Reducing America's Energy Dependence
Breaking our addiction to oil is the real solution to high gas prices.
Fill up or fed up? With Americans paying high prices at the gas pump, it is worth reflecting on the root cause of the problem and considering the consequences of our nation's dangerous addiction to foreign oil.
- High Gasoline Prices Caused by High Demand
- America Cannot Drill Its Way to Energy Independence
- The Fuel Efficiency Success Story: Breaking OPEC's Grip
- Saving Oil: We Did it Before, We Can Do It Again
- America Must Lead the Way
America's oil habit not only pinches our pockets and fuels OPEC's rising profits, but it also threatens our economy, national security and environment. According to the Department of Energy, the United States currently uses nearly 20 million barrels of oil a day, importing 55 percent of it. We spend more than $20 billion each year on oil from the Middle East. Twenty years from now, U.S. consumption will rise to 28.3 million barrels of oil a day, with 70 percent of it imported. This heavy reliance on foreign oil makes America increasingly dependent on some of the least stable, undemocratic countries in the world.
But we are a nation of inventors and entrepreneurs, and our creativity must now be aimed at energy independence.
High Gasoline Prices Caused by High Demand
The root cause of high gasoline prices is soaring demand, caused in large part by increasingly fuel-inefficient cars and trucks. Of the 20 million barrels of oil consumed each day, 40 percent is used by passenger vehicles, 24 percent by industry, 12 percent by commercial and freight trucks, 7 percent by aircraft, and 6 percent in residential and commercial buildings.1 The U.S. passenger vehicle fleet alone accounts for one-tenth of world petroleum consumption.2 To make matters worse, fuel economy of the combined car and light truck fleet peaked in 1987 and has essentially been declining since then (see Figure 1, below) due to outdated standards and increased sales of fuel-wasting SUVs and other light trucks.
While in real terms oil prices are not as high as in 1981, the current price tag of $40 per barrel of oil is the highest since the 1991 Persian Gulf War. High demand, driven largely by the transportation sector,3 has sparked this increase in three ways:
- First, there is very little excess global oil production capacity.4 Even OPEC officials estimate that world crude oil production is running at 97 percent capacity, with a thin cushion of only 2 million barrels per day.5 Moreover, the only significant spare capacity is in Saudi Arabia, making this politically unstable country the critical "swing producer."
- Second, high demand has reduced the ability of suppliers to respond quickly if a sudden supply disruption occurs, and thus traders and speculators have bid up oil prices on the spot market based on the fear that the global oil supply chain may be disrupted by terror attacks.6 As a result, the oil industry has profited generously over the last few months and passed the higher costs to consumers at the pump.
- Finally, U.S. gasoline demand has outstripped our domestic refinery capacity, leading to a tight market for gasoline and other refined products.
World surplus capacity in 2004 fell to its second lowest level in three decades.7 Lower supply and high demand makes the United States dangerously dependent on Middle East oil, which holds two-thirds of world oil reserves. The United States, with just 2 percent of world oil reserves, relies on the Middle East for one-fifth of our oil imports (see Table 1).
|Table 1. U.S. Imports in 2003 from Persian Gulf Countries (million barrels per day)|
|United Arab Emirates||0.010|
|Source: EIA, Monthly Energy Review, March 2004.|
Extremely low stockpiles add to world oil market anxiety. Stockpiles in the 26 western countries that make up the International Energy Administration equal about 100 days of their imported-oil needs -- or just 10 days of trading volume in oil markets.8 Analysts are concerned that disruptions anywhere along the supply chain in one to three of those countries could lead to a major shock in oil prices.9
Lastly, demand in other countries around the world, particularly in China, is growing even faster than U.S. demand. World oil consumption is expected to rise more than 50 percent by 2025 to 121 million barrels per day, driven largely by the 3 percent annual growth in demand in the developing countries of Asia.10 And like the United States, China is becoming more and more dependent on foreign producers since it has less than 2 percent of the world's oil reserves.11 With demand growing at nearly 10 percent per year, with imports rising more than 30 percent in 2003 alone, and with more than quadruple the population of the United States, the pressure a growing China puts on global petroleum markets will only escalate over time.
Source: Energy Information Administration, Annual Energy Outlook 2004, figure 99
America Cannot Drill Its Way to Energy Independence
The Bush administration and their industry allies claim that the way to ease the oil demand crunch is to expand drilling on public lands, even in pristine wilderness areas, and to speed up the process by relaxing environmental protections. Not only does this approach threaten the environment and public health, a "drill first, ask questions later" strategy is not an effective, sustainable solution.
First of all, increased domestic oil production cannot significantly reduce our reliance on imported oil. Domestic production peaked in 1970 at 9.64 million barrels per day and has since declined by 40 percent.12 (see Figure 3, below)
Although drilling proponents often say there are 16 billion barrels of oil under the coastal plain of the Arctic National Wildlife Refuge in Alaska, the U.S. Geological Service says the amount that could be recovered economically -- that is, the amount likely to be profitably extracted and sold -- is roughly 3.2 billion barrels. That amounts to only a six-month supply of oil, based on U.S. consumption. Simply put, there is not enough new oil recoverable from domestic sources at reasonable cost to influence the world price for oil or to substantially displace imports.
Rolling back pollution protections, as some advocate, to allow refinery expansions is also not the answer. Although refinery capacity is a factor in today's higher gasoline prices, environmental regulations are not the reason for tight refinery capacity, according to the DOE, the Environmental Protection Agency, the General Accounting Office, and even oil industry executives. Consider the market fundamentals: refiners reap higher profits when capacity is tight, so they actually have a disincentive to significantly expand production. In fact, oil executives have stated that the reason they did not expand refining capacity in the 1990s is that the low profitability of the business did not justify the investment.13
In June 2002, the Bush administration nevertheless went forward with a wholesale weakening of the Clean Air Act's preconstruction permitting requirements for refineries even though the agency concluded that these requirements -- namely, New Source Review -- had "not significantly impeded investment in new power plants or refineries."14 Besides disregarding the conclusions of EPA staff, when making this decision the administration ignored information from the DOE, which concluded that environmental requirements accounted for only a very small share of the refining industry's decline in profitability in the early 1990s.15 And even a top executive at refining company Valero emphasized that it was "the poor margins that had the biggest impact, not the environmental rules."16 Lastly, the GAO concluded that the industry criticisms cited by EPA in support of the new NSR loopholes and exemptions were self-serving and unsubstantiated.17
Bush officials and others also blame clean-fuel standards for tighter gasoline supplies, complaining that "boutique" gasoline blends drive up prices. However, oil refiners themselves insisted on the current menu of formulation requirements as an alternative to a unified national standard. And in spite of loud complaints, the number of fuel requirements is often exaggerated. For example, in 2001 when ExxonMobil created a map to advocate against clean fuel requirements, it showed 48 different requirements. However, the company multiplied requirements by three, claiming that this accounts for low-grade, mid-grade and high-octane gas. This conveniently ignores the fact that most companies create their mid-grade gas by mixing the other two.18 The EPA pegs the current number of requirements at 15 to 17, depending on the season.
In addition, it is important to keep refining costs in context. In 2002, refining costs and profits were just 13 percent of the total average cost of gasoline, while 87 percent went to distribution, marketing and federal and state gas taxes, with the biggest slice (43 percent) going to pay for crude oil.19 Refining costs are typically a mere 15 percent of what we pay at the pump or just 30 cents of a $2 gallon of gas.
The Fuel Efficiency Success Story: Breaking OPEC's Grip
According to the U.S. DOE, monthly average gasoline prices hit an all-time high in March 1981, when prices in today's dollars peaked at almost $3 per gallon (see Figure 4). The primary cause of that price peak was the war between Iran and Iraq, which removed large amounts of oil from the world oil market along with OPEC's ability at that time to enforce price and production quotas.
In response, the United States and other oil importing nations radically reduced their demand for OPEC oil through fuel efficiency, fuel switching and new production. In response, the total demand for OPEC oil fell by 13 million barrels per day, or 43 percent, between 1979 and 1983.20 Unable to maintain its desired market share at the high oil prices it was charging, OPEC was forced to slash its prices.
Fuel efficiency standards had a profound impact on U.S. oil demand. In 1975, Congress passed the Energy Policy and Conservation Act (EPCA), with the goal of saving 2 million barrels per day by roughly doubling the fuel economy of cars and light trucks. According to the National Research Council, Corporate Automobile Fuel Economy (CAFE) standards had reduced oil consumption by 2.8 million barrels per day in 2000,21 a 25 percent reduction in gasoline demand or a 13 percent reduction in overall U.S. demand (see Figure 2, above). CAFE standards saved consumers about $70 billion in 2000, $66 billion in direct consumer savings and another $3 to $6 billion through lower imported oil costs.22
Saving Oil: We Did it Before, We Can Do It Again
For years, OPEC kept prices within a band of $22 to $28 per barrel,23 enough to maximize profits without triggering serious reductions in demand by oil consumers. But OPEC prices started going up in early December of 2003. OPEC's decision to tighten production then helped drive up prices to today's $40 per barrel. This suggests that cartel leaders have decided that higher prices can be sustained without inducing oil importing countries to start getting serious about reducing demand.
But just as we did in the 1970s, America can break OPEC's grip on the oil market by using well-known technologies and policies. The most crucial step on the path to independence is to raise the bar on energy efficiency of our cars, pickups, minivans and SUVs. These passenger vehicles currently account for 40 percent of our petroleum consumption,24 and the transportation sector as a whole is projected to account for a whopping 89 percent of the growth in petroleum demand through 2020.25 Raising fuel economy performance to 40 mpg over the next 10 years alone could cut passenger vehicle oil demand by about one-third or 4 million barrels per day by 2020. By 2015, increased fuel efficiency would save 2 million barrels of oil each day (see Figure 5, below) -- about equal to current daily imports from Saudi Arabia and Kuwait (see Table 1).
This goal is achievable using technology already on the road today, including new, more powerful hybrid versions of Ford, Toyota and Lexus SUVs hitting showrooms later this year, as well as simple improvements in conventional drive train design. Other measures include:
- Mass-producing gasoline-electric hybrid vehicles, which get double the mileage of today's cars. Toyota and Honda already have hybrids on the road, and more are coming. Lawmakers should provide consumer tax credits to support the transition to this new technology.
- Expanding use of renewable, non-petroleum fuels, such as ethanol made from crop wastes, by steadily increasing requirements for "renewable content" in gasoline. A renewable fuels standard ramping up to 5 billion gallons per year would save 175,000 barrels of oil per day by 2013.26
- Encouraging "smart growth" instead of suburban sprawl to increase our transportation choices, reduce the need to drive and enhance our quality of life.
- Ensuring that replacement tires are as fuel efficient as original vehicle tires. This alone could save 270,000 barrels oil per day.27
- Keeping tires properly inflated. If motorists kept their tires properly inflated, total savings in 2013 could be as much as 200,000 barrels of oil per day.28 This would have the added benefits of longer tire life and improved safety.
- Using fuel-efficient engine oil. Selecting the proper grade of motor oil and using motor oils with additives that reduce friction may increase a vehicle's fuel economy by 1 percent to 2 percent.29 Widespread use of efficient motor oils could reduce fleet-wide gasoline consumption by 1 percent in 2013, saving 100,000 barrels per day.30
In addition to passenger vehicles, we can reduce our dangerous dependence on oil through a wide variety of measures to increase the efficiency of heavy-duty vehicles, buildings and industry. There are simple measures that together could produce additional oil savings in these sectors. Specifically, NRDC recommends that the United States:
- Reduce heavy duty truck idling. Reducing truck idling at overnight truck stops by providing electrical hookups or fitting trucks with fuel cell auxiliary power units could save 50,000 barrels of oil per day.31
- Weatherize homes that use home heating oil. Oil-heated homes are generally older and are often not well insulated. One study found that weatherization of houses heated by fuel oil produced average net savings of 18 percent. If all oil-heated homes achieved this level of savings by 2013, total oil savings would be about 80,000 barrels per day.32
- Reduce oil use in industry. Improvements to industrial processes could produce substantial oil savings. For example, greater use of gasification technology would allow industry to produce more useful products and fuels from the "bottom of the barrel," i.e. residual oil and petroleum coke. Increased recycling of plastics would also reduce oil use.
- Improve air traffic management. New communications, navigation and air traffic management procedures and technologies can rationalize air traffic and reduce time wasted waiting for take-off and landing slots.33 A study by DOE labs estimated that these air traffic management improvements could save the equivalent of 50,000 barrels per day in 2013.34
America Must Lead the Way
There is absolutely no reason why our elected leaders should not make a national commitment to reducing America's dependence on oil by investing in energy efficiency. This goal can be achieved through increased fuel economy for automobiles, greater use of renewable fuels, and other readily available measures. Based on today's oil prices, taking these commonsense steps would save Americans more than $20 billion dollars in annual crude oil costs -- while also reducing smoggy skies and combating global warming.
Kicking our addiction to oil will not only achieve real, consistent savings for Americans at the pump and improve our environment, but reducing our oil imports also will bolster national security and shield the economy from market manipulation and price shocks.
The United States has a proud history of technological innovation, and American companies have the know-how to solve our oil insecurity. We just need the political will of Congress and the Bush administration to deliver on this promise. So far, our political leaders have failed to put forth a serious plan to increase our nation's energy security.
The current energy bill (H.R. 6) in Congress is little more than a corporate wish list -- weakening environmental protections, extending regulatory loopholes, lavishing mammoth tax breaks for big gas-guzzlers, and creating new barriers to stronger fuel economy standards. In fact, the DOE's Energy Information Administration concluded that H.R. 6 would increase gas prices slightly and have a negligible impact on oil demand, production, and imports.35 Meanwhile, the transportation reauthorization bill, which would allocate more than $200 billion in transportation infrastructure over the next 6 years, fails to invest adequately in measures -- like smart growth and transportation alternatives -- that would reduce our oil dependence. Clearly, a comprehensive national oil savings strategy is the only real way to ensure America's energy security.
We have the know-how, so all we need is the will to break our oil habit. And while reducing imports of oil from beyond our shores, we can create jobs at home by increasing exports of technology, developed right here in America. Without a doubt, U.S. companies can (and must) compete successfully with European and Japanese rivals. Doing so will mean a more secure and prosperous future, with America where it should be -- in the lead.
13. Nelson Schwartz, Is Dick Cheney the New Hillary? Fortune, June 11, 2001, at 37. See also Alexei Barrionuevo, Exxon-Mobil CEO Doubts Anyone Would Build US Refinery, Dow Jones News Service (May 30, 2001) (citing Exxon Mobil's chairman and chief executive for the statement that no oil company was prepared to build a new refinery because they could make money from doing so).
15. Energy Information Administration, The Impact of Environmental Compliance Costs on US Refining Profitability. See also ICF Consulting, Review of Data on the Impact of New Source Review on Investment Decisions: Power Generation and Refinery Sectors, Draft Report (June 22, 2001), at 53.
16.Nelson Schwartz, Is Dick Cheney the New Hillary? Fortune, June 11, 2001, at 37. See also Alexei Barrionuevo, Exxon-Mobil CEO Doubts Anyone Would Build US Refinery, Dow Jones News Service (May 30, 2001) (citing Exxon Mobil's chairman and chief executive for the statement that no oil company was prepared to build a new refinery because they could make money from doing so).
28. See NRDC, Reducing U.S. Oil Dependence (undated) (available on line at: http://www.nrdc.org/air/energy/fensec.asp) (estimating savings of 2% of projected 2010 gasoline use through proper tire inflation) (citing National Highway Traffic Safety Administration, Many U.S. Passenger Vehicles Are Driven on Under-Inflated Tires NHTSA Research Survey Shows, (Aug. 29, 2001) (press release)). See also NHTSA survey data (available on line at: www.nhtsa.dot.gov/people/ncsa).
30. See National Research Council, Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards, 42-44 (2002) (estimating a 1% improvement of fuel economy through use of low-friction lubricants); EIA, Annual Energy Outlook 2003, Table A7 (projection of 2013 fuel consumption by light duty vehicles).
31. See C. Broderick, T. Lipman, et al., Evaluation of Fuel Cell Auxiliary Power Units for Heavy-Duty Diesel Trucks, Transportation Research - D 7(4): 303-315 (2002) (calculation based on 1818 gallons per truck and 425,000 long distance trucks).
33. Interlaboratory Working Group, DOE, Scenarios for a Clean Energy Future, 6.16 (2000) (ORNL/CON-476 and LBNL-44029). See also Is Eurocontrol outpacing FAA on the CNS/ATM trail?, Aviation Industry News (April 2001) (available on line at: http://www.ainonline.com/issues/04_01/Apr_2001_eurocontrolpg75.html).
last revised 7/2/2004
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