WHAT THE OTA REPORT SAYS TO CONGRESS

Failure of the government to enact a practical National Energy Strategy (NES) is sending the U.S. economy speeding toward bankruptcy.

This was the warning Congress was handed by the Office of Technology Assessment (OGJ, Nov. 4, 1991, p. 44).

The authors plainly tell Congress that only a new NES will stabilize U.S. oil and gas production, curtail the growth of petroleum demand, and lessen the appetite of Americans for imported oil.

Those objectives are desirable, OTA says. But it stops short of revealing the true effect on the U.S. economy if Congress and the administration fail to act on those and other problems related to energy production and delivery.

Oil imports are a case in point. A careful analysis of the OTA report reveals that if the U.S. continues to import oil, mainly from the Middle East, at the levels forecast, America's financial well being almost surely will collapse.

In 1990, the U.S. imported $52 billion worth of oil-more than 52% of our total merchandise trade deficit.

By 2020, the cumulative trade deficit resulting from oil imports alone will be $10 trillion-more than three times the national debt today and 100 times the 1990 deficit for all foreign trade. Those figures are based on the government's own estimates.

ENVIRONMENTAL THREAT

While the OTA study implies that increasing dependence on oil imports can create havoc with the national economy, it does not point out that the impact on the environment could be equally disastrous.

To get 17.8 million b/d of oil into U.S. refineries by 2020, 36 giant tankers, each loaded with 500,000 bbl of crude, would have to dock each day at U.S. ports. Put another way, 13,140 such ships would be unloading in our harbors every year.

The OTA study fails to point out that this tanker traffic will create several times more environmental risk than developing our resources and producing our oil, including offshore drilling and the Coastal Plain of the Alaskan National Wildlife Refuge (ANWR).

This need not happen if Congress and the administration act quickly and effectively to stabilize the U.S, oil and gas industry and demand growth. Surely, lawmakers will realize that the economy and national security of the U.S. should not be put at risk to import 17.8 million b/d of oil the OTA study says the nation will require by 2020 if we don't enact a strong NES.

To stabilize and revitalize U.S. oil and gas production, Congress and the administration first must face facts and reevaluate the overly optimistic figures in the OTA study. Our analysis indicates that the OTA's forecast of U.S. oil production in the coming years is not credible, based on the experiences of the industry since 1986.

OTA predicts U.S. production in 2020 will be 6.5 million b/d.

Our analysis shows it will be little more than half that-3.4 million b/d. We believe our estimate is more accurate in view of the steady decline in U.S. exploration during the past several years.

FUTURE OIL SUPPLY

With the domestic oil and natural gas industry dangerously ill and unlikely to recover quickly, the American people should have grave concerns about the future of the country's energy supply.

The OtA report emphasizes rising dependence of the U.S. on the Organization of Petroleum Exporting Countries for its petroleum through 2020. It neglects, however, to target which countries will be the main suppliers.

Currently, 60% of U.S. oil comes from OPEC, with one third, or 2.2 million b/d, coming from Persian Gulf countries and other Arab members of OPEC. This causes no concern about interruption in supplies so long as the kings and sheiks plan and continue to develop and retain the political capability to make these decisions.

Nevertheless, U.S. dependence on those sources can cause economic and national defense anxieties. Since 1950, political turmoil in the Middle East has caused six crises affecting petroleum supplies to the U.S. It is reason for concern when one realizes that only two or three accurate scud missiles could have dismantled the ability of Saudi Arabia to replace oil supplies lost because of the Iraq and Kuwait shutdown.

This is not a comforting thought because by 2000 the U.S. expects to get 72% of its oil imports from OPEC. The Arab-Persian Gulf OPEC members will be supplying 5.4 million b/d-more than one half of our imports.

Our analysis assumes there will be no decline in production by other suppliers, a statement we know is optimistic.

REDUCING DEMAND

The OTA study stresses oil demand reduction as one approach to the problem. It suggests that legislation is needed to encourage substitution of other fuels for oil and to reduce use by requiring manufacturers to produce automobiles that use less gasoline.

Momentum is increasing to substitute natural gas and other fuels to power engines heretofore dependent on gasoline. Canada has been a leader in this effort. Our survey indicates that the U.S. government should follow suit by switching its huge vehicle fleet to natural gas, of which there is an abundance domestically.

The OTA report's program to reduce demand is new fleet efficiency standards, including trucks, that would boost fuel efficiency to 50 mpg from 28 mpg. This alone would save 5.5 million b/d of oil. Fuel substitution by 2020 would save another 500,000 b/d. Thus far the public has been slow to react to substitution of natural gas for gasoline.

Another alternative-higher taxes on gasoline-has almost no public support. However, it has been most effective in reducing consumption in other industrial countries and almost certainly will get consideration here.

GOVERNMENT MISTAKES

Nowhere in the OTA study is there a mention of how government actions have resulted in disincentives that have all but killed the U.S. petroleum industry. A good example is the shortage of natural gas in the 1970s that occurred when the nation had a surplus of this fuel.

There is an abundance of gas. Early on, federal policy encouraged gas exploration and production by allowing tax credits and other incentives, including price increases where warranted.

However, the dynamics of supply were all but destroyed when the government took control of natural gas prices at an artificially low level. When these disincentives forced producers to sell at prices below their production costs, supplies declined and shortages resulted.

Another case in point in the OTA study concerns ANWR exploration and development. In its report to Congress, the agency generally discounted the benefit of allowing ANWR activity for a totally unsupportable reason. It said the reserve is too small compared with those in the Middle East and other potential areas already found in the U.S.

Geologists disagree with the OTA assessment of reserves. Whereas OTA estimates that ANWR has a potential of only 3.6 billion bbl of oil, geologists estimate the reserves there are almost five times that number.

ANWR start-up in 1998 and production of 2 million b/d by 1999 would reduce the U.S. trade deficit by $900 billion through 2020.

U.S. RESERVES

If the government acts to stabilize the U.S. petroleum industry, are resources available to meet the nation's energy needs?

Yes, says Dr. William L. Fisher, internationally known geologist at the University of Texas in Austin. In a report to the American Association for the Advancement of Science, Fisher said:

"If, as a matter of national policy, relatively stable levels of domestic production are desirable or necessary, the remaining resource base can provide these levels if aggressive drilling practices are used."

Many Americans think the country is running out of oil because of the continuing increase in imports and the decline of U.S. exploration and production. It is true that field activity has come to a virtual standstill.

Rig counts that once exceeded 4,000 have been on an almost steady decline since 1981. U.S. production trends were stabilized in 1978-85 when the rig count averaged 2,726, and production climbed.

Since 1986, however, the industry has faced continually worsening times. More than 300,000 persons who once depended on petroleum for their livelihood now are jobless.

The American people have a problem understanding why the U.S. is importing more than 7.2 million b/d of oil if we still have a large resource potential. And we do. While it's true that our proved reserves by U.S. government measurement are only 27 billion bbl, Fisher says there is another 65 billion bbl that can be developed from our resource base.

This does not include an additional 60 billion bbl yet to be discovered in areas like ANWR and offshore and onshore in the Lower 48. It also does not include an even larger resource base of 238 billion bbl equivalent of natural gas.

WHAT'S REQUIRED

OTA and Congress are aware of those reserves. They also are aware that by revitalizing the infrastructure of the domestic petroleum industry the U.S. can provide most of its oil and gas for years to come.

In so doing, it can stop the growth in imports, reduce the trade deficit, and save the government from bankruptcy.

How? With an administration and a Congress brave enough to tackle the issues the OTA report frankly says are "politically controversial" and making them the law of the land. Here is what's needed:

Tax incentives for exploration and production such as deductions, credits, and a realistic depletion allowance.
Measures that raise prices at the wellhead such as import fees or price floors.
Technical assistance and technology transfer programs.
Changes in the Strategic Petroleum Reserve program to favor certain classes of domestic producers or to include preservation of domestic production potential.
More federal onshore and offshore acreage open to leasing and more favorable lease terms and royalties.
Resolution of regulatory or environmental controversies that are delaying exploration, development, or production.
Removal of intangible drilling costs and depletion as preference items under the alternative minimum tax to stimulate drilling.