Financing Oil, Gas And Synfuels: The Obstacles

Abstract

Abstract By now almost everyone agrees that the United States has become excessively dependent on imported oil and that our economic and military security is thereby threatened. But tide capital costs of reversing the tide of oil imports, or even stabilizing them at their recent level, is truly staggering. The aim of the present discussion is to assess these costs and their potential impact on U.S. economic growth. DETERIORATION OF U.S. ENERGY POSITION To understand our present predicament, it is first necessary to examine past patterns of oil and gas demand and supply. patterns of oil and gas demand and supply. U.S. consumption of oil and gas rose every year from the mid 1950's through 1973 (Figure 1). In 1974 and 1975, sharply higher prices and a severe economic downturn led to a drop in consumption. But when economic growth returned in 1976, consumption resumed its upward path —despite much higher post-embargo prices. U.S. production also rose during most of the period, but at a slower rate, leaving a gradually widening supply gap that had to be filled with increasing imports. When domestic production peaked in 1970 and then began to decline, the need for imported oil rose more rapidly. By 1978, the U.S. was consuming 10 billion barrels of oil and oil-equivalent gas per year (Figure 2). of this, 3 billion barrels were imported mostly as oil. Another 7 billion were produced domestically, but offsetting additions to domestic reserves in that year amounted to only 3 1/2 billion barrels. Americans were draining their proved domestic oil and gas reserves twice proved domestic oil and gas reserves twice as fast as exploration and development was replenishing them. THE PRESIDENT'S PROGRAM It has now become almost an annual affair for U.S. Presidents to put forth policy solutions to reduce our precarious policy solutions to reduce our precarious dependence on imported oil. In the latest round of such pronouncements, President Carter last April revealed that his administration would gradually phase out price controls on domestic crude oil to provide more incentives for exploration and development, as well as to encourage conservation. The President also asked Congress to approve legislation to tax away a substantial part of the additional revenues that producers would garner from decontrol. (This excise tax is incorrectly known as the "windfall profits tax".) A major share of those tax profits tax".) A major share of those tax receipts, the President said in July, would be dedicated to developing 2 1/2 million barrels a day of oil substitutes by 1990, mostly synthetics from coal or oil shale. According to the administration these proposals, combined with energy legislation proposals, combined with energy legislation already enacted during the Carter Presidency, would cut oil imports to 4 or 5 million barrels daily by 1990. This compares with about 8 1/2 million daily in recent years. The 1990 goal of cutting oil imports in half seems unrealistic. Either oil and gas consumption would have to be significantly reduced below the present level, which could have severe economic ramifications, or domestic oil and gas output would have to be sharply increased. With respect to the latter possibility, it appears; that finding rates of recent years may not the sufficient to sustain even the current production level, let alone permit it to increase.