THE PRICE of imported crude oil has increased by 50 per cent this year, and it now appears that the real price of imported oil will double again within the next 10 to 20 years.
We are entering an era of chronic oil shortage, and much of the available supply is subject to sudden and periodic interruption because it is produced in areas of recurring political turmoil.
To cope with these dangers, it is useful, of course, to conserve and to stimulate the discovery and producation of additional petroleum supplies. But that is not sufficient. We need to create a substitute for natural petroleum. Because of the long lead times involved, we need to do so at once.
The United States could create additional capacity from synthetics - a vast oil reserve, in effect, that could be called into use to overcome shortages or to hold down the world price of oil if the OPEC cartel is trying to move price upward. The would give us the leverage we have lacked on oil prices and also insure a less bumpy transition to the distant future of alternative fuels. In this uncertain world, this is an insurance policy we need to buy - now.
The United States, if it has the will, can create a synthetic oil industry capable of producing 5 million barrels a day - more than 20 percent of our current needs. This can be done within five to ten years from sources such as shale, tar sands, heavy oils, coal and farm crops.
The synthetic fuels program would draw upon the proven experience of innovative government-industry programs developed to meet comparable materials shortages in World War II and the Korean War.
Three months after the attack on Pearl Harbor in December 1941, 90 percent of the world's natural rubber facilities came under the enemy's control. By 1945, when World War II ended, 87 percent of the rubber consumed in the United States was synthetic. Nearly all of it came from government-owned plants built during the war with Reconstruction Finance Corporation financing and operated by private industry.
Other critical materials shortages during World War II, notably in aluminum and steel, were met by additional plant capacity financed by the Defense Plants Corporation and other government agencies and operated by private companies under leases or management contracts.
In the Korean War we also faced serious shortages. This time we developed another method, under which the General Services Administration entered into market guarantee contracts with private industry to build new aluminum, copper and nickel capacity.
Under those agreements, the private firm obtained private financing to build specified facilities in exchange for 5-year tax amortization certificates and the government's commitment to purchase, at specified prices or prevailing market prices, any part of the output that could not be sold to military or commercial users. Some of these facilities employed known processes with predictable costs (e.g., primary aluminum reduction), but others involved new products (e.g., ferronickel) with uncertain costs and marketability.
The long-run cost of these programs to the government was negligible. Most gevernment-owned World War II plants were sold to their private operators or others at prices that largely recouped government costs. Under the Korean War market guarantee contracts, the new capacity was privately financed. The government did have to purchase some aluminum and other materials in excess of its own stockpile goals, but these excess inventories were later resold to private buyers or to the original producers at higher prices than the government has paid.
Today, about half the petroleum we use is imported. More than half of our imports and even higher percentages of European and Japanese imports come from the Middle East. Our heavy dependence on these sources makes us highly vulnerable to sudden upward price movements resulting from unterruptions to supply or from the actions of OPEC.
Moreover, no one can be certain, looking ahead to the next five or ten years, that this oil will continue to flow uninterruptedly to our shores. Political changes, terrorist activities, overt military action and natural disasters could lead to a significant reduction or even a halt of deliveries. Each time one of these contingencies occurs, the stress on the economic and social fabric of the industrial democracies will be enormous. The risks of not trying to correct the present situation are too great to bear.
The Department of Energy is pursuing a broad program to advance technology in a number of energy areas. Promising long-range applications such as laser fusion, and medium-range applications such as those based on solar technology, are expected to emerge. The substitute fuel program would not replace these DOE research efforts. But it would help greatly to fill the gap in the years before the DOE program can meet a significant portion of our energy requirements.
Our concern is the immediate future, the next five to fifteen years. For this period our present program relies primarily on savings from conservation and the increased output from domestic petroleum resources. The president estimates that the various conservation measures outlined in his April 5, 1979 program, together with new domestic oil production resulting from decontrol, will save from 864,000 to 1,539,000 barrels a day. Since we are using upwards of 20 million barrels a day - about half of it imported - we will still be heavily dependent on foreign oil even if the program produces savings at the high end of the estimate.
Substantial additional supplies can be attained only if we undertakes an expedited program to produce synthetic oil from sources and technologies that are already at hand. The production program would be based on today's technology. Through joint government-industry efforts, we would create a synthetic oil industry in much the same way we created a synthetic rubber industry almost 40 years ago and doubled our non-ferrous metal capacity almost 30 years ago.
The technology of synthetic oil is not in an early stage of research and development comparable to the intercontinental ballistic missile in 1950, the moon-landing program at its outset in 1960, or laser fusion today. It is a proven technology. Germany waged World War II on synthetic fuel produced from coal. South Africa has been producing synthetic oil since 1955 and has under construction a much larger production facility. In the United States, a number of studies as well as prototype developments contemplate the eventual production of synthetic oil from coal.
Synthetic crude oil (comparable in its characteristics to import crude oil) can also be produced from oil shale, which is also available in enormous quantities in the United States. There are large deposits of oil shale in Colorado, Utah and Wyoming, although environmental and other problems associated with its use and disposal appear difficult to overcome at present. Fortunately, there are important oil shale resources in Kentucky, Ohio, Indiana, Tennessee, and Alabama that seem to be generally free of the problems with Western shale. The Canadian tar sands can also be converted into fuels with existing technonogy.
The production program might also include substitute fuels made from farm crops. Fuel mixtures of alcohol made from farm crops and gasoline have satisfactorily powered automobiles and agricultural vehicles and offer the promise of saving worthwhile amounts of gasoline.
Large quantities of petroleum products or substitutes like alcohol could be made with known technology at costs production still above the present world prices of natural petroleum and its products. But while the future course of world oil prices remains uncertain, the trend will surely be upward in real terms - the only questions are how sharply upward in real terms and how soon.
A standing capacity to produce 5 million barrels daily from substitute sources would be of incalculable value to the United States and the free world - whether or not this capacity is continuously operated. Its existence - in operation or standby - would cushion the potential consequences of future political shocks, such as occurred in Iran this year and may well occur there or in other vital production centers again and again. By adding a significant additional operating or standby source of supply, we would also tend to dampen the inevitable upward trend of oil prices.And it would be an important step in developing the synthetic fuel capacity that will certainly be needed when conventional oil sources run down.
Depending on cost-prce relationships, the political stability of the world oil trade and balance-of-payments considerations, the United States and its friends would have several valuable options they do not now enjoy:
1. We could currently market and consume the new output, if necessary, by subsidizing any difference between production costs and market prices, and reduce imports by an equal amount. This might in turn lower world prices for the remaining oil that we must import.
2. We could currently purchase the new output and stockpile it as insurance against future political shocks.
3. Whenever supplies of natural petroleum at prevailing prices are deemed more attractive, we could shut down some or all of the new plants. In the case of those privately built under market guarantee contracts, we would pay the owners a standby fee to cover their loan amortization needs plus a reasonable return on equity, with the right to order them reopened whenever it becomes timely to shift to option 1 or 2.
A new corporation
To carry out such a program the United States should create a Petroleum Reserve Corporation, under the leadership of a proven business executive like John deButts, the recently retired chairman of AT&T. The corporation would be authorized to design and execute the program to create up to 5 million new barrels of petroleum and alcohol capacity a day. It would be authorized to issue federally guaranteed bonds. It would have authority to build new plants to be initially owned by the government (financed by its bond issues or perhaps by using part of the proceeds of the proposed windfall profits tax) and operated by private industry under leases or management agreements.
It would also have authority to enter into market guarantee agreements for new plants to be built and owned by private industry, with a government commitment to a) buy any part of the output that is not commercially sold, or b) pay the subsidy needed to make commercial sales, or c) order shutdown and pay a standby fee to cover amortization of debt and a reasonable profit, with the right to order reopening at any later time under option a) or b).
The corporation would analyze the feasibility of achieving its goals by employing various mixes of the sources, technologies and financing options available, and would then design its program and negotiate its contracts to suit.
The corporation would also be empowered to finance the building of plants in Canada (e.g., for tar sands) and perhaps elsewhere, under firm intergovernmental agreements for making the output available. It could also be authorized to enter into joint ventures with other nations, under which they would participate in the financing risks in exchange for the right to a share of the output. It would also serve as a focal point for helping to identify environmental issues relating to the production program that require prompt resolution by the president.
Estimates used by energy planners suggest that the one-time investment cost might be $20 billion to $40 billion for each 1 million barrels of synthetic capacity - or $100 billion to $200 billion for the proposed program. The cost to the taxpayer, however, is likely to be much less, depending on how many of the plants can be privately financed under market guarantee contracts, on the extent that other countries participate in the governmental financing risks, and on whether any government-financed plants ultimately can be sold to private industry.
Recently, the Japanese and the West Germans agreed in principle to participate in a U.S. government-sponsored substitute fuel venture and to contribute half of its expected $700 million cost. While the ultimate cost to the taxpayer could be significant, it pales beside the fact that we already incur a trade deficit in the rage of $30 billion a year for each 5 million barrels a day of oil we import, even at the current $17-to $20-a-barrle price, which seems likely to increase with every passing year.
Looking at the downside risks of our petroleum future, to invest in a 5 million-barrel-a-day synthetic production program is a worthwhile insurance premium. One this capacity exists, we could respond more flexibly to any future energy development. If real oil prices stay level or go down, we could place the capacity in standby, and this would be our only cost. Or, it we preferred to reduce our oil imports, we could operate the capacity at the additional cost of any required operating subsidies.
If real oil prices continue to go up - with now seems the most likely possibility - the plants would be self-supporting or close to that, and most of our investment would be returned.
Apart from what it would do to resolve our present petroleum predicament, the proposed program would have other valuable psychological and economic advantages.
First, it would give us all the psychological lift of "doing something" instead of just doing without. It would employ our managerial, technological, engineering and organizating talents to achieve a productive rather than a restrictive result.
Second, if present expectations of a natural or induced recession by 1980-81 prove correct, the program would stimulate the capital goods, and construction markets at the very time when a stimulus would be helpful.
Third, the program would give us a vehicle for acting jointly with other concerned industrial democracies to meet the joint actions of OPEC in a non-confrontational manner that OPEC's members could not oppose and might even support.
The public reception to such a program should be highly favorable. The right time to adopt it is now.