U'S' Energy Policy

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U.S. Energy Policy

• Facts and Fiction
• Problems and Challenges

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U.S. Energy Sources

• Petroleum
• Natural Gas
• Coal
• Nuclear Energy
• Renewable Resources

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Energy Consumption by Source, 1635-2000
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U.S. Petroleum Consumption

• U.S. Petroleum Consumption is 20,687,000
  barrels/day
• U.S. Net Petroleum Imports 12,390,000 barrels/day
• Dependence on Net Petroleum Imports 58.2
• The five largest importer countries are Canada
  (18 ), Saudi Arabia (16 ), Mexico (14 ),
  Venezuela (11), and Nigeria (10 ) which account
  for more than 2/3s of US imports. Other OPEC
  countries account for another 12 .
• U.S. Motor Gasoline Consumption 9,253,000
  barrels/day
• Total World Oil Production (2005) 82,532,000
  barrels/day

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World Petroleum Consumption

• Chinas demand for petroleum has increased from
  3,3 million barrels per day in 1995 barrels to
  6.7 million in 2005.
• Indias demand increased from 1.5 to 2.4 million.
• Total demand in Asia increased from 17.8 million
  to 23.8 while demand in Europe increased from
  15.3 to 16.2.

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Domestic Crude Oil Production
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Imported Crude Oil Price
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Real and Nominal Gasoline Price
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Explaining the Recent Price Increases

• The supply of oil can be modeled as an optimal
  dynamic resource extraction problem the key
  decision is whether to sell now or to sell later
  (when prices may be higher).
• Thus the supply of oil not only depends on the
  current price, but also expectations about future
  prices.
• Owners of oil will adjust their production and
  inventories until the price of oil is expected to
  rise at the rate of interest, appropriately
  adjusted for risk.
• Oil producers concluded that the demand for oil
  in China and some other countries will grow more
  rapidly in future years than they had previously
  expected.
• They inferred that the future price of oil would
  be higher than they had previously believed. They
  responded by reducing supply and raising the spot
  price enough to bring the expected price rise
  back to its initial rate.
• Hence, with a small change in the current demand
  for oil, the expectation of a greater future
  demand and a higher future price caused the
  current price to rise
• Note that the same theory explains why prices
  have come down due to the world wide recession.

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Gasoline Tax Policy

• Federal Motor Gasoline Tax 18.4 cents/gallon
• Average State Tax is 21.44 cents/gallon.
• Pennsylvania charges 32.2 cents/gallon.
• Total gasoline tax revenues were approximately
  60 billion dollars in the US in 2004.
• US gasoline taxes are much lower than in most
  other industrialized countries.
• Since gasoline taxes are relatively low,
  suspending or lowering taxes does not seem to be
  a reasonable policy.

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Oil- and Transportation related Infrastructure

• Federal, state, and local governments provide a
  variety of oil- and transportation-related
  infrastructures and services.
• Some of these expenditures are financed through
  earmarked user fees, such as dedicated highway
  fuel taxes and vehicle registration fees.
• Large government outlays remain that must be
  covered by general revenue.
• Funding these programs would become more
  problematic if the gasoline tax was lowered.
• We thus conclude that there are few economic
  reasons for lowering the federal or state
  gasoline tax.

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The U.S. Oil Industry

• The US oil industry is dominated by a small
  number of large firms such as ExxonMobile, Shell,
  BP, Chevron.
• Some economists, politicians, and journalists
  have blamed these companies for the recent price
  increases.
• It is, therefore, useful to take a closer look at
  the profitability of the industry and discuss the
  scope and role of government subsidies for the
  industry.

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Total Gas Tax Revenues and Profits of Oil
Companies 1977-2004
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Oil Industry Profits (2001-2007)
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Why have profits increased?

• Oil companies own oil reserves that have
  appreciated in value with the increase in oil
  prices.
• It costs oil companies less than 10 per barrel
  to extract and ship a barrel of oil.
• The finding costs to explore and develop an oil
  field range from 5 per barrel in the Middle East
  to 67 per barrel off of the U.S. coast. These
  are production costs.
• So when the market price jumps due to demand
  increases, speculators, political unrest, supply
  disruption, or other similar events, the oil
  company will benefit from these price increases
  since it bears the risk (Notice it would loose
  money if prices declined).
• Some economists call these profits windfall
  gains, which is somewhat misleading. These
  profits are risk premina.
• Oil companies also can make profits by signing
  long term contracts that guarantee the producers
  a certain price. These long term contracts
  partially work like call options. If the sport
  market price exceeds the price guaranteed in the
  contract, the oil company will benefit from this
  risky investment.

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Direct and Indirect Subsidies

• Critics of the US oil industry have also argued
  that there a variety of direct and indirect
  public subsidies. These include the following
• reduced corporate income taxes for the oil
  industry (average corporate tax rate of 11
  compared to 18 which is the non-oil industry
  average)
• lower than average sales taxes on gasoline state
  and local governments taxed gasoline at about
  half the rate as other goods -- approximately 3
  versus 6
• government funding of programs that primarily
  benefit the oil industry and motorists
• "hidden" environmental costs caused by motor
  vehicles, namely air, water, and noise pollution

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Natural Gas

• Natural gas is primarily used for residential and
  industrial heating.
• U.S. Production 18,476 billion cubic feet
• U.S. Consumption 21,653 billion cubic feet
• U.S. Imports 4,186 billion cubic feet, (most of
  it comes via pipeline from Canada.)
• To export natural gas over longer distances, gas
  is typically liquefied. Liquefied Natural Gas
  (LNG) can be then exported just like crude oil.
  LNG Imports currently are 584 billion cubic feet

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Coal

• Coal is primarily used for electricity production
  (49.7 of total energy generation).
• Since 1976, coal has been the least expensive
  fossil fuel used to generate electricity.
• In the United States, coal resources are larger
  than remaining natural gas and oil resources.
• When coal is burned as fuel, it gives off carbon
  dioxide (CO2), the main greenhouse gas that is
  linked with global warming.
• Burning coal also produces emissions, such as
  sulfur, nitrogen oxide (NOx), and mercury, that
  can pollute the air and water. Sulfur mixes with
  oxygen to form sulfur dioxide (SO2), a chemical
  that can affect trees and water when it combines
  with moisture to produce acid rain.

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Nuclear Power

• Nuclear power accounts for about 19 percent of
  the total net electricity generated in the US.
• Nuclear share of electricity in selected
  countries France (79.) , Germany (27 ), Japan
  (27 ), and UK (20 ).
• In 2006, there were 66 nuclear power plants
  (composed of 104 licensed nuclear reactors). 
• Compared to electricity generated by burning
  fossil fuels, nuclear energy is clean. Nuclear
  power plants produce no air pollution or carbon
  dioxide.
• Nuclear power may be cost efficient.
• A great concern in the nuclear power field is the
  safe disposal and isolation of spent fuel from
  reactors. There is much opposition against the
  planned storage site at Yucca Mountain.
• There is a risk of a large accident (Three Mile
  Island, Chernobyl, etc.)

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Renewable Energy

• Renewable energy resources are naturally
  replenished in a relatively short period of time.
  They include biomass, hydropower, geothermal
  energy, wind energy, and solar energy. In 2005,
  about 6 of all energy consumed, and about 9 of
  total electricity production was from renewable
  energy sources.
• Alternative transportation fuels are fuels used
  for transportation other than gasoline or diesel.
  Some alternative transportation fuels, such as
  ethanol and biodiesel, are renewable while
  others, such as propane and natural gas, are
  non-renewable

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Contribution of Renewable Energy to U.S.
Consumption, 2004
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U.S. Electricity Generation by Energy Source ,
2004
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Type of Renewable Energy Consumption by Sector,
2004
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The U.S. Department of Energy

• The Department of Energy's overarching mission is
  to advance the national, economic, and energy
  security of the United States to promote
  scientific and technological innovation in
  support of that mission and to ensure the
  environmental cleanup of the national nuclear
  weapons complex.
• Energy Security  Promoting Americas energy
  security through reliable, clean, and affordable
  energy   (4.1 billion in 2008). 1.7 billion
  were allocated to increase energy efficiency and
  the use of renewable energies.
• Nuclear Security  Ensuring Americas nuclear
  security  (8.8 billion dollars). Most of this is
  used to safeguard US nuclear weapons and prevent
  terrorists from acquiring nuclear weapons abroad.
• Scientific Discovery and Innovation
   Strengthening U.S. scientific discovery,
  economic competitiveness, and improving quality
  of life through innovations in science and
  technology   (3.9 billion)
• Environmental Responsibility  Protecting the
  environment by providing a responsible resolution
  to the environmental legacy of nuclear weapons
  production  (6.4 billion)