Podcast: Crude Oil Economics and Energy Policy
What Happens When They Don’t Agree?
with Ed Hirs, University of Houston | DJ Resources, Inc.
What are the goals of current energy policy as a whole?
First, consider a quick look at overall U.S. energy priorities to help set the context for crude oil policy goals. While a key goal is to eliminate dependence on foreign crude, this goal is a part of a larger energy policy.
- Improve electricity transmission
- Double supply of renewable energy
- Eliminate carbon emissions
- Establish efficient natural gas transmission system
- Eliminate dependence on foreign crude
Historical Notes & Past Policies
Next, consider past policies as related to crude oil. Here's a short summary of key policy starting in the late 1950's with the Eisenhower administration.
Eisenhower Administration
- Introduced mandatory crude oil import quota (1959 - 1974)
- Eisenhower recognized the national security issues related to a secure source crude oil and thus limited imports
- During this period, U.S. crude oil prices were as much as double that of world oil prices
- The state of Texas, not Saudi Arabia, was the major swing producer at the time
Nixon Administration
- A tremendous run of inflation influenced the U.S. to abandon the mandatory crude oil import quota. As U.S. production reached maximum output, the U.S. began to access additional foreign crude supplies.
- Crude oil prices began to dominate the U.S. economy, and in response to inflation, price controls were applied to oil production. U.S. oil companies responded by moving offshore to develop more supplies.
- Based on embargo issues, the strategic petroleum reserve was created in 1973. As a security reserve, this resource was to replace roughly 20% of current U.S. consumption for four months.
Energy Independence: What would energy independence cost for crude oil? What would it take to achieve energy independence based on supply, demand, and elasticity? The U.S. is energy independent for natural gas, coal and electricity, but not for crude oil.
U.S. Crude Oil Demand: In 2009, crude consumption was approximately 17 million barrels per day. This is down from 20 million barrels per day in 2007. In 2009, roughly 7 million barrels per day went to plastics and chemicals production. 10 million barrels per day was related to transportation.
Elasticity of Demand: The elasticity of demand is important to understand. This elasticity is the relationship between the price of oil and the resulting demand. The near-term elasticity of demand for crude oil is e(d) = -0.11. Thus a 1.0% increase in price results in only a 0.11% decrease in demand. Note, the demand for oil is relatively inelastic. As a result, doubling of oil prices won’t have a dramatic impact on consumption. Doubling of prices won’t stop Americans from commuting to work.
Elasticity of Supply: The elasticity of supply is similarly relatively inelastic. An estimate of the elasticity of supply is e(s) = 0.35.
Replacement of Supply: Estimating that the U.S. requires 13 million barrels (bbls) of oil per day to replace foreign oil imports, consider possible replacement sources. This is a significant capacity to replace and will require the combination of several alternatives. Many alternatives are higher marginal cost resources, but with the potential future cost of oil in excess of $200 per barrel, these become very economic.
Biofuels: Biofuels may provide 2 million Barrels of Oil Equivalent per Day (BOEPD) based on recent mandates. This includes biodiesel and ethanol substitutes that are readily available in the United States.
Conservation: Conservation may account for as much as 4 million BOEPD over the next decade.
Other Potential Supplies:
- Coal to Liquids (CTL), a technology that’s been used in Africa
- Gas to Liquids, a technology being used in Qatar
- Tar Sand or Shale Oil
Increased Domestic Supply: The United States Government has withdrawn oil lands in order to conserve this asset. However, conservation of strategic resources is an age-old problem. In the 1931 Economics of Exhaustible Resources by Stanford professor Harold Hotelling, he wrote "The government of the United States under the present administration has withdrawn oil lands from entry in order to conserve this asset." In fact, one of the questions currently facing the U.S. is how do we husband our resources for our own benefit? Maybe it’s time we start to act more in our own interest, not just for national security reasons but also for domestic economic purposes.
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