Energy Policy: Conceptual Framework and Continuing Issues

Congressional research reportMar 7, 2007

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Prepared for Members and Committees of Congress

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Energy policy continues to be a major legislative issue, despite passage of the Energy Policy Act

of 2005 (EPACT, P.L. 109-58). Shortly after EPACT’s enactment, Hurricanes Katrina and Rita

temporarily shut down production of oil and gas and refining capacity in Texas and Louisiana.

World and domestic demand for oil remained strong, and other factors have placed pressure on

gasoline prices and deliverability in the United States.

In the face of these developments, and because the prospect that this episode of elevated prices is

likely to be a long one, interest in energy policy remains high in the 110th Congress. When the

United States experiences a period marked by sharp increases in the price for energy and concern

about the adequacy of essential supplies, there is widespread concern that the nation has no

energy policy. The nation has, in fact, adopted several distinct policy approaches over the years,

and many of the debates have been about determining the appropriate extent of the federal

government’s role in energy.

There were episodes from 1973-2003 when oil prices spiked, but these were generally for

comparatively brief periods; overall, the period was one of general price and supply stability. It

isn’t so much that energy policy failed to be adequately responsive to past crises; rather, during

lengthy periods of stability and declining prices for conventional fuels, it has proven difficult to

sustain certain policy courses that might help shield the nation from occasional episodes of

instability. Because prices are now expected by some analysts to remain high, the prospect for

certain longer-range energy policies may now be more favorable. Traditionally, the energy debate

has been most vigorous over the balance to be struck between increasing supply and encouraging

conservation. However, when markets are unstable, debate turns on another axis as well, that of

short-term versus long-term policies.

Energy policy issues of continuing interest include Corporate Average Fuel Economy Standards

(CAFE) for passenger vehicles; improving U.S. energy infrastructure, including pipelines and

refineries; seeking effective means to promote energy conservation using currently available

technologies; and developing new technologies and alternative fuels.

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Introduction ..................................................................................................................................... 1

Energy Policy Since the 1973-74 Arab Embargo ............................................................................ 2

The Period of Oil Price Controls............................................................................................... 2

The Early Effects of a Market-Oriented Energy Policy ............................................................ 3

Other Responses to the Disruptions of the 1970s and 1980s .................................................... 3

The Challenge Faced by Policymakers ..................................................................................... 4

An Energy Policy Schematic........................................................................................................... 4

The Current Context: What’s Different? ......................................................................................... 6

Major Unresolved Energy Issues..................................................................................................... 7

Petroleum and Natural Gas ....................................................................................................... 7

Clean Air Standards and Gasoline Supply and Distribution ............................................... 8

Drilling in ANWR and on Other Federal Lands ................................................................. 9

Natural Gas Supply........................................................................................................... 10

Electricity Regulation and Supply........................................................................................... 10

Conservation and Energy Efficiency........................................................................................11

The Uncertain Future..................................................................................................................... 12

Table 1. A Schematic of Energy Policies......................................................................................... 5

Author Contact Information .......................................................................................................... 12

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In the first session of the 110th Congress, energy policy enters its eighth year as a major legislative

issue. The previous Congress passed a massive energy bill, the Energy Policy Act of 2005

(EPACT, P.L. 109-58), but subsequent developments worked to keep crude oil and gasoline prices

high and interest in legislative solutions active.

EPACT was enacted on August 8, 2005. Successive hurricanes, Katrina and Rita, in late August

and late September 2005, brought about the shutdown of more than 5 million barrels per day of

refining capacity in Texas and Louisiana and initially shut down the 25% of U.S. crude oil

production and 20% of U.S. natural gas production that comes from the Outer Continental Shelf

in the Gulf of Mexico. World and domestic demand for oil has remained strong, taking up most of

the world’s spare production capacity. The phaseout of the gasoline additive methyl tertiary butyl

ether (MTBE) and a renewable fuels mandate in EPACT have placed additional pressure on

gasoline price and deliverability in the United States. In the summer of 2006, gasoline prices

returned to the post-Katrina peaks of more than $3.00 per gallon and stayed there throughout the

peak driving season. Nevertheless, U.S. gasoline demand reached a record high, averaging over

9.5 million barrels per day in July. During early 2007, gasoline prices were in the low- to mid-$2

range.

The passage of EPACT had its roots in an unexpected jump in oil prices that began in the late

spring of 1999, following a production cut by the Organization of Petroleum Exporting Countries

(OPEC). In early 2003, oil prices were reaching into the mid-$30s. Prices rose even higher during

2004—exceeding $50 per barrel for a brief period—owing to growing world demand both in the

United States and the Far East, inadequate refining capacity, and Hurricane Ivan, which reduced

U.S. production from the Gulf of Mexico for several months. Crude oil and petroleum product

prices escalated further during 2005. These increases were initially attributable to growing

international demand for oil that, domestically, put a strain on U.S. and world refining capacity.

Then, in August and September, hurricanes Katrina and Rita caused further supply disruption.

This continuing period of volatility in fuel supplies and prices has been the fourth significant

episode since 1973 to jog American awareness of the extent to which the U.S. economy and

lifestyle depend on inexpensive and plentiful energy. However, this surge in price represents a

departure from historic trends because the rise in the price for oil fuels and energy products has

occurred for more than five years and has been sustained. Some analysts have coined the term

“demand destruction” to describe price-induced reductions in consumption, but overall demand

for oil has proven resilient. World demand for oil has grown from roughly 78 million barrels daily

in 2001 to roughly 84 million barrels daily during 2005.1

An additional departure from past patterns is that, historically, increases in crude oil prices owing

to supply or international issues have driven product prices as the higher cost for crude feedstock

is passed on. However, crude supply and stocks in 2005—prior to the hurricanes—were adequate.

Commitments by OPEC during the course of the year to maintain or boost production appeared to

have little but short-term effects on crude prices. Tightness in refined products prior to the

hurricanes and the accompanying rise of product prices was a function of insufficient refining

U.S. Department of Energy, Energy Information Administration, International Petroleum Annual, at

http://www.eia.doe.gov/emeu/ipsr/demand.html. The latest annual average available is for 2005.

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capacity in the United States to meet demand for a range of summer gasoline formulations. The

pressures on product prices appeared to work backwards to support higher prices for crude. The

hurricanes exacerbated these dynamics, further tightening product supply owing to problems with

pipeline distribution as well as refining capacity, and introducing at the same time an uncertainty

about crude supply that had not been as strong a worry prior to the storms.

In 2006 and 2007, a number of factors—new and old—have contributed to an especially brittle

climate for energy supply and price. Whenever the United States has experienced a period marked

by sharp increases in the price for energy and concern about the adequacy of essential supplies,

there is widespread concern that the nation has no energy policy. However, not only does the

nation have an energy policy, it has adopted several distinct policy approaches over the years.

This report discusses those major policy approaches, provides a conceptual framework for

categorizing energy policy proposals, and briefly describes energy issues that remain current in

the debate after the enactment of EPACT. Most policymakers acknowledged that EPACT would

provide negligible price relief in the short term, but they contended that it would encourage

domestic production of oil and gas and further conservation and alternative fuel initiatives. At

issue for Congress is whether there should be an additional policy response in the face of

continued pressure on oil price and supply.

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In the 30 years since the Arab oil embargo, the United States has pursued a number of different

energy policy courses. In the course of several episodes during this period when oil price and

supply became unstable, the U.S. moved from a set of policies more reliant on the federal

government, to policies more dependent upon markets. This history is briefly summarized in the

section to follow.

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In the aftermath of the Arab oil embargo in 1973, many looked to government to solve the

problem, for both the short- and long-term. By 1975, refiner acquisition costs for imported crude

oil had roughly tripled, rising from an average cost of $4/barrel (bbl) in 1973 to $12.50/barrel in

1974. However, refiner acquisition costs for domestic crude did not even double—rising from

$4/bbl to $7/bbl—owing to a system of federal price controls that kept the price of domestic

production below the market price. This discouraged domestic production and encouraged

imports. However, controls may have helped insulate consumers from some of the price increase,

which was the intended effect.

Automobile fuel economy standards were enacted during the late 1970’s to reduce gasoline

consumption in the transportation sector. At the same time, hopes were invested in governmentfunded research and development of conservation technologies and alternative fuels.

A second supply interruption was triggered in1979 by the fall of the Shah of Iran and a greatly

reduced flow of Iranian oil to world markets for several months. A phased deregulation of oil

prices, enacted in 1975 in the Energy Policy and Conservation Act (EPCA, P.L. 94-163), was

designed to enable prices to become more responsive to market conditions. But the pace of the

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deregulation was conceived to be gradual. At the time of the Iranian revolution, gasoline prices in

the United States were still subject to some control. The result was long lines at U.S. gas pumps.

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Letting the market set prices, supporters of deregulation had argued in the 1975 debate, would

encourage the development of additional domestic supplies of oil as well as the development of

alternative energy sources. Shortly after assuming office in 1981, President Reagan accelerated

the EPCA schedule for price decontrol. Energy policy, in general, became more market-oriented,

and the government role was lessened.

Sustained high crude oil prices contributed to a reduction in U.S. petroleum consumption from

18.8 to 15.2 million barrels per day (mbd) from 1978 to 1982; there was more substitution of

other fuels for oil, more efficient consumption of oil, and price-induced conservation. Higher

prices resulted in new oil production from non-OPEC nations, allowing the United States and

other consuming nations to diversify their sources of supply. Faced with a loss of market share

and revenue, OPEC increased its own production in the mid-1980s, thereby lowering the price for

crude oil. In the course of the year from 1985 to 1986, world oil prices plunged. In the United

States, refiner acquisition cost for imported oil fell from $27/barrel to $14/barrel.

Prices remained depressed until a fresh round of spikes in oil prices occurred in 1990-91

following Iraq’s invasion of Kuwait in early August 1990. That resulted in a cut-off of 4.3 million

barrels per day (mbd) from world markets. The price of oil, which had averaged $16/bbl at the

end of July 1990, exceeded $28 by late August and reached $36/bbl in September 1990.

Responding to the Iraqi threat, Western and Middle Eastern nations found common ground that

would have been unimaginable a decade earlier. By the late 1980s, recognition had grown of the

interdependence of oil-producing and oil-consuming nations; the OPEC nations had come to

recognize that long-term demand for their oil was jeopardized by any prolonged period of high oil

prices. Most did not wish to repeat the cycle of the early- to mid-1980s and boosted their

production to make up for some of the lost supply. Consuming nations also coordinated the

release of strategic stocks of crude and products. Prices began to fall in mid-October 1990 when

the United Nations approved the use of force against Iraq. Prices fell more sharply after the

United States and a consortium of nations began conducting air strikes on Iraq in mid-January

1991.

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During all of these episodes, importance was placed on conservation, more efficient use of

energy, and development of alternative energy sources. The oil shocks of the mid- and late-1970s

spurred considerable spending on alternative energy—including solar, geothermal, wind, clean

coal, synthetic fuels, alcohol-based fuels—and technologies to improve the efficiency of energy

use. Regulations were developed to improve the efficiency of home appliances and to incorporate

more energy-efficient designs in buildings. In the early 1980s, states and utilities promoted

energy efficiency as one form of “demand-side management” to reduce the need for construction

of new power plants. Many industries re-engineered their processes to save energy. Conservation

and efficiency were championed by some as a lower-cost and more environmentally appealing

way to achieve greater energy security than policies to boost supply. However, largely because of

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the generally lower prices over time for fossil fuels—as is noted below—these energy programs

showed mixed results.

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As suggested earlier, each episode of short supply and higher prices spurs concern that the nation

lacks an energy policy and has ignored past lessons. However, it is apparent from a review of the

years since the time of the Arab oil embargo and first oil price shock in 1973 until 2004 that it is

more accurate to see this 30-year period as one of general price and supply stability that was

periodically broken by short episodes of supply disruption and price volatility. It wasn’t so much

that energy policy failed to be responsive to earlier crises; rather, during lengthy periods of

stability and declining prices for conventional fuels, it proved difficult to sustain certain policy

courses that might help shield the nation from future episodes of instability.

An energy policy that would most effectively shield the nation and the economy from the worst

effects of supply shortages would be a policy that might well deny the nation the full benefits of

cheap and plentiful energy when markets are stable. The periods of relative calm and stability

result in a markedly uncertain environment for investment in alternative fuels, energy efficiency

technologies, and boosting the production of conventional fuels in regions where production costs

are significantly higher than in the Middle East. State and local regulations and codes further

cloud the climate for investment. Local opposition to new on- and off-shore production projects,

power plants, electric transmission lines, refineries, and pipelines is often most effective during

periods of price and supply stability, but sometimes eases only after shortages have actually

occurred.

However, a prolonged climate for higher prices—stemming from tightness in the supply of

products and continuing instability in Middle East regions where oil reserves are concentrated—

may introduce new changes in the character and particulars of U.S. energy policy. This possibility

is a benchmark to keep in mind when thinking about energy policy conceptually and as

subsequent debate on energy policy continues in Congress.

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Constructing a balanced energy policy that will not undermine other competing and equally

legitimate policy goals is a complex problem. How to boost energy supply without exacting an

unacceptable toll on the environment? How, then, to reduce gasoline consumption, a commodity

central to the nation’s economy and lifestyle, when raising its price to achieve a meaningful

reduction in demand could be economically disruptive and politically unappealing? Should

federal policy encourage the use of more expensive alternative fuels and technologies that

heighten efficiency, when OPEC has generally demonstrated a capability to adjust the price of oil

to keep it far cheaper than its substitutes?

Debate over energy policy has produced an enormous range of proposals, many of which have

been adopted at one point or another over the years. In general, it is helpful to recognize the broad

categories into which most proposals fall: Most energy policies are designed to affect either the

supply of or the demand for energy products, and they are, at the same time, designed to have an

effect either in the near term or the longer term.

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Traditionally, the energy debate has been the most vigorous over the balance to be struck between

increasing supply and encouraging conservation. However, energy policy turns on the additional

axis of short- and long-term policies. In the midst of high prices during the spring of 2001,

policymakers were pressed to come up with immediate policy responses that would afford

consumers price relief. However, at that time President Bush was advising Congress and

Americans that the Administration’s energy policy plan would focus on long-term remedies for

the nation’s energy problems and that there would be no immediate relief for consumers paying

higher prices for gasoline, electricity, and other fuels. The President and his supporters suggested

that by setting out an action-oriented and actionable comprehensive policy, markets and

consumers should feel some short-term reassurance. This did not quell all the demands for more

immediate action to reduce energy prices. Nor were they completely quelled during the protracted

debate over omnibus energy legislation from 2003 until the enactment of EPACT in the summer

of 2005.

It is useful to clarify the differences between short-term and long-term policy initiatives. For

example, a drawdown of oil from the Strategic Petroleum Reserve (SPR) affects crude oil supply

in the near term. However, enactment of tax incentives for investment in new oil drilling

technologies might add to domestic crude supply further in the future. Proponents of drilling in

the Arctic National Wildlife Refuge (ANWR) argue it might add anywhere from 300,000 b/d

(barrels per day) to 1.4 mbd to U.S. domestic supply, but this, too, is a longer-term policy

initiative.

Turning to the consumption side of the ledger, boosting the federal gasoline tax by $1.50/gallon

might be expected to reduce gasoline consumption in the near term, but increasing the corporate

average fuel economy (CAFE) standards on new motor vehicles would not take full effect until

older vehicles were largely replaced, a process that could take more than a decade.

The table below suggests a way in which many energy policies may be visualized along these

lines:

. A Schematic of Energy Policies

Table 1

Affecting Supply

Short- to

Mid-term

Mid- to

Long-term

Strategic Petroleum Reserve (SPR)

Allowing high prices to allocate and price

scarce energy

Tax incentives to promote production

Open new areas to leasing and exploration

Research and development

Market pricing of energy

Affecting Demand

High energy prices due to unfettered market forces or

taxation

Policies promoting conservation and more energyefficient choices

Corporate Average Fuel Economy Standards (CAFE)

Tax incentives to encourage less, or more-efficient

consumption

Efficiency standards

Efficiency labeling

Research and development in efficiency technologies

The axis of long-term/short-term, supply/demand does not capture all policy options. For

example, one of the major issues in energy policy is the price for fuels. Energy policy generally is

designed to affect price indirectly—by having price follow, or reflect, current demand or supply

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for energy. There are a few exceptions. Tax policy may address energy price directly to the extent

that excise taxes on fuel products can be raised or lowered (recognizing that these tax boosts or

cuts may not be reflected penny-for-penny in the “pump” price for fuels).

Short-term policies to affect supply, such as potential use of strategic reserves, have been

sometimes very controversial because, in the absence of a very clear-cut and widely

acknowledged physical shortage, such initiatives are perceived to be thinly disguised efforts to

grant price relief.2 Some suggest at times that high prices—left uninterfered with—are the best

policy of all, encouraging markets to provide more supply in due course, and that federal policy

should address only those most adversely affected by sharply higher prices. The Low Income

Home Energy Assistance Program (LIHEAP) is one such effort to provide direct assistance to

families whose quality of life is especially burdened by high energy prices. LIHEAP is a shortterm policy for addressing the impact of high prices for energy.

Supply and demand may also be affected by external events, including political and diplomatic

dynamics between or among the producing nations. Weather, seasonal or otherwise, will affect

supply and demand; policy cannot affect the weather, only its consequences. Lastly, Congress

always has the option to require study and analysis of a problem before settling on a policy

course. Requirements for such studies are regularly included in appropriations bills and other

legislation.

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In every energy debate, one question is a constant: How extensive a federal role is appropriate in

energy policy? However often that question recurs, the context in which it is raised changes. The

current context has become distinctly different than in previous episodes.

•

U.S. energy policy was primarily market-based for roughly 20 years, but policy

makers have been weighing whether problems in some sectors and with some

fuels are attributable to distribution or regulatory inefficiencies interfering with

markets, or whether government intervention may be necessary to protect

consumers and the economy from problems to which markets cannot flexibly

respond. Some critics of U.S. energy policy argue that these inefficiencies and

distortions are themselves the consequence of government intervention—for

example, Clean Air Act requirements that have required the manufacture of

several different regional formulations of gasoline.

•

Strong economic growth during the mid- and late 1990s at a time of declining

real energy prices resulted in growth in consumption even though efficiency of

energy use is dramatically better than during the 1970s and 1980s. Growth in

petroleum consumption in the United States as domestic production declines has

meant a commensurate increase in oil imports. During the second half of 2004,

growth in demand as well from the Far East pressured spare oil production

The Energy Policy and Conservation Act (P.L. 94-163, EPCA) authorizes drawdown of the Strategic Petroleum

Reserve upon a finding by the President that there is a “severe energy supply interruption,” or in the event of a

circumstance that “constitutes, or is likely to become, a domestic or international energy supply shortage of significant

scope or duration” and where “action taken ... would assist directly and significantly in preventing or reducing the

adverse impact of such shortage.”

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capacity. In the midst of market uncertainties, increased OPEC production—

unlike in the past—appeared unable to exert its historical effect of moderating

crude oil prices.

•

There is recognition of the interdependence of producing and consuming nations;

however, the political balance among the OPEC nations is delicate and can

influence oil production decisions and whether OPEC is able to exert market

control at all.

•

There is growing recognition that the recent shortages and price spikes in some

regions of the country have been compounded by insufficiencies in the nation’s

energy infrastructure—refining capacity, gas and oil pipelines, transmission lines,

and electric generating facilities. Some have questioned the advisability of

locating so much of the nation’s refining capacity in the Louisiana, Alabama, and

Texas.

•

Problems with gasoline supply and home heating oil stocks since 2000 imply

some need to develop additional refining capacity and transport systems that will

add both capacity and flexibility to distribution. However, national and local

environmental regulation and requirements, and local community sentiment,

affect the speed and ease of siting and building such facilities. Because high

prices tend to eventually depress demand, the industry is sometimes wary of

making investment in capacity that would achieve profit targets only during

short-lived periods of unusually high prices. Uncertainty about the course of the

economy may also contribute to questions about the profitability of these

investments. Concerns about greenhouse gas emissions add an additional

measure of uncertainty. Policymakers have debated additional measures for

“refinery revitalization” and streamlining the process for approval of refinery

siting and construction.

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The shift to a more market-oriented energy policy, additional lessons some have taken from

experiences during the 1980s and 1990s, geopolitical developments and developments such as

those outlined above are likely to play a part in any consideration of energy issues still pending

and of interest to many policymakers in a post-EPACT climate. Some of these issues are broadly

reviewed below. Tax policy plays a role in many of these areas. (See CRS Report RL33578,

Energy Tax Policy: History and Current Issues, by (name redacted).)

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The latest rise in crude oil prices had its origins in March 1999, when cuts by OPEC in world

crude production sent domestic refiner acquisition costs for crude oil on a sharp ascent from less

than $11/bbl in February 1999 to $24.50/bbl by December of the same year. Responding, in part,

to intense lobbying by the United States, the OPEC oil ministers boosted crude production and

settled upon $22-$28 per barrel as a desirable “price band.” But the price band grew increasingly

out-of-touch and irrelevant as prices renewed their increase, and surged during 2004. Prices for

crude breached $70/bbl in May 2006 and remained in the $50-$60 range in early 2007.

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Growth in demand, internationally and domestically, partly accounts for price increases. Demand

for petroleum products in the United States averaged 20.7 mbd during 2004 and 20.8 mbd in

2005, but averaged 20.6 mbd during 2006. Increases in demand, as well as declining domestic

production, have led to increased crude and product imports, which averaged 13.6 mbd in 2006—

10.1 mbd of crude and 3.5 mbd of refined product.3

Contributing to the gasoline price spike of mid-2006 were rising prices for crude, some

resumption in demand, and a tilt toward the manufacture of distillates that was slowing additions

to gasoline stocks. In addition, five fuel specification changes during 2005 put additional pressure

on the gasoline supply system.4 An ultra-low sulfur diesel program that began in June 2006

required that 80% of on-highway diesel have no more than 15 ppm (parts per million) sulfur

content. The elimination of MTBE (methyl tertiary butyl ether) placed pressure on ethanol supply

and prices and incurred some loss to product yield in the manufacture of RFG (reformulated

gasoline).

The ability of the OPEC cartel to exert influence upon oil prices at critical times underscores

that—with respect to petroleum—the problem is less that the world supply of oil is tight than that

so much of it is concentrated in other parts of the globe, principally the Middle East. U.S.

dependence upon imported oil is now about 60% of total consumption. Absent some elusive

technical “fix,” there are limited prospects for significantly reducing that figure without incurring

economic hardship and lifestyle compromises. However, relatively modest increases in

worldwide production or reductions in demand by consuming nations can substantially reduce the

magnitude of oil price spikes.

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Attention has focused on the Clean Air Act standards that regulate the oxygen content, volatility,

benzene, and the sulfur content of gasoline. Refineries face state and local standards on how to

achieve compliance with federal requirements. The expiration in early May 2006 of the

oxygenate requirement for reformulated gasoline and the use of methyl tertiary butyl ether

(MTBE) spurred demand for ethanol, leading to higher prices and tighter supply for ethanol.

One consequence of regional variations is that gasoline supply loses some of its fungibility; one

region experiencing a shortage may no longer be able to secure additional supply from a nearby

locality with a different blend of gasoline. Distribution becomes more complicated because

different blends sharing the same pipeline must be carefully batched to avoid contamination. In

the wake of the 2005 hurricanes, and again in the spring of 2006, some standards were

temporarily relaxed in an effort to improve gasoline production and ease distribution problems.

Additionally, foreign refineries that supply the U.S. gasoline market do not make the regional

formulations.

Some have urged a rationalization of Clean Air Act standards that would permit a

“harmonization” of U.S. gasoline standards. This would introduce flexibility into the gasoline

manufacture and distribution system that might bring prices down. Opponents of harmonization

U.S. Department of Energy. Energy Information Administration. Monthly Energy Review. February 2007: Table 3.1b

Petroleum Overview: Disposition and Stocks http://www.eia.doe.gov/emeu/mer/pdf/pages/sec3_3.pdf, and Table 3.1a

Petroleum Overview: Supply http://www.eia.doe.gov/emeu/mer/pdf/pages/sec3_2.pdf.

U.S. Department of Energy. Energy Information Administration. Short-Term Energy Outlook. January 10, 2006.

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argue that it might compromise air quality, and lead to further compromise of clean air objectives

in the future. Harmonization might also raise prices for fuel in regions that did not require the

more exacting formulations.

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The greater the nation’s ability to produce its own fuels, the less vulnerable it is to unanticipated

international developments that can reduce or threaten supply. But the policy options on the

supply side, such as opening up the Arctic National Wildlife Refuge (ANWR) for exploration, are

mostly long-term. Alaskan oil production, which once touched 2 mbd, has now fallen below

900,000 mbd and, without new production, will continue to decline.5 Low production could result

in rising transport tariffs on the Trans-Alaska Pipeline, with further adverse impacts on North

Slope production.

Proponents of exploring ANWR point to advances in exploration and drilling technology and

methods that have significantly reduced the extent of surface disturbance. While opponents

concede this may be so, they argue that these advances are limited to exploration and extraction,

and that considerable risk to the environment remains during the production and transportation

phases. Opponents also suggest that the risks are not worth bearing, especially if the resources in

ANWR turn out to be at the lower range of estimates, providing only an additional 300,000 b/d of

supply. Some respond to this argument by noting that the nation has experienced periods of tight

supply when even an additional few hundred thousand barrels of crude oil per day would have

significantly reduced gasoline and heating oil prices. For some opponents, any weighing of risks

and benefits are pointless because, citing the area’s pristine character, they argue that its ecology

and habitat should not be disturbed under any circumstances.

There was some expectation that proponents of ANWR exploration would gain congressional

authorization during the 109th Congress, but they did not succeed. (For additional information and

background, see CRS Report RL31278, Arctic National Wildlife Refuge: Background and Issues,

by (name redacted) et al.)

The broader issue raised by ANWR—that of access to public lands for energy exploration and

development—is a significant component of the national energy debate. There is considerable

disagreement about the potential resources on federal lands—particularly the amount of oil and

gas that may be “locked up” by land-use restrictions and other regulatory factors. The Bush

Administration’s energy policy report recommended an examination of “land status and lease

stipulation impediments” and that policymakers “consider modifications where appropriate.” A

report by the Department of Interior, on the other hand, indicates this may not be the problem

some have alleged.6 (For additional information and background, see CRS Report RS20902,

National Monument Issues, by (name redacted).)

There are other prospects for oil development in northern Alaska, including two fields scheduled for development just

outside the National Petroleum Reserve—Alaska (NPR-A).

Scientific Inventory of Onshore Federal Lands’ Oil and Gas Resources and Reserves and the Extent and Nature of

Restrictions or Impediments to the Development. January 2003. See http://momentum.doi.gov/epca/ExecSum.pdf.

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For the past decade in the United States, natural gas consumption was encouraged, particularly

for gas-fired combined-cycle power plants that could provide incremental electric supply to the

nation’s power grid at highly competitive prices and with few environmental constraints. Plentiful

supplies, and relatively low prices for several years, discouraged additions to natural gas reserves

during the 1990s.7 With surges in demand for electricity and a colder winter in 2000-2001,

residential and other consumers of natural gas suddenly faced sharply higher prices as

competition grew for gas supplies. At the wellhead, gas prices rose from $2.16 per thousand cubic

feet (mcf) in 1999 to $4.00 per mcf in 2001. But they reached the $8.00 level for a few months

during this period, and prices continued to rise during 2003 and 2004.8

But these developments hardly prepared markets for Hurricanes Katrina and Rita, which sidelined

1.5 mbd of crude oil production and 10 billion cubic feet per day. It should be noted that there is

no “catch-up” for production lost because of the hurricanes—more than 110 million barrels of oil

and more than 580 bcf of natural gas. Natural gas price futures briefly exceeded $15/mcf

(thousand cubic feet) in mid-December. Warmer than typical weather in January 2006 caused

prices to decline to well under $10/mcf early that month. The wellhead price averaged above $6

in late 2006. Sharp fluctuations in supply, demand, and price for natural gas can occur suddenly

between seasons.

A major potential source of additional gas is tanker-borne imports in the form of liquefied natural

gas (LNG). Expansion and refurbishment of facilities to accommodate LNG imports continues. In

addition, there are a number of proposals for new facilities that have received certification from

the Federal Energy Regulatory Commission (FERC); these facilities would receive LNG

produced abroad for consumption in the United States. The Alaska North Slope holds large

proven reserves of natural gas. Shortly before adjournment, the 108th Congress approved an $18

billion loan guarantee for the construction of this pipeline (P.L. 108-357), but development of this

resource has remained difficult and controversial.

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A reliable electric system depends on adequate transmission capacity. The blackout of 2003 in the

Northeast, Midwest, and Canada highlighted the need for infrastructure improvements and

standard operating rules. The regulatory regime has shifted in the electricity industry to encourage

competition in the generation sector, but investment in transmission infrastructure has not kept up

with increases in bulk power transfers and electricity demand. Additionally, transmission lines are

congested in several regions of the United States. Difficulty in siting the lines and regulatory

uncertainty have dampened interest in investing in the transmission system. The Energy Policy

Act of 2005 includes a provision that will allow transmission companies, under certain

conditions, to petition in U.S. District Court to acquire rights-of-way through the exercise of the

right of eminent domain.

Some have argued that transmission and wholesale power markets cannot be competitive without

additional market transparency, or access to market information. The Energy Policy Act of 2005

See http://www.eia.doe.gov/emeu/aer/txt/ptb0410.html.

EIA, Monthly Energy Review, Table 9.11.

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allows FERC to promulgate rules that will facilitate the dissemination of information about the

availability and prices of wholesale electric energy in transmission service. Proposals have been

made to require FERC to issue rules establishing an electronic information system to provide

information about the availability and price of wholesale electric energy and transmission

services to FERC, state commissions, buyers and sellers of wholesale electric energy, users of

transmission services, and the public. However, concerns have been raised that such a system

would take away too much authority from the states.

Concern over electricity supply has also led to some reassessment of the relative roles that natural

gas, coal, renewables, and nuclear energy may have in future electricity generation. In its energy

policy report, the Bush Administration indicated its objectives to remove barriers to the use of

coal in electric power generation, with a renewed emphasis on cleaner-burning coal technologies.

Supporters of renewable energy have urged the establishment of a national “renewable portfolio

standard,” which would require that a certain percentage of electricity generation come from nonhydro renewable energy sources. Nuclear energy supporters have long proposed that new nuclear

generating capacity receive incentives for helping to reduce air emissions.

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As has been noted, the energy policy debate has turned partly on perceptions of the balance

between supply-oriented and conservation-oriented policies that make up an appropriate energy

policy to address the current matrix of energy problems. For example, environmental groups

often ask why ANWR should be opened to leasing if a comparable amount of oil could be saved

by raising motor vehicle fuel economy.

The Energy Policy and Conservation Act (P.L. 94-163) established new car corporate average fuel

economy (CAFE) standards, beginning with model year 1978. Currently, the standards are 27.5

miles per gallon (mpg) for cars and 20.7 mpg for light-duty trucks, including sport utility vehicles

(SUVs). Proposals to raise the CAFE standards have been controversial. Beginning with

enactment of the FY1996 Department of Transportation Appropriations Act, Congress forbade the

expenditure of appropriated funds to make any change in the current CAFE requirements.

However, a study by the National Academy of Sciences (NAS), requested by the 106th Congress,

to recommend “appropriate” CAFE standards, was released at the end of July 2001.9 While the

report did not recommend a specific level for CAFE, it did conclude that “significant” reductions

in fuel consumption could be achieved within 15 years utilizing existing technologies. Were

increases in new car fuel economy achieved by reducing vehicle weight or disproportionately

encouraging the sale of small vehicles, the study allowed that additional fatalities could result.

However, some members of the NAS panel dissented, suggesting that the analysis of the

relationship between fuel economy and vehicle safety is extremely complex.

There is little question that the price hikes during past episodes of tight energy supply spurred

many improvements in energy efficiency. Some argue, however, that the easiest and lowest-cost

efficiency gains have been achieved, and that expectations should be lowered about the additional

efficiency gains that can be captured in the present price framework for energy. When the Reagan

See http://www.nap.edu/books/0309076013/html/.

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Administration redirected energy policy to a more market-oriented framework, it was argued that

R&D needed to be carefully focused on areas that were promising, but unlikely to be explored by

the private sector.

In its energy policy plan, the Bush Administration recommended a review of the funding and

performance of energy efficiency research and development for the purpose of determining

appropriate funding for performance-based research in public-private partnerships.

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As apparent as it seems to many that the nation should do “something” about energy, the

preceding pages have outlined the layers of complexity that augur against easy agreement to

many of the policy options that have been proposed and debated since the mid-1970s. A review of

the history shows that every episode of instability has had its own set of unique contributing

factors—and that these may be geopolitical, based in energy infrastructure or unanticipated

natural disasters, or triggered by extremes of heat or cold beyond anyone’s control. Making policy

decisions that will anticipate unpredictable future developments, or settling on policies to mitigate

the consequences when these events are before us, will remain a challenge for policymakers as

the energy debate continues.

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(name redacted)

Specialist in Energy Policy

/redacted/@crs.loc.gov, 7-....

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