Doing nothing on energy

Jan. 29, 2001
An electricity crisis in California and refinery closure in Illinois sound loud alarms about energy in the US.

An electricity crisis in California and refinery closure in Illinois sound loud alarms about energy in the US. Both events show what happens when do-nothing environmentalism prevails over energy supply. Both show how the politics of energy must change.

The crisis in California arose out of a political system that discourages energy development. At the core of the state's ruinous electricity shortage lies a chronic deficiency of generation capacity. It developed because acquiring permits to build power plants in California is difficult and time-consuming.

To California's misfortune, demand hit capacity limits last year just as prices surged for natural gas, regional competition for which had become intense. Historically averse to offshore drilling, the state relies more heavily than it should on gas from outside its borders.

Over the years, California received warnings aplenty about the costs of restraining energy supply. When proposals arise for specific projects, however, it too frequently opts to do nothing.

Sign of danger

The US must not follow its bellwether state down the same costly path. Closure of Premcor Inc.'s 76,000 b/d refinery at Blue Island, Ill., however, is a clear sign of danger.

Premcor, formerly Clark Refining Holdings Inc., blamed environmental regulation for its decision. It said the refinery couldn't produce adequate returns on investments required by imminent limits on the sulfur content of oil products. It had invested $70 million in the plant since 1995 (see Newsletter, p. 9).

The refinery-killing regulations are the Environmental Protection Agency's 1999 rule lowering sulfur concentrations in gasoline to 30 ppm from 300 ppm starting in 2005 and its proposal last May to cut sulfur in diesel to 15 ppm from 500 ppm by mid-2006. In each case, EPA regulated to the maximum possible extent. And in each case, it could have achieved equivalent environmental benefit with a more-measured, less-costly approach.

So a refinery surrenders to aggressive regulation with the US industry already unable to meet domestic requirements for oil products from existing facilities. The country imports about 10% of the products it needs, along with 60% of its crude.

Refining capacity, now 16.5 million b/d, grows incrementally if at all, mainly through debottlenecking as companies add processing units behind distillation units. Capacity growth of this type can't keep up with anticipated demand. The US Energy Information Administration recently projected an increase in national petroleum use to 25.8 million b/d in 2020 from 19.5 million b/d in 1999.

Without the kind of capacity gains that come only from grassroots construction, US reliance on imported products can only increase. Dependency is a larger concern for products than it is for crude. A given product made to a certain set of specifications isn't always available in trade when its needed, as the US saw this summer.

US policy thus should be encouraging the construction of refineries. Instead, it's closing them, preferring to do nothing.

Similar restrictions, founded in similar accommodation of environmental extremism, threaten domestic supply of crude oil and natural gas. Here the main problem is access to the resource.

En route out of office, former Interior Sec. Bruce Babbitt, boasted in a Jan. 17 press statement about how oil and gas production had risen from federal land during his tenure. "The facts tell a clear story," he said. "The president's actions in protecting special landscapes will not adversely affect our nation's ability to produce energy on those federal lands that are appropriate for oil, gas, or coal development."

Rubbish. With Babbitt at Interior, the category of "special landscapes" precluding oil and gas leasing covered everything outside known producing regions. In fact, Babbitt opposed a policy crucial to the production gains he cited: royalty relief for new production from deep water in the Gulf of Mexico.

Wishful thinking

Babbitt's zeal to do nothing for petroleum supply in frontier areas epitomized the Clinton administration's California-like approach to energy: to proscribe oil and gas activity and promise miracles from renewable sources. Of such wishful thinking, the California power market and Blue Island refinery are early casualties.

Energy politics must change during the new administration of George W. Bush. The US can assure itself of the energy it needs to remain the world's most vibrant economy without spoiling the environment. But it must assert in the politics of energy that doing nothing is not a reasonable option.