Air University Review, November-December 1978
The Honorable John Patrick Walsh
FEW, if any, domestic and global issues are as complex and controversial as the sundry elements relating to the production and consumption of natural energy. Uncertainties about current realities and future probabilities have deepened with the passage of time. In an overall sense, the energy situation seems to be embedded in a process of metamorphosis, complicating systematic analysis and rational policy judgments.
Nearly five years after the imposition of the Arab embargo and the vast surge in the international price of oil, the United States continues irresolutely to drift with the issue. Public comprehension of the nature of the problem and its looming threat to the safety and well-being of the nation has not prospered in the interim. In fact, public awareness of the issues involved appears to have deteriorated since the President presented his National Energy Plan in the spring of 1977. The Department of Energy has been established, but it remains a hollow facade in the absence of a congressionally approved energy policy. The policy proposals of the administration have been badly lacerated in the course of congressional considerations, which remain incomplete. Some provisions may be enacted in the current troubled session, but the outlook for comprehensive energy legislation is bleak. Furthermore, the administration has yet to unveil its long bruited Phase II plan to promote new energy sources. Drift remains the order of the day.
Meanwhile, the global supply of oil remains in surplus, albeit high priced. OPEC (Organization of Petroleum Exporting Countries) production remains below capacity levels, a restraining factor on fiat price increases.
In the first half of the year, total energy consumption increased in the United States, accompanied by adequate energy supplies. Favorable weather conditions have expanded hydroelectric availabilities from the relatively low levels of last year. Coal production is back to normal following the record strike during the past winter. Nuclear power production has moderately increased. Natural gas availabilities are more plentiful than they were last year. The flow of Alaska's North Slope oil, which began in July 1977, has reached significant levels. And the high price of energy, particularly oil, has inspired some improvement in energy efficiency. These factors, combined with lower economic growth rates, were reflected in the January-June period in a substantial decline in oil imports from the very high level in the similar period of 1977. Since economic growth levels during the remainder of this year and in 1979 are likely to be relatively soft, oil import demand and costs should remain below 1977 levels. 1
To some extent these favorable short-term trends have tended to obscure the medium- and longer-term energy problems and dangers. High-energy consumption tendencies continue in the society and are unlikely to be curbed unless a comprehensive energy program is enacted. The country is currently heavily dependent on external sources of oil, and this dependency will grow in the years ahead. Oil import costs are major factors in our domestic inflation, in our substantial trade and current account imbalances, and in the softness of the international value of the dollar. The trade compensatory value of North Slope oil will gradually decline in the face of increasing domestic demand. And there are substantial doubts that the existing goals for coal and nuclear energy production will be
Editor's note: The energy problem was previously "visited" by Ambassador Walsh in "The Energy Problem in a Global Setting," Air University Review, July-August 1977, pp. 2-14.
reached. Significant energy supplies from esoteric sources will not be available for many years. In addition, the outlook for oil and natural gas production is not particularly sanguine. Higher prices and improved technology are increasing the yield from existing fields, but this process has its limits. The mainland and the Gulf waters have been extensively explored, although exploratory activity continues at high levels. Exploratory activity in the Baltimore canyon off the continental shelf is at an early, inconclusive stage. Increasing the off take of North Slope oil to the capacity level of the Alyeska pipeline will not occur unless a transmission system across California is authorized and constructed or political decisions are made to permit export to Japan or to the Caribbean for refinement for American markets.
Looming ahead are serious supply and demand relationships. Adequate economic growth levels will be reflected in increased energy consumption with some improvement in the GNP/energy ratio. Maintaining existing hydrocarbon reserve levels will be a difficult task. Unless substantial new fields are discovered, the drain on existing, finite reserves will continue. 2 All projections indicate increased import requirements in the years ahead. This dependency will continue to burden our foreign policy. In the absence of fundamental corrective measures, the inherent dangers to world’s stability and the safety of the nation will inexorably increase. Time is of the essence.
In an energy-sense, the world appears to be in a false-dawn situation, a calm before the onset of stormier conditions. Energy supplies are now adequate relative to demand, although prices are high.
Oil continues to be the principal energy source and the price leader, closely associated with natural gas. Global oil reserves remain reasonably comfortable at about 678 billion barrels, largely situated in the Middle East, particularly in the Persian Gulf area. With global consumption annually exceeding 20 billion barrels, there is a premium value on exploration, which is now at high levels in increasingly difficult and expensive locales. However, balancing the consumption rate with new discoveries is a difficult and uncertain process. In effect, it would mean bringing in the equivalent of two new North Slope fields each year. And the development time to produce oil and natural gas from new fields is lengthy.3 The most promising new reserve areas are in southern Mexico, western Siberia, the sea frontier of Argentina, and the continental shelf off the East Coast of the United States. The politically disputed seas off the Asiatic mainland may also prove rewarding in terms of oil and natural gas reserves.4 Each involves technical problems, heavy capital expenditures, and uncertain time factors. Older fields, most significantly in the United States, Canada, Venezuela, and the industrialized western sections of the Soviet Union are in advanced depletion stages.
Oil is now in surplus in international markets, a condition that is likely to prevail into the middle of next year or longer. This condition reflects surplus OPEC capacity, the increasing availability of North Slope oil, and the growing capacity of the North Sea fields, the gradual increase in Mexican production, and the relative slackness of the industrial economies.
Global oil consumption in 1977 approximated 59.6 million barrels a day (mmbd), including about 50 mmbd in non-Communist countries. Assuming moderate economic growth rates in the industrial countries, global consumption in 1978 is likely to be in the vicinity of 62 mmbd, including about 52.5 mmbd in the non-Communist sector.5 This will include some accumulation of strategic reserves. OPEC offtake in 1977 approximated 31.6 mmbd and is currently running below that level. Since this is less than the productive capacity of the member states, price stability and even some price shaving is likely to continue through the end of the year. Price stability in 1979, however, is less likely. Pressure probably will mount within OPEC for a price hike effective 1 January 1979 to compensate for import price increases and the decline in dollar values. 6
Nearly five years after the imposition of the Arab oil embargo and the vast OPEC fiat price increase, the United States irresolutely drifts with its energy problems. During this time span, domestic energy consumption grew roughly in proportion with national production growth rates, although the efficiency of energy usage was improving. Since this was accompanied, prior to the availability of North Slope oil, by a decline in total energy output, the gap had to be covered by heavy imports of fossil fuels, particularly oil. 7 Oil imports during the 1974-1977 period increased by nearly 40 percent, representing in 1977 about 47 percent of total petroleum consumption.8 Simultaneously, there has been a massive shift in the source of the imports and growing dependence on Arab production. 9
Despite increased coal and nuclear energy output, the nation has become more dependent on oil, which is now almost double the amount contributed by any other energy source.10 This reality increases the demand for oil imports, which in 1977 rose by about 18 percent. Domestic oil production was marginally above the 1976 level due to the initial availability of Alaskan North Slope output, while natural gas production remained at about the 1976 levels.11 Coal production declined.12 Nuclear energy output increased significantly in 1977, contributing 11.7 percent of total electrical generation. The year, however, was also marked by an unprecedented number of nuclear project cancellations.13 Total electrical production was about five percent higher in 1978.
The average daily consumption of energy in 1977 was two percent above that of the previous year, including an increase of six percent in the use of refined petroleum products.14 A belated beginning also occurred in 1977 in the accumulation of a Strategic Petroleum Reserve (SPR). In the course of 1978 the accumulation rate is scheduled to increase from one hundred thousand to a million barrels a day. The ultimate goal is an oil reserve of one billion barrels, with an intermediate goal of about 500 million barrels by December 1980.15 As the accumulation proceeds, the insurance policy value of the SPR will increase.
The energy consumption and production outlook for 1978 is complex. Demand will correlate fairly closely with the levels of overall economic growth, although benefits are being derived from the gradual improvement in the efficiency of energy usage. Total energy consumption in the first quarter increased by 3.1 percent relative to the same period of 1977. The growth in oil use was below that level in part because of a surge in natural gas utilization. On the production side, higher supplies of North Slope oil will increase domestic production. Output from the lower-48 states will approximate 1977 levels. A similar situation is likely to prevail in respect to natural gas. Significant increases in nuclear energy and hydroelectric generating capacities are indicated. By mid-year, coal production was back to normal. However, strike generated production losses are unlikely to be compensated for in the course of this year. The gap between demand requirements and supply availabilities will continue to be covered by fossil imports, although below the very high 1977 levels. 16 The supply requirements of the Strategic Petroleum Reserve will grow in importance as the year progresses. Assuming normal economic growth rates, import requirements will edge upward in 1979.
Oil and natural gas exploratory efforts provide some brightness in an otherwise bleak energy picture. In 1977, rotary drill and seismic operations were well above the previous year as were well completions. These high levels of exploration will continue this year, along with the commencement of exploratory efforts off the continental shelf.
American efforts to forge a national energy program are badly bogged down with an uncertain future. The National Energy Program presented to Congress on 20 April 1977 was highly complex and destined to stimulate widespread opposition. As a minimum, however, it provided a conceptual framework for congressional consideration of the energy issue.
The administration's proposals forecast an economic growth rate through 1985, below existing GNP growth rates but in line with traditional trends. Simultaneously, it assumed considerable improvement in energy efficiency, including substantial shifts from the use of oil and natural gas to the plentiful coal reserves. 17 Coal production was to exceed one billion tons by 1985, an increase of about 60 percent, and nuclear energy electrical generating capacity was to more than double. Annual energy demand growth was to be reduced below two percent, and oil imports were to fall to six million barrels a day. The latter would reflect a substantial decline in the annual oil consumption rate.18
The program was presented as an integrated whole with mutually supportive and dependent parts. Its prime emphasis was on conservation rather than increased production. A so-called "Phase II plan," emphasizing energy production proposals, has not yet materialized.
Subsequent congressional actions with respect to the original proposals have been tortuously prolonged with disjunctive consequences. In the ensuing political melee, they have been seriously shredded, particularly in the Senate. Widely varying House and Senate proposals were referred to a Joint Conference Committee last fall, which has not as yet completed its work. With time running out on the Ninety-fifth Congress, efforts continue to reach a series of conference compromises. If this can be accomplished in the coming weeks, the joint proposals would have to go to floor votes. Although both bodies ale weary of the issue, it is conjectural whether legislative agreement will occur this year. The variances within Congress with respect to this complex subject bear some resemblance to the splinters within the United Mine Workers Union in regard to the 1978 coal contract. Even if an energy program is enacted this year, it will differ widely from the original proposals, and it will fall short of optimum levels in terms of conservation, production, and the efficient use of available energy sources. 19
In the event of continuing congressional impasse, the administration might choose to impose import duties or import quotas. 20
However, unless they were quite severe, they would be unlikely to curb import demand significantly. Furthermore, they would have some adverse price and administrative consequences. The administration would prefer that Congress enact the proposed crude oil equalization tax, which would eliminate the requirement for the burdensome refinery entitlement program.
The discord within Congress in regard to the energy problem reflects the public mood. It is evident that the people are confused about the nature of the problem and reluctant to support corrective measures. Meanwhile, dreams of technological breakthroughs linger on as a form of national opiate. Under these circumstances, the formulation and implementation of an effective national energy policy remain a distant objective. 21
The energy outlook is both murky and dangerous. Many uncertainties exist with respect to future demand and supply relationships. It seems highly probable, however, that world demand for oil will strain supply availabilities in the course of the next decade.22 If this occurs, it probably will be accompanied by substantial price increases in real terms. This, in turn, would fan inflationary pressures with adverse production, employment, trade, and balance of payments consequences. If a scramble for available supplies develops, the potentiality for international conflict would increase. The energy outlook, at a minimum, is troublesome, and the significance of resource diplomacy will grow.
The disparate roles of three countries--Saudi Arabia, the U.S.S.R., and the United States--will be particularly important. Saudi Arabia posesses the largest reserves and is the biggest oil exporter. It is also the residual supplier and price moderator in OPEC. Its present production approximates 8 mmbd, substantially below its indicated capacity of 10-11 mmbd. If it is to play an effective role in the next decade as a price moderator, it will have to increase its offtake very substantially.23 Its technical capacity and political willingness to do so are subject to considerable doubt. Production capacity will increase into the next decade but at a relatively modest rate.24
The U.S.S.R. remains the largest oil producer, but it is falling short of production goals with respect to oil and other energy sources. Its western fields are in the process of depletion, and its main Siberian field, Samotlor, will soon peak. To maintain production levels, the Soviets will have to bring in new fields in more remote Siberian regions in the face of severe environmental, transportation, and technological problems. Capital costs will be very high. Developmental delays would curb their export capacities and perhaps force them into an import mode. Either would tighten global supplies. Nevertheless, the indicated and probable reserves of the Soviet Union are substantial, and it is likely to be in a favorable reserve position relative to the United States at the end of the next decade.
The United States is the largest producer and consumer of energy in the world. In recent years, the magnitude of its oil import demand has provided a flooring for OPEC pricing decisions, has seriously strained American trade and current account balances, and eroded the value of the dollar. The consequences for domestic and global economic stability have been serious.25 In addition, American foreign policy is now influenced to an important degree by our heavy dependence on imported fossil fuels, particularly from Arab sources. This is a reality with which we must live.
The energy supply and demand outlook in the United States is far from assuring. Domestic oil production peaked in 1970 and natural gas in 1973. The decline in oil production was finally reversed when North Slope oil came on stream in the latter part of 1977. The last large find was at Prudhoe Bay in 1968. The mainland has been extensively explored, and drilling off the west coast of Florida and the Gulf of Alaska has been unrewarding. Exploratory work has recently begun off the continental shelf with inconclusive results and limited optimism. Exploratory efforts in the Bering and Beaufort Sea areas have not been authorized as yet, and the time element in bringing new fields into production is quite long. Higher prices and improved extraction techniques will increase the yield from existing wells, but there are limits to this process. Gradual depletion and ultimate exhaustion of our hydrocarbon reserves appear inevitable.26 Simultaneously, there are growing doubts about the accuracy of governmental projections of future coal production levels 27 and nuclear energy generating capacity. 28 In the absence of technological innovations with respect to other potential sources, shortfalls in coal and nuclear output would increase the demand for oil and natural gas.29 This, in turn, would be reflected in higher hydrocarbon import levels, if the external supply were available.
The 1985 oil import estimates in the National Energy Plan of 6 mmbd were highly optimistic. 30 At the Bonn summit meeting, the administration pledged to reduce imports to 9 mmbd from a projected level of 11.5 mmbd. Projections of this type reflect a variety of assumptions and are highly complex. As a minimum, however, they indicate very heavy American dependence on oil imports in the years ahead.
Higher costs will stimulate greater efficiency in the use of energy. The administration has established a goal of maintaining a ratio between GNP growth and energy demand at or below 0.8. Nevertheless, if the economy remains vibrant, the nation will be faced with higher fossil import requirements in the years ahead. This likelihood raises serious questions of a supply, cost, and security nature.
Existing and projected global oil production capacities should be able to accommodate the likely level of world demand growth into the early years of the next decade. Beyond that point, however, global supplies probably will tighten unless Saudi Arabian capacity, in particular, is significantly increased. There is considerable doubt from a technical and policy viewpoint that this will occur. If the supply/demand ratio does tighten, substantial price increases in real terms are probable.
The vast surge in recent years in energy prices has already had serious economic and political consequences, which are continuing. The inflationary effects have been painful. Investment patterns have been altered; production and employment losses have occurred; severe international payments problems have developed; and heavy capital shifts, particularly to the small Arab oil exporting countries, have strained the international monetary system.
In the case of the United States, the fossil import bill soared from $7.7 billion in 1973 to about $45 billion in 1977.31 This was a basic element in last year's record trade and current account deficits. Oil imports this year will probably be about ten percent below 1977 totals at an approximate cost of $40 billion. Despite this welcome development, the 1978 trade and current account deficits will approximate or exceed the unfavorable 1977 totals.
The heavy trade and current account deficits contributed to the serious and disequilibrating sag in the international value of the dollar. While this development increases the competitiveness of our exports, it has adverse inflationary consequences. Better synchronization of the economic growth rates of the industrial countries would benefit our trade accounts. However, if our trade imbalances remain high, the strain on the dollar is likely to continue unless there is a compensating inflow of foreign investment capital. There is an evident need to curb our voracious energy appetite and expand our exports.
Fundamental security issues are involved in the efforts to maintain stable economic growth rates. Unless we expedite the requisite actions to adjust to our changed energy circumstances, the economy and society could be subject to considerable shock in the years ahead. This could occur as a result of future oil price surges or as a result of tightening oil supplies. This could simply reflect supply and demand factors in international markets.
On the other hand, it could occur as the result of political, paramilitary, or military factors. The outlook for a peace settlement in the Middle East is not bright, although the current quarrelsome impasse need not give way to a fifth Arab-Israeli war. It could lead, however, to decisions by the main Arab oil producers to use the leverage of leveling-off, reducing, or embargoing exports. Such actions would have adverse economic consequences and would intensify political tensions, possibly leading to military conflict. If the fifth Arab-Israeli war does occur, an oil embargo would be a high probability. Adroit sabotage might have similar consequences in respect to supply availabilities. And, in the event of a conventional war involving the Great Powers, even if severely limited, the likelihood of continued oil supplies from the Middle East would be slim. The issue would be insignificant in the case of strategic warfare.
TAKEN AS a whole, the global and national energy outlook, particularly with respect to oil, is quite serious. Time is of the essence, but we are collectively drifting with the problem. This is a severe test of democracy-a looming crisis without a visible energy shortage. There are increasing dangers that the situation could become critical before the general public recognizes its inherent seriousness.
Air University (ATC)
Notes
1. Import demand may stiffen in the fourth quarter, reflecting stockpile requirements and anticipatory buying. Imports for the Strategic Stockpiling Reserve will reach substantial daily levels before the end of the year. Furthermore, OPEC may choose to raise prices effective in 1979. This possibility may be reflected in anticipatory petroleum purchases in the late months of this year.
2. Optimum conservation measures are highly desirable, but they could only delay by a few years the eventual effective exhaustion of existing fields. Their prime value relates to balance of payments considerations. Lower oil demand diminishes the demand for imported oil, not for domestic oil.
3. The National Academy of Engineers Project "Independence" study estimated that it takes from 3 to 10 years to produce oil and gas from new fields.
4. As oil prices increase in the years ahead, it seems likely that small fields will be exploited in many parts of the world. In a collective sense, such a development could produce considerable oil.
5. Industrial country consumption, of oil increased in the first quarter of 1978 by 3.4 percent relative to the same period of 1977.
6. OPEC is confronted by serious dilemmas in maintaining the purchasing power of their oil revenues. Oil prices are denominated in dollars. Pricing quotations for the varying qualities of oil are keyed to the $12.70 price per barrel established 1 January 1977 for Saudi light crude. Rising import costs and the decline in the value of the dollar in the intervening period have reduced the purchasing power of their oil revenues. The degree of losses has varied within OPEC, largely reflecting the trade orientation of the individual countries. Those who trade heavily with countries whose currencies have strengthened relative to the dollar have been hit hardest, particularly Nigeria, Indonesia, Iraq, and Kuwait. Strong pressures exist within OPEC to raise the base price of Saudi crude and to shift quotations from the dollar to a basket of currencies. Such actions, however, could have disequilibrating consequences for the world economy and for dollar values. Such a development would adversely affect world oil demand and OPEC investments in the United States. Furthermore, shifting currencies could boomerang since current dollar quotations are low. The Saudi and Iranian governments have hitherto opposed changes in the existing price and currency quotations in the face of growing resentments from the other members.
7. Total domestic energy production in the 1973-1976 period declined at an annual rate of 1.2 percent, due to drops in oil and natural gas output. The overall decline was essentially checked in 1977 as the result of the initial production from the Alaskan North Slope, although the December coal strike dropped it fractionally below 1976 levels. Total energy production in 1977 is estimated at 60.2 quadrillion BTU, only 0.1 percent below the 1976 level but more significantly below the 1972 total of 62.9 quadrillion BTU.
8. In the same time period, imports of fossil fuel rose from 19.5 to 25.8 percent of total energy consumption.
9. In 1973, OPEC producers provided 70 percent of U.S. oil imports, with Arab producers accounting for 22 percent. During the first quarter of 1978, OPEC's share had risen to over 85 percent, with more than 41 percent coming from Arab sources. The Arab increase reflected substantial declines in Venezuelan and Canadian sales to the U.S.
10. In 1977, refined petroleum represented 48 percent of the total energy consumed in the nation; natural gas, 26 percent; coal, 19 percent; nuclear energy, 4 percent; and the drought-played hydroelectric units, 3 percent.
11. At the end of 1977, domestic oil production approximated 8.5 mmbd, including about 0.7 mmbd from the North Slope. Production from the lower-48 states peaked in November 1970 at 10,089,000 barrels a day. The subsequent decline exceeded 21 percent. Natural gas output peaked in 1973. Since then it has declined more than 13 percent. This has been reflected in increased demand for fossil fuel imports.
12. Because of the coal strike, which began in December, coal production in 1977 dropped to 672 million short tons relative to 678.7 million tons in 1976.
13. At the beginning of 1978, the nation had 65 fully operating reactors with maximum dependable capacity of 45,737 electrical megawatta. In 1977, sixteen nuclear power projects with an indicated capacity of 18,000 megawatts were canceled. The cited reasons were uncertainties about government policy, the need for licensing reform, environmental actions, and uncertainty about electricity demand growth. While it seems probable that available capacity will exceed 100,000 megawatts in 1985, this is far less than earlier predictions. With some hyperbole, Secretary Schlesinger observed that "nuclear energy is barely alive" (Associated Press, May 19,1978). It is certainly steeped in controversy.
14. The increase in total energy consumption was less than in 1976, at least in part due to a decline in the rate of GNP growth as well as some improvement in the efficiency of usage. On the other hand, the rate of growth in the consumption of refined petroleum products was higher.
15. The SPR was established by the Energy Policy and Conservation Act (PL 94-163), enacted on December 22,1975. At the end of April 1978, there were 21.5 million barrels in the SPR. Average April deliveries, including transport, cost $14.95. The SPR goal for the end of 1978 is 125 million barrels.
16. Import dependence in the first half of 1978 was 41.2 percent relative to 48.5 percent in the same period of 1977. Imports were down by 12.8 percent, largely due to the availability of North Slope oil. Domestic production in June at 8.9 mmbd was up 10.9 percent. Import costs in the first half of the year were $19.2 billion, 9 percent below the totals for the comparable period of last year.
17. Oil and natural gas represent about 75 percent of our energy consumption and about seven percent of our proven energy reserves. Coal supplies about 19 percent of our energy while representing about 90 percent of our proven energy reserves.
18. U.S. oil consumption grew at an average annual rate of 4.4 percent from the end of the Second World War through 1973. The vast OPEC price increase at the beginning of 1974 and the accompanying recession resulted in consumption declines in 1974 and 1975. However, consumption rose by 7.6 percent and 5.0 percent in 1976 and 1977, respectively. Holding the annual growth rate in the years ahead to about 2.0 percent would be a considerable accomplishment.
19. There were 113 proposals in the original energy plan, which could be separated into five basic elements: coal conversion, utility rate structural reform, conservation measures, natural gas pricing, and the crude oil equalization tax. The latter two are the most significant and controversial. In a tactical sense, the Senate intends to consider each separately, while the House leadership wishes to consider at least the first four as a package. In mid-July, the Senate passed a watered-down coal conversion bill. Although the conferences have also reached agreement on the utility and natural gas provisions, the task of drafting legislative language had not been completed by the end of July. No agreement had been reached at that time with respect to conservation measures or the so-called well-head tax. The outlook for the latter is particularly bleak.
It will be a difficult task to complete legislative enactments prior to adjournment for the election period. If this does not occur and Congress does not reconvene in November, the Ninety-sixth Congress would inherit the problem when it meets next January.
The energy situation was a major factor of consideration at the mid-July summit meeting in Bonn. In the final statement, the participants recognized that the overall situation "remains unsatisfactory." Recognizing its particular responsibility, the United States pledged to reduce its dependence on imported oil and "to have in place by the end of the year a comprehensive policy framework within which this effort can be urgently carried forward" (New York Times, July 18, 1978). Fulfillment of this commitment would require a noteworthy degree of congressional accord and activity.
20. Presidential authority in these matters flows from the Trade Expansion Act of 1962. The Senate has voted to rescind this authority. Similar action by the House appears doubtful.
21. In a report released in mid-June, the Trilateral Commission sharply criticized the United States for failure to enact "a comprehensive, coherent energy policy of any kind." The report stated that "the reasons for this were at heart political: deep disagreements between the executive and the Congress on the best way to proceed, lack of consistent White House leadership, and, closely related, a mounting cynicism and sheer lack of understanding of the scope of the problem among the general public" (New York Times, June 14, 1978).
22. James R. Schlesinger, Secretary, Department of Energy, foresees in the mid 1980s a notional worldwide oil shortage of about 5 mmbd. The effect, in his view, would be to drive up prices or slow down economic activity to balance the available supplies against demand. Those who disagree with his assessment of looming shortages in large part assume that there will be a global recession or at least very slow economic growth in the industrial countries. This would be a severe price to pay to delay an energy shortage. U.S. News and World Report, July 10, 1978.
23. In an April 1977 release entitled "The International Energy Situation: Outlook to 1985," analysts of the Central Intelligence Agency projected the global demand for OPEC oil in a range of 47 to 51 mmbd, including a requirement for Saudi production ranging between 19 and 23 mmbd. Production at this level would risk rapid reserve depletion and heavy gas flaring. The financial implications are staggering.
24. Following discussions in Saudi Arabia, Energy Secretary James Schlesinger forecast Saudi capacity in 1983-84 at 12 mmbd. He said the Saudis are not planning to match the soaring demand, New York Times, January 24, 1978.
25. In press interviews before the July summit meeting, President Valery Giscard d'Estaing of France and Chancellor Helmut Schmidt of West Germany expressed deep concern about the magnitude of U.S. oil imports. The French President said, "At the present time, an important reduction in United States oil imports is the precondition for an improvement in the world economy." The German Chancellor said, in respect to U.S. oil imports, that "In my view this is the most important single source of the upheaval in the worldwide network of trade and payments and it should be corrected" New York Times, July 13, 1978.
26. This has direct military implications. The transportation sector of the economy is almost completely dependent on petroleum products, as are military operations. Transportation uses about 25 percent of total energy consumed and about 60 percent of the petroleum that is utilized. The Department of Defense is a relatively small petroleum user, consuming in 1976 about 2.8 percent of total national consumption. Over half of the DOD total is used by the Air Force. Military requirements in wartime are assumed to be 2.5 times greater. When correlated with probable secure wartime supplies, largely domestic in nature, these requirements reach substantial magnitudes. Furthermore, the availability of fuel for future defense operations is completely dependent on nondefense efforts.
27. Productivity in the coal industry has been declining for some years. In addition to this problem, reaching the 1985 production goals of over one million tons of coal would require a substantial expansion in the labor force, the opening of many new mines, a marked improvement in transportation facilities, expensive equipment adjustments, and environmental problems. The capital requirements would be very high, and the formulation of an integrated managerial approach to the overall problems would not be an easy task. Secretary Schlesinger has stated that current projections indicate a shortfall of about 200 million tons relative to the 1985 production goals.
28. The national mood in respect to nuclear energy is indecisive at best. Estimates of on-line nuclear generating capacity in 1985 have steadily declined in recent years, falling from 240,000 electric megawatts in 1974 to a May estimate of 111,000. Lead times are very long, and plant deferments and cancellations have been high.
29. The production and use of 85 million tons of coal are the equivalent of the use of one million barrels a day of oil.
30. In June 1977, the Library of Congress Research Service estimated 1985 oil imports at 11.8 mmbd; in July, the GAO forecast imports at 10.3 mmbd; in August, Exxon estimated the 1985 rate at 12.5 mmbd; in October, the GAO revised its estimate to a range of 1l.9 to 12.9 mmbd; in November, the Petroleum Industry Research Foundation estimated the 1985 rate at 9.6 mmbd; in March 1978, Standard Oil of Indiana predicted that oil imports would average 9.8 mmbd in 1980 and 10.4 mmbd in 1985; in May, the Department of Energy suggested a range between 9.1 and 12.5 mmbd, based on varying conditions.
31. In 1977, customs statistics (FAS) listed petroleum imports at $42.1 billion, nearly 30 percent of total imports. In addition, $2.6 billion of crude oil was imported into the Virgin Islands to be refined for U.S. consumption. The delivered cost of imported crude rose from $4.08 per barrel in 1973 to $14.60 last year.
Contributor
Ambassador John Patrick Walsh (Ph.D., The University of Chicago) is the State Department Adviser to the Commander of Air University (ATC). He is a Foreign Service Officer who has served in a variety of assignments at home and abroad, including being Ambassador to Kuwait. He was also an International Fellow at Harvard University.
Disclaimer
The conclusions and opinions expressed in this document are those of the author cultivated in the freedom of expression, academic environment of Air University. They do not reflect the official position of the U.S. Government, Department of Defense, the United States Air Force or the Air University.
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