Energy Policy Conundrum

1. Energy Policy Conundrum • Dependence on foreign supplies of oil and natural gas as an “economic” and a “national security” issue • Oil shock in 2005 was primarily-demand driven; 1970’s shocks were supply-driven • Bush Approach: subsidies/tax breaks to encourage domestic production, open ANWR, ethanol, technology, research efforts • Significant taxes on imported fuels may be needed to reduce dependence on imports

2. Other Energy Issues • Reliability of electricity grid/supply • Hugh profits of oil companies • Corporate initiatives (GE, Wal-Mart) • Alternative energy sources • Greenhouse gas issue • Energy development and the environment • Future of nuclear power and coal

3. Background Issues • Transportation consumes about 30% of energy followed by industry (about 25%) • About 40% of energy supplied by petroleum, followed by coal and natural gas (20% each), nuclear (10%) and other sources (10%) • Coal is by far the most important fuel for electricity production • Energy use per dollar of GDP is declining • Net imports of energy are projected to continue increasing in the future

4. Oil Issues • About 58% of U.S. consumption is imported. Expected to rise to 60% by 2025 (DOE). Bush labeled “America as the junkie addicted to oil” • Oil production has not kept up with consumption • Resulting higher prices expected to encourage exploration and conservation • Worries about U.S. refining capacity • ANWR potentially represents 5% of U.S. oil consumption

5. Oil Issues-Global • China is now 2nd largest consumer of oil in the world • About 2/3’s of global oil reserves are located in the Persian Gulf region (compared to about 2% for the U.S.) • Emergence of Russia as major oil exporter

6. Oil Issues-Politics • The high price of oil has allowed Iran to be less dependent on foreign investment (and more willing to stand up to the west in the current dispute over nuclear development) • Putin has renationalized a major part of the country’s oil production. Desire to “enhance the power of the Russian state.” • Ability of Hugo Chavez to make waves in Venezuela enhanced by high oil prices • Debate in Saudi Arabia-Should it expand production capacity from 11m to 12.5m barrels per day?

7. Oil Issues-Conservation • Hybrids, hydrogen powered automobiles • CAFÉ (corporate average fuel economy) standards could be raised • Significantly higher taxes on gasoline

8. Oil-National Security Economics • Refer to Handout • National Security is a “public good” • Excessive dependence on imports reduces level of national security • Strategies: oil reserve, energy conservation esp. with cars, taxes on imports, subsidize domestic supply (and alternatives)

9. Natural Gas • Russia and Iran account for nearly 45% of world’s reserves • U.S. no longer self sufficient in natural gas • “Dash to Gas”---clean, efficient, expanded uses in electricity generation, etc. • Gas mainly transported via pipelines, LNG will play growing role in future

10. Natural Gas • Little ability to expand U.S. natural gas production • U.S. pipeline imports from Mexico and Canada expected to decline over next 25 years (depletion and growing domestic demand in those countries) • Net imports of LNG will grow 6-fold over next 20 years (DOE)

11. Coal • Enormous domestic reserves • Source of various air pollutants and carbon emissions • World consumption of coal projected to rise from 5.3B tons in 2002 to 8.2B tons in 2025 • 1990’s shift to natural gas in electricity production; greater reliance on coal expected in the future

12. Coal-Environmental Issues • Pollution concerns are the biggest concern re: coal • Extensive govt/industry research on addressing pollution concerns • IGCC-Integrated Gasification Combined Cycle • IGCC permits separation and capture of most pollutants including carbon. Carbon is injected underground for permanent storage • Process is experimental and expensive ($250 per ton of carbon) • Currently, no nationwide restrictions on CO2 emissions. Policy change likely in future.

13. Nuclear Power • 100 operating plants in U.S. • Nuclear power supplies about 1/5 of electricity in U.S. (second most important source after coal) • Last nuclear power plant built in U.S. came on line in 1996 • High energy prices and innovations in construction and safety have increased interest in building new plants

14. Case for Nuclear Power • Free from serious air pollution problems • Carbon-free • Energy security (domestic source) • Once built, plants are relatively cheap to operate

15. Case Against Nuclear Power • Nuclear power plants are extremely expensive to build (over $2B). Coal plants cost about $1.2-1.4B while natural gas plants run about $500 M) • Safely concerns (nuclear accidents) • Storage of nuclear waste • Security concerns-diverting spent fuel to development of nuclear weapons

16. Nuclear Power-Policy Issues • Construction of new plants will require addressing the issue of nuclear waste storage • High energy prices make the nuclear option more viable. So would carbon taxes. • Increasing concerns about the Greenhouse Effect makes nuclear power a more viable option • Some incentives for nuclear power included as part of the 2005 Energy Plan

17. Renewables • Renewables could provide a “energy security benefit” • High prices of energy aid the prospects for renewables such as solar, wind, wood products, ethanol, etc. High costs, esp. for solar, is a drawback. • Renewable sources account for about 11% of U.S. power production with hydroelectric power accounting for the biggest share. There is little prospect of expanding the use of hydropower. • Non-hydro renewables are projected to increase share of electric power generation from 2.2% in 2003 to 3.2% by 2025.

18. Renewables • Renewables also have environmental concerns (burning wood, wind power and harm to birds, etc.) • Some incentives for renewables included as part of the 2005 Energy Plan. • Coal, oil not currently required to cover full “external costs” Taxes on carbon emissions would improve outlook for renewables.

19. 2005 Energy Plan • NERCs power enhanced to promote reliability of electricity supply in U.S. • Some incentives for renewables. • Tax credits for energy efficiency improvements including up to $3,400 for purchase of hybrids. • Overall plan will do little to reduce dependence on imports.