This NRDC paper describes the evidence that our dead-end energy policy risks harm to consumers and workers. Specifically, three emerging trends show that we are headed the wrong way:

1. High prices recur and markets remain jittery (with oil companies profiting handsomely);
2. Consumers in all states pay for our misguided policy while producers in a handful of states benefit; and
3. Large SUV sales suffer, threatening American manufacturers and jobs.

As unrest in oil-producing countries and rising global demand destabilize the world's energy markets, and citizens wonder whether they should be more concerned about local prices at the pump or international events, it is worth asking the bigger questions. Why are our national energy policies taking us in the wrong direction? Who is paying the costs and who is benefiting? The following NRDC analysis shows that consumers and workers are paying a steep price for failed leadership in Washington and Detroit, while oil companies are profiting handsomely. This paper also identifies the road to an energy policy that would lower prices, create jobs, and protect the environment.

The False Promises of Current Policy

Today's energy policy perpetuates American's dangerous dependence on oil. U.S. oil consumption rose 18 percent between 1990 and 2003, driven by continued growth in the total number of miles Americans travel while the fuel economy of our passenger vehicles declined due to stagnant standards and the market shift to less efficient SUVs. Total U.S. oil consumption was 17 million barrels per day in 1990 and is now 20 million barrels per day. More than half of the oil we use today is imported, much of that from unstable and undemocratic regimes. Without a change in course, this predicament will only get worse. The Department of Energy projects that imports will rise to 70 percent of our supply by 2025.

Energy policy currently being debated in Washington amounts to little more than a gift to energy companies -- weakening environmental protections, extending regulatory loopholes, lavishing mammoth tax breaks for the biggest of big gas-guzzlers, and creating new barriers to stronger fuel economy standards. The result is an energy policy mired in the past, rather than a strategy to improve our security, create jobs, and protect our environment for the future.

Any energy policy based on a belief that we can drill our way to energy security is doomed to failure. The U.S. has a mere two percent of world oil reserves while we consume more than 25 percent of current world production. We already rely on the Middle East for one-fifth of our oil imports while that region holds two-thirds of world reserves.

Without a comprehensive policy to end our dangerous dependence on oil, our security and economic vitality will be bound increasingly to developments in Saudi Arabia, Iraq, and Kuwait, rather than Michigan, Florida, and California.

Over a Barrel

Unrest in Iraq, Russia, and Venezuela, combined with soaring oil demand in Asia as well as the United States have pushed oil prices to record levels, peaking at close to $50 per barrel on August 19, 2004.¹ Prices eased off during the following week, suggesting that part of the run-up was due to speculative trading. Extreme price spikes are not the whole story, however -- baseline prices have been heading unsteadily upward (they have not dropped below $30 dollars per barrel since December 1, 2003), indicating a longer-term shift in the oil market.²

World oil prices are likely to remain volatile for the foreseeable future. This is driven by low excess global oil production, with even OPEC estimating that world crude oil production is running at 97 percent of capacity. U.S. refinery capacity also remains tight, while continued instability and the danger of terrorist attacks in oil-producing regions like the Middle East make for jittery markets.

Oily Profits

When prices are high someone must be benefiting. Indeed, the five biggest multinational oil corporations saw a $5.5 billion increase in profits during the first half of 2004 compared with the same period the previous year, as shown by the chart below.³ Both ExxonMobil and ChevronTexaco posted record second quarter profits in 2004.

Given these handsome profits, it's no wonder the oil industry and its political allies have a stake in the status quo. But the rest of America doesn't. Increased prices have hurt American consumers and workers.

Remove Nozzle, Empty Wallet into Gas Tank

Higher international crude oil prices translate into higher prices at the pump. By September of 2004, Americans had already paid more than $12 billion gasoline costs in excess of 2003's tally. The chart below shows a state-by-state breakdown of these excess payments at the pump for the first half of 2004, factoring out taxes. Although gasoline and crude oil prices don't move completely in lock step, crude oil prices typically constitute more than half the price of gasoline at the pump (other factors are refining and marketing costs and state and federal sales taxes). This means that higher crude oil prices were highest when Americans are taking vacations and driving the most.⁴

Sitting Pretty in Alaska and Texas

Because the United States relies heavily on oil imports, most of the additional money Americans spent went abroad, about half of which flowed to OPEC countries such as Saudi Arabia. Of course, oil is also produced in many states, and oil producers' revenues increase with higher oil prices (although the benefits are concentrated in far fewer hands than costs since consumers far outnumber producers). In order to gauge the net effect of increased prices on states, NRDC calculated revenue in excess of the previous year's amount in producer states (comparing the first half of 2004 with the same period in 2003) and then subtracted the excess consumer costs. The results for those states where the difference was $100 million or more are summarized in the graph below. The list of losers is long while there are just two winners: Alaska and Texas.

Jobs in Jeopardy

Stubbornly high gas prices are likely to continue spurring a trend toward declining sales of large SUVs and increasing sales of fuel-efficient hybrid electric vehicles such as the Toyota Prius.

Stagnating SUV sales, especially among larger SUVs such as the Ford Expedition and the Chevy Tahoe, have troubled American automakers in 2004. This is especially true for the supersized SUV on the market, the GMC Hummer. Sales of the Hummer H2 plummeted 26.4 percent in the first half of 2004 compared with the same period in 2003.⁵ And DaimlerChrysler, Ford, and GM all saw decreases of one percent compared with the previous year.⁶ Detroit automakers have earned most of their profits from the SUV and truck segments of the market in recent years, which amplifies the importance of these trends for the U.S. auto industry -- and auto industry jobs.

This has translated into inventory overhangs for big SUVs, as shown in the chart below.⁷ According to J.D. Power & Associates, as of the end of June 2004 the industry had a staggering 3.5 million unsold vehicles, a record for the month of June.⁸ This, in turn, reduces the need for additional supply from manufacturers. If current trends continue, Ford and GM will likely be forced to close more factories and idle more workers than in years past.

Sales figures would be even worse if it were not for the large rebates manufacturers have been forced to offer to move inventory. Almost unheard of until recently for popular SUV models, GM, Ford, and DaimlerChrysler find they have to offer $3,000 to $5,000 rebates to entice buyers to drive inefficient vehicles off dealer lots.⁹ This trend indicates that Detroit was not prepared for dropping consumer interest in gas-guzzling SUVs in response to rising gasoline prices.

U.S. automakers are scrambling to respond to increasing consumer interest in fuel-efficient hybrid vehicles. Ford rolled out its first hybrid, the Ford Escape SUV, in August 2004. The front-wheel drive version is rated 36 mpg in the city and 31 on the highway. As the first hybrid SUV and the first U.S.-made hybrid, this vehicle has generated tremendous interest and has gotten rave reviews. Interestingly, there are differences between hybrids -- those that rely more on their battery pack are referred to as "full" and those that rely on it less are "mild." The new Escape and Toyota's Prius are full hybrids, while Honda's Civic hybrid is mild. GM plans to introduce mild hybrids in 2005 and 2006 and full hybrid SUVs in 2007.

Toyota and Honda are not standing still, however. They plan to follow up on their success, with Toyota releasing hybrid Lexus and Highlander SUVs in the fall of 2004 and Honda producing a hybrid version of its most popular sedan, the Accord. Even Hyundai is planning to sell hybrid electric vehicles to government fleets in late 2004. Pressure on sales, market share, and jobs at GM, Ford, and Daimler-Chrysler is sure to increase as these companies offer consumers more efficient choices.

The Right Direction: Lower Prices, Good Jobs

The solution to these problems is to reduce oil demand -- and therefore prices -- through innovation. With a serious national commitment the United States could reduce its projected oil consumption by more than 1 million barrels per day within a decade and more than 2.5 million barrels per day by 2020, an amount equal to our current imports from the Persian Gulf.

Available, cost-effective technologies exist today to improve fuel economy in cars and trucks of all sizes and reduce oil consumed in factories and homes. But it won't happen until leaders in Washington and Detroit make it happen. Passenger vehicles are the single largest driver of U.S. oil consumption, yet thanks to legal loopholes that discourage the use of clean, efficient technology, the average fuel economy of America's cars and trucks is getting worse. It has been that way for more than a decade.

This trend can be reversed through leadership in Washington including providing automakers with incentives to retool their factories for the manufacture of more efficient vehicles, raising fuel efficiency standards, and expanding the market for gasoline-electric hybrid vehicles through performance-based consumer tax incentives. Additional oil savings can be achieved by increasing the use of renewable, non-petroleum fuels, encouraging smart growth development that increases Americans' transportation choices and makes communities more livable with less driving, and expanding programs to weatherize oil-heated homes and help businesses adopt more efficient production processes. Over the longer run, we can end our oil dependence through efficient use of renewably produced hydrogen or biofuels.¹⁰

Consumers, workers, and the environment are paying too high a price for today's energy policy, which keeps us chained to the interests of big energy companies and unstable oil-producing regimes. It's time to break the chain.

Related NRDC Pages
July 2004 Fact Sheet: Reducing America's Energy Dependence
Break the Chain: End Our Dependence on Oil

Notes

1. Energy Information Administration, Cushing, OK, WTI spot price. CBS Marketwatch, 7/28/04.

2. Energy Information Administration, Cushing, OK, WTI spot price.

3. Company quarterly reports. Net income for Total converted from euros at 1.204 dollars per euro.

4. Source: Energy Information Administration. State gasoline prices multiplied by sales, comparing January through June 2004 to January through June 2003.

5. "Bigger Discounts, Luxury Battles, Clamor for Crossovers Lie Ahead," Joseph B. White, Wall Street Journal, 7/19/04.

6. Autonews

7. Source: Autonews

8. "3.5 million vehicles: Automakers have a big glut," Jeffrey McCracken, Detroit Free Press, 7/14/04.

9. Source: Autonews. Ford Motor Co. and General Motors incentives expiring August 2, 2004, Chrysler Group incentives expiring August 31, 2004.

10. Dangerous Addiction: Ending America's Oil Dependence, Natural Resources Defense Council and Union of Concerned Scientists, 2002: http://www.nrdc.org/air/transportation/oilsecurity/securityinx.asp