European Affairs

Conventional Energy Sources Are Still the Most Important     Print Email
John Felmy

Before the terrorist attacks of September 11, energy security was generally considered to have two different aspects. The first was security in a physical sense - guns, gates and guards. The second was security of supply: how much oil, coal, gas, and renewable forms of energy will we need? And how are we going to acquire those supplies in a reliable and affordable manner?

But on September 11, we learned that these two different aspects had melded together. Very soon after the attacks, the American Petroleum Institute started getting telephone calls from all across the United States asking why gas prices were suddenly spiraling upward, lines were forming at gas stations and people were getting into fist fights. We were dumbfounded because inventory levels were adequate and there was no supply crisis.

What was happening was pure and simple panic among consumers who had heard a lot of misinformation. Some suppliers also raised prices because there was a huge spike in prices on the Brent oil market that day, which triggered some automatic pricing mechanisms. The result was a sharp loss of consumer confidence, which is the third aspect of energy security that now needs to be considered.

Fortunately our latest statistics were ready for release on the afternoon of September 11, and they showed not only that inventories were adequate but that they had actually increased that week. After we worked frantically to get the message out, the panic receded.

But that was not all. After September 11, we received countless calls from the media insinuating that our facilities were completely unprotected no matter how potentially dangerous they were. That was simply untrue.

So we have to work hard to maintain public confidence and to demonstrate to everybody involved that, as an industry, we are responding to the new challenges of energy security. We are doing so on a number of different levels.

We are working with other industry associations on information sharing and with federal agencies to develop security guidance for energy corporations. We are working with the new Department of Homeland Security.

We are also working with all parts of the energy infrastructure - electricity, coal and natural gas - because they are all tied together. If a power plant loses its natural gas supplies, there is as much of a problem as if the plant had come under attack.

We are also working with Congress, where two very important pieces of legislation need to be adopted. The first is an exemption from the Freedom of Information Act for voluntarily supplied information. Without this, we will not be able to volunteer confidential information because of the fear that someone else might acquire that information and publish it on the web.

We also need liability and antitrust relief. If, for example, the government asks us to develop emergency plans to cope with the loss of 10 refineries, oil companies will have to hold discussions that could violate antitrust laws. So we need protection in that regard. Both these legislative requirements are absolutely essential.

We also need access to law enforcement and intelligence information so that we can help companies to respond to alerts and other contingencies. So we have been working extremely hard over the past year on the first two legs of the energy security stool - consumer confidence and physical security. As for the third leg, security of supplies, we are going to need a new energy bill, and I am hopeful that that can be achieved.

As part of a new energy policy, we shall need greater efficiency and energy conservation. But that alone will not be enough to meet our future needs, not least because heightened energy efficiency creates backsliding problems.

If you improve energy efficiency dramatically, people tend to make more use of energy-consuming assets. If, for example, the fuel economy of vehicles sharply increases, people will drive more because it becomes cheaper. So we have to be very careful about what we are doing.

Renewable energy is very important, but it is a minute source of supply, in the United States and around the world. Solar, wind and geothermal power supply 0.4 percent of U.S. energy requirements. Even if that figure were increased tenfold, these sources would still play only a very small role, and they also have problems with reliability.

Even with increased efficiency and greater use of renewable sources, we shall still need more conventional energy - oil, coal, gas, nuclear and hydroelectric power. We need further research and development to increase the efficient use of these fuels.

We must expand the strategic petroleum reserve, and we must develop additional domestic supplies of oil and natural gas. The Arctic National Wildlife Reserve is a good source of supply and should be developed immediately.

We also need to streamline our regulations. We must, for example, consolidate the 19 different types of gasoline provided for under current rules, and we must address the serious logistical and production problems posed by current law that mandates oxygenates in gasoline.

We need to repeal unilateral economic sanctions against energy producing nations, which quite frankly do not work. And we need to reform the tax code that makes the refinery sector such a low-margin business. That is why we have lost 50 percent of our refineries, why refinery capacity is down, and why the system is under so much strain.

It is also important to educate Americans in the realities of prudent energy use. You do not need to drive to the store just to buy one gallon of milk. Unfortunately, most Americans are simply ignorant about what energy means to them and to the country as a whole.

Finally, we need to do more scientific research into global climate change before jumping to unsupported conclusions. Many people, for instance, have failed to weigh the influence of solar activity, which is currently at a 1,000-year peak. If you plot sunspot activity and global warming on the same chart, applying a smoothing technique to iron out year-to-year changes, you find a 98 percent correlation between the two phenomena over the past century. Based on available data, you can see the same relationship going back 400 years and continuing right up to the present day.

Fifteen years ago scientists said solar activity had no impact on climate change. Now some of them believe it could account for 40 percent of global warming.

Climate change is a serious issue. We do not know what has happened, and we need to focus on the science. If we do not, we risk adopting some costly policies, such as the Kyoto Protocol on global warming, which the United States has rejected.

 John Felmy is Chief Economist and Director of the American Petroleum Institute's Policy Analysis and Statistics Department. He also serves as Vice President of the US Association for Energy Economics. He has over 20 years of experience as an analyst of energy, economic, and environmental affairs. He is a member of the American Economics Association and the International Association for Energy Economics.

 

This article was published in European Affairs: Volume number IV, Issue number I in the Winter of 2003.