Politically contrived gasoline shortage.

• Author: Marxsen, Craig S.
• Position: Critical essay

The 1972 book The Limits to Growth (Meadows et al. 1972) sensationalized the theory that natural-resource depletion and rising pollution would soon bring catastrophe. The authors theorized that, among other problems, running out of basic resources such as petroleum would cause a collapse of industrial and agricultural production as well as a resulting loss of a large part of the world's human population. An "energy crisis" immediately following the book's publication enhanced its credibility and brought it a great deal of public attention, although the energy crisis later proved to have been only a temporary anomaly caused largely by price controls. Recent, substantial increases in gasoline prices may revitalize the catastrophists' conviction that imminent fossil-resource exhaustion demands prompt substitution of renewable fuel sources, such as ethanol. Convinced that because fossil fuels apparently are nearly exhausted as a practical energy source and we can abandon them almost costlessly, opponents of fossil fuels advocate drastic reduction of their use to prevent a ruinous crisis of carbon dioxide pollution. Yet the alleged crisis requires a near-zero discount rate to raise the prorated present value of damage, per gallon of gasoline combusted, far above the relatively modest figure obtained by use of a market interest rate for discounting purposes.

A more serious potential economic crisis caused by rising motor-fuel prices, in contrast, does not spring from pollution or resource exhaustion, but from the catastrophists' mistaken belief in what has become their almost self-fulfilling prophecy (see Marxsen 2003). Through the political system, they have promoted regulatory actions that are discouraging the investment that would otherwise have prevented today's worsening refining bottleneck. Obstruction of investments in gasoline refineries, achieved by regulatory interventions, is probably a more significant threat to the affordability of gasoline than any approaching exhaustion of gasoline's fossil sources. Reestablishment of refiners' reasonable property rights and adoption of strict liability as the major instrument for controlling carbon dioxide and refinery pollution might end what otherwise may become an ever-worsening, regulatory-induced "energy crisis."

The Price Mechanism

Robert Solow responded promptly to The Limits to Growth. He explained that the price mechanism would induce substitution of alternative sources as oil became scarcer (1973, 44-47). Production methods that rely on relatively more abundant natural resources eventually will substitute for dwindling supplies of oil that had previously been cheap and easy to exploit (Solow 1974, 3-5). Now, more than thirty years later, specific forms of such substitution have become more visible to those looking ahead toward practical alternatives.

Although crude oil still appears to be relatively abundant and supplies most of the world's material from which gasoline is refined, other fossil sources of gasoline seem to offer commercially viable alternatives. These sources include methane (or natural gas), coal, bitumen obtained from tar sands or oil shale, and crude petroleum's "bottom of the barrel" components, such as asphalt. Let us ignore nonfossil feedstocks, such as corn and turkey guts, because they escape political opposition from opponents of fossil fuels and, in any event, have potential to make only a small contribution to present rates of gasoline consumption. Because available stocks of petroleum, methane, coal, tar sands, and oil shale are sufficient for centuries to come, however, the possibility of sustaining supplies of ordinary gasoline for motor fuel at reasonable prices appears virtually assured, regardless of nonfossil sources, if the political system will permit. Conversely, a complete transition to nonfossil sources at this time would doubtlessly result in much higher gasoline prices.

Fossil-Energy Sufficiency

A great deal of fossil-fuel material remains buried in accessible places. In the U.S. Department of Energy's International Energy Outlook 2006, world energy use is projected to rise from 421 quadrillion Btus, or "quads," in 2003 to 722 quads in 2030 (2006b, 1). Paul Holtberg, director of the Demand and Integration Division of the U. S. Department of Energy, and Robert Hirsch, a senior energy program advisor at Science Applications International Corporation, estimate that 13,400 quads of conventional crude oil and 14,000 quads of conventional natural gas remain exploitable. At least another 15,000 quads are available from unconventional sources of crude oil, such as tar sands and oil shale. In the lower forty-eight states of the United States, geopressured brine and gas hydrates may offer as much as 335,000 quads, according to Holtberg and Hirsch (2003). Bob Williams (2003a), former executive editor of the Oil and Gas Journal, reports a global methane hydrate endowment more than 190 times the amount in the United States. Worldwide coal resources exceed 135,000 quads, according to Holtberg and Hirsch. At the 2003 rate of global energy use, and not counting the geopressured brine and methane hydrate endowment outside the lower forty-eight states, such fossil-fuel reserves would apparently last more than 1,200 years, and they would last more than 700 years at the projected 2030 rate of consumption. Moreover, Holtberg and Hirsch's estimates seem to be conservative ones. David L. Greene, Janet L. Hopson, and Jia Li estimate in a report prepared for the U.S. Department of Energy by Oak Ridge National Laboratory that the world's remaining supply of exploitable oil (including that from shale and tar sands) is about 106,572.2 quads, with about 32,885.6 quads recoverable under technologies and prices expected to prevail before 2050 (2003, 9). Thus, fossil hydrocarbons for making gasoline and other liquid fuels will almost certainly be adequate for centuries to come. The real obstacle is the world's political systems.

Obstructing Refining

Government interventions have constrained the petroleum-refining industry for decades. A 2004 U.S. Department of Energy National Petroleum Council report documents a variety of impediments to expansion of refining capacity. Not a single new-site refinery has been built in the United States since the mid-1970s (Shackouls 2004, I-19). From 1981 to 2002, the average return on equity for petroleum companies was 11.3 percent, and the S&P 500 average was 12.2 percent (I-14). The return on capital employed in refining and marketing was only 5.3 percent, compared with a return on capital of 7.7 percent for the industry as a whole (I-14). The low returns reportedly derive from significant regulatory-driven investments that yield no return, combined with the highly competitive nature of the business (I-16). Building a new refinery involves a huge investment and is therefore subject to tremendous losses from any delays. Environmental regulation--including New Source Review enforcement and National Ambient Air Quality Standards--and uncertainties generated by waivers, exceptions, and amendments to regulations create strong disincentives for investment in new refineries (I-6). Ben Lieberman (2006), a senior policy analyst at the Heritage Foundation, contends that as much as 25 percent of total capital outlays in the refining sector are devoted to environmental regulatory compliance. Ever-changing specifications for reformulated gasoline and low-sulfur diesel frustrate refiners' efforts to achieve maximum volumetric efficiency during peak demand periods and further reduce the return on an investment in a new refinery (Shackouls 2004, I-18). The government's obstructions of the use of carbon fuels somewhat resembles its more visible prevention of the expansion of nuclear power in spite of engineering advances that have almost totally eliminated the more significant nuclear-safety issues that once seemed relevant.

The potential for regulatory harassment may make refiners with less-than-extraordinary prospective profits unwilling to remain in business in coming years. In a 2002 report, Jerry Hill, principal environmental engineer at Bechtel's Houston office, illustrates what had then become a strategy emphasized by the Environmental Protection Agency (EPA). The EPA's Office of Enforcement and Compliance Assurance had increased its focus on petroleum refineries, and inspection teams made a number of detailed audits, each spending many days searching for violations of federal and state pollution regulations. These armies of fault-finding inspectors compiled and submitted to the U.S. Justice Department and filed in district federal courts long lists of alleged violations of pollution laws. At the top of Hill's list of violations was failure to obtain construction permits, failure to install the best available control technology, and flaring gas that contained sulfur. Other violations included insufficient labeling of containers and inadequate record keeping. Hill describes the prompt and costly defeat of a refiner who decided to go to trial. Thirty-six refineries in nineteen states settled these actions for the most part with negotiated consent decrees that involved millions of dollars for remedial expenditures and additional millions for...