We rely on imports for half our oil. We are dangerously vulnerable to reductions or interruptions in the flow of this oil from Iran that such reductions can come swiftly and unexpectedly. Other importers, such as Western Europe and Japan, are even more vulnerable because they get most of their oil from the Middle East. How can the oil importers reduce their vulnerability?
We have a good model in this country.It was the way we created a market for energy-efficient cars. The government set targets for gasoline efficiency, which car makers had to meet or pay large penalties. When the program began in 1975 cars averaged 13 miles per gallon. In a series of steps over 10 years the average fuel efficiency of cars made in a given year had to go up to 27.5 mpg in 1985. The government mandate said nothing about how to improve the fuel efficiency of cars. It said only what the result must be and developed systems for measuring car fuel efficiency.
Cars makers groaned that it couldn't be done especially because polluting exhaust emissions had to be reduced too. They said Americans wouldn't buy the cars. But the government held fast. Engineers were brought back into the front room in Detroit and a revolution in American car design followed, which is illustrated by the GM X series of front-wheel-drive cars. Without this mandate by the government, where would Detroit stand today since buyers put gas mileage high on their requirements in a new car? Imports are more fuel efficient and set a record volume of sales last month as U.S. car production dropped 10 percent.
We can reduce oil imports in the same way by creating a synthetic fuels (synfuels) industry based on our abundant reserves of coal and oil shale. Alcohol from crops can contribute too.
The povernment should require oil refineries to use synfuels for a rising percentage of their feed into the refinery, which produces gasoline, jet fuel, hearing oil and other products. It should make them pay a penalty if they fail to meet the required synfuels quota. The penalties should be high enough to be a real incentive, for example, twice the price per barrel the refiner pays for conventional oil.
The government must do two other things to get the synfuels industry moving. First, it must guarantee not to reduce synfuels quotas, because those who invest billions to build synfuels plants must be protected against loss of the synfuels market in the unlikely event that another Saudi Arabia is discovered and conventional oil prices fall. The other thing the government must do is to greatly expedite the procedures for acquiring sites and permits to build and operate very large plants of a new kind. We might still have no oil from Alaska if the government had not acted to clear the way for construction of the Alaska pipeline.
Even a crash synfuels in less than five years.in to produce a flow of synfuels in less than five years. But now we must take the steps necessary to reduce our oil import vulnerability.
The government should require oil refineries to use synfuels for 1 percent of their feed in 1985 rising to 10 percent by 1990. This would require 4 synfuels plants of 50,000 barrels a day costing $1.5 billion each by 1985 and 40 plants by 1990 producing synfuels at about $35 a barrel. This based on refinery feed at 20 million barrels a day, half of which is imported. If growing demand increased refinery feed, more plants would be needed. Part of the synfuels output is synthetic natural gas, which should begin to replace natural gas. Thus 50 to 60 plants might be needed to produce 2 mbd of liquids, which now amounts to 10 percent of our oil needs and 20 percent of our imports.
Forty synfuels plants would cost $60 billion in 1979 dollars. The mines and transportation system to supply the necessary 250 million tons of coal would cost another $10 to $15 billion. All of this investment would be private capital - none would be supplied by the government.
The customers for synfuels would be the refiners who would buy the best synfuels at the best price, which is just what the competitive private market brings about. Choice of process and product mix would cease to be a matter for decision by government bureaucrats. Instead, sophisticated buyers would determine products and prices that should be set by the market.