Editor’s Note: The following report was prepared by the American Petroleum Institute’s John Felmy, Chief Economist and Director of Policy Analysis and Statistics, and was forwarded to Ammonite by the US Senate Energy Committee staff. The energy statistics indicate how urgent it is for the United States to implement a comprehensive energy policy – and soon!

The State of the U.S. Energy Industry

American Petroleum Institute

     The fuel supply challenges that faced the United States over this past year are only the most recent reminders that our nation has fallen far short of addressing our energy needs in a sustainable, strategic fashion.

     U.S. crude oil production has declined by 40 percent over the last 30 years. At the same time, consumption has increased by 36 percent. As a result, imports have increased from 23 percent of demand to today’s level of about 57 percent. U.S. production of natural gas declined 14 percent between 1973 and 1999 and has been virtually flat for the past seven years.

     While the current energy market places tremendous burdens on consumers, it could get worse. According to the U.S. Department of Energy’s Energy Information Administration (EIA), Annual Energy Outlook 2001 (AEO) demand for energy will increase substantially between 1999 and 2020:

Real Gross Domestic Product is projected to increase by 86 percent
Total energy consumption is forecasted to increase by 32 percent
Petroleum demand is projected to increase by 33 percent
Natural gas demand is projected to increase by 62 percent
Coal demand is projected to increase by 22 percent
Electricity demand is projected to increase by 45 percent
Renewable energy supply is projected to increase by 26 percent
Nuclear energy is projected to decline by 11 percent
Energy efficiency (output per unit of energy) is projected to improve by 37 percent
Net petroleum imports are projected to increase, providing 64 percent of U.S. demand in 2020.
Growth in petroleum demand is led by transportation, where efficiency improvements are more than offset by growing travel demand and petroleum’s market share increases slightly.
Crude oil production falls by 14 percent.
Imports of crude oil grow by 40 percent.
Petroleum product imports increase by 148 percent.
Refinery capacity expands from 16.5 to 18.2 million barrels per day
Refinery utilization increases from 93 to 95 percent.

     The AEO results imply massive investments in infrastructure to produce and deliver energy to American consumers. The record to date does not give one confidence that the current regulatory structure will support these investments. The AEO forecast projects an increase in refinery capacity of 1.7 million barrels per day and an increase in refinery utilization. If this is new capacity, it could mean the construction of 8-10 new refineries. We have not built a new large-scale refinery in over 20 years. How are we going to do this? Similarly, the forecast for oil and natural gas consumption implies the construction of major new petroleum products and natural gas pipelines. Other natural gas and petroleum facilities will be needed to meet the increased demand. How are we going to do this given the daunting regulatory apparatus? The answer is that we need to develop and implement an energy policy that focuses on adequacy of supply to meet the growing needs of consumers. The goal should be the provision of reliable and affordable supplies of energy to consumers.

     Energy policy must focus on infrastructure needs and plans to facilitate the increased investments in the required infrastructure put in place. The Energy Policy must take into account all sources of energy because a deficiency in any one source can have a major impact on other energy sources. Investments in energy efficiency infrastructure must be carefully considered, but it is important to note that improved energy efficiency alone will be insufficient to meet future needs. This is because the energy-using equipment turns over slowly. For example, 90 percent of cars purchased today will be on the road 8 years from today. Most other energy-using equipment lasts much longer. The equipment’s energy efficiency is locked in until it is retired and early retirement is very expensive to society. The increased energy demand can only be met with substantial investments in energy supply infrastructure.

     If we are to continue America’s economic growth and continue creating jobs and wealth across the country, we must have the affordable, reliable energy that fuels our economy and supports our way of life. Congress must develop cost-effective mechanisms for increasing domestic supply. Environmental concerns must be addressed, and these can be best dealt with through free-market-based incentives, which provide the best foundation for cost-effective solutions.

For more information, please contact John Felmy, Chief Economist and Director of Policy Analysis and Statistics, the American Petroleum Institute (202) 682-8530 or felmyj@api.org.

Where do we stand vis-à-vis past energy shocks?

	1974	1979	1981	2000 ytd
Oil import share of consumption %	36.7	45.3	35.7	56.6
OPEC share of imports %	53.7	66.7	55.4	46.0
Petroleum demand mmbd	16.65	18.51	16.06	19.49
Crude oil production mmbd	8.77	8.55	8.57	5.84
Natural Gas Plant Liquids mmbd	1.69	1.58	1.61	1.74
Crude oil imports mmbd	3.48	6.52	4.40	8.88
Products imports mmbd	2.64	1.94	1.60	2.15
Well success %	63.2	69.2	69.6	80.3
Well depth feet	4662	4689	4512	6105
Well cost real $1,000	482	782	855	769
Oil reserves Bbbl	34.3	31.2	31.0	22.7
Gas reserves tcf	250.0	208.3	209.4	167
Real oil price – current $	31.52	41.81	66.41	30.52
Refineries	273	308	315	155
Refinery capacity mmbd	14.36	17.44	18.62	16.52
Capacity utilization %	86.6	84.4	68.6	92.6

     These figures reveal that we are far more dependent on foreign sources of energy, we have depleted our reserves of oil and natural gas to meet the needs of consumers and have been restricted from looking for oil and natural gas in the most promising areas of our country. Where we have been able to drill, we have had to drill deeper, but we have dramatically improved technology, so that our success rate for wells has improved dramatically and the cost per well is lower. Fortunately, the most important difference now is that we do not have price and allocation controls that disrupted markets and brought gas lines and absolute shortages of natural gas.

U.S. Energy Infrastructure

× U.S. crude oil production peaked in 1970 at 9.6 million B/D. In 2000, it averaged 5.8 million B/D, some 40 percent less than 30 years earlier.

× Over the same period of time, imports as a percentage of U.S. petroleum deliveries rose from 23.3 percent to 56.6 percent.

× Proved crude oil reserves stood at 39 billion barrels at the start of 1971. By 1999, they had declined by over one-third to 22.7 billion barrels.

× In 1981, 315 oil refineries operated in the U.S. with a cumulative capacity of 18.6 million B/D of crude oil and other inputs. In the first half of 2000, the 155 remaining refineries had a cumulative capacity of 16.5 million B/D.

× U.S. production of dry natural gas peaked in 1973 at 21.7 trillion cubic feet.  By 1999, production had fallen almost 14 percent to 18.7 trillion cubic feet.

× Over the same period of time, natural gas imports as a percentage of U.S. consumption rose from 4.3 percent to 15.8 percent.

× Proved U.S. natural gas reserves have fallen by one-third over the last 20 years. In 1974, they stood at 250 trillion cubic feet. By 2000, they had fallen to 167 trillion cubic feet.

× Employment in crude oil and natural gas extraction averaged 708,000 in 1982. By 1999, payrolls had shrunk by almost 60 percent to 293,000. At the same time, payroll employment in all other sectors of the economy rose by 44 percent.

× Electric utility net summer capability was 641.5 million kilowatts in 1999, its lowest value since 1984. It has dropped nearly 10 percent since its 1995 peak of 709.9 million kilowatts.

× Meanwhile, energy usage has seen almost unabated growth. End-use consumption increased 18.6 percent from in the last 20 years, rising from 81 quadrillion Btu to 98.3 quadrillion Btu.

× No orders for new nuclear power generating units have been placed since 1978.

× No construction permits for nuclear power plants have been granted since 1979.

× The last new nuclear electric generating unit became operable in 1996. Only four units have come "on-line" since 1990.

× Since 1970, utilities have cancelled plans for 124 nuclear generating units. As of the end of 1999, only 104 units were actually operating.

API, February 2001

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