the fact that America's energy infrastructure and resource base is being shut down, and this, in turn, is causing a crisis from the gas pump to the electric meter. In fact, it would be almost laughable in its naivete as a policy solution if it wasn't so clear that it was political in nature, geared towards an American public kept in the dark about the true state of our energy crisis.

The domestic oil industry is in shambles. First, OPEC's recent increase means they have lifted supply this year by 3.2 million barrels a day, putting their total production back to 1998 levels, when world prices fell to $8 a barrel. The latest increase in production is having little impact on prices because U.S. and other marginal oil production are gone and demand has increased. We are approaching 60 percent dependency on foreign imports of crude oil used for heating oil and transportation. This is in comparison to the 42 percent dependency we faced less than 10 years ago.

In the previous 20 years, imports increased only 10 percent. The domestic industry has lost hundreds of thousands of jobs and well over one million barrels a day of production. That means over 10,000 supertankers a year entering American ports with crude oil going to refineries, many now located on the coasts of America.

Once refined, it has to be put in batches, made up of as many as 30 different gasoline formulas as required by law, and then put into pipelines to be shipped all across the country in quantities the local markets demand. Again, that is in comparison to the less than half a dozen formulas required to be shipped through those same pipelines less than 10 years ago. Most of these pipelines were built in the 1950s.

Domestic oil production onshore has fallen off to historic lows with the price drop to $8 a barrel, and 50 out of 200 refineries have closed, many located in the Midwest. A new refinery has not been built in a quarter of a century. In the PADD region (Petroleum Administration for Defense District) that faced all those shortages and price spikes (including Oklahoma), only 70 percent of the gasoline used is produced and refined in the region now. The Environmental Protection Agency is also proposing new regulations on the production of diesel fuel that will encourage the shutting down of additional domestic refineries.

Although not widely discussed, the oil crisis has had a dramatic impact on American natural gas production; over 90 percent of what we use is produced in America. In fact, there is little additional natural gas capacity that can be imported since Canada is our only significant importer. While they may have added pipeline capacity, it will be hard to increase gas production to the United States until they bring on the McKenzie Delta Field. And because over 70 percent of natural gas is produced by independent producers who raise their capital for exploration and production from existing oil and gas production income, when there is no income, no gas wells get drilled either. That basically put us over two years behind in replacing reserves, much less meeting new demand.

So what is the problem now that prices have increased? A lack of confidence by the oil and gas industry that OPEC won't pull the rug out again is part of the problem. It is all about certainty. While the rig count is increasing--there are close to 800 rigs drilling for natural gas--it is not nearly enough. To replace existing reserves and meet new demand may require close to 2,000 rigs. There are not that many rigs available in the United States, few new onshore rigs are being built, and even if we had the rigs there are not enough qualified people to man them.

According to statistics compiled by the Oklahoma Corporation Commission, natural gas production in Oklahoma, the third largest gas producing state, has still increased by only 1 percent over 1999. The good news is that intents to drill are up 40 percent over last year, and in Texas they are up 60 percent. But it usually takes an average of three years to develop on-shore projects. Gas supplies are likely to be short this winter because we are two years behind in drilling to replace reserves, and that is not even counting what we need to meet greater demand.

A recent National Petroleum Council report recommends that access to supply for exploration and production must increase, especially on federal lands. It estimates that 137 trillion cubic feet (TCF) in the Rockies and another 76 TCF offshore in the eastern Gulf of Mexico, Atlantic, and Pacific coasts, which are directly or effectively off limits, could supply American consumers.

Alaska has tremendous gas supplies, but we have no pipeline to bring it to the lower 48 states. It must be made a national priority to build one. Cambridge Energy Research Associates estimates that, at a minimum, the petroleum industry will need to add 50 percent more gas reserves over the next decade than they were finding in the 1990s. Approximately a $1.5 trillion (in constant dollars) investment in production through 2015 will be required to meet estimated demand.

What does this have to do with the electricity shortages? The same lack of adequate infrastructure and the accompanying necessary energy production also lie at the root of this shortage. The demand for electricity generated by the new age of technology has not been recognized and planned for anywhere in the United States.

Usage of the Internet now comprises 8 percent of our electricity demand. But there is no place where government barriers and bad planning is more evident than in California, where it takes four to five years just to get government permission to build new generation and transmission facilities. Their deregulation legislation contributed to the problem by not adequately providing for a competitive marketplace. In San Diego they saw a 700 percent increase in price in one year's time. Without the right deregulation plan in place, we could end up with a similar result in Oklahoma.

There is also a major connection between the tight gas supply situation I discussed earlier and electricity because gas is the fuel of the future for electrical generation. We have all worked so well together to sell the benefits of gas, particularly the environmental benefits, that predictions of a 30 TCF marketplace in the next 20 years are not at all outlandish. Ninety-six percent of planned power generation projects will be gas fired. Oklahoma has 21 such gas-fired power plants on the drawing board.

What the industry or knowledgeable policymakers have not done well is to demand policies at the state and federal levels that will result in production sufficient to meet these demands. My friend Dan Yergin, chairman of Cambridge Energy, said recently, "There is kind of a disconnect in this country with natural gas. We are just assuming that it will be there."

I agree with Dan. Some politicians do not want to face the fact that it won't be there if we don't drill for it. If we want domestic production, the President and Congress had better let the producers in this country know it.

Winston Churchill once said, "Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing had happened." We can no longer afford leadership on energy that walks on by the truth. On October 19, Federal Reserve Chairman Alan Greenspan said, "Policymakers will need to be on the alert for oil-driven, indeed, energy-driven, risks to our expansion."

We are facing a national energy crisis. But that crisis can be averted with an honest assessment of our resources, existing infrastructure, and demand for energy, coupled with national, bipartisan leadership that will put in place policies that allow America to meet our energy needs.

The states have done their part in trying to maintain their domestic options. Governor Keating has led 28 of the 33 energy-producing states in passing legislation to preserve domestic production and provide affordable energy for American consumers.

Fueling the American consumer is what this effort is all about. Americans, whether oilmen or deliverymen, need certainty about what U.S. energy policy is. Let me begin this discussion on a blueprint for a more secure energy future with the following suggestions:

  • I recommend that the state and federal government act to protect consumers in the short term by providing greater support for low-income Americans through the Low-Income Home Energy Assistance Program (LIHEAP) and the free weatherization programs.

  • As we put together a plan of action, conservation and alternative fuels must be part of our portfolio. Frankly, higher prices are already starting to encourage this.

  • To ensure abundant supplies of energy at reasonable prices for the long haul, the United States must immediately state its intention that, in the national interest, it will encourage the rebuilding of our national energy production, refining, and delivery systems. It must allow reasonable access to federal lands to provide reliable, abundant, and reasonably priced energy to fuel the high-tech, energy-intensive American economy.

  • This statement of national intent must be stated as both domestic and foreign policy. Frankly, the other oil producing nations of the world would welcome knowing what our policy is and may work with us towards greater stability and reasonable prices for all consumers.

I am optimistic that with strong national leadership supported by the states, the specific policy options outlined in our final panel can turn around the present crisis we face. I hope so, because our children's future is at stake.

Denise A. Bode is Vice Chairman of the Oklahoma Corporation Commission, the state agency that regulates all activities associated with the exploration and production of oil and gas, the rates and services of public utilities, and the operation of intrastate transportation. She gave the keynote address at "Energy Shortages in Energy-Rich America--Why?" a conference co-sponsored by Governor Frank Keating of Oklahoma and The Heritage Foundation.