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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems 10 U.S. Energy Policy in the Global Economic Context The energy upheavals in the winter of 1973–74 made it clear that the United States is strongly affected by energy developments abroad. It is no less obvious that U.S. energy policies, especially in oil and nuclear power, in turn affect other countries. This chapter deals with some international aspects of American energy policy, focusing particularly on the world supply and demand situation. The chapter opens with an overview of world energy developments before the 1973–74 oil price increase, an overview that brings out the growing dependence on oil and gas. It then reviews the consequences of that price increase. A discussion of the magnitude of global energy resources serves as an introduction to the prospects for energy relations between the United States and the rest of the world. THE RISE IN OIL AND GAS, 1960–1973 Table 10–1 gives comparable data for production, consumption, and international trade in the principal fuels for the world as a whole and for the world broken down into five regions. Data are shown for 2 years, the earliest year for which comparable data are available and the last year before the increase in oil prices created a new situation; the table also gives the annual percentage growth rate between 1960 and 1973. These growth rates, of course, have not been constant in the past and will not be so in the future. Between 1960 and 1973 world production and consumption of energy
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems almost doubled, corresponding to an annual growth rate of 5.1 percent. This is virtually identical with the estimated growth rate of world gross national product (GNP) during the period.1 (It should not be inferred from this that energy consumption and GNP necessarily move proportionately; their relation is discussed in chapter 2.) In terms of the composition of world energy consumption and production, the most rapidly growing category was nuclear power, of which there was virtually none in 1960. Even in 1973, however, nuclear power supplied less than 1 percent of the world’s energy. Apart from this category, whose importance lies in the future, the most rapid growth was in natural gas and petroleum, both of which grew at annual rates of nearly 8 percent. Hydroelectric power, which includes a small amount of geothermal power, increased about 5 percent/yr. World coal production and consumption were virtually stagnant, with an annual growth rate below 1 percent. Reflecting these changes, the share of petroleum in world energy consumption increased from 34 percent in 1960 to 47 percent in 1973, and that of natural gas from 14 percent to 19 percent in the same period. The share of coal dropped from 47 percent to 28 percent, while that of hydroelectric power remained unchanged at 5 percent. The growth rates of production and consumption of different fuels varied greatly among regions. Only in the United States did consumption grow fairly uniformly, with the share of coal falling and the share of all other fuels rising. For other regions the consumption of petroleum and natural gas rose much faster than that of total energy. The 22 percent growth rate of natural gas in Western Europe is especially remarkable; this was almost entirely at the expense of coal, the consumption of which actually declined. In Western Europe the share of petroleum in total energy consumption rose from 34 percent in 1960 to 61 percent in 1973, while that of natural gas increased from almost nothing to nearly 11 percent; coal dropped from 56 percent to 20 percent. These drastic changes in consumption patterns were accompanied by no less dramatic changes in the regional patterns of production. In some places these changes complemented one another; for example, natural gas production in Western Europe increased about as much as natural gas consumption there, while coal production fell about as much as coal consumption. In the United States the situation with respect to these two fuels was similar. Neither in the United States nor in Western Europe, however, was there a sufficient increase in petroleum production to match the increase in demand. U.S. crude oil production rose at an average rate of less than 2 percent/yr between 1960 and 1973. (Actually, production reached a peak in 1970 and declined thereafter.) European and Japanese petroleum production remained small, so the sharp rise in demand had to be met entirely from the rest of the world. In the communist countries,
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 10–1 An Overview of World Energy from 1960 to 1973 (quads)a Activity and Fuel Source World United States Western Europe Other Developed Countriesb Communist Countriesc Other Developing Countries 1960 1973 Average Annual Growth Rate (percent) 1960 1973 Average Annual Growth Rate (percent) 1960 1973 Average Annual Growth Rate (percent) 1960 1973 Average Annual Growth Rate (percent) 1960 1973 Average Annual Growth Rate (percent) 1960 1973 Average Annual Growth Rate (percent) Consumption All energy sources 131.5 250.4 5.1 44.5 74.7 4.1 26.4 52.2 5.4 8.9 25.1 8.3 39.0 68.2 4.4 12.8 30.2 6.8 Percent of world total (100) (100) — (33.8) (29.8) — (20.1) (20.8) — (6.8) (10.0) — (29.7) (27.2) — (9.7) (12.1) — Petroleum 45.2 118.5 7.7 18.6 32.3 4.3 8.9 31.7 10.3 3.6 16.2 10.4 6.4 20.0 9.2 7.8 18.3 6.7 Natural gas 18.0 47.8 7.8 14.1 25.3 4.6 0.4 5.6 22.5 0.5 1.9 10.8 2.1 10.8 13.4 0.9 4.2 12.6 Coal 61.4 69.1 0.9 10.1 13.3 2.1 14.8 10.6 −2.5 2.9 3.8 2.1 29.8 35.3 1.3 3.7 6.0 3.7 Hydrod 6.9 13.2 5.1 1.5 3.0 5.5 2.3 3.6 3.5 2.0 3.0 3.2 0.8 2.0 7.3 0.4 1.7 11.8 Nuclear negl.e 1–9 n.m.f negl. 0.9 n.m. negl. 0.7 n.m. 0 0.3 n.m. 0 negl. n.m. 0 negl. n.m.
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems Productiong All energy sources 132.2 252.1 5.1 41.4 61.7 3.1 17.0 19.7 1.0 6.0 13.9 6.6 40.4 70.4 44 27.3 86.5 9.3 Percent of world total (100) (100) — (31.3) (24.5) — (12.9) (7.8) — (4.5) (5.5) — (30.6) (27.9) — (20.7) (34.3) — Petroleum 46.0 120.8 7.7 14.7 18.8 1.9 0.6 0.8 2.2 1.0 4.7 12.6 7.2 21.6 8.8 22.5 74.8 9.7 Natural gas 18.1 48.4 7.9 14.1 24.8 4.4 0.4 5.3 22.0 0.5 2.9 14.4 2.1 10.5 13.2 0.9 4.8 13.7 Coal 61.1 67.8 0.8 11.1 14.5 2.1 13.6 9.2 −3.0 2.5 2.7 0.6 30.4 36.2 1.4 3.5 5.3 3.2 Net deficit or surplusg,h All energy sources −0.7 −1.7 — 3.0 13.0 11.9 9.4 32.5 10.0 3.0 11.4 10.8 −1.4 −2.2 3.5 14.5 56.3 11.0 Petroleum −0.8 −2.3 — 4.0 13.4 12.2 8.2 30.9 10.7 2.6 11.5 7.6 −0.9 1.6 4.5 −14.6 −56.4 10.9 Natural gas −0.1 −0.6 — negl. 0.5 n.m. negl. 0.2 n.m. — −1.0 n.m. negl. 0.3 n.m. negl. 0.6 — Coal 0.3 1.2 — −1.0 −1.1 0.7 1.1 1.4 1.8 −0.4 1.0 n.m. −0.6 −0.9 3.2 0.2 −0.6 n.m. aDetails may not add to total due to rounding. bAustralia, Canada, Japan, and New Zealand. cSoviet Union, Eastern Europe, People’s Republic of China, and North Korea. dIncludes geothermal. eLess than 0.1 quad. fNot meaningful. gIncludes hydroelectric, geothermal, and nuclear, not shown separately since production was virtually equal to consumption. hSurplus if negative. Equals difference between consumption and production. Source: Adapted from U.S. Department of the Interior. Energy Perspectives 2 (Washington, D.C.: U.S. Government Printing Office (Stock No. 024–000–00826–6), 1976), pp. 20–31. In order to make the regions more homogeneous, Canada, Australia, and New Zealand have been merged with Japan to form the “Other Developed” region and taken out of the “Rest of the World,” now called “Other Developing.” Data on the three transferred countries are taken from Organization for Economic Cooperation and Developments, Energy Balances in OECD Countries. 1960–1973 (Paris: Organization for Economic Cooperation and Development, 1976).
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems growth in petroleum consumption was approximately matched by growth in production. Between 1960 and 1973 petroleum production in the “other developing” region2 grew at an annual rate of nearly 10 percent, from increased output in the Persian Gulf area and from such major new producers as Libya, Nigeria, and Algeria. It is no accident that the energy deficits of the Western industrial countries were met entirely from increased oil imports and that trade in coal and natural gas remained relatively small. This reflects the low transportation cost of oil. During the 1960s this cost fell further as larger and larger tankers were brought into service. The principal flow of energy products continued to be from the Persian Gulf to Western Europe, but exports to the United States and to Japan had an even larger percentage growth. Table 10–2 illustrates the development of electricity production from 1960 to 1973. Except in the “other developing” region, electricity grew more rapidly than primary energy, with the highest growth rates occurring in the “other developed” and communist regions. For the world as a whole, electricity consumption grew nearly 50 percent more than primary energy consumption. With the same exception, the share of hydroelectric power dropped everywhere. Nuclear power became significant, particularly in the United States and Western Europe, but the share of fossil fuels (oil and coal) also rose. In 1973 three fourths of the world’s electricity was generated from fossil fuels. Table 10–1 also shows that the growth rate of primary energy consumption varied considerably among the five regions. It was lowest in the United States, and only slightly higher in the communist countries. The highest growth rate was recorded in the “other developed” region, which includes Japan; the “other developing” regions and Western Europe were also well above the world average growth rate. As a result of these disparities, the share of the United States in total world consumption fell from nearly 34 percent to nearly 30 percent, and that of the communist countries from about 30 percent to about 27 percent. Western Europe’s share increased slightly, and the shares of the remaining two regions went up considerably. However, the United States remained the world’s largest energy user, even compared with the aggregated blocs of countries in Table 10–1. There was even more variation in the growth rates of energy production. The rate was highest for the “other developing” region, which includes the principal petroleum exporting countries; it was also substantial in the “other developed” region, due mostly to Canada. The other three areas were all below the world average growth rate. In the United States the growth rate of production was 3.1 percent, compared to one for consumption of 4.1 percent. In the communist countries production and
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems consumption grew at the same rate, while in Western Europe there was very little growth in energy production up to 1973. The shares of the five areas in world energy production changed accordingly. In 1960 the United States and the communist countries each produced some 31 percent of the world’s energy; by 1973 they accounted together for only 35 percent of the total. The share of the United States dropped below 25 percent and that of Western Europe, already small in 1960, dropped even further. None of the three noncommunist developed areas were self-sufficient in energy in 1960, and with production growing at a slower pace than consumption their energy deficits increased rapidly: about 12 percent/yr in the United States, 11 percent/yr in the “other developed” countries, and 10 percent/yr in Western Europe. Despite the somewhat lower growth rate, the European deficit remained the largest; 62 percent of European consumption had to be supplied from outside the area in 1973. In percentage terms, the United States was much less dependent on outside sources, 83 percent of consumption being supplied from domestic production in 1973. Virtually all of the energy deficit of the industrialized Western countries was met by the “other developing” region, which includes OPEC. Energy exports from the latter region grew at an annual rate of 11 percent between 1960 and 1973; in 1973 nearly 65 percent of its production went outside the region, compared to 53 percent in 1960. THE OIL PRICE RISE OF 1973–1974 The net outcome of the developments just reviewed was that Japan and Western Europe, and to a lesser extent the United States, became heavily dependent on oil from the rest of the world, and in particular from the Middle East. The low price of imported oil and the discovery of large amounts of natural gas provided more competition than the European coal industry, despite considerable government help, could handle. Japan never had large domestic sources of energy, but the decline of coal mining was even steeper there than in Europe. With the possible exception of the United Kingdom, these two areas apparently did not perceive heavy dependence on imported oil as a danger until it was too late. In the United States, on the contrary, dependence on foreign petroleum had been a matter of official concern since the 1950s, largely under the influence of the domestic petroleum industry, whose high-cost production was threatened by cheaper oil from overseas. The oil import quota program, in force from the late 1950s until 1972, kept the domestic price of crude oil well above the world level. Despite production controls (known as “market demand prorationing”) enforced by the major
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 10–2 World Electricity Production from 1960 to 1973a Region Totalb (billions of kilowatt-hours) Growth Rate (percent) Hydroc (percent) Nuclear (percent) Fossil (percent) 1960 1973 1960 1973 1960 1973 1960 1973 United States 844 (35.3) 1946 (32.2) 6.6 17.8 14.2 0.1 4.3 82.1 81.6 Western Europe 560 (23.4) 1381 (22.9) 7.2 40.2 25.7 0.4 5.1 59.5 69.1 Other developed 257 (10.7) 815 (13.5) 9.3 68.0 36.4 0 3.1 32.0 60.5 Communist 474 (19.8) 1391 (23.0) 8.6 16.0 14.6 0 0.6 84.0 84.8 Other developing 257 (10.7) 510 (8.4) 5.4 23.0 36.9 0 0.6 77.0 62.5 World 2392 6043 7.4 28.6 21.9 0.1 3.1 71.2 75.0 aSome percents may not total 100 due to rounding. bNumbers in parentheses indicate percents of world total. cIncludes geothermal. Source: Compiled from U.S. Department of the Interior, Energy Perspectives 2 (Washington, D.C.: U.S. Government Printing Office (Stock No. 024–000–00826–6), 1976), pp. 171–176, and Organization for Economic Cooperation and Development, Energy Balances in OECD Countries, 1960–1973 (Paris: Organization for Economic Cooperation and Development, 1976).
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems producing states, the net effect probably was to accelerate the depletion of domestic petroleum reserves. New discoveries became more difficult to realize; they were overtaken by growing consumption in the early 1960s, so proved reserves peaked in 1968 and then declined. The only recent American discovery of international significance (in northern Alaska) remained unavailable for several years because of opposition to the building of a pipeline. At the same time, environmental concerns about the use of high-sulfur coal for electricity generation further stimulated the demand for imported oil. Other such concerns, expressed through increasingly active and effective citizens’ groups, led to abandonments and postponements of hydroelectric power, nuclear power, and offshore oil projects. These developments made the United States a major factor in the global supply-demand balance. Until the mid-1960s U.S. oil imports were relatively small and were satisfied mostly by nearby areas—Canada and Venezuela. As American demand grew, more had to come from the Persian Gulf area, which was already supplying most of the increasing demand in Western Europe and Japan. We have already seen that production in the Middle East had expanded rapidly during the 1960s. Large new discoveries and intensified competition among the oil companies had caused crude oil prices to soften in this period. This helped to open up markets for the new output, but it also threatened the level of royalties paid by the oil companies to the countries where reserves were located. To counter this threat, the royalty owners organized themselves in the Organization of Petroleum Exporting Countries (OPEC) and were moderately successful. (One must remember that most of the OPEC countries own little but desert, aside from oil, and it is on the wealth represented by the oil that they must build industrial economies able to survive when the oil runs out.) As demand began to outstrip supply and U.S. oil production approached capacity, OPEC saw its opportunity. Its first achievement along these new lines came in early 1971, when the oil companies agreed to a sizeable increase in royalty rates. Despite this price increase, oil consumption continued to grow, stimulated by the worldwide inflationary boom that started around 1972. The imbalance came to a head in the fall of 1973, when the fourth Arab-Israeli war was accompanied by an embargo imposed by the Arab oil exporters against certain Western countries, including the United States. How much quantitative effect this embargo had is still unclear, but the psychological effect was unmistakable, reinforced as it was by widespread concern over exhaustion of natural resources. Small quantities of non-Arab oil changed hands at prices as high as $17 per barrel, about seven times the price prevailing before the embargo. Encouraged by this demonstration of the oil importers’ vulnerability, OPEC declared a
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems unilateral price increase of about 300 percent, setting the crude price at about $10 per barrel. It is important to note that the cartelization of the oil market and the resulting price increase were made possible by the sharp increases in the import demand of the United States and, to a lesser extent, other industrial countries, rather than by any worldwide shortage of oil. We shall discuss world reserves later in this chapter. REACTIONS TO HIGHER OIL PRICES The sudden quadrupling of oil prices, coming on top of steep price rises in other commodities, had a serious impact on the world economy. Since in the short run energy consumption is not very sensitive to price changes, the consuming countries had little choice but to pay the higher price. Other energy commodities (coal, natural gas, and uranium) also became more expensive. At first energy consumption was held in check not by higher prices, but by a world recession that started in 1974 and reached a trough in 1975. This recession, the most serious one since the Great Depression of the 1930s, cannot be attributed solely to the increase in oil prices. Industrial production in the developed countries was already losing steam in the summer of 1973, while inflation was advancing to rates not seen since the Korean War. Several important countries had already tightened their monetary and fiscal policies with a view to bringing inflation down, though progress in this direction was not to come until much later. For most countries the oil price increase was of external origin and therefore could not be overcome by domestic economic policies directed at internal inflationary pressures. In fact, the maintenance of restrictive monetary and fiscal policies in the face of rising import prices served to aggravate their depressing effect on income and employment in the oil-importing countries. To these countries the increase in oil prices presented itself initially as a worsening of the balance of payments. While restrictive monetary and fiscal policies are a standard response to a deterioration in international transactions, they were not effective in the prevailing trade situation because the oil-exporting countries could not immediately increase their imports in line with their higher export revenues. In addition, the tight monetary policy was probably unnecessary because the surpluses of the oil-exporting countries remained in the international banking system, where they were available to finance oil importers’ deficits. Once these facts were recognized and the domestic inflation was reduced to some extent, the principal industrial countries gradually turned their
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems economic policies toward cautious stimulation. The danger of a resurgence of inflation made caution necessary, but in fact most countries were able to bring about a recovery from the 1974–1975 recession while continuing to reduce their rates of inflation. These developments outside the energy markets are vital to understanding the behavior of energy consumption after the OPEC price increase (Table 10–3). Since comprehensive data are not yet available, this table is limited to oil and electricity and covers only the leading industrial countries. To relate these two main components of energy consumption to overall economic activity, it also gives GNP at constant prices, and for comparison purposes all figures are expressed as index numbers with base 1973. The main conclusion from Table 10–3 is that oil consumption has not continued the rapid growth evident from Table 10–1. Since 1973, oil consumption in the seven countries included has remained stagnant at best, and in some it has fallen considerably. Comparison with the GNP numbers shows that in 1973–1977 oil consumption in each of these countries rose less than GNP, the opposite of what was shown for 1960–1973 in Table 10–1. Certain differences among the countries are also apparent. The decline in oil consumption relative to GNP was least in the United States and Canada, in both of which there is substantial domestic production. In these countries oil prices were not allowed to rise to the world level for fear of creating large windfall gains to domestic producers; instead the price of domestic oil was kept down by price controls and other devices. This option was not open to the other countries, most of which also raised excise taxes. In the United Kingdom, France, and Germany, moreover, the greater availability of natural gas from the Netherlands and the North Sea provided a substitute for certain oil products. Recent developments in electricity are less clear than they are in oil. Since fuel accounts for a small part of production costs, electricity prices did not rise as much as primary energy prices. Most of the apparent slowdown in electricity consumption (which is virtually proportional to the production shown in the table) is probably attributable to the behavior of GNP. Demand analyses for electricity show that it responds very slowly to price changes, though the response is large in the long run. There have also been changes in world energy production since the 1973–1974 price increase, which will be traced here only for oil. As Table 10–4 shows, total world production increased about 7 percent between 1973 and 1977, with most of the increase accounted for by the communist countries. The desire to keep prices high forced the OPEC countries to curtail their production initially, and in 1977 it was about the same as in 1973. Their share of world production fell from 56 percent in 1973 to 52
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 10–3 Oil Consumption, Electricity Production, and Real Gross National Product in the Principal Industrial Countries from 1972 to 1977, in Index Numbers: 1973 Equals 100 Region and Activity 1972 1973 1974 1975 1976 1977 1978 United States Oil consumption 95 100 96 94 101 106 109 Electricity production 94 100 100 102 108 113 116 Gross national product 95 100 98 97 103 108 112 Canada Oil consumption 95 100 102 100 103 104 107 Electricity production 91 100 106 104 112 120 127 Gross national product 93 100 104 105 110 113 118 France Oil consumption 89 100 94 87 94 89 94 Electricity production 94 100 103 102 111 116 122 Gross domestic producta 95 100 103 103 109 112 116 Italy Oil consumption 95 100 100 97 99 97 102 Electricity production 93 100 102 101 112 114 n.a.b Gross domestic producta 94 100 104 101 107 109 112 United Kingdom Oil consumption 100 100 93 83 82 85 86 Electricity production 94 100 97 96 98 100 102 Gross domestic producta 93 100 98 97 100 102 105 Federal Republic of Germany Oil consumption 94 100 89 86 93 92 96 Electricity production 92 100 104 101 112 112 118 Gross national product 95 100 100 99 104 109 110 Japan Oil consumption 86 100 97 91 96 100 102 Electricity production 91 100 98 101 109 n.a.b n.a.b Gross national product 91 100 99 101 107 113 120 aReal gross domestic product is the gross national product less net factor income from abroad. bNot available. Source: For oil consumption, Central Intelligence Agency, International Energy Statistical Review, National Foreign Assessment Center (Washington, D.C.: Central Intelligence Agency (ER ISER 79–012), Sept. 5, 1979), pp. 14–15. For electricity production, United Nations, Monthly Bulletin of Statistics, vol. 33 (no. 8), Aug. 1979, and Energy Information Agency, Annual Report to Congress 1978, vol. 2 (Washington, D.C.: U.S. Department of Energy, 1979), pp. 119 and 121. For gross national product and gross domestic product, International Monetary Fund, International Financial Statistics (Washington, D.C.: International Monetary Fund, May and Aug. 1978).
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems could be produced at present rates until the middle of the twenty-first century.* However, this does not mean that the resource will last that long, since demand will certainly increase for part of that period, until alternative energy sources are introduced, higher prices bring declining consumption, and depletion of the resource lowers production rates. In the more immediate future there is little need to consider unconventional oil production, for the potential of conventional techniques has by no means been exhausted. The present price level has encouraged intensive exploration, especially outside OPEC areas. It is too early to say what this exploration boom will turn up. In the United States and Canada the number of new oil wells has increased considerably, but most of these are small and might not have been considered commercial before the recent price increase. Elsewhere there have been further successes in the North Sea and substantial discoveries in Mexico, which may again become a large exporter, as it was earlier in this century. Some other non-OPEC developing countries (notably Brazil and India) are making headway in their efforts at self-sufficiency in oil. However, since the Iranian crisis of 1978 many exporting countries have begun to adopt more cautious policies on expanding production, and it is by no means certain that price increases will evoke as much additional production as once hoped. Mexico, for example, has been talking of a limit on oil exports. Nothing in sight threatens OPEC’s dominance in the world oil market; that would take at least another North Sea, and quite possibly two. (The addition of another 10 million barrels of crude oil per day—the equivalent of two North Seas—would cut the demand for OPEC oil to a point where allocation of cartel members’ exports would become so difficult that the cartel might break down.) WORLD URANIUM RESOURCES Unless public resistance to the growth of nuclear power dictates otherwise, uranium may in due course challenge oil as the leading source of energy. It is not, however, possible to analyze it in as much detail as oil, since data on world uranium resources are even less reliable than those on oil resources. Nevertheless, one recent set of estimates is presented as Table 10–7. It gives reserves at a price of $130/kg of uranium, equivalent to $50/lb of uranium oxide (U3O8) and fairly close to present market prices; the resources involved may therefore be described as reserves. Most of these reserves are found in the United States,9 Australia, South Africa, and Canada; there * See statement 10–1, by E.J.Gornowski, Appendix A.
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 10–7 Estimated World Resources of Uranium Recoverable at Costs up to $130 per Kilogram as of January 1977 (thousands of metric tons) Region Reasonably Assured Resources Estimated Additional Resources Total North America 825.0 1709.0 2534.0 Western Europe 389.3 95.4 484.7 Australia, New Zealand, and Japan 303.7 49.0 352.7 Latin America 64.8 66.2 131.0 Middle East and North Africa 32.1 69.6 101.7 Africa south of Sahara 544.0 162.9 706.9 East Asia 3.0 0.4 3.4 South Asia 29.8 23.7 53.5 World (except communist countries) 2191.7 2176.2 4367.9 Source: J.S.Foster, M.F.Duret, G.J.Phillips. J.I.Veeder, W.A.Wolfe, and R.M.Williams, “The Contribution of Nuclear Power to World Energy Supply, 1975–2020," in World Energy Resources 1985–2020 (Guilford, U.K.: IPC Science and Technology Press, 1978), p. 116. are also sizeable amounts in France and in a few African nations. Except for Australia, all these countries have had some production in recent years. The Soviet Union and other communist countries are not included in the world totals. The total of 4.4 million tons in Table 10–7 is equivalent to about 150 years of current production, but uranium use will, of course, increase as nuclear power becomes more important. Australia is the principal source of uncertainty about the world’s uranium resources. Not only are many known uranium deposits spread over the Australian continent, suggesting that reserves are larger than the current estimates, but Australia’s policy on uranium exports is also a matter of conjecture. The country has no urgent need for nuclear power, being well endowed with coal, hydroelectricity, and natural gas, so domestic demand is not an obstacle to exports. However, Australian minerals policy has generally been one of wariness toward foreigners, mitigated by a desire for development of the outlying regions, where minerals are usually found. At the moment it appears likely that Australia will permit some uranium exports under stringent controls to prevent nuclear proliferation, and only in quantities that are too small to depress the world price seriously. While Canada is an established exporter, its future policies may not be very different from Australia’s. However, Canada may also attempt to tie uranium exports to sales of its heavy water
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems reactors. South Africa could be relatively forthcoming with exports but may link their availability to diplomatic support, or at least neutrality, with respect to its domestic policies. Apart from the estimated reserves shown in the table, it would be useful to know something about resources that may become available at much higher prices. In the United States the Chattanooga shales contain uranium in low concentrations; at a high enough price they would become reserves. Similar low-grade mineralizations occur in other parts of the world, for instance in Sweden. However, if these low-grade areas are mined to feed reactors as inefficient as light water reactors, the amount of shale that has to be moved per unit of power produced is comparable to that moved in the strip mining of coal. The environmental impact is expected to be even more severe than that of strip mining. Uranium can also be obtained as a by-product of other minerals such as phosphate, but the amounts are relatively small. The present price of uranium offers strong incentives for exploration, which may help clarify the world resource situation. Evaluation of world uranium prospects, however, is greatly complicated by recent reports of an international cartel. The exact significance of these reports is not yet clear, but a cartel (or even the threat of a cartel) could be expected to stimulate importers’ interest in U.S. supplies and in such uranium-saving technolo gies as reprocessing, breeders, and thorium-based reactors.10 High uranium prices, whether artificial or not, will also encourage exploration in large areas of South America and Asia where the surface has hardly been scratched. These various responses take time, and in the meantime a well-organized cartel could be effective in maintaining, and quite possibly increasing, the world price of uranium. LONG-RANGE PERSPECTIVES ON WORLD ENERGY FLOWS The committee has not attempted to produce a set of long-range projections of world energy markets. In addition to the normal difficulties raised by such projections, the uncertainties about fuel reserves and about OPEC’s price behavior would call for a bewildering variety of alternative assumptions. Making these world scenarios consistent with the domestic scenarios used in chapter 11 of this report would make the task even more formidable. In lieu of a formal presentation of alternative global projections, we confine ourselves to a few general remarks on global energy perspectives.11 The developments described in Tables 10–1, 10–2, and 10–3 will serve as a background to these remarks. To begin with, we assume that the United States undertakes no new energy policy measures beyond those enacted by
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems the end of 1978, and allows existing price controls to expire; the effects of additional U.S. policies on the rest of the world are discussed in the next section. The growth of world energy consumption will slow from the 5.1 percent/yr recorded in 1960–73. This slowdown, which is already evident in Table 10–3, will result from both higher prices and a lower growth rate of world GNP. However, if present patterns of economic growth in the world continue, and if the aspirations of the developing countries for larger shares of economic activity are realized, the average long-term growth rate of energy demand is unlikely to fall much below 3 percent/yr. Even if energy conservation in the United States accomplishes a great deal domestically, it will be more than offset by demand growth in countries at the “takeoff” stage of development. By the year 2010, world energy consumption will probably be 3–4 times as large as it is now. The developing countries will then have a larger share m world energy consumption than they have at present. Electricity demand will probably grow more rapidly than total energy demand for two reasons. First, a large part of electricity cost is due to capital charges, and this will become more true as more capital-intensive forms of electricity generation, particularly nuclear reactors, are introduced. This means that electricity prices are less sensitive to fuel costs. This becomes increasingly true as more advanced reactors are introduced. If primary fuel costs rise more than capital costs, electricity will become cheaper relative to other energy forms. Second, as societies become more affluent they tend to prefer more convenient energy forms, such as electricity or gas, much as they convert more and more grain to animal protein in their food demand. By 2010 world electricity consumption could be 3–5 times as large as at present. If the market is the principal determinant of relative demand, and if there are no noneconomic constraints on the rate at which nuclear capacity can be expanded, then two thirds or more of electricity would probably be supplied by nuclear power, with coal a distant second, consumed mostly in the United States. In our view, expansion of nuclear capacity at so great a rate is unlikely. Also, a breakthrough in solar electric technology, if it came soon enough, could reduce the attractiveness of nuclear power somewhat. In the absence of truly spectacular discoveries elsewhere, the OPEC countries (especially those in the Middle East and Africa) will account for the bulk of the world’s oil production in the early part of the twenty-first century. In addition to North America, Europe, and East Asia, even Latin America will by then probably be a large oil importer unless the Venezuelan heavy oils are fully developed. However, North American production, though smaller than at present, will still be substantial.
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems Cumulative oil production between now and 2010 is likely to exhaust all presently proved reserves of “conventional” oil (Table 10–6). Because of intervening discoveries, however, oil reserves should still be at least as large as they are now, but they will be high-cost reserves, with production costs at least twice those of conventional reserves in the United States.* The Middle East and Africa will become large exporters of natural gas and uranium; U.S. and Canadian uranium will also face a considerable export demand. The degree to which these countries will be willing to satisfy this demand with political conditions acceptable to importers is difficult to foresee. The communist countries are a source of considerable uncertainty. Oil production in the Soviet Union appears to be leveling off, while consumption there and in Eastern Europe continues to grow. The Soviet Union is now a sizeable exporter of oil to the noncommunist world, especially to Western Europe, but may find it difficult to maintain these exports, thus making Western Europe even more dependent on OPEC. Indeed, some analyses suggest that the Soviet Union may have to import oil in the mid-1980s. If so, there would be a considerable impact on the demand for OPEC oil. However, the resulting strain on the Soviet balance of payments may force the regime to adopt stringent conservation measures and to rely more on natural gas, with which the U.S.S.R. is well endowed. There is even more uncertainty about China’s oil resources. In view of China’s industrialization plans, which imply rapid growth in energy consumption, it appears unlikely that China will become a major exporter. On the other hand, China can probably not afford large oil imports if domestic discoveries are disappointing. Thus there is little reason to view China as a major factor in the world oil market during the remainder of this century. 6. As oil production gradually falls more firmly under OPEC control, the opportunity for surges in oil prices like those of 1974 and 1979 will increase. Moreover, as OPEC’s reserves of low-cost oil are depleted, the incentives to raise prices will increase; this would be true even in the absence of a cartel. The price of uranium, increasing at an accelerating rate as the electric power industry becomes predominantly nuclear, could approach $100/lb of U3O8 (in 1972 dollars) by the end of this century if reprocessing is prohibited. Even with reprocessing and recycling of fuel, the uranium price will probably be high enough to make breeder reactors competitive with existing types in some parts of the world, especially in * Statement 10–2, by E.J.Gornowski: My statement 10–1, Appendix A, also applies here.
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems Europe. Coal and natural gas will also become considerably more expensive in real terms, Because of their predominance in oil, natural gas, and uranium, the Middle East and Africa will develop an even larger surplus in their energy trades, probably running into the hundreds of billions of 1972 dollars by the turn of the century. The corresponding deficits will be primarily in the industrial countries (except Canada), U.S. invisible items of trade are now quite strong and are supporting the nation’s current account. A good part of this flow represents oil company earnings in the world market, which partially offset the high costs of oil imports. In addition, new conservation efforts, new oil finds, and a high propensity to import by OPEC help keep the U.S. external position from deteriorating too much. In the United States the energy trade deficit will be somewhat reduced by the expected growth in exports of coal or uranium if such exports are permitted. If the United States were to limit uranium exports there would be a correspondingly larger demand for U.S. coal. The main reason uranium would normally be preferred by importers is its lower transportation cost. These projections do not take account of the trade in nuclear power plants and related facilities (and possibly other advanced energy technologies), which may offset a large part of the industrial nations’ energy trade deficits but will add to the deficits of many countries that do not produce oil. In the absence of political constraints, worldwide investment in nuclear power between now and 2010 could add up to about $1 trillion (1972 dollars), and much of this will be supplied by North America, Europe, and Japan. Needless to say, other nonenergy exports will also have to expand to cover the growing energy trade deficits of these and the non-OPEC developing countries, and this may present serious problems for international trade. To the extent that economic growth in the industrial countries is slower than in the recent past there will be more political resistance to allowing manufactured imports from developing countries at exactly the time when such imports are most necessary to finance their energy purchases. CONSEQUENCES OF ACTION ON NATIONAL ENERGY POLICIES The world energy picture sketched in the previous section is hardly reassuring from either an economic or a political point of view. Let us now consider what difference certain U.S. policies might make. Conservation in the United States beyond what is induced by higher world oil prices would reduce the growth in world demand for OPEC oil and thus reduce the cartel’s power to raise the price and limit production.
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems The more the conservation effort concentrates on oil (or natural gas in uses where the two are directly substitutable), the greater will be the benefits to the rest of the world, although the magnitude of these benefits should not be exaggerated. Promotion of domestic energy production, especially of oil and gas and directly substitutable energy forms, would be equivalent to conservation in its external economic effects. For example, even a remote possibility that offshore exploration will turn up large new oil provinces will serve to restrain OPEC. Conversely, a prohibition or retardation of offshore drilling would greatly strengthen the cartel’s market power. Price controls on oil and gas, or other measures shielding domestic consumers from world energy prices, would have effects opposite to that of accelerated conservation and domestic production; they would reinforce the pressure for a higher world oil price. The “entitlements” scheme for oil is especially harmful because it in effect subsidizes imports and penalizes domestic production; this scheme will presumably be phased out with the end of price controls (now anticipated for 1981). A tariff on imported oil would encourage conservation and domestic output by allowing the domestic price of oil to rise to match the landed price of imported oil (assuming price controls have expired). It would also enable the nation to reduce the monopoly profit that would otherwise go to OPEC. A tariff would be particularly effective if adopted simultaneously by other major oil-importing countries. It might then become a major constraint on the cartel’s ability to raise the world price of oil. Import quotas, with competitive bidding for import licenses, would similarly reduce OPEC’s power over oil prices. Abandoning nuclear reprocessing is likely to accelerate the rise of uranium prices. This would increase the incentives for reprocessing in uranium-importing countries. To counter this tendency, the United States (possibly in agreement with Canada and Australia) would have to keep the price of enriched uranium low enough, by subsidies if necessary, to make reprocessing uneconomic. The importing countries would then have to accumulate spent fuel, or possibly send it back to the original sources. Even if European and developing countries’ reluctance to depend heavily on North America and Australia for their basic energy needs could be overcome, the combination of declining uranium reserves and increasing stocks of spent fuel will make a policy of subsidizing enriched uranium increasingly expensive in the long run. As the price of virgin uranium rises, the use of secondary materials becomes ever more attractive. If such a policy made a major contribution to preventing nuclear war or large-scale terrorism, the probably high cost to the United States would not be considered prohibitive. However, alternative methods of controlling weapons proliferation (for example, international safeguards programs
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems including international surveillance of reprocessing operations) could be cheaper and more effective, and must be explored. Abandonment or postponement of the breeder reactor is likely to have effects similar to the avoidance of reprocessing, raising the price of uranium and thus strengthening the interest of other countries in the development of breeders or advanced converter reactors. Under some plausible circumstances, the United States could remain a uranium exporter through the end of this century. Hence, a major delay in the U.S. breeder program, rather than setting an example to others, may accelerate breeder development elsewhere, if only because it would leave less U.S. uranium available for export (or increase U.S. demand for uranium imports). In any case, European work on breeders may be too far along, and too strongly supported by energy projections, to be stopped, despite growing political opposition to nuclear power in many European countries and Japan. To the extent that public distrust of nuclear power in the industrial countries slows its growth, the pressure on uranium supplies will decrease and the above-mentioned problems will be postponed, although the problems of the international oil market will intensify. A slowdown in the growth of U.S. GNP would help keep down our energy demand and be similar in that respect to the accelerated conservation discussed earlier. However, it would also reduce our demand for nonenergy imports and thus make it more difficult for other countries, especially poor ones, to finance their energy imports. Moreover, slower economic growth, while possibly beneficial from an environmental point of view, would make it more difficult to restore and maintain full employment. Since it would adversely affect investment, it would also retard the turnover of capital stock and thus make it harder to improve energy efficiency. THE DEVELOPING COUNTRIES AND THE WORLD FINANCIAL SYSTEM As we have seen, the growing demand for energy in the developing countries will make them increasingly important in the global energy picture. Some of these countries are already considerable importers of oil, and others will become so as their transportation sectors expand. Moreover, the industrialization that is an inescapable aspect of economic development will greatly increase their reliance on electric power, of which they now have very little. (See Table 10–2.) Their agriculture will also shift from animal and human energy to tractors, harvesters, and trucks, and from natural to industrial fertilizers. As personal incomes rise in these countries, they will want better housing with more lighting and appliances,
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems not to mention air conditioning. The more affluent of their citizens will demand motorcycles, automobiles, and air travel. In fact, the total demand for energy in these countries could conceivably rise faster than GNP.12 Furthermore, we must hope that their economies do grow at reasonable rates, not only in their own interest but also for the sake of global political stability. No doubt a substantial part of the required energy can be supplied from domestic sources. Oil and gas are found in many developing countries, but most of those with large resources have already joined OPEC. While there does not appear to be much coal in the developing countries, hydroelectricity could be expanded considerably, at ecologically acceptable sites, if financing were available. Sizeable quantities of uranium presumably remain to be discovered in some regions, but uranium (and possibly thorium, of which India has large reserves) is only a small part of the cost of nuclear power. It is clear therefore that a large part of the energy needed by developing countries will have to be imported. In addition, heavy investments in electric power will be necessary even if the fuel can be obtained inside the country. Electric power, of course, is generally capital intensive, but it will be even more so if oil, gas, and coal are not available so that nuclear and hydroelectric power, or, in the more distant future, solar energy, must be used. In fact, oil is likely to be preempted by transportation uses, and in most developing countries coal would have to be imported from the United States and Australia, the only countries with a large potential for exports. It seems likely, therefore, that the developing countries as a whole will concentrate their investments in nuclear and hydroelectric power, at least by the end of this century, and that they will have to import increasing amounts of oil and uranium.* This prospect implies further strains in the international financial system, which is already being taxed by the aftermath of the 1973–1974 oil price increase.13 The developing countries at that time generally had little leeway in their balances of payments for increased oil prices; moreover, the recession in the developed countries induced by the oil price increase had a severe effect on their export earnings. The OPEC countries on the whole did not spend much of their vast new revenue on exports from developing countries. As a result, the non-oil-producing developing countries as a group (with notable exceptions such as India) suddenly found themselves with large trade deficits whose financing continues to preoccupy the international banking community. The difficulty is not so much that the money is not available; the OPEC * Statement 10–3 by J.P.Holdren: It is unfortunate that this chapter essentially ignores the potential of renewables other than hydropower, and of geothermal energy, in many developing countries.
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems surpluses remain in the world banking system and could be invested elsewhere. The problem is rather that the countries with cash surpluses (principally Saudi Arabia, Kuwait, and the United Arab Emirates) have not been willing to lend large amounts directly to the developing countries, although they have made relatively small amounts available to a few selected countries and to international organizations. These countries with surpluses have preferred to invest in short-term assets in the United States and Europe, rather than in long-term investment projects in the developing countries. Consequently, Western banks have had to assume the credit risks of loans to countries whose debt-servicing ability is heavily dependent on continued rapid economic growth. Various international arrangements are now being worked out to diversify these risks. The stakes are high, for without adequate financing the developing countries would have to curtail economic growth, to the detriment of billions of people already close to the subsistence level, and of the international banking system’s stability. The developing countries’ needs for massive investments in electric power will only magnify their financial problems. The developed countries, preferably in consultation with the OPEC countries that have cash surpluses, should give high priority to schemes for maintaining a flow of financial resources to poor countries that foster their economic development. This means, among other things, that they should encourage imports from the poor countries even where these imports compete with domestic production. The international institutions active in this field (particularly the International Bank for Reconstruction and Development, the International Development Association, and the regional development banks) need further strengthening. Increased public awareness of the domestic aspects of the energy problem should not lead to neglect of its far-reaching international implications. NOTES 1. The estimation of world GNP meets with the difficulty that the communist countries do not use this concept; instead, they calculate gross material product, which does not include all services. The United Nations Statistical Yearbook contains an estimate of world GNP excluding services. If services were included, the growth rate would probably be a little higher, though still not very different from the growth rate of energy consumption. 2. This region consists almost entirely of developing noncommunist countries, with South Africa the only significant exception. 3. A table on p. 267 of the International Petroleum Encyclopedia (Tulsa, Okla.: Petroleum Publications, 1978) presents a picture for natural gas rather similar to that sketched here for oil. World gas production went up 12 percent from 1973 to 1977, mostly due to rapidly rising output in the U.S.S.R. The U.S. share of world production fell from 48 percent in 1973 to 38 percent in 1977. Contrary to the situation in oil, the OPEC countries are not a major factor in gas.
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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems 4. Subsequent reports to the World Energy Conference have not changed these estimates substantially. See World Energy Resources, 1985–2020 (Guilford, U.K.: IPC Science & Technology Press, 1978). 5. If “probable reserves” are included (as in Exxon Corporation, World Energy Outlook, April 1977) additions to reserves are more or less level from 1945 on, with a small dip in the last few years. This somewhat different pattern underscores the importance of timing assumptions in the analysts of resources. Usually reserves are considered “probable” before they are proved. The date at which indicated resources become probable reserves is inevitably somewhat arbitrary. 6. For a summary see Table 3–1 in Workshop on Alternative Energy Strategies, Energy: Global Prospects 1985–2000 (New York: McGraw-Hill, 1977). 7. See Pierre Desprairies, “Worldwide Petroleum Supply Limits,” in World Energy Resources, 1985–2020 (Guilford, U.K.: IPC Science & Technology Press, 1978), pp. 1–47. The estimate given there for “unconventional petroleum (deep offshore and in the polar zones, enhanced recovery, oil shales, tar sands, synthetic oils)” exploitable toward the end of the twentieth century at a price of $20–$25 per barrel (1976 dollars) is about the same as for conventional petroleum. 8. According to the report cited in note 7, “enhanced recovery can increase the present average recovery of 25–30 percent…up to 45–50 percent,” p. 15. 9. Table 10–7 does not break down North American reserves by country, but other sources indicate that at least two thirds of them are in the United States. 10. According to Foster et al., “The Contribution of Nuclear Power to World Energy Supply, 1975–2020,” in World Energy Resources, 1985–2020 (Guilford, U.K.: IPC Science & Technology Press, 1978), pp. 126–127, thorium supplies from known sources (primarily as a by-product) are likely to be adequate at present prices. 11. More detail may be found in research inspired by CONAES but not done under its auspices; see H.S.Houthakker and M.Kennedy, “Long Range Energy Prospects,” Journal of Energy Development 4, no. 1 (Autumn 1978):1–28. 12. However, this possibility could be offset by the fact that their capital stock will be mostly new, so it can be designed to be efficient at present and prospective energy prices. 13. The most recent manifestation of these strains is the large current account deficit of the United States, which emerged in early 1977 and has had its counterpart in the large surpluses of Germany and Japan. While U.S. oil imports are a major contributor to the deficit, the failure of U.S. exports to grow in real terms is at least as important. The emergence of the deficit was followed by a sharp rise of most European currencies and the yen in terms of dollars, though most of the world’s currencies have remained at par with the dollar and the Canadian currency has depreciated. The cheaper U.S. dollar should in due course correct the current account deficit, especially if other industrial countries stimulate their economies from their present recession, thus further encouraging U.S. exports. In the meantime the dollar’s depreciation has not made oil imports more expensive because the price of oil is fixed in dollar terms; it has, however, increased the cost of non-oil imports and has thereby aggravated inflation in the United States. Consequently the attempt to keep U.S. oil prices low through price controls, which is one factor in our large oil imports, has led to a larger rise in other prices.
Representative terms from entire chapter: