The Mythology of Energy; Y. Brozen

Yale Brazen The Mythology of Energy THE WAR against the automobile and against private enterprise con tinues. This time, it appears in th~ guise of a quest for a reduced inter national payments imbalance and freedom from coercion by the Or ganization of Petroleum Exporting Countries. Propaganda almost as crude and just as untruthful as that used by the Allies in World War I is the major instrument in the current MEOW (Moral Equivalent of War) campaign for expansion of taxation and government power. The campaign uses several myths in its attempt to sell Americans on Dr. Brozen is Professor of Business Economics, Graduate School of Business, University of Chicago, and Adjunct Scholar, American Enterprise Institute for Public Policy Research. ceding more of their freedom to the central government. Here is a list of the more blatant falsehoods ac cepted and propagated by the opin ion manufacturing establishment.

1. The world will run out of oil in the 1980s. 2. The severe international pay ments imbalance is caused by the high usage and high price of im ported oil. 3. An oil-rooted adverse payments balance is causing the dollar to depreciate, causing import prices in dollars to rise and, as a conse quence, causing inflation. 4. We are vulnerable to an oil em bargo by the Mid-East countries. 5. The gasoline shortages and long 387 388 THE FREEMAN July lines at filling stations in late 1973-early 1974 were caused by the oil embargo in effect at that time. 6. We must reduce our vulnerabil ity to an embargo by accumulat ing a one-billion-barrel stockpile of oil and by cutting energy us age. 7. The government must plough bil lions into government-directed energy research to save us from ourselves and from foreign pow ers. One myth propagated up to the be ginning of this year is no longer on the list because it has become so obviously false. It was argued that the shortage of natural gas could not be cured by price incentives and that price ceilings should be retained since the only effect of lifting the ceilings would be a ~~rip-off" of consumers. Nevertheless, price ceilings were raised by Congressional action (without a windfall profits tax on gas producers). The administration is now embarrassed by a surplus of natural gas. It is urging industry to use more natural gas.

Another discarded myth is that the coal and coal transportation in dustries would need special gov ernmental assistance to meet our energy needs. This, too, has been rebutted by experience since coal price ceilings expired in 1974 (with no windfall profits tax on the coal industry). A coal surplus developed following the expiration of price ceil ings. The coal industry is now crying for ploughing more tax revenues into research on liquification and gasification of coal. Myth Number One. Let us take the myths still prevalent and examine each. Myth number one is that the world will run out of oil in the 1980s. Actually, it is unlikely that we will run out of oil by the 2080s. There is, in the free world today, a 36-year supply of proven reserves already staked out and producible at today's prices. The number of years' supply of proven reserves is at the highest level in the history of the statistic.

Traditionally, proven reserves have ranged from fifteen to thirty years at contemporaneous rates of oil use. Moreover, the statistic is only indi rectly related to the actual amount of oil existing underground in the world, and even the direction of the relationship is unclear, because exhaustion of prospects produces a rise in price, and hence makes pre viously worthless reserves worth uproving." How much more oil remains to be discovered that is producible at to day's prices is unknown. Geologists' estimates range from a low of a twenty-year additional supply to a high of fifty years. 1 Taking the lowest estimate, to1979 THE MYTHOLOGY OF ENERGY 389 day's real prices need not change for the coming half century to induce a supply of petroleum sufficient to meet all demands. At prices 50 per cent higher than today, producible reserves in sight more than double. It would become worthwhile to use the enormous shale oil deposits in Colorado, Utah, and Wyoming. Of the 1.87 trillion barrels of oil in shale, 600 billion are recoverable at the higher price. That is enough to supply us for another 100 years.

There are also staggering reserves available in the Canadian Athabas ca tar sands and the Missouri, Kan sas and Oklahoma tar sands which would become economically work able at the higher price. In addition, secondary and ter tiary recovery of the oil left be hind in oil pools already worked could more than double known and proved reserves. Generally only one-third of the oil in a pool is recov ered. The other two-thirds is left in the ground because it is too costly to be worth recovering at today's prices. A rise in price would make a portion of the left-behind oil recov erable. At a higher price, we could produce as much oil in the future from the already known and aban doned fields as the total amount produced in the world's history to date. Myths Number Two and Three. President Carter has urged the pas-· sage ofa stand-by gasoline rationing program and Congress has passed mandatory automobile mileage per formance standards on the ground that we must slow imports of oil to cure our adverse balance of pay ments and stop the decline of the dollar. If auto energy use standards do anything to the balance of pay ments, it will worsen it, not improve it.

If oil imports cause an adverse bal ance of payments or if the great increase in crude oil prices in 1974 were a cause of an adverse balance of payments, then Germany and Japan should be in much deeper trouble than we. They import all of their crude oil while we import less than half. They import all of their natural gas while we import only a small fraction. Yet their balance of payments is positive. While the dol lar declined, the mark and the yen appreciated. The cause of the pay ments imbalance and the decline of the dollar is the string of unprec edented peacetime federal deficits since 1973. The net result of the mandatory downsizing of the auto fleet to re duce oil imports will be more rather than less imports. An enormous cap ital outlay is required to do the downsizing job and to retool to pro duce the new models. Estimates of the cost, in addition to the usual model change costs, exceed $30 bil lion. That capital could· save more 390 THE FREEMAN July energy if it were left available to invest in dry process kilns for pro ducing phosphates and cement and for other energy conserving uses.

The free market would do a far more effective job of allocating capital among alternative energy saving uses, including an appropriate rate of downsizing automobiles, than the government can or will do. Myths Number Four and Five. Why did we have those long lines at gasoline stations in 1974? Was it because of the Arab embargo? The reason for those long lines was because the Federal Energy Of fice allocated gasoline and gave or ders to refiners as to what products they could produce. All during the period of the embargo, our stocks of gasoline, crude oil, and other petro leum products in storage kept in creasing. 2 Crude oil was still being imported. Instead of coming from the Mid-East, it came from Canada, Indonesia, Venezuela, and Nigeria. Some came indirectly from Libya and other Mid-East countries via Curacao and the Bahamas. The embargo made only a small difference in the volume of imports.

The oil companies did a massive and heroic job redirecting world trade. Routing of oil was changed in some cases and sources in other cases. But the Federal Energy Office screwed up the works. It underallocated gasoline to metropolitan areas, such as Chicago, New York, and Wash ington, and it overallocated to rural areas. City residents wasted gasoline by driving far into rural areas to fill their tanks. Are we subject to possible blackmail by embargo? The answer is a clear no! During the Arab em bargo, we imported from other sources and indirectly from the Mid-East countries that were em bargoing us. Libya knew its oil was coming to us, but as long as it was labeled as going elsewhere when it left Libyan ports, Libya was glad to get the revenues. There are more alternative sources available today than there were in 1974. Mexico is now supply ing us with growing amounts. Ven ezuela has 20 percent of its capacity shut down and available. Nigeria is a bigger producer now than it was in 1974. Dome Petroleum is starting full scale development and transpor tation out of the Canadian Arctic.

China is now exporting oil. Myth Number Six. We are now developing storage facilities and ac cumulating a one-billion barrel stockpile of oil, at a cost of $25,000,000,000, purportedly to make ourselves less vulnerable to any future embargo. The Arabs must be laughing themselves sick all the way to the bank as we tum over $15,000,000,000 to them for oil we are going to stick back in the ground 1979 THE MYTHOLOGY OF ENERGY 391 (in old hollowed out salt domes). Is it really necessary to accumu late a stockpile to reduce our vul nerability to an embargo? The an swer is no! Many countries are will ing to supply us if the Arabs cut us on: including some Arab countries if we cover up the fact that they are supplying us. (From the events of early 1978, we might judge the sup ply of Arab oil to be more secure than the supply of UMW coal. Perhaps we should question the ad ministration's proposals to make ourselves even more dependent on coal than we are.) There are less expensive ways of providing a ready reserve than building a stockpile. We could drill wells in our naval reserves, such as Elk Hills, and develop them to the point where they are ready to pro duce. The wells could be capped but ready to produce in case of need.

There is no need to pump the oil above ground, develop underground storage, and stick it back into the ground. Let the oil remain in natu ral storage at no cost. Have the wells ready to go when the need arises. The cost would be far less. Myth Number Seven. Finally, we come to the myth that the govern ment must plough billions of dollars into energy research if the new technology is to be developed to pro vide the energy we need when oil runs out in the 1980s. First, let's recognize that a shortage is a busi ness opportunity. If anything in de mand is likely to run short, its price will rise. Anyone developing a sub stitute or an additional supply will find plenty of eager customers. With the increase in the price of home heating fuels, suppliers began offering automatic damper controls which cut the use of fuel by 20 percent. When fuels were cheap, it was not economic to install auto matic damper controls; they could not pay for themselves. The capital it would have taken to produce them was more productive in producing gas than in saving gas. Production of the controls would have been a waste of metal, plastic, and workers' time. These factors of production were conserved by the more efficient expenditure of capital on gas discov ery and production.

As it became increasingly costly to produce gas, capital began to flow into damper controls where it could save more gas than it could produce. The investment now pays for itself. The rise in the price of energy is inducing the production of energy saving equipment and of less en ergy intensive motors, engines, generators, cement kilns, furnaces, boilers, refrigerators, freezers, air conditioners, and water heaters. It is also attracting investment into pri vate Research and Development (R&D) to develop alternative sources of energy, to develop 392 THE FREEMAN techniques for secondary and ter tiary recovery of oil from spent fields, and to improve methods of extracting oil from shale and tar sands. In 1975, oil companies in vested $51 million in coal R&D, $38 million in developing methods for converting coal into synthetic fuels, $30 million in oil shale R&D, $9 million in tar sands R&D, $7 million in geothermal R&D, and $2 million in solar R&D.

Currently, private expenditures on energy R&D are near the $2 billion level. This may seem a pale effort compared to the $4 billion that the federal government is laying out on nuclear and solar research. But examination of past private and governmental research efforts sug gests that we will get 100 times the return per private dollar in R&D that we get from the government dollar. 3 The federal government has laid out .$4,200,000,000 on develop ing a liquid metal, fast breeder reac tor. 4 It achieved so little that it is giving up the effort. The private market does a superior job in allocating resources to their most productive uses, in cluding choosing among alternative R&D programs, than the govern ment does. 5 If the government wouldn't try to do so much, we would get more accomplished, and energy would be more plentiful than it is now. @ -FOOTNOTESlCCOil and Gas Resources-Welcome to Un certainty," Resources (Washington: Resources for the Future, March 1976); House of Repre sentatives Committee on Interstate and Foreign Commerce, Basic Energy Data, 94th Congress, 1st sess., 1975; Peter Odell, UAre the Oilmen Crying Wolf Too Soon?" The Guar dian, July 16, 1978, p. 9.

2Richard Mancke, Performance of the Fed eral Energy Office (Washington: American En terprise Institute, 1975). Crude oil and petro leum product stocks rose by 85 million barrels during the embargo relative to preceding year stocks. p. 5. 3u Much of energy research and development activity, such as the aggressive coal gasifica tion .programs, falls in the category . . . [of] policies that have little social value and great social cost." Edward J. Mitchell, U.S. Energy Policy: A Primer (Washington: American En terprise Institute, 1974), p. 72. Also see Price L. Petersen, A Critique of Two Assessments of the Synfuels Commercialization Program (Washington: American Petroleum Institute, August 8, 1977), p. 72. 4Brian G. Chow, The Liquid Metal Fast Breeder Reactor: An Economic Analysis (Washington: American Enterprise Institute, 1975), p. 13. 5John E. Tilton, U.S. Energy R&D Policy: The Role ofEconomics (Baltimore: Johns Hop kins University Press, 1974), p. 29.