25 Years after OPEC’s Embargo

Published January 1, 1999

A quarter-century ago, rumblings of an energy shortage threatened economic, environmental, and energy apocalypse. But the threat never materialized. Instead, the nation experienced fantastic changes in technology, an abundance of conventional fuels at record low costs, an ever-emergent information age, and astounding economic growth. Gross domestic product has grown $3 trillion since 1977.

Today, global warming doomsayers would have the nation embrace radical change in its energy infrastructure. We must act now, they argue–we can sort out the details (including whether any real threat exists) later. A new energy system, they warn, is our only insurance against the possibility of warming. We must begin the “inevitable” transition to a future free of fossil fuels.

As we pause to reflect during this 25th anniversary of the OPEC oil embargo, we realize recent history must have something to teach us. I have identified 10 energy lessons–most of which run counter to the prevailing, outdated energy wisdom.

1. Energy forecasts are inadequate.

The record of energy forecasters is extensive and dismal, making even economists look good. Almost without exception, hundreds of reports and studies failed in virtually every way possible to correctly anticipate the energy future that is ours today. Oil was to reach $100 per barrel. Coal and gas prices were to have at least tripled. But they are all lower.

2. Fossil fuels aren’t limited.

Theoretically, all things on Earth have some limit. But let’s be practical. What we have to consider is what will be available to us within the time periods of business and policy planning, capital infrastructure, and human ingenuity. There is no evidence that conventional fuels will be in short supply for many decades.

Since 1977, additions to oil reserves have exceeded demand growth. Reserves of cheap coal (central to our electric supply) are enormous. In the wings are enormous untapped unconventional oil resources that emerging technologies may render downright cheap before decades pass. Also standing by is the potential to make liquid fuels from coal and even natural gas–a resources that is today simply flared off as inconvenient waste because the technology doesn’t yet exist to bring it to markets economically.

3. Alternative energy is not an option.

Environmentalists who talk about alternative energy sources mean windmills and solar energy. But after 20 years and billions of dollars in support and incentives, wind/solar provides a scant 0.5 percent of the nation’s energy.

Developing nations’ energy plans remain dominated by conventional energy, even though they could avoid our “mistakes” by pursuing alternatives. Even Guatemala, land of the rain forest, recently announced construction of a clean-coal power plant to meet demand for cheap energy. The alternative? Expensive solar and wind power that would depress economic growth.

4. Cheap energy is good.

Energy energizes civilization. It cannot be too cheap.

Energy purchases are the largest single commodity input to the economy, accounting for $500 billion of spending a year. Over the past 20 years, total spending on energy has, incredibly, remained flat even as total energy consumption has risen and the economy has soared.

This combination has allowed new money to go toward productive investment and social services, instead of escalating energy bills. This is good.

5. Markets aren’t stupid.

Energy-efficiency opportunities are like $20 bills just lying around. At least that’s what supporters of environmentally friendly technologies would have us believe. They say people who don’t go in for alternatives are merely uninformed–they simply don’t see the opportunities.

Their solution? Pour money into government information programs. A classic example is the effort to persuade consumers to buy expensive ultra-efficient refrigerators, on the argument that higher capital costs would be offset by lower long-term electric bills.

Those programs failed. Why? Consumers knew intuitively that the alleged payback was based on a common, but false, claim: that electricity and energy prices would rise. They didn’t.

6. Efficiency increases demand.

Energy efficiency, long held as the best way to reduce energy use, doesn’t. True, national energy efficiency has improved since 1977; today we need 30 percent less energy per dollar. But U.S. annual energy use has grown by the equivalent of 2.5 billion barrels of oil over the past 20 years.

What happened? Efficiency reduced the cost of energy. This is good.

Energy use falls only in a stagnant or depressed economy. Witness the Eastern Bloc nations, which did reduce their actual energy use–because their economies tanked.

7. Cyberspace won’t reduce oil use.

The Information Age will increase our use of oil. For one thing, information technology functions like an economic lubricant. Economic growth, especially in developing nations, means more energy use, if for no other reason than people will buy cars as soon as they can afford them. Then too there is the universal lock-step relationship between economic growth and electric use, which drives a global appetite for conventionally fueled power plants.

Second, there is the “It’s a Small World After All” syndrome: The Information Age accelerates global commerce, which leads to increased shipping and more movement of people for business and tourism. Airplanes and ships will remain oil-powered for a long time.

8. Oil is the alternative fuel.

The search for alternative transportation fuels is an environmentalist crusade. But not because we are facing an oil shortage. Nor because we are impairing air quality. On the contrary, new cars are remarkably clean. The exhaust of some new cars is actually cleaner than the air in many cities.

Ironically, technological progress seems to favor gasoline. The only immediately practical alternative is the hybrid, epitomized by Toyota’s new Prius, with a gasoline engine that powers electric motors. (Not a new idea, by the way; trains are diesel-electric.)

Alternative fuels’ biggest hurdle is replacing the enormous clockwork infrastructure already in place to create and deliver gasoline. If we must find a radical new transportation technology, something with twice the efficiency and zero emissions, the solution of choice looks like the gasoline-powered fuel cell, a true alternative that capitalizes on the existing gasoline infrastructure while delivering zero emissions through the chemical-electric magic of a fuel cell.

9. Fossil fuels drive the digital age.

Electricity is the currency of the digital age. Not only do all information devices depend on it, but increasingly all types of equipment are electric.

The overall effects of this transformation are clear. Excluding transportation, 85 percent of all of the nation’s energy growth since 1977 was used to make electricity. Not only do computers use electricity (even more than commercial lighting), but the huge factories that make semiconductors depend primarily on it. Even the steel industry has electrified and automated through microprocessors.

The source of all this abundant and cheap electricity? Two-thirds comes from fossil fuels, mostly coal. Sixty percent of the growth in supply has come from fossil fuels since 1977; the balance was nuclear.

10. Competition increases bills, but also services.

Legislation forcing more “competition” in the electricity industry is ostensibly designed to result in lower electric bills. But electricity is too important to the economy to ignore opportunities to increase innovation. More money is spent on electricity than gasoline, natural gas, and heating oil combined.

Competition drops prices, but not the total bill. Telecom deregulation provides the case study. As the cost of existing core service (pennies per minute) goes down, the appetite for new and expanded service leads to increased overall spending on a panoply of new services. Energy companies are sure to follow this example.

Not to worry, though–new products will further spur new services, conveniences, and greater economic growth.

Physicist Mark P. Mills is a technology strategist and energy consult and president of the research-consulting firm Mills

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