For months now, while American politicians have debated earnestly over solutions to the "energy crisis," a dissenting voice has crept forward with a disconcerting message: there isn't any shortage of energy, after all.
This word is brought to you from unexpected quarters - the oil industry. It began as private mutterings among oil executives, but now they have gone public with the message: there's plenty of oil and other energy waiting to be developed, if only the government will get out of the way.
Obviously, this new line of argument conflicts directly with how the Carter administration has framed the energy problem for the American public and the Energy Czar, James R. Schlesinger takes note of this development with some sarcasm:
"It was the majors that said for a decade: 'We are running out of oil.' Finally, the government said: 'We hear you, we are running out of oil.' Then the companies suggest the natural, inevitable consequence is to jack up prices for us, so that we have higher prices and profits, as befits a period of national emergency.
"The government responds: 'You don't need them on existing fields.' Some of the companies then suddenly suggest: 'We don't have an emergency, after all.'"
Schlesinger observes: "That's kind of disingenuous."
What the companies are saying in varying fashion - along with some independent economists and petroleum experts - is this: the world is not "running out," as President Carter put it in his original alarm last spring. The world has vast resources in oil and natural gas and other hydrocarbons which the American people can enjoy - if only the government will get off the industry's back.
The administration regards this as a crass political tactic, designed to yield tax breaks and higher profits for the oil companies and to repeal the environmental controls and to sabotage conservation objectives that the society needs.
"It really distresses me," said Schlesigner, "that that kind of rubbish captivates the minds of the captains of our industry, because it obviously is almost all wrong."
But the industry message, whatever the motives, suggests that the country is worrying about the wrong thing, that the "energy crisis" (if there is truly going to be depletion a crisis) is not so much about the depletion of energy resources, but about the system of private enterprise and public regulation with governs the delivery of energy to consumers. There are fundamental conflicts between the private interests of the energy companies and national goals of the Carter administration.
Mobil Oil, as you may have noticed, began a new national ad campaign last week, beginning with this provocative assertion in bold headlines:
"We'd like to challenge those who say we have to live with a long-term shortage of energy."
Mobil, the third largest of the seven majors, admitted: "Sounds crazy, an oil company saying there is no energy shortage. But there isn't . . . There is no good reason from the standpoint of availability of physical energy resources why the U.S. should consider massive changes in lifestyle or limitations on the energy growth needed for economic well-being and social progress."
At a private meeting last week in Chicago, top executives from other oil majors agreed to push the Mobil line in their public positions - in effect, shedding the "energy shortage" from their public tall. "Others industry authorities have been saying the same thing, a bit less flamboyantly, for some weeks.
Charles J. DiBona, the Nixon energy adviser who is now executive vice president of the American Petroleum Institute, proclaims:
"I think that much of the problem derives from a widespread, underlying philosophy in the administration that we're running out of oil and gas. No doubt our fossil fuel resources are finite. But there is a fundamental misconception about how soon they will be exhausted - or even more serious how supplies can be affected by changes in producer incentives."
Bruce Wilson, petroleum-industry analyst for a major investment-banking firm, insists:
"There's plenty of oil and gas in the world. It's a function of price, I don't see us running out worldwide, I really don't. It's there for a price."
The August editorial page of The Wall Street Journal crankily cites government studies to support the claim that there is "1,001 years of natural gas" left in America alone - if only the government will repeal price controls.
John Moody, president of the American Association of Petroleum Geologists, contends: "We are not faced with an overall energy shortage. We are faced with an energy availability shortage because of the economic pressure that force us to use our low-entropy [easily convertible] energy first."
Moody, by the way, likes to point out that Middle East oil, crucial as it is, represents only 1 per cent of the world's potential energy sources, from coal to tar sands to oil shale to undiscovered natural gas, on and on.
At this point. The average reader of ordinary intelligence has a right to feel confused. The public has been hearing for several years, from politicians and petroleum executives, that the United States is "running out" of its principal fuels - high-grade petroleum and natural gas.
In the broad sense, that is still true. Everyone agrees that conventional sources of oil and gas the cheap oil and gas have a limited future within the United States (though there is still intense controversy over the worldwide potential for discovering new oil). Everyone recognizes that this country will be shifting to a new generation of fuels in the next two decades - including new forms of oil and gas, extracted from formations which are not profitable now refined by processes which will convert low-grade "gunk" into competitive products.
But the argument begins here; when will these transactions become necessary? And: how much will they cost?
This is a question of government-corporate economics and it will not be resolved this season or next. This debate will be raging a decade from now. The Mobile ads call it a "deliverability crisis" and, in effect, the industry is blaming the government before the fact: if an energy "gap" develops in the 1980's, blame your Uncle Sam for his meddling.
While the Carter administration has dwelt upon resources "running out" as a theme which would engage public sensibilities, government energy planners in private agree that the heart of the problem is this question of delivery. Government officials predict, however, that if disastrous shortages do develop in the next decade, public outrage will turn on Houston, not Washington.
"Unless they shape up," warned "they [the oil companies] are going to bring on what they have always said they wanted to avoid which is a serious degree of government control and possibly ultimately - nationalization."
To understand what these people are arguing over, there are certain fundamental verities about the oil business that are crucial to every issue of the "energy crisis":
Oil companies, as any profit-minded corporation would do will always go first to the cheapest sources of fuel - the easy oil with the best profit margin. In time, as that oil runs out, the industry moves on to the more expensive sources - whether it means drilling deeper wells or building ocean platforms - but only when the price is high enough to maintain the profit margin.
For instance, California alone has something like 35 billion barrels of so-called heavy oil in the ground (some estimates claim there are 100 billion barrels). But this "gunk" oil largely ignored.Some of it gets pumped and refined into asphalt, but basically it doesn't pay.
The California "gunk" is not even counted in the U.S. proven reserves (if it were, the reserves would nearly double). Beyond our shores, the Venezuelans have an estimated 700 billion barrels more of this stuff - also too costly to produce at current prices.
When anyone talks about "reserves," whether it's a government expert of an oil-company lobbyist's total survey of minerals in the ground. They are talking about the potential minerals that could be extracted profitably at the current prices. Thus, reserve figures tend to increase when the price goes up or when new technology suddently renders "unprofitable" resources available at competitive prices.
This "reserves" business is a crucial variable in the energy debate because the question of how much oil is really out there influences decisions about how much people are willing to pay for it and what kinds of oil are worth extracting. If oil is scarce, people will pay more. Thus, every player - oil companies and foreign governments - has a vested interest in understanding the "reserves."
Saudi Arabia, for example, lists it "official" reserves as 177.5 billion barrels. But everyone in industry and government acknowledges that Saudi reserves are well in excess of 200 billion barrels. One vast section of the Arabian peninsula - known among oilmen as "the empty quarter" - has hardly been explored yet.
The North Sea fields owned by Britain and Norway are, likewise, subject to argument over their true size. One Dutch every expert predicts that there is enough oil and gas in the North Sea to make Western Europe "energy independent" if it is fully exploited. Even if he is wildly off the mark, that estimate is still billions of barrels more than either government has suggested. Socialist Britain, like a private oil company, has to be careful not to dampen the price by talking to bullishly about potential reserves.
The pivot point which connects there verities into one equation is price. Typically, an oil company will cast its capital forward in a five-to-seven-year cycle - calculating which of these various sources of oil or gas or any other fuel will be profitable by the time the well is pumping or the coal mine is producing or whatever. The price of the future is the key to all these calculations.
The classic illustration from American oil lore is the bountiful Oklahoma oilfield owned by the Osage Indians. It was "pumped dry" in the 1920s. Even so, Phillips Petroleum held onto the rights and waited for the price to rise and more efficent recovery methods to be developed. A generation later, Phillips reopened the Osage wells and, using enhanced recover techniques, began pumping profitable oil again.
At the moment, incidentally, congressional studies estimate that America can gain an additional 51 billion barrels of oil reserves from new technology for enchanced recover. How is that possible? on the average, an oil well only recovers about 40 per cent of the oil beneath it. America is sitting theoretically on 300 billion barrels of high-grade oil which is "lost" under current technology and price.
Reserves, price and profit. These are the factors, in endless variables, which guide the private decision-making that will determine whether Americans get the energy they need. The energy "gap" at this moment is one of perceptions: the Carter administration argues that the price is right for the companies to embark upon all the changes which Amerca needs - toward other fuels, toward increased exploration and production. But the companies are still complaining. The price isn't right, they say, the risk is too great.
So what is the magic price which will keep the energy flowing? No matter what experts tell you, the short answer is that nobody knows. It has nothing to do with how much it costs to produce the oil. Saudi oil costs as little as 25 cents to get out of the ground; it sells now for about $14 a barrel, a profit margin split between the Arabs and the oil companies. The oil companies would love to maintain that sort of markup on everything they sell, but there is not inexorable rule of commerce that requires the government to give them everything they want.
The government, in fact, faces bad choices: It can hold down the price to what it considers a reasonable rate-of-return and run the risk of shortages when the companies refuse to produce - such the natural-gas shortages last winter. Or it can give the companies the higher prices they demand - and produce devastating economic effects including huge transfers of income from all consumers to a few producers, not to mention inflation and increased burdens on the poor.
This much is certain from past experience: whatever the price is, the oil companies will argue for more. In the late 1960s, they were asking for $3 a barrel. in 1972, they said $5 or $6 a barrel would be plenty, enough even to make some snythetic fuels profitable. Now the price is $13.50 and it's not enough.
This disagreement about the future is virtually theological. Are the oil companies, once again, "wallowing in self-pity," as one top energy adviser suggests? Or must oil climb to $25 a barrel, twice the current price, to avoid that future "energy gap?"
The oil people, inspired by their "free booter" heritage, tend to believe that the dynamic of their industrial past will carry us successfully into the future, unlocking new pools of energy when the price is right, if only the government will remove the constraints of price control and other regulations.
The apostles of conservation, led by the Carter administration, insist that mankind is at a different crossroads now - that the old system of price-and-discovery can't keep up with the world's exponential growth in demand, that someday the energy delivery system will be overwhelmed unless the government convinces consumers and producers to reduce their appetites now. This warning does not include the other threat - the possibility of another oil embargo from the Middle East.
The Carter plan predicts that this "gap" or "shortfall" will occur by 1985 unless dramatic changes are made before then. That projection is widely disputed because one of its key premises is the Central Intelligence Agency's prophecy that the Soviet Union and its satellites - which now sell energy to other nations - will be importing 3.5 million barrels a day by 1985. This prediction, unveiled by the White House when President Carter announced his energy plan, is now regarded with considerable skepticism, not only by outside oil experts, but also by Schlesinger.
Yet administration officials would still say that this is looking at the hole instead of the doughnut - give or take a few years, the "gap" is out there waiting for us.
The idea of a "gap" or an impending "crisis" has its political uses - goading the public to do things it might not wish to do - but there are numerous skeptics who think it is a bogus concept. "Gapology," they call it. These include neutral experts, economists and social thinkers, who have no allegiance to the oil industry but who think the dynamic of price-and-profit will prove stronger than government edicts.
"For 30 years," said Morris E. Adelman, Massachusetts Institute of Technology economist, "the oil industry has been saying there's a surplus now, but rising consumption is going to drive it out. That's what President Carter has been saying in a spectacular way."
Here is Adelman's "gasology" rule: "Gaps arise and, as you go toward the gap, it recedes. The price may go up, but there ain't going to be no gap."
The assumption is that, as scarcity looms, the society reacts - in both public and private decisions. It begins to conserve. It raises prices. It develops alternative fuels. It steps up exploration. All these actions push the gap further off into the future.
But if "gaspology" is the reality, then what's the problem? Schlesinger and the Carter planners have identified a more profound predicament - replacing what they call America's "capital goods stock" from the profligate past to a future which will compel greater efficiency.
This is truly an epochal problem. The "capital stock" involves virtually every machine or building or appliance which consumes energy, from automobiles and refrigerators to skyscrapers and steel mills. At present, virtually all of the nation's "capital stock" was designed to run on low-cost and abundant energy which we could afford to waste. Now rather suddenly that easy past is gone - and over time America has to make the transition to new generations of technology that don't guzzle oil. There is nothing mysterious about how to do this; it can be done. But the question again is: how fast must it happed to avoid crisis. And at what cost?
The all-energy companies profess to see another obstacle in the various government laws enacted to protect air and water from further degradation. As typified by the Mobil ads, the industry has still not accepted the notion that environmental controls are an expression of political and cultural values it must learn to live with.
The environmentalists, on the other hand, who generally support the idea of an "energy crisis," who trumpet alarms about a world "running out" of everything, make their own cultural argument against what society wants, bordering on moralistic sermons. Generally, they portray Americans as vulgarly wasteful, living too luxuriously for their own good or that of human history. They would like to repeal many of the living standards which most citizens clearly want to keep: the comforts of high-energy machines like air conditioners, the high growth rates which spread jobs and affluence through the society.
So here is where we are now: the government proposes to goad us into doing things more efficiently - buying cars that burn less gasoline per mile, turning down the thermostat, converting factories from natural gas to coal, building new office buildings that save energy, not waste it.
But here is where the collision occurs - there are layers and layers of crucial decisions that the government cannot control for the society's good - decisions about where people invest their capital to make a profit. The government can provide tax incentives, it can plead and threaten. But these thousands of private decisions are made in accordance with those old rules - reserves, price and profits.
For instance, if an oil company wants to get serious about developing that "gunk" oil in California or Venezuela, its experts ask themselves: will the market support $25 a barrel seven or eight years from now when that new refinery is built and the "gunk" oil comes "on stream"?
The private answer right now is a whispered "no." The private answer is also "no" to other exotic possibilities such as coal gasification and oil shale and tar sands and geopressure brine and other hydrocarbons that are there to be marketed, once the price is right.
This is not merely a case of capitalist greed. If an oil company decides to take the risk on something new and the market price is still geared to cheaper oil, that company loses enormously. If Exxon or Mobil spends a quarter of a billion dollars on a coal synthetics plant right now, it wants to be sure that the world will be ready for high-priced coal synthetics by 1985. If it isn't, that $250 million is a drag on profits.
MIT economist Adelman observes "I don't thinks people with the money to invest really do believe it [the predictions of an energy gap]. If they really believed the price forecasts they would be out there developing oil shale or coal synthetics or whatever."
Instead, industry is urging the federal government to assume the development risks on so-called exotics with public money. Oil companies are drilling thousands of new oil-and-gas wells in America but, according to A. V. Jones of the Independent Petroleum Association of America, 90 per cent of those new wells are drilled within one mile of existing wells. In other words drill where the investment is a lot less risky.
If the energy companies are not putting their money on the high-risk ventures that the government claim; are needed, where are they putting it? One answer is overseas - in the reliable fields where they know there is lots more oil. According to a recent report from the Commerce Department and the Conference Board, U.S. companies are investing $11.1 billion this year in overseas petroleum development - mainly in the Middle East and Britain's North Sea. Oil capita flows first to easy oil.
President Carter's energy adviser; would argue that these oilmen are following wrongheaded traditions that are liable to get the whole nation in trouble - pushing us toward that "energy gap" which might freeze the U.S. economy in its tracks.
But skeptics think the oil companies know exactly what they're doing - following the best price first in the certain knowledge that oil has a much brighter future than the political alarums indicate. When the companies think the price is right, the skeptic predict, the companies will go after the "gunk" and all the other alternatives.
It's easy to see where this argument is headed, not just this season or next but over the coming decade. If the private decisions by the companies continue to conflict with the public goals, political frustrations will increase. A government held hostage will threaten to take greater control over the machinery that delivers the energy - the companies.
Some hesitant political movement is already headed in that direction. The Senate voted a week ago to authorized the government explore its own offshore oil resources - hiring private companies to do it for them. If government exploration proceeds, the next logical question will be: why sell the public's oil to the oil companies when the governemnt can hire them to pump it for the people?
The oilmen have a quick answer for that one: "If you like the Post Office you'll love nationalized oil."
In the meantime, if a disastrious shortage does develop, who is to blame? Industry or government?
In that regard, a highly place administration official predicts: "The United States government, whatever it lacks in capacity, has the capacity to out-demogogue the oil industry."