U.S. Vulnerability to an Oil Import

Curtailment

September 1984

NTIS order #PB85-127785
Recommended Citation:

U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability (Washington, D. C.: U.S. Congress, Office of Technology Assessment, OTA-E-243, September

1984).

Library of Congress Catalog Card Number 84-601110

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, D.C. 20402
Foreword

This report responds to a request by the Senate Committee on Foreign Relations

for an analysis of the U.S. oil replacement capability in the event of an oil supply shortfall

of indefinite duration. The assessment complements several other OTA reports related

to energy efficiency and oil replacement: Residential/ Energy Conservation, Energy Efficiency of Buildings in Cities, Industrial Energy Use, Increased Automobile Fuel Efficiency and Synthetic Fuels: Alternatives for Reducing Oil Imports, and Energy From

Biological Processes.

The report analyzes energy supply and demand technologies which can replace

large amounts of oil within 5 years after the onset of a major oil supply shortfall, occurring within the next few years and accompanied by a large and enduring increase in

oil prices. Emphasis is placed on those technologies that are commercially available

now or are likely to be commercial by 1985, and, within this group, attention is given

to the least cost alternatives to oil. In addition, the report analyzes the macroeconomic

effects of an oil shortfall and how these effects could be influenced by different rates

of investment in the oil replacement technologies.

In the course of this assessment, OTA drew on the experience of many organizations and individuals. In particular, we appreciate the generous assistance of our advisory panel as well as the efforts of the project’s consultants and contractors. We would

also like to acknowledge the help of the numerous reviewers who gave their time to

ensure the accuracy and comprehensiveness of this report. To all the above goes the

gratitude of OTA, and the personal thanks of the project staff. It should be understood,

however, that OTA assumes full responsibility for this report, which does not necessarily

represent the views of individual members of the advisory panel.

- JOHN H. GIBBON S

Director

. . . Ill
U.S. Vulnerability to an Oil Import Curtailment Advisory Panel

Rodney W. Nichols, Chairman

Executive Vice President, The Rockefeller University

Al Aim*

Deputy Administrator

U.S. Environmental Protection Agency

Richard E. Archer

Design Program

Southern Illinois University

Jan Brinch

Mueller Associates, Inc.

Nazli Choucri

Department of Political Science

Massachusetts Institute of Technology

Ernest L. Daman

Senior Vice President

Foster Wheeler Corp.

Michael Del Grande

Manager, Energy and Environment

American Telephone & Telegraph Co.

Bob Hemphill, Jr.

Applied Energy Services, Inc.

Brad Holloman

New York State Energy Research

and Development Authority

Robert L. Judd**

Sacramento, California

Terry Lash***

Deputy Director

Illinois Department of Nuclear Safety

Ray Maliszewski

Assistant Vice President

Bulk Transmission Planning

American Electric Power Service Corp.

Hal Miller, Jr.

Vice president, Planning and Rates

Transco Energy Co.

Roberta J. Nichols

Scientific Research Laboratory

Ford Motor Co.

Christopher Palmer

Director, Energy and Environment

National Audubon Society

Richard A. Rettig

Department of Social Sciences

Illinois Institute of Technology

Walter S. Salant

The Brookings Institution

Joanna Underwood

Executive Director

INFORM

R. Fred Wilson

Assistant to the Senior Vice President

Texaco, Inc.

Herb H. Woodson

Director, Center for Energy Studies

University of Texas

*Formerly with John F. Kennedy School, Cambridge, Massachusetts.

* * Formerly with the California State Energy Commission.

* * * Formerly Science Director, Scientists’ Institute for Public lnformation.

iv
U.S. Vulnerability to an Oil Import Curtailment OTA Staff

Lionel S. Johns, Assistant Director, OTA

Energy, Materials and International Security Division

Richard E. Rowberg, Energy and Materials Program Manager

Thomas E. Bull, Project Director

Nancy Naismith, Project Director*

James F. Ryan Joanne M. Seder David Strom Richard Thoreson

Kathryn M. Van Wyk, Editor

Administrative Staff

Lillian Quigg Edna Saunders

Contractors/Consultants

Gibbs & Hill, Inc., New York

Interindustry Economic Research Fund, Inc., College Park, MD

Dale Jorgenson Associates, Cambridge, MA

Energy & Environmental Analysis, Inc., Arlington, VA

Commonwealth Energy Group, Inc., Winchester, MA

Americans for Energy Independence, Washington, DC

Emilio E. Varanini, Ill, Sacramento, CA

Franklin Tugwell, Claremont, CA

Kate Tomlinson, Washington, DC

Elinor Schwartz, Arlington, VA

Rasor Associates, Inc., Sunnyvale, CA

Ransom & Casazza, Inc., Washington, DC

David H. Hunsberger, Washington, DC

Philippe Becker, Berkeley, CA

Wallace Tyner, West Lafayette, IN

● Served as Project Director until September 1983.
Acknowledgments

OTA thanks the following people who took time to provide information or review part or all of the study.

J. Asbury

Argonne National Laboratory

Douglas Bell

U.S. Environmental Protection

Agency

Robert Boyd

American Gas Association

Charles Brooks

U.S. Department of Energy

Agua Das

TIPI Workshop

Allenspark, Colorado

Dallas Dawsen

American Gas Association

Ev Ehrlich

Congressional Budget Office

Wayne Ferris

General Accounting Office

Keith Frye

U.S. Department of Energy

Linda Gaines

Argonne National Laboratory

Michael 1. German

American Gas Association

R. F. Giese

Argonne National Laboratory

Burl Haigwood

Renewable Fuels Association

David Hallberg

Renewable Fuels Association

Richard Barrington

U.S. Department of Energy

K. Hub

Argonne National Laboratory

Larry R. Johnson

Argonne National Laboratory

Thomas Milne

Solar Energy Research Institute

Kevin M. Myles

Argonne National Laboratory

Sidney R. Orem

Industrial Gas Cleaning Institute

Frank T. Princiotta

U.S. Environmental Protection

Agency

Jerry Ramsey

U.S. Department of Energy

Thomas Reed

Solar Energy Research Institute

Norman F. Sather

Argonne National Laboratory

Benjamin Schlesinger

Booz, Allen & Hamilton, Inc.

Bettina Silber

Americans for Energy Independence

Thomas Stern

Americans for Energy Independence

Al Sobey

General Motors Corp.

J. Stavrou

Argonne National Laboratory

George Stosur

U.S. Department of Energy

Jim White

U.S. Department of Energy

A. M. Wolsky

Argonne National Laboratory

vi
Contents

1.

II.

Ill.

Iv.

v .

VI.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

U.S. Energy Consumption Patterns, 1952-82 . . . . . . . . . . . . . . . . . . .

Fuel Switching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Increased Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fuel Use Changes and Longer Term Effects . . . . . . . . . . . . . . . . . . . .

VIl. Economic Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

3

9

39

57

101

119

127

157

vii
Chapter I

Introduction
Chapter I

Introduction

The U.S. economy and energy supply system

were jolted by two oil supply disruptions during

the decade of the 197’0s. In each case, deliveries of liquid fuels were restricted or unreliable for

several months after the onset of the disruptions,

and oil prices rose rapidly. Following these initial instabilities, deliveries became more reliable;

but petroleum prices remained permanently

higher1 than before the disruptions, a situation

that is economically equivalent to a permanent

reduction in petroleum supplies. Thus, both disruptions can be characterized as resulting in a

temporary period of instability, but a permanent

reduction in oil supplies.

The disruptions and supply shortfalls during the

1970s have created substantial economic problems for the United States and changed U.S.

thinking about the importance to the United

States of energy and of a stable energy supply.

The recessions and inflation during that period

were due in part to the large, permanent oil price

increases. in addition, the dependence of the

United States and its allies on imported oil has

intensified the already critical strategic problem

of the Middle East, and the United States has invested and is continuing to invest considerable

sums of money to establish a strategic petroleum

reserve capable of cushioning any further shocks.

Another response to the higher oil prices has

been the considerable change in oil use in the

United States. Oil demand in 1983 was down

about 20 percent from the peak year of 1978, and

U.S. net oil imports dropped from about 8.6 million barrels per day (MMB/D) in 1977 to about

4.3 MMB/D in 1983. This change is a result of

conservation and fuel switching, as well as reduced and changed economic activity. Because

of these substantial import reductions, which

have also occurred in other oil-importing nations,

the amount of oil exported from the Middle East

1 FolIowing the 1973-74 disruption, real oil prices rose by about

120 percent and remained at that level. After the 1979 disruption,

real oil prices peaked in 1981 at 120 percent higher than their 1978

level. By early 1984, 5 years after the onset of the disruption, 011

prices remained at about 60 percent above their 1978 level, Economic recovery from the current recession is likely to put some

upward pressure on oil prices in the years ahead.

has declined by about 10 MMB/D since 1978. Indeed, the decline in world demand has been considerably larger than the loss of oil exports from

Iran and Iraq resulting from the Iran/Iraq War.

Given these conditions, the natural question

is how much should the United States be concerned about the possibility of another curtailment of oil supplies to this country. The problem is still very serious. Despite their large drop,

oil imports are still a significant fraction (about

30 percent) of total U.S. oil demand. And even

though the U.S. economy is considerably more

energy efficient, continued economic growth is

still heavily dependent on a steady supply of

energy at relatively stable prices. In addition, the

responses constructed so far to deal with a possible future shortfall are only able to cushion the

shock and relieve supply restrictions over a

period of about a year or so. Judging from the

previous disruptions, however, a future shortfall

is likely to be, in effect, permanent. Finally, there

are circumstances under which the supply of oil

could again be dramatically reduced. For example, a major war in the Middle East could destroy

the production capacity of the large producers

for several years. Indeed the war between Iran

and Iraq has significantly reduced those countries’ export capability for the last 5 years and

there are signs that this war could spread to other

parts of the Persian Gulf.

To investigate possible U.S. responses to a sudden and permanent reduction in oil supplies to

the United States, OTA has assessed the nonmilitary technological measures that could be taken

to replace large amounts of oil within 5 years after

the onset of a supply shortfall. This assessment

does not explicitly address emergency management strategies (e.g., a drawdown of the Strategic Petroleum Reserve and private oil stockpiles)

designed to minimize the initial instabilities following a disruption, although such measures

would be needed. Rather, it focuses on an

evaluation of the rates that energy technologies

could be deployed to replace the lost oil following a shortfall and on the economic impacts and

3
4 • U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

—

potential market clearing price of oil associated

with different rates of deployment.

Initially, OTA considered a wide variety of technologies for reducing U.S. oil consumption, including technologies for switching from oil to

other fuels and for increasing the efficiency of oil

use. The technologies that show the most promise for replacing large quantities of oil within 5

years after the onset of a supply shortfall (assumed

to begin in 1985) were then considered in more

detail. Potential deployment rates for these latter

technologies were derived, based on historical

peak rates of deployment, estimates of production capacities for the needed equipment, assumptions about U.S. oil consumption in 1985,

and other relevant factors. An alternative deployment scenario was then also derived, based on

more pessimistic assumptions about the rates of

investment in the energy technologies.

To study potential economic impacts, it is necessary to specify the magnitude of the potential

oil supply shortfall. Since OTA is primarily interested in studying the effects of oil replacement

technologies, the postulated shortfall should be

relatively large, so that it cannot be accommodated solely through relatively minor economic

and behavioral adjustments. One such possibility might be the cessation of oil exports from the

Persian Gulf countries. As of mid-1983, these

countries exported a little more than 9 MMB/D,

down from about 14.4 MMB/D in 1981 (mostly

due to a reduction in Saudi Arabian production).2

Since the U.S. accounts for about one-third of

the non-Communist world oil consumption, the

U.S. share of a 9 MMB/D world oil shortfall would

be about 3 MM B/D.3 Other scenarios are possi2EXPOR5 in 1381 are ba5ecf on production of 16 MMBID and consumption of 1.6 MMB/D by these countries (“BP Statistical Review

of World Energy 1981 ,“ British Petroleum Co., Britannic House,

Moor Lane, London E2CY 9BU.). Mid-1983 exports are based on

production of 10.5 MMB/D (“Monthly Energy Review, ” DOE/EIA0035(83/10), October 1983) and an assumed consumption of 1.4

MMB/D.

J[f U.S. oil prices are allowed to rise to world levels during the

shortfall and U.S. price elasticity of demand is the same as in other

countries in the world, then each country’s consumption would

drop in proportion to its consumption before the shortfall. The

elasticity of oil demand in the United States, however, may be

greater than in most other industrialized countries because U.S.

energy use is generally less efficient. Furthermore, because U.S.

consumer oil prices are generally lower than in other industrialized

countries, the percentage increase in U.S. oil prices could be larger

ble, ranging up to a U.S. shortfall of nearly 5

MMB/D, if Persian Gulf exports return to their

1981 levels;4 but 3 MMB/D is more plausible and

is adequate to illustrate the effects of deploying

the oil replacement technologies. Consequently,

for the purposes of this analysis we have assumed that the U.S. oil shortfall would be 3

MMB/D starting in mid-1985.

Based on this hypothesis, on assumptions about

the rate that oil stocks would be drawn down, s

and on the technical analysis, OTA modified and

used a macroeconomic model of the U.S. econ-

— .

than elsewhere. If so, the reduction in U.S. oil consumption could

be proportionately greater than in other industrialized countries.

On the other hand, the fact that about two-thirds of the U.S. oil

consumption is domestically produced means that the flow of capital

out of the country to pay for imported oil would be significantly

less (relative to gross national product) than in many other industrialized countries. Thus, the drop in industrial output and the

consequent relative reduction in oil consumption in some of these

countries could be larger than in the United States.

4As mentioned in the text, Persian Gulf countries exported about

14.4 MMB/D in 1981. With a world oil shortfall of this size, then

under the International Energy Agreement (IEA) the United States

would have to reduce its consumption by about 3.4 MM B/D (less

the emergency reserve drawdown obligation). In that year, however, the U.S. oil use was 32.9 percent of world oil consumption

(excluding U. S. S. R., China, and Eastern Europe). Consequently, in

the absence of the IEA allocations and market pricing of oil in the

United States, the U.S. share of a 14.4 MMB/D world shortfall would

be 0.329 X 14.4 = 4.7 MMB/D. For a 10 MMB/D world oil shortfall, the U.S. share would be 2.5 MMB/D under the IEA and 3.3

MMB/D in the absence of IEA allocations. The corresponding numbers under a 5 MMB/D shortfall are 1.4 MMB/D and 1.6 MMB/D,

respectively. (These calculations are based on 1981 production and

consumption figures from “BP Statistical Review of World Energy

1981 ,“ British Petroleum Co., Britannic House, Moor Lane, London E2CY 9BU and the text and sample calculation in “Agreement

on an International Energy Program (as amended to 19th May,

1980),” International Energy Agency.) Despite the fact that adherence to the IEA would provide the United States with larger supplies of oil than would the free market (after initial adjustments),

the IEA may nevertheless be viewed initially by the public as being unfair to the United States. Since the United States imports most

of its oil from sources other than Persian Gulf countries, a cessation of oil exports from the Persian Gulf would not have a large

immediate effect on U.S. imports. Under the IEA, however, the

United States would have to divert some of its imports to other IEA

member countries. Although the international oil market would

eventually divert larger amounts of our imports to these other IEA

member countries, the initial, organized diversion may still be

viewed with some suspicion in the United States.

5

In both scenarios, the Strategic Petroleum Reserve (SPR) and private oil stockpiles are assumed to be drawn down at a rate starting

at 1.5 MMB/D and dropping to 0.75 MMB/D after 1 year, 0.38

MM B/D after 2 years, and zero at the end of the third year. Consequently, OTA has assumed stocks totaling almost 700 million barrels of oil would be used, of which over half currently is in the SPR,

At mid-1983 rates of filling the SPR (0.24 MMB/D), the SPR would

reach about 525 million barrels by mid-1 985.
Ch. 1—Introduction • 5

omy6 to estimate plausible economic impacts of

the oil shortfall with different rates for deploying

the oil replacement technologies. The difference

i n the economic impacts associated with the two

technology deployment scenarios then served as

a principal measure of the effects of deploying

these technologies.

In the next chapter, the major issues and findings of the assessment are summarized. Chapter

III presents a brief history and current profile of

6

Inter-Industry Forecasting Model of the University of Maryland.

energy and oil use in the United States. Chapters

IV and V summarize the technical analyses of the

oil replacement potential through fuel switching

and conservation, respectively; and chapter VI

combines these analyses into overall scenarios,

examines the overall changes in fuel use, discusses possible variations on the scenarios, and

briefly describes the longer term effects of deploying the technologies. The final chapter gives a

description of the economic model and discusses

the macroeconomic effects, including the results

of the modeling and other relevant economic

considerate ions.
Chapter II

Summary
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Major Findings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Specific Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Replacing Oil Through Energy Technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Macroeconomic Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Environmental Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Longer Term Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Policy Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Advance Preparation for an Oil Supply Shortfall . . . . . . . . . . . . . . . . . . . . . . . .

Measuring the Rate of Oil Replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Selected Regional and International Considerations . . . . . . . . . . . . . . . . . . . . . .

TABLES

9

9

17

17

21

23

24

25

26

29

31

33

Table No. Page

I. Major Oil Replacement Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2. Estimated investment Costs for Major Oil Replacement Technologies . . . . . . . 13

FIGURES

Figure No. Page

1. Potential Replacement of Oil Through Fuel Switching and

Increased Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Economic Comparison o fTwo Oil Replacement Scenarios . . . . . . . . . . . . . . .

3. Potential Reductions in Oil Consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. Potential Oil Replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.GNP: Two Shortfall Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

14

20

21

21
Chapter II

Summary

INTRODUCTION

Since 1973, the United States has experienced

two major oil supply disruptions and shortfalls

which resulted in large and enduring increases

in oil prices. Although the Nation has made great

strides in reducing oil consumption in response

to those price increases, another disruption and

shortfall could still have significant negative consequences for the U.S. economy.

Much of the continuing debate on how to deal

with another disruption and shortfall has centered

around emergency response mechanisms such

as oil stockpiling and standby fuel allocation

schemes. Little attention has been paid to ways

of responding to a shortfall of indefinite duration

because it has always been assumed that any oil

cutoff would end after a period of 1 or 2 years.

An indefinite shortfall is not implausible, however. Indeed, the lasting increases in oil prices

that resulted from events in the 1970s are the economic equivalent of lasting supply shortfalls. And

as a result of the most recent shortfall, the period

1978-83 saw a 60-percent increase in the real

price of oil and an unadjusted decline in oil demand of nearly 4 million barrels per day (MMB/D).

Judging from this historical experience, therefore, an important aspect of the United States’

vuInerability to a future oil import curtailment is

the Nation’s ability to adjust to a lasting or protracted oil supply shortfall and price rise. As

demonstrated by the Nation’s response to the

most recent price shock, a lasting shortfall would

require technological and economic adjustments

that go well beyond short-term emergency responses, although those responses would also

certainly be necessary.

MAJOR

At the onset of an oil supply shortfall, emergency measures such as reductions in private and

public oil stocks can cushion the immediate effects of the oil shortfall. After 5 to 10 years, long

At the request of the Senate Committee on

Foreign Relations, OTA addressed the possibility of a lasting shortfall by asking the following

questions: how could the United States respond

to a large and protracted oil supply shortfall by

technical means alone and how do the economic

consequences of a shortfall depend on the deployment rate of oil replacement technologies?

As a starting point for its analysis, OTA made

a number of assumptions:

1.

2.

3.

4.

Acceptance of the International Energy Program1 IEA agreements results in a 3 MMB/D2

shortfall in the United States (compared to

a preshortfall demand of 16 MMB/D).

The shortfall is assumed to be of indefinite

duration (i.e., to last at least 5 years) at the

outset and to begin in the mid-1980s.

The economy would not undergo major

structural changes, such as major shifts in

output mix or behavior during the 5-year

period.

The Strategic Petroleum Reserve, as well as

private oil ‘stockpiles, would be used to reduce the immediate effects of the shortfall,

but they would be depleted within 3 years,

dropping from a drawdown rate of 1.5 MMB/D

the first year of the shortfall to zero by the

end of the third year.

“’Agreement on an International Energy Program (as amended

to 19th May, 1980),” International Energy Agency.

‘Corresponding to a (non-Communist) world oil shortfall of about

9 to 10 MMB/D.

FINDINGS

Ieadtime technologies such as enhanced oil recovery and synthetic fuels production can begin

to provide liquid fuels, which are essentially indistinguishable from the lost oil. In the period of

9

37-833 0 - 84 - 2
10 • U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

about 1 to 5 years after onset, however, oil consumers will either have to forgo certain energy

services or invest in nonoil energy technologies.

OTA has examined each sector in the U.S.

economy and identified the technologies that,

based on technical considerations, are likely to

be able to replace the largest quantities of oil,

at the least cost, for each sector. The rate that

each oil replacement technology (fuel switching

and increased efficiency of use) could be deployed was then estimated from existing capacities to produce and install the necessary equipment, historical peak rates of installation and

various end-user constraints. Based on this analysis, OTA has concluded that the United States

has the technical and manufacturing capability to replace up to 3.6 MM B/D of oil use within

5 years after the onset of an oil supply shortfall

(see fig. 1 and table 1).

The criteria used to select the most promising

technologies for each major end use of oil were:

1 ) the technology must be commercial now or

is likely to be commercial by mid-l 985, 2) individual units can be installed or built in less than

2 to 3 years, 3) the technology has sufficiently

broad applicability to be capable of replacing a

significant fraction of the oil consumed for that

end use, and 4) the technology is currently

among the lowest cost alternatives to oil for that

end use. In other words, OTA selected those

technologies that—based on current engineering

Figure 1.— Potential Replacement of Oil Through

Fuel Switching and Increased Efficiency

0 1 2 3 4 5

Year

SOURCE: Office of Technology Assessment

cost estimates and technical judgments—could

replace large quantities of oil in a relatively short

time at costs below OTA’s estimate of the probable post-shortfall price of oil ($50 to $70 per barrel in 1983 dollars).

Inflation following a large oil shortfall will, of

course, increase the cost of many of these oil replacement technologies, and it could alter the

relative costs among the technologies. These

changes will depend on a complex variety of factors and, currently, there is no good way to predict the actual outcome. Nevertheless, the difference between the current costs of the major

replacement technologies selected and the probable post-shortfall price of oil is sufficiently large

to warrant reasonable confidence that these technologies will be economic alternatives to oil following a large shortfall.

The options satisfying these criteria that can replace the largest amounts of oil within 5 years

after the start of a shortfall are:

1. increased efficiency and switching to alternative fuels to reduce oil use for space and

water heating in buildings and for steam in

industry and electric utilities, and

2. increased average efficiency of automobiles

and light trucks on the road.

Smaller, additional amounts of oil can be replaced in transportation and materials uses of oil

(e.g., petrochemicals) using a variety of other

technologies, but the near- to mid-term opportunities are more limited because of longer leadtimes and/or higher costs.

At the end of 5 years, deployment of the major oil replacement technologies would leave

transportation fuels and materials production as

the predominant remaining uses for oil. Aside

from refinery use of oil for fuel (8 to 10 percent

of refinery throughputs), less than 5 percent of

the remaining oil consumption would be for

space and water heating and steam, mostly in

residential and commercial buildings in the northeastern United States and in small industrial

boilers throughout the country.

This oil replacement would require about 2 trillion cubic feet (TCF) of natural gas (11 percent

of 1982 consumption) and 115 million tons of
Ch. II—Summary . 11

Table 1 .—Major Oil Replacement Options

Oil replacement potential

Sector after 5 years (MMB/D)a

Electric Utilities:

Switching to coal and completion of new powerplants

currently under construction . . . . . . . . . . . . . . . . . . . 0.5

Increased use of natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6

Industry:

Switch to natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.45

Switch to coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2

Increased efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.15

Reduced refinery throughput . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0

Residential and commercial

(heat and hot water in buildings)

Switch to natural gas.. ..., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.45

Switch to electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4

Increased efficiency and switch to other fuels. . . . . . . . . . . . . . . . 0.15

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0

Transportation:

Increased efficiency of cars and light trucks . . . . . . . . . . . . . . . . . 0.7

Increased efficiency in other transportation modes . . . . . . . . . . . . 0.1

Increased production and use of ethanol. . . . . . . . . . . . . . . . . . . . 0.1

Switch to other alternative transportation fuels . . . . . . . . . . . . . . . 0.1

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6

aNumbers rounded to nearest 0.05 MMB/D

SOURCE OffIce of Technology Assessment

solid fuels (coal and wood) peryear (13 percent

of 1982 production) as substitutes for oil. Nearly

all of the increment of natural gas, however,

could be made available through investments in

increased efficiency of natural gas use.

End-user investment costs for the major oil

replacement technologies can vary from $0 to

$5,000 per barrel per day (B/D) of oil replaced

(for conversion of an industrial boiler to natural

gas) up to $35,000 to $60,000 per B/D of oil replaced (for installation of a central electric heat

pump for residential space heating and hot water) (see table 2). However, with residential electricity costing 8 cents per kilowatt hour (kWh)

(1983 average was 7.2 cents/kWh), even the cost

of installing a heat pump in an average oil-heated

residential building could be recovered in 2 to

6 years, depending on the price of oil following

the shortfall and on the actual investment cost.

The payback period for the other options considered would be shorter, unless there were rapid

inflation in equipment costs and/or natural gas

prices. (Although some inflation in the price of

equipment would be expected, as mentioned

above, there is no fundamental reason why these

prices should become prohibitively high, Furthermore, natural gas price rises could be moderated

by investments in increased efficiency of natural

gas use, with investment costs similar to those for

increased efficiency of oil use. )

Total investment would amount to $30 billion

to $40 billion per year,3 on average, or about 7

to 9 percent of recent annual investments in producer durables and residential structures.

Although the anticipation of large increases in

the price of oil would be a strong incentive to

invest in oil replacement technologies, nontechnical constraints couId Iimit the actual rate of investment in these technologies to a level which

is considerably lower than the rate at which the

technologies could be supplied. For example, in3

The higher number includes investments to Increase the efficiency of natural gas use. The numbers do not, however, include

the cost of new car and light truck purchases because this involves

an ongoing activity.
12 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Photo credit: Midco Corp.

Many oil-fired boilers used for home heating and hot

water can be converted to natural gas simply by the

addition of a gas burner (circled)

dustrial oil users may shut down their plants

rather than make large investments in the face

of an uncertain future demand for their products.

Electric utilities using oil may have difficulties borrowing money in the bond markets particularly

if their current financial health does not improve

and regulatory climate does not change to facilitate these investments. Further, if electric rates

increase after the onset of the shortfall, a drop

in demand for electricity could further deteriorate

utilities’ financial situation. There could also be

delays in issuing construction permits for converting industrial and utility boilers to coal and in

issuing operating permits and certification for new

electric powerplants. States that produce highsulfur coal may resist the use of low-sulfur coal

in these conversions (needed to meet emissions

Photo credit: Atlantic Research Corp.

A coal-water mixture flows from a pipe at an Atlantic

Research Corp. facility. Such mixtures contain up to

70 percent coal in water together with small amounts

of stabilizing agents. Because the mixtures are fluid,

they can be stored and delivered in systems similar

to those used for oil, thereby eliminating the need for

a coal yard at the end user’s location

standards 4 while minimizing the investment and

construction time). Consumers may defer the purchase of new (more fuel efficient) automobiles.

Converting boilers from residual fuel oil to coal will not increase

sulfur and particulate emissions if low-sulfur coal is used and particulate control devices are installed. Emissions of some other pollutants, involving impurities found in coal but not in residual oil,

ash disposal, and mining-related impacts would increase, however.

Furthermore, about one-third of the roughly 100 million ton/yr increase in coal use would be in existing and new electric powerplants and would be used to replace home heating oil. This replacement of oil with coal would lead to net increases in sulfur,

particulate, NQx and other emissions associated with coal. The

magnitude of the increase would depend on how much of the coal

is burned in new and existing powerplants with efficient emission

controls versus the amount burned in existing powerplants with

inefficient controls. Presumably most of the marginal electric generation would be in new powerplants meeting new source performance standards.
Ch. II—Summary • 13

Table 2.—Estimated Investment Costs for Major Oil Replacement Technologies

Investment cost

(thousand 1982 dollars

per barrel per day

Option of oil replaced)

• Fuel switching in industrial and utility boilers:

Conversion to solid fuel

(including coal-water mixtures). . . . . . . . . . . . . . . . . . . . . . . . . . . 10-20

Construction of new solid fuel boiler

with coal-handling facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-50

Construction of coal-water mixture

production plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3

Completion of new powerplants

currently under construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 0

a

Conversion to natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 - 5

● Fuel switching in residential and commercial

space heating and hot water:

Natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-25

Electric heat pumps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-60b

Electric resistance heating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1O-2OC

Solid fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-3 5

d

● Residential and commercial energy conservation:

Building insulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40-6 0

e

. Industrial oil replacement:

Amalgam of efficiency improvements

and product mix shifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-70

f

aA~~ume~ $5OO per kllowatthour to complete and plant operation at 70 Percent of CaPaCW

bBa~ed on an ,n~tallation ~o~t ranging from $2,000 to $3,500 for a system used only for space heating tO $2,500 tO $4,000

for a system for space heat and hot water and on the national average oil use of 676 gal and 1,055 gal per year for homes

(n which 011 rowdes heat only, and both heat and hot water, respective

CAssumes t 1“ $5 () per household for electric resistance space heaters and 1,000 for a hot water heater.

dAss ume s $250 t. $750 for wood stove (including installation) for space fleating only or $2,500 for new wood-fired central

boiler for heat and hot water. eThls estimate represents an average over a number of building types and ages. Actual site-specific Costs will Vary frOm leSS

than $1,000 per B/D up to over $200,000 per B/D, f Industrial replacement ,nvolves a broad range for investment co~ts. At the low-cost end, investment is incidental (e,g , fOr

product mlx shifts); and at the high-cost end, investments are large because firms are willing to pay an insurance premium

In order to Increase the security or price stability of its fuel supplies

SOURCE: Office of Technology Assessment and Gibbs & Hill, Inc., “Oil Replacement Analysis Phase l—Selection of

Technologies:’ contractor report to Office of Technology Assessment, April 1983.

And residential and commercial oil users may be

unable or unwilling to invest in increased efficiency and new heating and hot water equipment

at a time when their heating bills are putting a

strain on their finances; they may simply be ignorant of their options; or, if they are tenants,

they may be unable to convince their landlords

of the need for the investments. Similar reasons

as well as continued price controls on natural gas

may inhibit investments by natural gas consumers

in measures to increase the efficiency of gas use.

As a result, there may be inadequate supplies

of natural gas to achieve this level of oil replacement.

Because there is considerable uncertainty about

the rate at which oil (and possibly gas) users

actually will invest in replacement technologies,

OTA derived two plausible replacement scenarios: one, in which the full 3 MM B/D shortfall is

replaced with these technologies within 5 years

(case A), and another, in which the investment

rate is slower and only half this amount is replaced after 5 years (case B).

Although the economic consequences in both

response cases would be substantial, the rapid

response requires no major changes in the industrial mix of the economy nor permanent curtailments in energy services. Macroeconomic projections indicate that the rapid response would

create significantly less severe economic consequences than a slower, more constrained response. The average loss in gross national product (GNP) over the 5-year period is significantly

less (40 percent) for case A than for case B,

employment losses are 30 percent lower for case

A than B, and the oil price rise during case A is

about half of the case B increase (see fig. 2). Furthermore, although employment is similar after
14 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement capability

Figure 2.—Economic Comparison of Two Oil Replacement Scenarios

Two Oil Price Projections, 1982-90

1982 1984 1986 1988 1990

Year

10

5

0

-5

-10

GNP: Two Shortfall Projections

Percentage Reductions From Reference Case

o 1 2 3 4 5 6

Year

Reference case High response Low response High response Low response

case A case B case A case B

—

Unemployment: Two Shortfall Projections

Percentage Point Changes From Reference Case

0

n

“o 1 2 3 4 5 6

Year

High response Low response

case A case B

SOURCE. Office of Technology Assessment.

the 5-year period for the two cases, in case B,

the employment level is brought back at the expense of lower labor productivity,

In other words, to the extent that the lost oil

is not replaced through investment in replacement technologies, oil consumption must be

lowered through reduced economic activity and

personal consumption. While the total investment cost of the rapid response would be substantial, the investments would result in a lower

net cost to the economy than that in the slower,

more constrained response.

In addition, there will be a strong interaction

between the rate of oil replacement by investment in energy technologies and the state of the

economy. The faster rate of oil replacement restrains the growth in oil prices thereby increasing disposable income. This, in turn, improves

the investment climate, thereby reinforcing the

incentives to make these oil replacement invest-
Ch. II—Summary • 15

ments. Conversely, investor reticence could lead

to a recession which is more severe than that dictated by the magnitude of the shortfall; and this

reticence could be self reinforcing leading to a

severe recessionary spiral. Stability therefore is

also a very important concern.

If the low rate of investment occurs, however,

two additional factors must be considered before

one can conclude that incentives to increase the

rate of investment in the replacement technologies will reduce the adverse economic effects.

First, oil must be more expensive than the replacement technologies. If it is not, incentives to

invest in replacement technologies could still

stimulate the economy; but the stimulative effect

would be greater if the incentives were directed

toward more profitable investments (or towards

investment in general). OTA’s analysis indicates,

however, that with a real shortage of 3 MMB/D

and with market pricing, oil prices would be

higher than the cost of the major fuel switching and conservation technologies considered.

Second, the general level of investment in producer and consumer durables must be below

normal levels. If it is not, incentives to invest in

replacement technologies could increase overall investments somewhat, but they could also

stimulate inflation and divert some resources from

more profitable investments, which could reduce

the overall productivity of the economy in the

mid to long term. Historical data, s however, indicate that expenditures for producer and consumer durables dropped folIowing the 1973-74

and 1978-79 oil crises. One would expect a similar behavior following the large oil shortfall considered here; and, in any case, the level of these

investments can be followed using existing systems of data collection and analysis.

Considering the uncertainties, the importance

of a stable economy, and the significant differences in the economic impacts associated with

the rapid versus the slow response, it would be

prudent to prepare to stimulate the rapid response, if necessary, and to maintain a stable economic environment. Although OTA found that

the rapid deployment rate could be achieved

5“StatisticaI Abstracts of the United States 1982 -83,” U.S. Department of Commerce, Bureau of Statistics, December 1982.

without government-mandated conversions of

production facilities to supply energy technologies, advanced planning by Federal and State

governments is needed.

A system for monitoring directly the rate of investments in oil replacement technologies would

have to be established. In some sectors (i.e., new

automobile sales and electric utility fuel use), the

monitoring apparatus already exists, but care

should be taken to ensure that the results are

analyzed and published reguIarly and promptly.

In other areas, data collection will have to be

modified or expanded. In all cases, the data collection and analysis should be specifically designed to measure the rates of investment in oil

replacement technologies and the quantities of

oil replaced. And, to be most effective, the monitoring system should be in place and functioning prior to onset of an oil shortfalI in order to

provide operating experience and a historical

data set to aid analysis of the data collected following the onset of a shortfall.

Various levels of contingent incentives, ranging from information and technical assistance to

economic incentives and, finally, regulation could

also be established to stimulate investment in oil

replacement technologies. Removal of those economic reguIations that inhibit investments in

some of these technologies may also be needed.

The details of these incentives and measures, including specific procedures, responsibilities, and

implementation plans, shouId be established before a shortfall so that incentives tailored to individual end uses and energy sectors can be implemented quickly and smoothly if needed.

In the event of a shortfall, the first level of incentives, involving information dissemination and

technical assistance, could be initiated immediately. Economic incentives could be introduced

if, after perhaps 6 months to 1 year, investments

lag significantly behind the rate that the technologies can be supplied, the general level of investment in consumer and producer durables is

depressed, the price of oil has risen at least 50

percent (in real terms), and other economic indicators (e.g., the stability of oil prices, trends in

employment and GNP, and speculative investment in oil) suggest the necessity or advisability

of further government action. The incentives
76 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

could then be increased successively until an acceptable rate of investment, as measured by the

investment monitoring system, is achieved. In order to avoid the possibility that investors may delay investments in anticipation of future government subsidies, provisions could be included to

make any subsidies effective retroactively to the

onset of the shortfall.

In the extreme case, government subsidies may

eventually have to pay a large part of the $30 billion to $40 billion per year cost of investments

needed for the rapid response plus perhaps $10

billion/yr to promote new car sales. It maybe possible to finance these outlays, however, through

a windfall profits tax if it were increased so as to

collect 50 to 70 percent of the increased domestic oil and natural gas liquids production profits

resulting from the price rise.6

In any case, ensuring that the rapid response

rate can be achieved clearly requires that a decision be made at the highest level that the government will intervene if the market response

is overly cautious. It also requires advance preparation to establish a functioning system which

monitors investments in replacement technologies and to develop specific procedures to be

used to stimulate investments, if necessary. The

uncertainty would have to be removed from the

investment climate, and clear signals about the

need for investments would be required. But with

the willingness to intervene, the ability to measure the relevant investment behavior, and the

mechanism to apply successively stronger incentives, it seems likely that the potential benefits of

rapidly deploying the replacement technologies

could be realized.

Over time, the vulnerability of the United States

to a large oil supply shortfall will gradually change.

The long-term trend toward reduced consumption of oil for fuel in stationary applications is

likely to continue, Eventually, most buildings,

manufacturing (except chemicals), and electricity

generation will not be directly dependent on oil,

and the vulnerability of these sectors to rapid oil

6

For example, with domestic production of 10 MMB/D, a $23

per barrel increase in oil prices (OTA’s lower price rise estimate)

would increase domestic oil and natural gas liquids production profits by $73 billion/yr. Sixty-eight percent of this is about $50 biIlion/yr.

price rises will be reduced. As this occurs, however, most of the technologies considered in

detail in this report will become increasingly ineffective as cushions against supply shortfalls because they are directed at replacing stationary

uses of oil for fuel. I n transportation, materials

(e.g., chemicals), and off road agricultural, mining, and construction equipment and vehicles—

where the remaining oil consumption will be

concentrated—the Ieadtimes for replacing large

quantities of oil is long and is likely to remain s0.

7

The results of these changes are ambiguous and

partially contradictory. Although reduced U.S. oil

consumption would tend to lower the probability and physical magnitude of an oil shortfall,

reduced short-term oil replacement capability

would tend to increase the price rise associated

with a shortfall of any given magnitude. Furthermore, although expenditures for oil may become

a smaller fraction of gross domestic expenditures

and manufacturing costs (than they would be

without the changes), the economic disruption

resulting from a shortfall of a given size could be

greater, owing to the larger price rise.

OTA’s analysis of increased automobile fuel

efficiency indicates that even if this option is

pursued vigorously and even if stationary (nonfeedstock) uses of oil are eliminated, the United

States would still import large quantities of oil

by the year 2000, owing primarily to an expected

drop in U.S. oil production in the 1990s. 8 And

if world oil markets are tight in the 1990s, the

United States could be more vulnerable to a

shortfall than it was in the 1970s. If oil consumption (in the United States and elsewhere) remaining after these efficiency and fuel switching objectives are accomplished could be reduced and/or

replaced with synfuels at a rate that keeps world

oil markets slack, however, sudden reductions

in production in any given region of the world

would have less of an impact because part of the

loss would be made up through increased production from underutilized capacity elsewhere.

7See also Increased Automobile Fue Efficiency and Synthetic

Fuels: Alternatives for Reducing Oil Imports (Washington, DC: U.S.

Congress, Office of Technology Assessment, OTA-E-1 95, September 1982).

8

Ibid,; see also World Petroleum Availability: 1980-2000-A Technica Memorandum (Washington, DC: U.S. Congress, Office of

Technology Assessment, OTA-TM-E-5, October 1980).
Ch. II—Summary ● 1 7

SPECIFIC

OTA’s analysis of oil replacement technologies indicates that the most effective near- to

mid-term replacements for the oil lost in a large

shortfall are those that increase end-use efficiency and convert oil users to natural gas and

solid fuels (coal, wood, and coal-water mixtures), as well as electricity for space heating and

hot water (in parts of the country where there

is excess nonoil-fired generating capacity). These

technologies are primarily directed at replacing

the oil used for space heating, hot water, and

steam and at reducing gasoline consumption.

Replacing large amounts of nongasoline transportation fuels and oil-based materials (e.g., chemicals, asphalt, lubricants), on the other hand, will

require longer Ieadtimes and, in some cases,

more extensive replacement of capital equipment.

FINDINGS

Replacing Oil Through

Energy Technologies

The potential responses to an oil supply shortfall that begins in 1985 are summarized below

for each of the major oil-consuming sectors. The

results are then collected into estimates of the

overall rate that oil could be replaced within a

5-year period.

Rapid Response—Case A

Utility Use

Electric utilities could begin immediately by

using natural gas exclusively in the boilers already

equipped to use either oil or natural gas. This

change could replace up to 0.2 MMB/D or nearly

Photo credit: U.S. Department of Energy

Electricity is generated in this modern coal-fired powerplant. The coal yard is to the left
78 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

one-third of their projected 1985 oil use. However, because OTA has assumed that incremental

natural gas supplies are limited and has allocated9

most of the gas to the residential, commercial,

and industrial sectors, the increment of natural

gas allocated to utilities at the end of 5 years is

only about one-sixth of their projected 1985 oil

use. Consequently, their major options for replacing oil are to convert oil-burning boilers to solid

fuels and to complete nonoil-fired powerplants

now under construction and scheduled for completion between 1985 and 1990.10 This is particularly true in the Northeast (New England, New

York, and New Jersey), where even if all feasible conversions were carried out and all powerplants were completed and brought on line, utilities would still not be able to replace all of the

oil used during times of peak demand. Depending on the growth in demand for electricity, a

small amount of oil may also have to be burned

in utility boilers in Florida, California, and the

Mid-Atlantic States, even after feasible conversions to coal and powerplant completions. Most

of this oil, however, could probably be replaced

with natural gas. In other regions of the country,

completion of all powerplants currently under

construction is less important, from the standpoint of replacing oil and providing electricity for

residential and commercial space heating and hot

water.

The solid fuel options include conversions to

coal, wood, and coal-water mixtures. 11 The technical changes to the boiler systems (e.g., heat ex9Priority use for the increment of natural gas was assumed to go

to residential and commercial customers. The remaining gas was

then divided between the industrial and utility sectors in proportion to the amount of oil remaining after the most likely conversions to solid fuels were completed. In all, it was assumed that 2

TCF/yr of natural gas would be available for direct replacement of

oil. OTA estimates that increased efficiency of natural gas use in

the industrial, residential, and commercial sectors could supply

nearly all of this gas.

10This obviously does not imply that all powerplants current &

under construction can serve as replacements for oil. In many regions, the planned capacity additions greatly exceed the new capacity needed to replace all utility oil use and, at the same time,

supply sufficient additional electricity to replace all the oil used for

space heat and hot water by residential and commercial customers. In New England, New York, and New Jersey, however, virtually all of the planned capacity additions are needed just to replace most of the oil used by utilities.

11 Coal-water mixtures are fluid mixtures of pulverized coal and

water. These mixtures might typically be 60 percent coal (by weight)

and have an energy content of about 3.3 MMBtu per barrel.

changer tube spacing, ash disposal, particulate

control systems) are similar for all of the solid

fuels, but coal-water mixtures would probably be

favored where space limitations prevent construction of solid fuel yards because the mixtures can

be prepared offsite and transported, stored, and

delivered to the boilers in facilities that are similar to those used for oil (with appropriate changes

to valves, pumps, burners, etc.).

In all, utility conversions and completion of

plants currently under construction could replace

most of the 1985 utility oil use, or about 0.6

MMB/D.

Residential and Commercial Use

Residential and commercial customers can

convert to natural gas and electricity for space

heating and hot water. In most regions these conversions could virtually eliminate oil use for these

purposes. In New England, the New York/New

Jersey region, and Hawaii the oil replacement potential from these conversions is more limited,

however, because many oil customers are not located near gas lines and electricity generation is

heavily dependent on oil.12 In these regions,

therefore, additional oil could be replaced

directly by increasing the end-use efficiency and

converting to wood and possibly coal (particularly in the Northeast) and solar collectors. Although the latter options are likely to be pursued

throughout the country, in regions other than the

Northeast and Hawaii they would serve primarily to reduce the incremental demand for natural gas and electricity rather than increase the

total technical potential for oil replacement in

these sectors. In all, these changes could replace

about 1 MMB/D of oil in the residential and commercial sectors.

Industrial Use

The principal replacements for the 1 MMB/D

of oil used in industrial boilers are solid fuels and

natural gas. The solid fuel technologies include

12Conversions to electricity for heat and hot water could actually

increase oil consumption in these regions if they are carried out

before the utilities eliminate their oil use. And the delay before utilities can accomplish this limits the oil replacement from conversion to electric heating within the 5-year time period.
Ch. II—Summary • 79

direct combustion13 of coal, wood, and coalwater mixtures, as well as the use of onsite gasifiers, which convert solid fuels to a low-energy

fuel gas. OTA estimates that about two-thirds of

the oil used in industrial boilers could be replaced

with solid fuels and natural gas within 5 years,

but for a variety of reasons, replacing the remaining third would take longer.

Many industrial facilities have limited space to

accommodate ash and solid fuel handling facilities and particulate control systems; and many

are too old to justify major investments in only

a part of the system, even under the conditions

of an extended oil supply shortfall. OTA estimates

that these constraints would limit solid fuel substitution to about half of the oil used in the large

(greater than 50 MMBtu/hr) industrial boilers. This

oil, about 0.2 MMB/D, is consumed in about onefourth of the 4,000 boilers of this size. Additional

oil could be replaced by solid fuels if some of the

older facilities were scrapped and replaced with

new plants capable of using solid fuels, but decisions to do this would be based on a variety

of nontechnical factors, which OTA has not

analyzed.

All of the constraints mentioned above, as well

as some others, are likely to affect conversions

of small (less than 50 MMBtu/hr) boilers to solid

fuels. For example, there may be difficulties in

obtaining reliable fuel supplies; and diseconomies

of scale and often low load factors for small boilers increase the cost per unit of oil saved, relative to that of typical large boilers. Furthermore,

the production capacity for small boilers (about

1,000 units per year) prevents replacement of

more than a small fraction of the 140,000 small

industrial oil-burning boilers. Retrofits to gasifiers

could be more numerous, but the total fraction

of small boilers converted to solid fuels and the

oil replaced from these conversions is still likely

to be relatively small.

The remaining industrial boilers not converted

to solid fuels and near to existing gas lines could

13For direct combustion, large boilers cou Id either be modified

or replaced with solid fuel boilers, while small boilers are more

likely to be replaced.

be converted to natural gas.14 However, since

OTA has assumed that only 2 TCF of additional

gas would be available and that residential and

commercial customers would have priority, only

about 60 percent of the remaining oil used in industrial boilers could be replaced with gas, owing

to limited supplies of this fuel.

In all, OTA estimates that the solid fuel and gas

conversions could replace about 0.65 MMB/D of

oil from industrial boilers. In addition, increased

efficiency in all uses of oil by the industrial sector and reduced oil refinery throughputs could

reduce consumption by another 0.37 MMB/D,

bringing the total to a little more than 1 MMB/D

in 5 years.

Transportation Use

OTA estimates that about 1 MMB/D of oil could

be replaced in the transportation sector in about

5 years, with 80 percent of this coming from increased efficiency of automobiles and light trucks.

Substantial savings are likely to occur even in the

absence of an oil shortfall.15 Automobile and light

truck manufacturers have been converting their

plants to produce more efficient vehicles for a

number of years, and as these vehicles replace

the ones currently on the road, fuel consumption will drop.

14Obviously, it would be more easily economically justified to

extend natural gas lines longer distances to accommodate large

boilers and large groups of small boilers than could be justified for

isolated small boilers.

15Maximum savings could reach nearly 1 MM B/D over the 5-year

time period, but actual savings will depend on the demand for fuel

efficiency in new cars and the volume of new car sales. I n a crisis,

new car sales are likely to slump (which would reduce the savings),

while demand for fuel efficiency would increase (which would increase savings). These two factors tend to cancel each other out.

For example, OTA estimates that with average annual new car sales

of 11 million vehicles/yr and a 1990 new car fuel efficiency of 27.5

miles per gallon (mpg), the fuel savings between 1985 and 1990

wouId be about the same as with annual new car sales of 7 million

vehicles and a 1990 new car fuel efficiency of 36 mpg, or about

0.8 MMB/D for cars and light trucks (assuming light truck sales and

efficiencies mimic those of cars). In the extreme case, where

automobile sales slump to 5 million vehicles annually and 1985

new car efficiency is 25 mpg, rising only to 32 mpg by 1990, savings would still be about 0.5 MMB/D. (See also Increased Automobile Fuel Efficiency and Synthetic Fuels: Alternatives for Reducing Oil Irnports, op. cit.
20 • U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

In addition, smaller savings are possible through

shifts in the modes of freight transport (from

planes to trucks, trucks to rail, and rail to water

transport), marginal increases in the efficiency of

freight and commercial passenger transport, increased production of fuel ethanol (for alcohol

blends in gasoline), and conversions to compressed natural gas, liquefied petroleum gas, and

(possibly) mobile gasifiers, which convert solid

fuels to a fuel gas on board the vehicle.

Total

With all of the changes described above, oil

replacement could total about 3.6 MMB/D by the

end ofs years; and based on current production

capacities and historical high rates of conversion,

the replacement might proceed something like

that shown in figure 1.

Slower Response—Case B

For the slower response case, OTA assumed

that new automobile sales would drop to half the

level of the late 1970s and that incremental natural gas supplies would be one-third of the 2 TCF

per year assumed in the more optimistic scenario.

With these alternative assumptions, the oil replacement in the industrial and residential/commercial sectors would drop by about two-thirds.

In the utility sector, however, even with the reduced number of coal conversions and new

powerplant completions, there would still be sufficient activity to replace about half of utility oil

use (provided demand for electricity does not

grow rapidly). Similarly, in the transportation sector, there would still be sufficient replacement

of older vehicles by newer, more fuel-efficient

models to capture almost two-thirds of the oil savings derived in the more optimistic scenario.

Taken together, these changes would reduce the

oil replacement at the end of 5 years from 3.6

MMB/D to about 1.7 MMB/D.

Figure 3 shows the oil replacement by end-use

sector for both response cases, 6 months, 2 years,

and 5 years after the onset of the shortfall. In figure 4, the oil replacement from investment in the

replacement technologies is combined with the

Figure 3.—Potential Reductions in Oil Consumption

5.0-

After After After

4.5 — 6 months 2 years 5 years

4.0

t - 3.6

3.5

3.0

2.5

2.0

1.5

1.0

.5

2.0

1.7

A B A B A B

Scenario

Industry Residential/ Transportation Electric

commercial utilities

SOURCE: Office of Technology Assessment,
Ch. II—Summary • 21

Figure 4.—Potential Oil Replacement

1 2 3 4 5

Year

Stock Scenario A Scenario B

drawdown rapid response slower response

* — — - -

SOURCE: Off Ice of Technology Assessment

assumed Strategic Petroleum Reserve and private

stock drawdown to give two scenarios for the

overall potential replacement of oil lost from the

short fall, as a function of time.

In all, about 30 percent of the oil that could

be replaced in the rapid response by the end of

5 years could be attributed directly to increased

efficiency in space heating, industrial processes,

automobiles, and light trucks. Also, greater efficiency could reduce natural gas use, thereby

making more natural gas available to meet the

needs of the rapid response case.

Macroeconomic Impacts

The postulated curtailment of oil imports was

simulated using an input/output model of the U.S.

economy. 16 While all aspects of such an unprecedented economic shock are difficult to anticipate,

the modeling exercise focused primarily on the

16Macroeconomic analysis is based on the IN FORUM model

(Inter-industry Forecasting Model of the University of Maryland)

of the U.S. economy. It permits detailed accounting for oil flows,

prices, capital stocks, and technology deployment for 78 producing sectors as well as associated personal income and consumption, exports and imports, and government activities. OTA calibration of the model was limited primarily to activities directly affected

by oil markets, and thus the rest of the economy was taken as it

was previously incorporated into the IN FORUM model structure.

The scope of analysis is also limited to including only a brief treatment of emergency conditions immediately following the disruption shock in order to concentrate on conditions over a 5-year

period.

macroeconomic implications of alternative technological responses. The two 5-year shortfall

scenarios, the rapid and the slow response, were

simulated in order to bracket the range of technological uncertainties.

Comparisons of the two scenarios suggest that

the more rapid rate of investment in oil replacement more effectively limits the losses. The range

of possible economic outcomes derived from the

model is summarized in figure 5 in terms of GNP

behavior.

From the 5-year perspective, the model predicts that the main impact of the shortfall on GNP

is a temporary delay in the achievement of longterm output objectives. In the one extreme, case

A, the net GNP loss 5 years after the onset of the

shortfall (relative to the reference case) could be

made up in about a year of normal growth (about

2percent). In the other extreme, case B, making up the loss would take about 2 years. Although there is a severe recession 2 years after

the beginning of the oil import curtailment, this

recession is only temporary and the economy

rapidly regains most of the loss. In other words,

the model suggest that if short-term economic

problems can be resolved,17 the loss of oil im17 SPR drawdown addresses some of the short-term economic

problems, but the economic response also depends on fiscal and

monetary policy, speculation, income transfers, and mar-w other

factors.

o 1 2 3 4 5 6

Year

High response Low response

case A case B

SOURCE: Office of Technology Assessment.

I
22 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

ports should not significantly lower long-term

prospects for economic growth.

A second general observation concerns the average loss in the level of GNP over the first 5 years

after onset of a shortfall compared to the reference case.18 In the rapid response scenario, the

permanent loss of oil imports lowers GNP on

the average by about 3.5 percent. In the slower

response scenario, the average loss is about 6.2

percent. The GNP rebounds toward the end of

the 5-year period because investments in oil

replacement have reduced the burden of high

energy costs on the economy.

A third comparison (though less important from

a longer term perspective) involves year-to-year

change in GNP during the first 2 years following

the shortfall’s beginning. While comparisons between normal growth rates and average output

over 5 years are most interesting, given the model

used, this shorter term perspective is probably

most important for public perceptions of economic hardship. in the slower response scenario,

there is considerably less investment in oil replacement technologies than in the rapid response. This leads to a slower pace of oil replacement and increased bidding for the remaining oil

supplies. Consequently, the slower response scenario results in a larger oil price rise and greater

economic hardship.

Although GNP actually declines only in the second year after the shortfall begins, the decline

in case A is only 1.3 percent from the previous

year, while it is 5.2 percent in case B. This difference can be appreciated by noting that in the

worst recession since the Great Depression, real

GNP declined in 1982 by 1.7 percent from that

in 1981. The recession just prior to that, from

1979 to 1980, involved only a 0.2 percent decline

in GNP. In other words, case A is within recent

historical experience; case B is well outside of it.

Besides this overview of the entire economy,

the economic situation 5 years after the shortfall

18 Please notice that the Model’s behavior at the start of the

postulated disruption in 1985 is strongly influenced by current expectations that the economy will have considerable growth momentum. If, on the other hand, the United States were mired in recessionary doldrums, the projections could be quite different.

begins can also be described in terms of the market clearing price of oil. Market expectations for

oil price inflation provide the rationale for investment in oil replacement at the same time as they

cause dislocation in industry and loss of consumer purchasing power. In case A, an oil price

increase of about 60 percent above its current

level would be sufficient to accommodate oil demand to reduced supply. In case B, oil prices

must increase by about twice that amount to balance demand with supply.

These price expectations summarize both the

technological opportunity set for oil replacement

and the behavioral adjustments to higher oil

prices which are built into the macroeconomy.

Behavioral adjustments include product mix shifts

from products with relatively large oil inputs to

those with relatively low inputs, adjustments in

direct fuel consumption by consumers (mainly

by driving less and turning down thermostats),

and general restriction of economic activity.

Finally, all of these economic conclusions must

be qualified by acknowledging the uncertainties

that may not have been treated realistically in the

modeling effort. First and most important are

emergency responses immediately following the

onset of the shortfall. Although the GNP projections shown above included the entire 5-year

shortfall period, the actual numbers could be

greatly affected by market and political actions

that are not closely related to the technological

focus of this study. In addition, the oil shortage

emergency could trigger inflationary or recessionary spirals that would slow down oil replacement.

On the other hand, the shock of another oil

loss could trigger major lifestyle or technological changes that would lower the cost of oil

replacement. For example, work and entertainment patterns may be shifted to the home, where

rapid advances in communications and computer

technologies could significantly reduce the need

for auto travel. These were not considered in the

economic analysis because primary attention was

given to those flexibilities and rigidities in the

energy economy that can be predicted from the

technology analysis in the assessment and from

recent historical experience.
Ch. II—Summary . 23

Environmental Impacts

The increased use of solid fuels for the rapid

response path (a total of 115 million tons/yr of

coal equivalent) will require that coal production

be increased by up to 13 percent over 1982

levels, a situation that will entail greater miningrelated impacts. About 65 million tons/yr of coal

would be used in utility and industrial boilers converted from oil. To avoid increases in sulfur and

particulate emissions, these boilers would have

to use low-sulfur coal and particulate control systems, for which supplies are adequate for the

postulated scenarios. However, there would

probably bean increase in nitrogen oxide (NOx)

emissions in some of these boilers; and to the extent that fuels with higher sulfur contents are used

in converted boilers (without new scrubbers)

sulfur dioxide (SO2) emissions would also increase.

An additional 35 million tons/yr of coal would

be used in new and existing coal-fired utility

boilers to replace (mostly distillate) fuel oil used

in the residential and commercial sectors. This

would also lead to an increase or at least a delay

in the reduction (through retiring older boilers)

of SO2 and NOX emissions. The remaining 15

million tons/yr would be used in new ethanol distilleries. The larger distillery boilers (50 million

gal/yr or larger of ethanol production supplied

by a single boiler) would be regulated by Federal New Source Performance Standards, but most

of the distilleries would probably be regulated primarily by State and local requirements for emission controls.

Production ofs billion gal/yr of ethanol (which

is included in the rapid response and is capable

of reducing U.S. oil consumption by about 0.1

MMB/D) would require a 15-percent increase in

Photo credit: U.S. Department of Energy

Coal is surface mined using drag lines and other large mining equipment
24 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

grain production. This would probably lead to

more than a 15-percent increase in soil erosion

and the accompanying pesticide and fertilizer

runoff because much of the new cropland would

be more erosive and less productive than current

average cropland used for grain production.

The increased supplies of wood for fuel could

be supplied as part of careful forest management

programs without significant adverse environmental impacts; but if the wood is harvested in

a haphazard manner, damage to the forest and

eventually to forestland productivity could be

substantial. Furthermore, burning wood without

emissions controls (e.g., for home heating) would

likely lead to significant local increases in particulate emissions, including higher levels of polynuclear aromatics (which are generally not a

problem with either central electric power generation or natural gas or oil combustion). But sulfur emissions from wood would be insignificant.

Longer Term Effects

In the longer term (greater than 5 years), the

principal consequences of the rapid response will

be inflationary pressures on natural gas and food.

If natural gas production falls sharply in the 1990s,

the increased dependence brought about by oil

replacement will greatly increase natural gas

prices and/or imports. But if production capacity remains at current levels or higher, or a slower

drop in production is coupled with feasible increases in the efficiency of natural gas use, price

pressures will be lower, and a more orderly, longterm transition to increased use of coal, electricity, and renewable can occur. Supplying the

grain feedstocks for 5 billion gal/yr of ethanol production will lead to increases in farmland and

food prices, and these increases will persist as

long as the feedstocks are supplied. On the other

hand, if ethanol production is kept below about

2 billion gal/yr, the impact on food prices probably would be relatively small (i.e., less than a

l-percent increase).

Also, the reduction in oil consumption (resulting from the shortfall) and the replacement of oil

by nonpetroleum fuels and increased efficiency

will accelerate the transition that must occur in

the 1990s as domestic oil production drops. And

if long Ieadtime technologies, such as new enhanced oil recovery and synthetic fuel projects,

are initiated during the first few years of the shortfall, they would begin to reduce somewhat the

liquid fuel shortages in the 1990s. With the rapid

response, the United States could minimize the

adverse economic consequences of a large oil

shortfall and accelerate many of the changes

that will eventually be needed if the United

States is not to remain heavily dependent on imported oil. With the slower response, however,

the adverse economic effects would be both

more severe and longer lasting.

Finally, the vulnerability of the U.S. economy

to oil supply shortfalls is not likely to decrease

in the near-to mid-term future, and it could very

well increase. As domestic oil production

declines, U.S. oil imports will increase and/or

some of the oil used for space and water heating

and steam will be replaced. Increased imports are

likely to lead to increased oil production in politically unstable areas of the world, thereby increasing the size of any potential oil shortfall, and

reduced use of oil for the most easily substitutable

end uses will reduce the quantity of oil that can

be replaced quickly. In both cases, U.S. vulnerability will increase.

These trends can be countered somewhat in

the mid to long term by relying more heavily on

coal and biomass for chemicals production, by

increasing transportation fuel efficiency (primarily

automobiles and light trucks), and by producing

synthetic fuels. The first two actions would reduce

the fraction of business costs and personal consumption that is tied to oil prices, thereby reducing the importance of oil prices to the overall

functioning of the economy. Domestic synthetic

fuels production would reduce the payments for

imported oil and together with new sources of

conventional oil production in the world, would

increase (or at least lower the reduction in) the

excess worldwide oil production capacity that

can buffer the effect of a sudden drop in world

oil supplies. Effecting these changes, however,

will require many years. Even if they are pursued

vigorously, the United States is likely to remain

vulnerable to world oil shortfalls until well after

the year 2000.1

9

Igsee lncreas~ Automobile Fuel Efficiency and Synthetic Fuels:

Alternatives for Reducing Oil Imports, op. cit.
Ch. II—Summary • 25

POLICY

OTA’s analysis indicates that the economic

damage, such as increased unemployment and

lowered GNP, caused by a large oil supply shortfall (or price increase)20 can be reduced significantly (but not eliminated) by expeditious investment in technologies that replace the lost oil with

increased efficiency and alternative domestic

fuels. Although a drawdown of the Strategic Petroleum Reserve (SPR) and private oil stocks probably is essential to moderate pressures on the oil

markets i n the short term, the effects of investments in oil replacement technologies could

easily exceed the importance of stock drawdowns

after about 1 year.21 And after 2 to 3 years, stocks

would most probably be exhausted. Price controls and subsidization of oil imports, such as was

done in the mid-1970s, may also be able to moderate the immediate price shock; but the resultant, incorrect price signals, if allowed to persist,

could lead to economic inefficiencies that might

be more damaging in the long term than those

produced by rapid changes in oil prices.

Although OTA has not analyzed the effects of

various strategies for oil stock drawdowns or price

controls, it is clear that these measures will be

most effective if strategies for using them are developed and refined in advance of a supply shortfall. The analysis needed to formulate these strategies may lead to the conclusion that price controls should be rejected; but, at the minimum,

a clear plan22 shouId be developed for a draw20From an economic perspective a price increase is the same as

a reduction in supplies. In this sense, both of the supply shortfalls

experienced by the United States in the past 11 years have been

permanent, since in each case the price of oil remained permanently

higher after the shortfall than it had been before the shortfall. While

many circumstances surrounding each shortfall are unique, it is not

unreasonable to expect that a future supply shortfall could also be

permanent in this sense, even if surplus oil production capacity

were to develop later.

21After 1 year, investment in oil replacement technologies could

replace slightly more than 1 MM B/D (million barrels per day) of

oil consumption, However, with oil stocks of 700 million barrels

and an initial rate of drawdown equal to 1.5 MMB/D, the rate of

oil removal from stocks would have dropped to significantly less

than 1 MM B/D after 1 year.

22The alternative strategies considered shouId include: 1) offering unlimited quantities of SPR oil (up to the physical maximum

rate that it can be delivered) at a predetermined price, and 2) delivering predetermined amounts of SPR oil (based on the size of

down of the SPR, in conjunction with deployment

of private stocks, if the benefits of the SPR are

to be maximized. Furthermore, any such plans

should take into consideration the potential deployment of oil replacement technologies and

the effect that various methods of drawdown

would have on this deployment.

Beyond these near-term responses, investments

in oil replacement technologies can provide the

principal means of easing pressures on oil markets in the mid-term, as well as lowering expectations of future oil price rises (and thus speculation in oil stocks). And these investments (like any

other investment in consumer and producer durables) would serve to stimulate the economy and

partially counteract the economic downturn resulting from a shortfall. Through these effects, the

investments would tend to limit the oil price rise

and economic damage.

In the absence of price controls, the large increase in oil prices accompanying the postulated

shortfall wouId provide a strong incentive for oil

users to invest in replacement technologies.

Nevertheless, investors may be extremely cautious in making long-term capital investments,

owing to the economic uncertainties or high capital costs. In either case, the rate of investment

in oil replacement technologies could be well

below the rate that they can be manufactured

and installed. This, together with lowered rates

of investment in other consumer and producer

durables, would be indicative of a “market failure” that could lead to a recession more severe

than that dictated by the magnitude of the shortfall.

A central problem facing policy makers who

wish to minimize the potential economic losses

from an oil supply shortfall is therefore to: 1) identify the technologies that can replace large quantities of oil at least cost to various oil users, 2)

monitor the performance of energy markets and

investment patterns for signs of market failure like

the shortfall) at the market price. The former approach would tend

to put a lid on oil prices (thereby discouraging speculative, private

stock formation beyond a certain level, among other things), while

the latter would be directed more toward maintaining physical supplies of oil.

37-833 0 - 84 - 3
26 ● U.S. Vulnerabbility to an Oli Import Curtailment: The Oil Replacement Capability

that described above, and 3) where possible and

appropriate, apply incentives to modify the investment behavior. Addressing this problem requires advance preparation in order to establish

a functioning system to monitor the appropriate

investment behavior and in order to develop the

specific procedures and incentives to be used to

stimulate investments, if necessary.

A decision to intervene will, of course, be made

very difficult by the inevitable uncertainty concerning the duration and direction of an oil supply shortfall and by the enormously complicated

tasks of choosing appropriate policy levers to affect investment and coordinating the activities of

various institutional and governmental entities

with different jurisdictions and objectives. These

obstacles are formidable; the argument for intervention, however, rests on the real possibility of

market failure and on the very high cost to the

country of such failure.

The objective of this study was not to analyze

in detail the effectiveness of alternative means of

shaping investment choices, but rather to specify

the most promising technologies for replacing

large quantities of oil within 5 years after the onset

of a shortfall and to indicate some of the economic costs and benefits, for the country as a whole,

associated with investment strategies that rely on

these technologies to different degrees. An analysis of this kind can provide useful guidelines for

those who find it prudent to consider policies

related to these technologies in planning for, or

actually responding to, both the immediate emergency and the longer term problems created by

an oil supply shortfall.

With these objectives in mind, the policy analysis outlines a general strategy for identifying and

responding to the type of market failure described

above and summarizes various other policy concerns directly related to implementing this strategy. In the next section, there is a description of

a policy strategy designed to ensure that the potential benefits of deploying oil replacement technologies can be realized. Following this are sections on actions that can be taken in advance to

prepare for the possibility of an oil supply shortfall, ways of measuring the rate of investment in

the replacement technologies, and a brief discussion of selected regional and international considerations.

Several other policy concerns associated with

an oil supply shortfall are not addressed in this

report. These include the desirability and potential efficacy of military intervention to secure oil

supplies. They also include numerous questions

of equity associated with large transfers of wealth

within the country and the uneven impact of

higher oil prices among the regions of the country and energy-using sectors. And there are questions of priority access to or subsidization of oil

supplies to various end uses, such as for home

heating, which is crucial to the health of millions

of households; agriculture, which is essential to

the entire population; and transportation, which

binds the economy together.

These are all extremely important questions

, that will have to be resolved in formulating a

comprehensive policy for responding to an oil

supply shortfall. In most cases, however, specific

decisions regarding these issues would not preclude or obviate the possible need for government intervention to ensure that the potential

benefits of deploying technologies to replace the

oil lost in a shortfall are actually realized. indeed,

realizing these benefits can lessen some of the

concerns mentioned in the above paragraph.

Policy Strategy

The basic hypothesis of this assessment is that

the United States suffers a 3 MMB/D reduction

in its oil supplies beginning in the mid-1980s and

lasting for at least 5 years. one of the first actions

the government could take under these circumstances is to begin a drawdown of the SPR23 in

2 3O TA has not examined what would constitute an optimal

drawdown of the SPR. For the purposes of the economic modeling, however, OTA has assumed that private and SPR stocks amount

to 700 million barrels and that they are drawn down at a rate beginning with 1.5 MMB/D immediately after the onset of the shortfall,

with the rate dropping to 0.75 MMB/D after 1 year and 0.38 MMB/D

after 2 years. The stocks would then be depleted by the end of 3

years. For additional information on SPR drawdown, see the following publications:

GAO: Strategic Petroleum Reserve: Substantial Progress Made, But

Capacity and Oil Quality Concerns Remain, EMD-82-19, December 1981.

Purchase Price of Strategic Petroleum Reserve Oil Fair But

Payment Timing Is Costly, 1980.
Ch. II—Summary ● 27

order to help stabilize the oil markets as they adjust to the sudden change in supply. This action

would reduce the price rise in the short-term; but

as the stocks are depleted, the SPR drawdown

would diminish in importance.

Another action that could be taken immediately is to expedite, where necessary, the processes

of issuing State permits u rider State implementation plans (of the Clean Air Act) for conversions

of industrial and utility boilers to coal (e.g., 10

month permitting process). OTA’sanalysis indicates, however, that these conversions can be

achieved within the existing environmental regulations. if low-sulfur coal is used in the converted

boilers, together with particulate control devices,

and the boilers are properly adjusted for NOX

emissions, the conversions would not lead to increases in regulated emissions or changes in ambient air quality. Consequently, in most cases

there should be little regulatory resistance to

issuing the needed permits. Similarly, current permitting procedures need not delay the completion and issuing of operating permits and certification for new electric powerplants.24

Unresolved social conflicts, however, could delay coal conversions and new powerplant projects by several years or more. The places where

this would have the greatest effect on oil replacement would be in electric utilities in New England

and the New York/New Jersey area25 (which conCBO

CRS:

U.S. Strategic Petroleum Reserve at a Turning Point: Management of Cost Oil Supply Problems, and Future Site Development, 1980,

Factors Influencing the Size of the U.S. Strategic Petroleum

Reserve, ID-79-8, June 15, 1979.

Financing Options for the Strategic Petroeum Reserve (Barry

J. HoIt), April 1981.

Strategic Petroleum Reserve: lmplications for U.S. Foreign“

and Defense Policy, June 15, 1982.

Strategic Petroleum Reserve, IB81096, Feb. 14, 1984.

24 See Nuclear power in and Age of Uncertainty (Washington, DC:

U.S. Congress, Office of Technology Assessment, OTA-E-216,

February 1984).

25Electric utiIities in other regions of the country either do not

use significant amounts of oil or have sufficient capacity additions

planned to eliminate their oil consumption and provide sufficient

nonoiI-fired electricity for residential and commercial conversions

to electric space heating and hot water, even if some of the projects are blocked. In the case of high growth in demand for electricity between 1985 and 1990, however, the Mid-Atlantic region and

Florida are marginal cases; and significant resistance to conversion

and new powerplant projects could leave these regions consuming a few tens of thousands of barrels per day 5 years after the onset

of an 011 shortfall.

sume about 0.3 MMB/D) and in conversions of

industrial boilers to coal (total oil replacement potential of 0.2 MMB/D). While this 0.5 MMB/D of

potential oil replacement is an important part of

the total, it is not essential. Even if a sizable fraction of these projects were blocked, the Nation

still could replace the full 3 MMB/D postulated

shortfall within 5 years, although more pressure

would obviously be put on other types of oil

replacement. Nevertheless, it probably is important to expedite any legal actions and still more

important to ensure fuII and effective public participation during permitting so that citizens’ concerns can be addressed and potential benefits of

conversion explained.

In addition, a related first step could be to institute changes in electric utility rate regulation

since current procedures bias against large capital investments. In particular, elimination of the

fuel adjustment clause, allowance of construction work in progress, institution of trended

original cost accounting for determining rates on

converted plants, and the establishment of rates

that allow utilities to capture part of the savings

obtained from converting to coal are steps that

would probably be necessary if utility boiler conversion is to take place beyond that already in

progress. *b These actions would have to take

place on the State level but Federal encouragement would help. If the States are unwilling or

unable to take action, the Federal Government

may have to legislate such changes if they prove

necessary. The Public Utility Regulatory Policy

Act provides precedent for such Federal action.

Steps to remove remaining price controls on

natural gas should also be considered. Such

measures would act to stimulate new supplies

from old natural gas fieIds27 and provide additional incentives for conservation of natural gas.

Both would be important in ensuring that the natural gas supplies needed to replace oil lost in the

shortfall would be forthcoming, and that they

would remain available in the event domestic nat26For a more complete discussion of the current state of electric

utilities in this country and potential regulatory reform proposals

see “Promoting Efficiency in the Electric Utility Sector, ” Congressional Budget Office, U.S. Congress, Washington, DC, November

1982; and Nuclear Power in an Age of Uncertainty, op. cit.

27 See “Effects of Decontrol on Old Gas Recovery, ” staff memorandum, Office of Technology Assessment.
28 • U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

ural gas production declined significantly over the

5 years after the onset of the shortfall.

In addition to these measures, Congress may

also wish to stimulate investments in oil replacement technologies directly. One strategy for doing this would be to establish (where they do not

now exist) the data collection and analysis

needed to monitor investments in oil replacement

technologies. In the event of an oil shortfall, the

monitoring apparatus (see below) could be used

to measure investment behavior. Various levels

of investment incentives could then be implemented, depending on the rate of investments

and other economic measures, such as the price

of oil, stability of oil markets (as measured by the

rate of change of oil prices and stocks), and

unemployment and inflation rates.

A first level of government action could involve

dissemination of information designed to inform

oil users about their options for replacing oil. This

could be accompanied by advertising campaigns

and statements by political leaders emphasizing

the importance of making investments to replace

the lost oil and the economic consequences of

not doing so. This couId also include public participation in a variety of activities designed to increase public awareness of energy issues and

create a favorable attitude toward measures designed to replace oil.

In addition to the first level, a second level of

action could include economic incentives. Residential and commercial oil customers could be

provided with low-interest loans and/or tax

credits for qualifying investments. Sales of inefficient automobiles could be taxed, and subsidies

could be placed on the sale of more efficient

ones.28 These incentives could be formulated to

be a net subsidy on the purchase of new cars if

the volume of new car sales dropped significantIy. 29 In addition to the regulatory changes dis28This would, however, encourage the sales of smaller cars, a market where U.S. manufacturers have not been strong competitors

in the U.S. market. It would also amount to a net subsidy to auto

companies that only sell small cars.

29 Keeping new car sales volumes up is nearly as important as encouraging higher new car average fuel efficiency, because even

the less efficient new cars are significantly more fuel efficient than

the corresponding average car on the road. (For further discussion

see Increased Automobile Fuel Et77ciency and Synthetic Fuels: Alternatives for Reducing Oil Imports, op. cit.

cussed above, loan and interest guarantees could

be provided for electric utilities in order to facilitate their access to the capital bond markets. Fi-

● nancial incentives, such as tax credits, could also

be provided to the industrial sector for investments in oil replacement, although these have

proved to be ineffective at the relatively low levels

that have been applied historically. JO

In addition to (or in place of) the first two levels,

the government could regulate some aspects of

oil replacement. The largest utility and industrial

boilers could be targeted for conversion to coal;

and industrial oil efficiency standards (Btu of oil

consumed per unit of output) could be applied

to various industries. Fuel use and efficiency

standards could also be applied to large commercial and apartment buildings. Application of such

standards to small businesses and private homes,

on the other hand, could be extremely controversial and difficult to enforce. Similarly, attempts

to increase the corporate average fuel economy

of automobiles and light trucks without 4 to 5

years advance notice would probably prove to

be relatively ineffective because of the long leadtimes for product development and acquisition

of new capital equipment.31

The investment needed to replace 3 MMB/D

of oil and, if necessary, to increase the efficiency

of natural gas use would be about $150 billion

to $200 billion over a 5-year period, or about $30

billion to $40 billion per year, on average (not

including the cost of new cars, which is an ongoing activity). This level of investment is about 7

to 9 percent of recent annual investments in producer durables and residential and nonresidential structures. By comparison, OTA estimates that

crude oil prices would rise by $23 to $40 per barrel (above a predisruption level of $30 per barrel), increasing domestic oil and natural gas liquids production revenues by $84 billion to $146

billion per year (with domestic production at 10

MMB/D). Consequently, even in the extreme

JOsee Industrial Enetgy Use (Washington, DC: U.S. Congress, Office of Technology Assessment, OTA-E-198, June 1983).

JIObvious[y, new car fuel efficiency would increase following the

oil shortfall, but it would primarily be the result of demand shifts

to more efficient cars already in production and introduction of

new models that were in the development stage prior to the

shortfall.
Ch. II—Summary ● 2 9

case, where Federal subsidies would pay a large

part of these investment costs (and perhaps new

cars received subsidies of $1,000 each, on average, or $6 billion to $10 billion per year), these

costs could probably be financed through a windfall profits tax, if it were increased to collect 50

to 70 percent of the increased domestic oil production profits.

An overall strategy then might consist of establishing the investment monitoring system and

contingent incentives and taxes in advance. In

the event of a shortfall, the first level of incentive could be implemented immediately. If, after

6 months to 1 year, investments appeared to be

proceeding too slowly and other economic measures appeared to favor market intervention, 32 the

second level could be introduced, and the financial incentives could be increased if they proved

not to be sufficiently effective. The third level of

incentives could then be introduced if the response to the two previous levels were judged

to be inadequate.

The advantage of this strategy is that it provides

a flexible and well-defined government response

that can be adjusted, depending on the market

behavior and the response to various levels of incentives. With the monitoring system, which examines each sector individually, there is also the

ability to apply different levels (as well as different

types) of incentives to different sectors and to

identify and correct any significant sector-specific

constraints (e.g., certification delays for new powerplants). A possible disadvantage is that investors

may delay investments in anticipation of future

government subsidies such as occurred in the

1970s with respect to the purchase of home insulation. If this is judged to be a significant problem, however, provisions could be included to

make any subsidies effective retroactively to the

onset of the shortfall, thereby reducing the speculative value in delaying investments (unless large

, 

32For example, if : 1 ) investment in oil replacement technologies

were low, 2) unemployment were rising, and 3) the economy were

stagnating, then investment incentives would probably be appropriate. High inflation beyond that caused by rising oil prices, on

the other hand, would tend to speak against market stimulation,

And if the economy, oil markets, and employment appeared to be

stable then, even if investments in oil replacement technologies

were low, government intervention to stimulate these investments

might not be necessary.

groups of investors act in concert to trigger a subsidy that might otherwise not have been needed).

Beyond the short- to mid-term oil replacement

options, an oil shortfall is likely to renew interests

in the longer term options, such as further increases in corporate average fuel economy standards for new cars and synthetic fuels production.

Although these options would have little impact

on liquid fuel supplies until well over 5 years after

the onset of a shortfall, they could contribute to

moderating liquid fuel prices in the 1990s when

conventional domestic production of both oil and

natural gas is likely to decline. To be effective in

promoting these options, however, government

policies would have to show a stable commitment over a period of a decade or more.

Advance Preparation for an

Oil Supply Shortfall

One government response to the threat of a

future oil supply shortfall is to promote investments in a wide variety of oil replacement technologies in order to put downward pressure on

oil prices and increase worldwide surplus oil production capacity. This reduces the risk of a severe

supply shortfall. However, some of these technologies require long Ieadtimes and therefore are

of little use in preparing for the possibility of a

shortfall in the near future. Furthermore, this strategy cannot contribute to a quick response if and

when a shortfall materializes.

It has been suggested that one way to reduce

the response time is to construct and stockpile

any oil replacement equipment that might be in

short supply following the disruption. Since the

time needed to convert an individual facility or

building away from oil is less than about 2 years

for all of the technologies included in OTA’s replacement scenarios, stockpiling could theoretically reduce the time needed to replace the oil

significantly.

OTA’s analysis, however, indicates that, in most

cases, the equipment that would have to be

stockpiled represents a sizable fraction of the total

investment needed for the complete conversion

away from oil. (Conversely, any equipment that

is not expensive generally is relatively easy to pro-
30 • U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

duce, and production capacity for it can be expanded rapidly.) Consequently, it would generally be more cost effective to make the additional

investment needed to complete the conversion

and then use the equipment to reduce fuel costs,

rather than to allow the equipment to stand idle

in a stockpile.

In some cases (e.g., conversion of large boilers

to coal), a limiting factor could be the number

and capacity of experienced architecture and engineering firms capable of designing and carrying out the conversion. Increasing the capacity

for these conversions would involve increasing

the pool of trained manpower; and, in the absence of immediate job opportunities, this could

prove to be difficult and costly.

A number of other actions, however, can be

taken in advance to increase the ability to respond to a large oil supply shortfall. But most of

these fall into the categories of advance planning

and information, rather than hardware acquisition.

A monitoring system needed to measure the

rate of investment in oil replacement technologies

should be established well in advance of a shortfall to provide operating experience and a historical data set in order to assess better the information collected following onset of a shortfall.

The details of the various levels of investment incentives, including specific procedures, responsibilities, and implementation plans, should also

be established in advance so that incentives can

be implemented quickly and smoothly when

needed.

Surveys of boilers where coal conversions are

most likely should be kept current; information

about potential coal storage sites, coal transportation capabilities, and possible local shortages

in skilled labor should be developed; and the information should be made available to assist private and government planning at all levels. Plans

for technical assistance could be developed to

help large oil users find coal storage sites and

transportation for low-sulfur coal and to aid them

in the mechanics of obtaining the necessary permits for coal conversions.

Information could also be provided to increase

the public’s awareness that investments in fuel

switching and increased efficiency of energy use,

following a large oil supply shortfall, will reduce

the adverse economic effects of the shortfall and

that these measures can be implemented within

the existing environmental regulations. This

would encourage investment in the whole range

of oil replacement technologies and would increase the public acceptance of, or minimize the

resistance to, possible government intervention

and other activities needed for oil replacement

following a shortfall.

Finally, an important pre-shortfall step might

be to undertake the electric utility regulatory and

natural gas pricing changes suggested above.

Such actions would provide an incentive for utilities to convert existing natural gas boilers to coal

at an accelerated rate. Nearly two-thirds of these

existing boilers are uneconomic at today’s oil and

natural gas prices but continue to operate partly

because of the current regulatory climate.33 As

discussed previously, the gas pricing changes

would bring about additional supplies, and consumers would be able to make decisions about

their use of gas based on prices closer to the replacement value. All of these actions would stimulate oil replacement in any event, and, in case

of a shortfall, would be in place and operating

to help ensure adequate gas supplies for the rapid

response.

For these measures to be most effective, there

would have to be a commitment, as a matter of

government policy, to intervene to promote investment in oil replacement technologies if the

market response is overly cautious. However,

.-

jjsee “promoting Efficiency in the Electric Uti Iity sector,” Congressional Budget Office, op. cit.
Ch. II—Summary ● 3 1

with this commitment, the ability to measure the

relevant investment behavior, and the mechanisms to apply successively stronger incentives,

it seems likely that the potential benefits of rapidly

deploying the oil replacement technologies could

be realized.

Even in the absence of a supply shortfall in the

mid-1980s, the long-term trend is toward reduced

use of oil for fuel in stationary applications. As

this trend continues, most of the technologies emphasized in this report will become increasingly

ineffective as cushions against an oil supply shortfall. The principal remaining uses of oil will be

for transportation and materials (e.g., chemicals),

and U.S. oil replacement capability will increasingly be determined by the speed with which oil

substitutes can be deployed in these sectors.

Although the Ieadtimes for replacing large

quantities of oil in these end uses are likely to

remain long, the ability to respond in these areas

to an oil supply shortfall could be increased

somewhat through research and development

(R&D). For example, development and standardization of designs for mobile gasifierss34 adapted

to modern vehicles could provide a device that

could be easily and rapidly manufactured in large

quantities to replace the fuels used in cars, trucks,

buses, and other surface vehicles, although the

potential market for these devices is highly uncertain. Development of small (e.g., less than 10 million gal/y r), prefabricated synfuel plants for converting solids, probably solid biomass,35 into

methanol or gasoline, 36 might enable a rapid deployment of these plants to produce gasoline sub-

.———

jqMobi Ie gaslflers are devices that are carried on board cars,

trucks, buses, and other vehicles and that convert solid fuels into

fuel gases that can be used to fuel the vehicle. See also the section

on technologies in ch. IV.

jssolid biomass (wood grasses and crop residues) may k a more

economic feedstock for small synfuel plants than coal is, because

the former does not require an oxygen plant owing to the higher

oxygen and hydrogen content of the biomass. Whether this will

prove to be a decisive economic advantage remains to be seen,

however.

JbFor a rapid response, gasoline production may be preferred to

methanol production because the latter (if used in large quantities)

would require retrofitting of vehicles or the manufacture of new

stitutes without the inflationary effect on food

prices associated with ethanol production. Continued R&D into chemical feedstocks from plants

and solid fuels and more efficient chemical manufacturing processes can also increase the options

for reduced oil consumption in the chemical industry. And continued development and manufacturing of increasingly more fuel-efficient vehicles will enable consumers to purchase these

vehicles in larger numbers in the first few years

following a large oil price rise than would be the

case if these efforts stagnate.

Even if successfully developed, the 5-year oil

replacement capability of these options is likely

to be considerably smaller than that associated

with the technologies considered in detail in this

report. Nevertheless, continued R&D of oil and

natural gas substitutes provides an important

means of countering the long-term trends toward

increasingly tight supplies of these fuels and therefore provides an important means of reducing the

probable magnitude and severity of an oil supply

shortfall that may occur further away in time.

Measuring the Rate of Oil Replacement

Owing to the uncertainties about the investment rates in oil replacement technologies that

would occur with a free market response and

with various levels of market intervention by the

government, it is important to have measures of

the rates and types of investment that occur to

see if intervention is necessary to increase the rate

——

vehicles designed for methanol. However, since OTA has not

assessed the constraints associated with deploying prefabricated

synfuel plants or increasing the availability of methanol-compatible

vehicles, it is unclear which of these wouId be the Iimiting factor.

If the fuel supply were limiting, supplies could be supplemented

with the surplus production capacity of methanol from natural gas

(perhaps 0.05 MMB/D oil equivalent in the United States). However, unless this methanol is imported, it may be preferable to use

the (domestic) natural gas in the vehicles directly, since more miles

could be driven per unit of natural gas consumed if it is used directly.

On the other hand, future developments that increase the efficiency

of methanol-fueled engines could more than overcome the energy

loss of converting natural gas to methanol. Current indications are

that methanol or gasoline could be produced from solid biomass

at lower prices (per unit energy) than ethanol.
32 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

of oil replacement and, if so, to help determine

the minimum level of intervention needed. As described below, some of the investment rates can

be determined from data currently being collected, while the measurement of others will require additional data collection and/or analysis.

All rate determinations will require continual and

prompts 37 updating and evaluation of the relevant

data if they are to be of maximum use in policy

decisions. And the data collection and analyses

should be carried out in a manner that is designed

and intended for determining oil replacement

rates through investment in energy technologies.

.

The rate of increase in the fuel efficiency of cars

on the road can be conveniently monitored using

the data currently being collected on new car

sales, new car average fuel efficiency, and scrappage rates, provided the results are made known

in a timely manner. Similarly, considerable data

already exists on utility boilers and new powerplants under construction; and the number of

these boilers and new powerplants is sufficiently

small that they can be monitored on an individual

basis.

Monitoring industrial oil use, involving about

4,000 Iarges38 boilers, over 140,000 smaller boilers,

and numerous varied industrial processes, would

require ongoing surveys39 of manufacturers.40

Surveys similar to those needed have been conducted in the past by the Department of Commerce, with funds from the Department of Energy. 41 Although these surveys were recently

—-

discontinued, they or similar surveys could be

37Quarterly reporting of the data would probably be adequate.

IBGreater than 50 MMBtu/hr capacity.

JgSimply monitoring gross industrial energy consumption would

not provide sufficient data to distinguish between increased efficiency of oil use and switching to natural gas, on the one hand,

and the closing of oil-consuming manufacturing facilities, on the

other. For example, increased efficiency of gas use coupled with

switching from oil to gas could reduce oil consumption, while leaving gross industrial gas consumption unchanged. These types of

ambiguities could not be fully resolved by applying measures of

manufacturing output, unless there were detailed information about

the fuel use of the manufacturers that are expanding or contracting

output. Furthermore, there are seasonal and annual fluctuations

in industrial fuel use that could mask the overall trends.

~The oil replacement potential in mining (not including oil refining), agriculture, and construction, which are the other parts of the

industrial sector, is limited and these subsectors would not need

to be surveyed.

AI Under the title “Annual Survey of Manufacturers: Fuels and Electric Energy Consumed. ”

reinstated with modifications* to provide the information necessary to monitor oil replacement

investments in industry. Some of these data could

also be cross-checked with data on deliveries of

various types of equipment, new natural gas

hookups to existing industrial facilities, and orders

received by architecture and engineering firms

for conversions of large oil-fired boilers to coal.

A variety of measures can be used to follow the

investment in oil replacement technologies by the

18 million residential and commercial oil customers. The companies that deliver fuel oil, kerosene,

and liquefied petroleum gas to these customers

could report changes in the number of customers (to indicate fuel switching) and changes in the

fuel use per heating degree day. (They already

collect the latter data so that they know when

to refill customers’ tanks.) Gas and electric utilities, that have special rates for space heating customers, could report the number of customers

in existing buildings switching to these energy

sources for space heating (i.e., exclusive of new

buildings). Other gas and electric utilities could

report the number of existing customers that have

shown large increases in their use of these energy

sources (indicating fuel switching) and the number that have had new delivery lines installed to

increase the capacity. Data could be compiled

on changes in the number of gas furnaces and

electric heat pumps sold for space heating. And

ail of these data could be augmented with surveys

of small, statistically representative samples of

residential and commercial oil customers. This

information could then be combined to give estimates of the rates of investment in oil replacement technologies, and the estimates could be

cross checked with data on regional consumption of fuels and electricity by these sectors.

With these types of reporting systems and experience in collecting and analyzing the data, reasonable estimates of the general trends and magnitudes of oil replacement through investment in

the major oil replacement technologies could be

provided on a continuing basis.

QFOr example, the surveys should include fuel that is not bought

and sold as well as that which is; it should give the production output

of various industrial subsectors and the fuel use per unit of product output; and it should provide information on fuel switching capability that is in place.
Ch. II-Summary ● 3 3

Selected Regional and

International Considerations

As mentioned above, the reduction in oil consumption that is not replaced through investment

in oil replacement technologies must be accounted for by reduced economic activity and

personal consumption (of oil as well as other

commodities and services). The principal market

mechanism through which this interaction is effected is the price of oil. And one difference between the slower and faster rates of investment

is that, in the former case, the oil price rises to

a higher level in order to drive down economic

activity and personaI consumption to a lower

level.

Although there will be some regional and local

price differences and temporal fluctuations in

these differences, the larger trends and changes

in the price of oil should be felt roughly uniformly

throughout the country. Consequently decisions

to invest or not invest in oil replacement technologies in a given region will not only affect the

price of oil locally but also nationally; and these

decisions will affect the (local) price of oil less

than they would have done if the region were

partially isolated from the national oil markets.43

However, the burden of making the investments

(if they prove to be a burden44) will not be spread

uniformly throughout the country because the

total oil replacement potential, the relative

replacement potential in the various sectors, and

the relative amounts of various types of investments needed all vary from region to region.

For these reasons, a coordinated national policy may be preferred to a series of independent

local and regional policies so that some of the

burdens can be shared more evenly and the national nature of many of the impacts can be incorporated more easily into policy decisions. Furthermore, in order to maximize oil replacement,

it is necessary that every energy sector invest in

replacement technologies as rapidly as practiAjBecause the oil replaced by a given investment will be a larger

percentage of local oil consumption than of national oil consumption and the investment therefore will have a greater effect on local

supplies than on national supplies of oil, unless the two oil markets are strongly coupled.

AAObviously, if the investments do not prove to be a burden, incentives to increase the rate of investment will not be needed.

cable. National policy bodies may be better able

to resist regionally powerful interest groups seeking exemptions, prohibitions, or special treatment

that could lead to lower rates of investment.

To a certain extent the United States as a country is in a similar position, relative to the rest of

the world, that a region of the country is in, relative to the United States as a whole. Unless the

United States is willing to isolate its oil markets

partially from world markets, as was done with

price controls and entitlements programs in the

mid-l970s, the international price of oil will

essentially equal U.S. oil prices. Although the

United States uses about one-third of the oil consumed by non-Communist countries in the world

(and therefore changes in U.S. consumption have

considerable influence over the international

price of oil), the impacts in the United States of

an oil shortfall will still depend partly on actions

of other countries. The international price of oil

and the health of other countries’ economies (and

thus their trade with the United States) will be

influenced, among other things, by the extent to

which they also are willing to invest in oil replacement technologies.

Although OTA has not analyzed the international aspects of this problem in detail, it is clear

that actions at the national level will be needed

to influence the behavior of other countries in

a direction that is consistent with U.S. interests;

and the existence and use of a strong national

policy for reducing U.S. oil consumption will improve the bargaining position, persuasiveness,

and influence of the United States in any such

international interactions.

Furthermore, the International Energy Agreement (IEA), to which the United States is a party,

states that “Each Participating Country shall at all

times have ready a program of contingent oil demand restraint measures enabling it to reduce its

rate of final consumption . . . “ or it “ . . . may

substitute for demand restraint measures use of

emergency reserves held in excess of its emergency reserve commitment . . . “45 Currently, the

U.S. “emergency reserve commitments” are

45’’ Agreement on an International Energy Program (as amended

to 19th May, 1980),” Articles 5 and 16, International Energy Agency.
about 400 million to 450 million barrels,Qb which

is roughly equal to mid-l984 SPR stocks. Consequently, current “excess” reserves are equal to

private oil stocks that can be drawn down. Since

the normal market behavior during periods of rising oil prices is to increase private oil stocks, the

“excess” reserves may, in effect, be negative for

several months after the onset of a shortfall. The

tendency to increase private stocks could be

countered through a more rapid drawdown of

the SPR following a small oil shortfall, but that

 reserve commitment is days net imports. In 1983, net U.S. imports were 4.3 and they may

exceed 5 in 1984.

response would probably be inadequate following the large shortfall considered in this study.

And to the extent that the United States appears

not to fulfill this part of the IEA, other channels

of international cooperation could also be partially compromised.

Finally, the quantity of SPR stocks needed to

provide a credible level of “excess” reserves

clearly depends on the fraction of the “demand

restraint” that relies on these reserves. A national

policy designed to ensure that a more rapid rate

of oil replacement can be achieved would not

only reduce the level (and cost) of reserves

needed to ensure compliance with the IEA but
Ch. II—Summary ● 3 5

it wouId also enable the United States to achieve 980 million barrels for the slow oil replacement

that level at an earlier date. For example, with scenario and 420 million barrels for the rapid oil

the supply shortfall and oil replacement scenarios replacement scenario. The difference, 560 milconsidered in this report, the IEA requirement for lion barrels, would cost about $17 billion (at $30

demand restrain and “excess” stock use (1.6 per barrel) and take about 3 years to acquire at

MMB/D) would require total “excess” stocks of the early 1984 SPR fill rate.
Chapter Ill

U.S. Energy Consumption Patterns, 1952-82
Page

Energy Consumption and Intensity Averaged Over the Entire U.S. Economy . . . 41 .

Energy Consumption by End-Use Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

All Fuel Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Oil Consumption . . . . .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Petroleum Product Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Motor Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Distillate Fuel Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Residual Fuel Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Ethane and Liquefied Gases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Jet Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Other Petroleum Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

The Combination of Oil Product Mix and Four Demand Sectors . . . . . . . . . . . . 47

Residential and Commercial Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Electric Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Industrial Sector Energy Intensity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

industrial Product Mix Shift . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Economic Recession and Productivity Decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

TABLES

Table No. Page

3. EIA Petroleum Product Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

4. Refined Petroleum Products Supplied to End-Use Sectors, by Type, 1982 . . . 47

5. Growth Rates for Alternative indices of Mining and Manufacturing Output . . 51

FIGURES

Figure No. Page

6. Total Oil Consumption and Price per Barrel . . . . . . . . . . . . . . . . . . . . . . . . . . 39

7. Total Natural Gas Consumption and Average Price . . . . . . . . . . . . . . . . . . . . 40

8. Average Price of Electricity Sold by Electric Utilities, 1960-82 . . . . . . . . . . . . 40

9. Consumption of Energy by End-Use Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

IO. Energy Consumption-GNP Ratios, 1962-82 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

11. Energy Use and GNP Growth Rate Trends, 1952-82 . . . . . . . . . . . . . . . . . . . . 42

12. Refined Petroleum Products Supplied to End-Use Sectors . . . . . . . . . . . . . . . 44

13. Consumption of Natural Gas by End-Use Sector.. . . . . . . . . . . . . . . . . . . . . . 44

14. Industrial Energy intensity Using the FRB Output Index . . . . . . . . . . . . . . . . . 49

15. Industrial Energy Intensity Using Census Data . . . . . . . . . . . . . . . . . . . . . . . . . 50

16. Gross National Product Overtime. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

17. Total Investment and Expenditures for Durable Goods... . . . . . . . . . . . . . . . 52
Chapter Ill

U.S. Energy Consumption Patterns, 1952=82

During the past decade, U.S. energy use changed

considerably in response to a series of fuel supply

shocks and reversals in energy supply/cost trends,

By far, the most important fuel supply shocks involved oil imports. The first of two import disruptions occurred in 1973-74 as a result of the

Arab-Israeli war. The second occurred in 1979-

80 as a result of the Iranian revolution.

Both shocks had long-term effects on oil markets, effects that preview the expected consequences from a possible third disruption in the

future. These effects on oil prices and total oil use

over time are summarized in figure 6. As shown,

average refiner acquisition prices more or less

doubled during each disruption, and total oil use

peaked. 1 Two years after the Arab oil embargo — . ———

‘The price of imported oil actually tripled during the 1973-74 curtailment, but the net effect on prices paid by refiners was reduced

by the blending of imports with domestic production. Prior to 1973,

domestic prices were much higher than import prices, and after

1973, domestic prices were temporarily held below international

prices.

Figure 6.—Total Oil Consumption (MMB/D) and

Price per Barrel (1982 dollars)

38 A

I I I I I I 1 I

1968 1970 1972 1974 1976 1978 1980 1982

Year

SOURCE: Energy Information Administration, 1962 Annual Review of Energy,

Washington, DC, April 1963, pp. 67, 91.

of 1973-74, total U.S. oil use had dropped to

about 1 million barrels per day (MMB/D) below

its 1973 peak. After the initial shock of the second oil disruption, total oil consumption declined

for 4 years. In 1982, U.S. oil demand was more

than 3 MMB/D below its all-time high of 18.8

MMB/D in 1978.

In addition to oil import disruptions, U.S. energy use has also been affected in the last decade by a series of events involving economic adjustments related to energy supply/cost trends.

These include the longest coal miners’ strike in

U.S. history; a reversal in natural gas production,

which had been rising rapidly during the 1960s;

a reversal in the cost of electricity, which had

been declining for decades; the introduction of

Federal and State environmental quality standards; and a dramatic shift in the financial cost of

capital in 1979. Although the 1977-78 coal miners’

strike, which lasted 109 days, may have had only

temporary significance in terms of disrupting supplies, it boosted oil use during the period just

prior to the Iranian revolution and thus increased

oil demand at a crucial time. The other four economic adjustments deserve more attention because they continue to influence energy markets,

as well as the potential flexibility of market responses to future oil import curtailments.

In 1972, domestic natural gas production hit

a peak, after rising steadily since World War II

(see fig. 7). The decline in total production resulted from a depletion of natural resources and

from Federal price regulation, which held prices

below the rising costs of producing gas from new

reserves. At the same time, demand was expanding rapidly because gas is a good substitute for

oil used in stationary heating applications, because gas can meet environmental emission

standards at relatively low capital costs, and because the price of gas was held down by regulations while the price of oil rose sharply.

At about the same time that natural gas production peaked, the price of electricity sold by

utilities bottomed out after decades of steady decline and began to rise during the 1970s (see fig.

8). This reversal resulted from several factors, in39
40 • U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 7.—Total Natural Gas Consumption (TCF/yr)

and Average Price (1982 dollars/TCF)

$6.00

GSOURCE: Energy Information Administration, 1982 Annual Review of Energy,

Washington, DC, April 1963, pp. 107, 117.

Figure 8.–Average Price of Electricity Sold by

Electric Utilities, 1980-82

6.50

5.50

4.50

SOURCE: Energy Information Administration, 1982 Annual Review of Energy,

Washington, DC, April 1963, p, 165.

eluding rising fuel costs, rising costs of meeting

environmental regulations, and the rising cost of

capital. In addition, during this period there were

few technological advances to maintain or lower

the capital cost per kilowatthour of generating

capacity and/or to reduce the Btu input of fuel

per kilowatthour of electricity produced.

Furthermore, the introduction of national environmental quality standards affected energy use

during the past decade. The Clean Air Act and

Amendments established a national system of air

quality regulation, which included ambient air

quality and prevention of significant deterioration

standards. Partly because of these emissions

standards and the uncertainty about future standards, many opportunities for switching to coal,

which appeared economic on the basis of fuel

costs alone, have not been pursued. Other reasons why switching to coal may not have been

cost effective include the costs of conversion,

handling equipment, transportation, and storage.

Even today, coal still appears to be too bothersome and unreliable to handle and burn for any

but the largest installations.

Finally, in 1979, a sharp increase in interest

rates limited the growth potential for the entire

economy and made it more difficult to reduce

U.S. economic dependence on oil. Both of these

economic limitations arose because the high cost

of capital reduced the level of investment, decreased employment and worker productivity,

and slowed improvements in energy efficiency

and conversions to less expensive fuels. The high

cost of capital particularly constrained growth in

the electric utilities industry, which produces the

most capital-intensive energy commodity, and

made conversions from oil to coal extremely expensive.

This chapter discusses in detail how energy use

patterns have changed during the past decade

as a result of these developments, with particular emphasis given to oil and natural gas. Natural gas is examined in nearly as much detail as

oil because it is an exceptionally good oil substitute for all stationary heat and power applications,

provided the user can connect to a distribution

pipeline. 2 Together, oil and gas are considered

the premium fossil fuels.

21 n fact, ga5 is the preferred fuel in many small burners, Such as

those in the home, where it can be delivered by pipeline instead

of by truck and where it burns more cleanly than oil. Furthermore,

gas offers superior flame control in process heating and is the least

costly source of hydrogen. However, as a gaseous fuel with a lowenergy density per unit volume, it is inferior to oil as a transportation fuel because so little of it (measured in Btu) can be stored in

a tank in between fillups.
Ch. Ill—U.S. Energy Consumption Patterns, 1952-82 Ž 41

ENERGY CONSUMPTION AND INTENSITY

AVERAGED OVER THE ENTIRE U.S. ECONOMY3

Prior to 1974, total U.S. energy use grew in step

with the economy. Total energy use increased

i n every year for 20 years after 1952 except two,

when minor declines occurred during economic

recessions (1 954 and 1958) (see fig. 9). The ratio

of Btu per dollar of gross national product (GNP)

stayed within a narrow band centered around

59,000 (see fig. 10).

From 1952 to 1972, oil and natural gas accounted for nearly all (97 percent) of the increase

in total energy use.4 Until 1970, gas grew at a

much higher rate than oil because of the rapid

expansion of transmission and distribution lines

built during World War II and because of the

huge inventory of gas reserves discovered during oil exploration in the first four decades of this

cent ury.

3

The primary source of data for this and the next three sections

is the 1982 Annual Review of Energy, El A/DOE.

4

The increased demand for coal for electricity production was

more than offset by the decline in the direct use of coal in the industrial and transportation sectors.

Figure 9.–Consumption of Energy by

End-Use Sector

1952 1957 1962 1967 1972 1977 1982

Years

(Without electricity

distributed)

SOURCE Energy Information Administration, 1982 Annual Review of Energy,

Washington, DC, April 1983, p. 8

However, all of these trends changed in the

early 1970s. Total energy use declined in 1974

and 1975 (see fig. 10). After 2 years of significant

decline, total energy use bounced back in 1976

and 1977 and increased in 1979, reaching the

most recent peak at just under 79 quadrillion Btu

(quads).5 Since then, total energy use has declined on the average by more than 2.7 percent

per year through 1983.

Since 1973, oil and gas use has followed a similar pattern. The upward trend in oil use reversed

itself after the Arab oil embargo of 1973-74. It

should not be surprising that the upward and

downward movements in total energy use and

premium fossil fuel consumption would be similar, since the latter accounts for most of the total.

It is also worth noting that the premium fuel share

in total energy has steadily declined from a peak

of 78 percent in 1972 to 67 percent in 1983.

Beginning in the early 1970s, a dramatic change

occurred in the growth rates for oil and gas relative to the GNP. Before 1970, use of both premium fossil fuels grew more rapidly than the

GNP, as shown in figure 11. Since 1973, both

‘One quad = 1 quadrillion (1015, Btu.

Figure 10.—Energy Consumption-GNP Ratios,

1962-62

1950 1955 1960 1965 1970 1975 1980 1985

Years

SOURCES Energy Information Admmlitration, 1982 Annual Review, of Energy

Washington, DC, April 1983; Department of Commerce, Survey of Current Business, March 1984 Bureau of the Census, Statistical Abstract

of the United States 1983, Washington, DC, 1983.

3 7

-

833 0 - 84 _ 4
42 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 11.—Energy Use and GNP Growth Rate Trends, 1952-82

1952-60 1960-69 1970-73 1973-75 1975-79 1979-82

Natural gas

consumption

Petroleum

consumption

GNP growth

r I

SOURCES: National Income and Product Accounts of the U.S. Department of Commerce, Bureau of Economic Analysis,

September 1981; and Energy Information Administration, l&Z Annual Review of Energy, Washington, DC, April 1983.

rates have either grown more slowly or, when increases motivated all premium fossil fuel users

GNP decreased, declined more rapidly than the to reduce their consumption. The price increases

GNP. As measured by the ratio of fuel used to also gave domestic oil and gas producers strong

economic activity, oil peaked in 1973 at 27,000 new incentives to increase exploration and proBtu per dollar and declined steadily to 19,800 Btu duction. The domestic natural resource base has

per dollar in 1983. Natural gas peaked at 14,000 not increased significantly, however, and domesBtu per dollar in 1970 and declined to 11,300 Btu tic oil production has declined since 1970, exper dollar in 1983. cept for the addition of Alaskan oil. Domestic natThe major reason for these changes in fuel use ural gas production also dropped below its 1973

was rapidly increasing prices, after taking general peak, although the actual decline in production

inflation into account. Figure 6 shows that since capacity is somewhat obscured by current uncer1972, oil prices more than quadrupled and nat- tainties associated with Federal price regulation

ural gas prices almost tripled. These enormous and possible deregulation.
Ch. Ill—U.S. Energy Consumption Patterns, 1952-82 . 43 —

ENERGY CONSUMPTION BY END-USE SECTOR

Using conventional energy accounts, total

energy use can be divided into five sectors: 1)

residential; 2) commercial; 3) industrial; 4) transportation; and 5) electric utilities. Residential and

commercial energy use figures are often combined because data are not collected separately

for all fuels. Fuel use data for electric utilities are

also folded into total energy use by the other sectors because electricity is valued in the economy

only as an intermediate input into the consuming/producing activities associated with the other

four divisions. What is commonly called the industrial sector includes the activities of manufacturing, mining, construction, and agriculture,

Data are gathered for all five sectors, when possible, because each has a distinctive economic

objective (e. g., residential, commercial, and industrial) or engages in a distinctive activity (e.g.,

transportation and electric utilities). Furthermore,

with the exception of the transportation sector,

each sector comprises a different group of decisionmakers with different economic problems.

The combination of distinctive objectives and

problems means that the sectors may follow trend

lines distinct from one another as the economy

grows and contracts over time.

All Fuel Products

When separated, electric utility fuel use displays by far the strongest growth trend, increasing by almost 500 percent and doubling its share

over 30 years (see fig. 9). All sectors generally increased their energy use from 1952 to 1972, although industrial consumption declined somewhat during the recession years, particularly 1954

and 1958.

During the next 10 years (through 1982), residential/commercial energy use (excluding electricity) declined by about 20 percent, and industrial consumption declined by about 22 percent.

Measured in terms of share in total fuel use, the

residential/commercial sectors declined more

than 3 percentage points during the last 10 years,

compared to a 2-percentage-point decline during the 1952-72 period. The industrial sector share

declined by 7 percentage points during the last

10 years, compared to a decline of 8 points during the previous 20 years. From 1972 to 1982,

electric power generation increased its share by

8 percentage points and transportation increased

its share by about 2 points.

When electricity fuel use data are folded into

totals (at 10,000 Btu per kilowatthour [kWh]) for

the three end-use sectors, the trend for the residential/commercial share is reversed. Instead of

declining during the 30-year period, the share

rose steadily, and actual energy use stayed relatively stable after 1974. Electrification, in other

words, was of major importance. In the industrial sector, the addition of electricity made only

minor changes in both share and actual use

trends. There was still a long-term, steady decline

in the industrial share of total energy and a significant decline in actual consumption over the

last 10 years. In fact, no long-term trend in shares

of energy use by sector was reversed during the

past decade of oil price inflation and other energy

market turmoil.

Oil Consumption

As shown in figure 12, oil use in all four sectors grew steadily prior to 1973. The electric utilities sector experienced the most rapid increase,

growing by an average annual rate of about 10

percent and more than tripling its share of total

oil use over the 20-year reporting period. Oil use

by the residential/commercial sector grew most

slowly over the same period, showing an average annual growth rate of about 3.2 percent. Industrial sector oil use grew at about 3.7 percent

per year, while transportation sector use grew at

the rate of 4 percent annually.

Since 1973, oil use has been shifting to the

transportation sector. The industrial sector has

maintained its share in total oil use in the last decade, principally because nonfuel use of oil—e.g.,

as a raw material—has grown, offsetting the decline in fuel applications. In contrast, the residential/commercial sector continued to lose its share

of total oil use, and at a rate faster than that exhibited in the previous 20 years. Finally, after

holding its total use and its share of total oil use
44 Ž U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 12.–Refined Petroleum Products Supplied to

End= Use Sectors

1 I

8

0

1952 1957 1962 1967 1972 1977 1982

commercial

SOURCE: Energy Information Administration, 1982 Annual Review of Energy,

Washington, DC, April 1983, p. 66.

constant until 1978, electric utilities have since

lowered both sharply.

Natural Gas

Natural gas use data are available for all five

end-use sectors. However, only four sectors show

significant trends (see fig. 13). In the transportation sector, gas use has remained constant at 3

percent of the total since 1952 because it is used

almost exclusively as a fuel for pipelines. The

other four sectors steadily increased gas use until 1972. During the last decade natural gas use

declined in all sectors, with the greatest decline

occurring in the industrial sector.

In terms of natural gas shares over the 30-year

period, the industrial sector had the largest drop,

declining from 55 percent of the total to about

38 percent of total natural gas consumption,

while the commercial sector experienced the

largest gain, increasing its share from 7 to about

15 percent, The electric utilities sector also in0
Ch. Ill–U.S. Energy Consumption Patterns, 1952-82 ● 4 5

PETROLEUM

Refineries convert crude oils into a variety of

products. Although most of the products are

fuels, crude oils can also be refined to produce

petrochemicals—i e., feedstocks for the manufacture of a wide variety of plastics, synthetic fibers,

paints and coatings, adhesives, piping, and the

like.

Each of these products offers different opportunities for material substitution and conservation

in its end-use applications. By examining the current product mix and its applications (next section), and how these have changed over time,

the nature of U.S. economic dependence on oil

can be described.

Out of at least 15 distinct product categories,

the Energy Information Administration reports a

30-year consumption time series for six (see fig.

12 and table 3). The “other products” category

includes kerosene, petrochemical feedstocks, lubricants, wax, petroleum coke, asphalt, road oil,

still gas, natural gasoline, unfractionated stream,

plant condensate, and miscellaneous other products. This category is a mixture of fuels and

materials.

Before describing trends in greater detail for

each of these product categories, it is important

to note that production for all six increased during the 1952-72 period. A growing economy that

required greater numbers of engines, greater

quantities of heat and steam, and larger volumes

of petroleum-based chemicals and synthetic materials was the primary force in driving oil use up,

Table 3.—EIA Petroleum Product Categories

Percent of

total Iiquidsa used

in 1982

1. Motor gasoline . . . . . . . . . . . . . . . . . 41.5

2. Distillate fuel oil. . . . . . . . . . . . . . . . 18.8

3. Residual fuel oil . . . . . . . . . . . . . . . . 13.0

4. Ethane and Iiquified gases. . . . . . . 6.5

5. Jet fuel . . . . . . . . . . . . . . . . . . . . . . . . 6.8

6. Other products . . . . . . . . . . . . . . . . . 13.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0

a

lncludes natural gas liquids and all products made from crude oil.

SOURCE: Energy Information Administration, 1983 Annual Review of Energy,

Washington, DC, April 1983.

PRODUCT MIX

However, consumption of all products slipped

in 1974 and 1975 as a result of rapidly rising fuel

prices. After the initial price shock wore off and

as real prices declined, the economy began to

grow again in the mid-197@ and product demand rose until 1979. In the last 4 years, all but

one product category —ethane and liquefied gases

–declined as a result of price escalation, the economic recession, and the higher fuel efficiency

of new cars. Each of the six major product categories is discussed below.

Motor Gasoline

Gasoline is used almost exclusively in automobiles and light trucks. Since 1952, the share

of gasoline in total oil use has stayed in the

neighborhood of 40 percent. When real oil prices

were steady, growth in gasoline demand was relatively low, and when prices rose sharply in the

last decade, consumption declined at a relatively

slow pace. Since total oil consumption peaked

in 1978, gasoline use has declined by a smaller

percentage than four of the five other product

categories. Perhaps a much sharper decline is imminent, as expected technological change would

suggest (see ch. V). Because gasoline represents

such a large portion of all petroleum products,

however, even a small percentage decline translates into larger volume declines.

Distillate Fuel Oil

Distillate (#1 or #2) is used primarily for heat

and mechanical motion (diesel). While #2 fuel

oil and diesel are chemically distinct, they are

generally considered as one fuel product because

they come from the same boiling fraction in a barrel of crude oil and refineries can trade them off

with little change in operations. Like gasoline,

distillate has maintained over 30 years its share

in total oil use, but its roughly 18-percent share

is less than half that of the predominant product.

Residual Fuel Oil

The next largest single petroleum product category (measured by volume) is residual fuel oil

(resid). As its name implies, it is the residuum,
46 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

or bottom, of a barrel of crude, which remains

after all other fractions have vaporized into the

distillation column. Residual oil is generally too

viscous to flow without preheating and special

pumping. Therefore, its use is limited to large

boilers. Residual fuel has been the only product

category to lose its share of total petroleum use

continually over the 30-year period, going from

21 percent in 1952 to 11 percent in 1982. Its most

rapid share loss has occurred during the past 4

years, primarily because of the large decline in

use by electric utilities. In general, this declining

share has been the result of its relatively low enduse value, the availability of good fuel substitutes

(e.g., coal and natural gas), and the increasing

ability of refiners to crack large resid molecules

into higher valued fractions, such as gasoline and

distillate.

Ethane and Liquefied Gases

These relatively light hydrocarbons are used

primarily as petrochemical feedstocks and secondarily for high-quality process and space heating, particularly in remote areas. Over the past

30 years, this category sharply increased its share

in total oil use (from 4 to 10 percent) because

both demand and supply conditions were favorable.

On the supply side, unlike other refined petroleum products, liquefied gases have an alternative source of supply in natural gas reserves. Since

gas use expanded more rapidly than oil over this

period, the potential supply of liquefied gases expanded at more than twice the rate of other petroleum products.

On the demand side, these light liquids are

used primarily for chemical feedstocks, and demand for feedstocks has continued to be strong

even during periods of sharply rising prices. The

strength of this demand may be explained by the

relatively rapid growth of the chemicals industry6

GMeasu res of relative growth for the chemicals industry are

rendered imprecise by relative price changes over such a long time

period (30 years). However, two growth rate comparisons are

available which nevertheless clearly show the strength of this industry. First, as reported by the Department of Commerce (The Nat/ona/ /rrcome and Product Accounts of the United States, 1929-76,

and by the relatively low-cost share of feedstock

materials in total petrochemical product cost

leading to relatively low price elasticity for petrochemicals.

Jet Fuel

Jet fuel is the other product category that has

sharply increased its share among all oil products

over the last 30 years. However, this increase

occurred entirely before 1973. Since then, its

share has remained relatively steady. This category (slightly less than 7 percent of total product) is the least important of the five major products, as measured by volume consumed.

Other Petroleum Products

A diverse group of products are included in this

category, making it difficult to generalize about

end-use trends except to note that about 90 percent of the end uses are used in the industrial sector. The nonindustrial uses are primarily for

kerosene for space heating and hot water and lubricants for transportation. Since the share of industrial activity in the economy has been steadily

declining (see later section in this chapter), the

share of this petroleum product group may tend

to decline, as well. However, since 1952 this

composite category has maintained its share in

total oil consumption at around 13 percent. Although its share declined to about 12 percent in

1982, this appears to be the result of a temporary

decline in industrial output associated with the

deep recession in that year. The reasons for this

share stability are the same as those for liquefied

gases, given above.

Statistical Tables, pp. 229-233), income generated (current dollars)

by “chemical and allied products” grew at an annual rate of 7 percent, while the economy grew at 6.7 percent. Of course, the relative

difference would be much greater if inflation were removed. Second, from 1969-80, the growth in the Federal Reserve Board index for the chemicals industry was 3.9 percent, while that for all

manufacturers grew at 3,25 percent. (See /ndustria/ Production, Annual, Board of Governors of the Federal Reserve System.)
Ch. Ill—U.S. Energy Consumption Patterns, 1952-82 . 47

THE COMBINATION OF OIL PRODUCT MIX AND

FOUR DEMAND SECTORS

U.S. oil use can be further examined by integrating oil product mix and end-use sectors.

Table 4 shows major petroleum products categories supplied to each end-use sector for 1982.

Residential and Commercial Sectors

Residential and small commercial building

owners typically use distillate or liquefied petroleum gas for space and water heating because

these fuels are very convenient to use in equipment of moderate cost. On the other hand, residual oil is used only in the largest boilers in very

large apartment and commercial buildings. This

fuel is less expensive, but handling is more difficult and costly. Since 1977, #2 distillate fuel oil

use has declined greatly, and use of #6 residual

fuel oil and liquefied gases has declined by an

even greater percentage (see fig. 12). A sharply

rising trend in electricity use by these two sectors indicates that a substantial amount of oil is

being saved by the substitution of electricity,

which now exceeds oil as a heating source. Natural gas is used also as an oil substitute in these

sectors. However, its increased use as an oil substitute is being offset by the use of more energyefficient technologies and equipment and other

conservation measures.

Electric Utilities

Ninety-three percent of the petroleum used by

utilities in 1982 was residual fuel burned in

boilers. Over the past 30 years, utilities have

sharply reduced oil use, primarily by substituting coal and nuclear power. Most recently, large

reductions in the use of #6 residual fuel have

occurred because actual demand for electricity

has fallen far below estimates. When faced with

excess capacity, utilities will shut down oil boilers

first to maximize savings in fuel costs. If demand

suddenly increases, however, oil use will climb

to the extent that coal and nuclear generating capacity are not available.

Transportation

Gasoline, diesel, and jet fuel are the primary

products used by the transportation sector. Gasoline accounts for the largest share—65 percent;

diesel–l 5 percent; and jet fuel–11 percent. Two

of the three most important fuels, gasoline and

jet fuel, are used almost exclusively in the transportation sector. Furthermore, the amount of

distillate burned as diesel fuel in transportation

is about equal to all other uses of distillate combined, and much of the distillate used in indusTable 4.—Refined Petroleum Products Supplied to End-Use Sectors, by Type,

1982 (thousand B/D)

Residential/ Electric

Fuel commercial Industrial Transportation utilities Total a

Motor gasoline . . . . . . . . . . . . . . 50 70 6,420 0 6,540

Distillate fuel oil (#2) . . . . . . . . 700 620 1,310 40 2,670

—Hot water and steam

—Engine

—Other

Residual fuel oil (#6) . . . . . . . . . 170 460 440 640 1,720

—Hot water and steam

—Marine fuel

LPG . . . . . . . . . . . . . . . . . . . . . . . 260 1,210 20 0 1,500

—Heat and hot water

—Industrial feedstock

Jet fuel . . . . . . . . . . . . . . . . . . . . 0 0 1,010 0 1,010

Other b 

. . . . . . . . . . . . . . . . . . . . . 60 1,700 100 10 1,860

asum of the parts may not equal the total because of rounding.

blncludes (In order of ,mpodance) asphalt, other petroleum feed stocks, still gas petroleum coke, lubricants, kerosene, speciat

naphthas, av!atlon gasoline, wax, and road oil,

SOURCE: Energy Information Administration, 1983 Annual Review of Energy, Washington, DC, April 1983, p 69
48 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

try is also diesel fuel for engines, such as in agricultural, mining, and construction equipment. In

addition to these fuels, smaller amounts of residual fuel oil are used in marine

Industrial

ships.

The mix of petroleum products used in the industrial sector is by far the most varied. The only

major petroleum products not used in this sector are the two aviation fuels (jet fuel and aviation gasoline). The industrial sector is the major

consumer of asphalt, lubricants, road oil, and the

other products included in the “other” category.

Compared to the other three sectors, the industrial sector employs the most diverse, complex, and rapidly changing technologies, and

these make it difficult to predict future consumption patterns. However, industrial users have options to adjust to higher oil prices that are not

available or at least not as effective for the other

demand sectors. These include shifting away from

products that use more oil to products that use

less, changing production processes in order to

switch fuels or to use oil more efficiently, and substituting skilled labor and control technology in

order to maximize fuel efficiency. In lieu of an

extensive description of fuel use technology in

specific industries, behavior of this second most

important oil-consuming sector is described first

in terms of time trends in energy intensity and

second in terms of historical analysis, which suggests the effect of petroleum price inflation on

product mix.

INDUSTRIAL SECTOR ENERGY INTENSITY

Only two out of the four energy-consuming

sectors—the industrial and utility sectors—measure

the value of their activities or output by market

prices. In the residential/commercial and transportation sectors, the value of goods and services produced can be estimated on the basis of

the value of purchased inputs, but this provides

only a lower boundary for value of output. Presumably, residential customers and automobile/

truck drivers purchase petroleum because the

heat and transportation derived from the fuel are

worth more than its cost. However, since these

are sales to final users, there is no market price

to measure the value of actual end-use services.

For electric utilities, there is a market test of

value. Since only a single commodity is produced, electricity, the value of production is

simply the price per kilowatthour multiplied by

the number of kilowatthours of electricity generated. Thus, in this case, energy intensity is proportional to engineering efficiency. Engineering

efficiency rose significantly from about 21 percent (Btu electricity out per Btu fuel input) in 1952

to 29.5 percent in the mid-l960s and has

leveled out since then.7 Consequently, the energy

7Energy Information Administration, 1982 Annnual Review of

Energy, Washington, DC, April 1983, p. 13.

intensity (value of output in constant prices

divided by Btu inputs) declined by almost 30 percent by the mid-l960s, but has held steady since.

Industrial output can be measured in at least

two different ways: 1) as an index of physical output, or 2) as an economic product. Both types

of measurements involve difficult data analysis

because of the diversity of industrial activities.

Each of these output measures are discussed

separately below because they give different

perspectives on industrial energy intensity,

The Federal Reserve Board (FRB) has developed an index of industrial output designed to

approximate the physical quantity of goods produced in mining and manufacturing. It does not

include agriculture or construction. For this index, the FRB collects constant dollar or related

physical unit measures of output or economic

activity by 4- to 6-digit SIC8 industries. In order

to aggregate this large number of separate output indices into a single national index, the FRB

normally uses fractional weights representing the

share of each industry in total U.S. industrial value

added. In other words, if plastic milk bottle mak8

The Standard Industrial Classification (SIC) defines industries in

accordance with the composition and structure of the economy

and covers the entire field of economic activities,
Ch. Ill—U.S. Energy Consumption Patterns, 1952-82 Ž 49

ers contribute 10 times as much to real national

product as contact Iense makers, then the multiplicative weight applied to the output index number for milk bottles would be 10 times as large

as the corresponding weight for contact lenses.

Note that value-added weights eliminate doublecounting of the plastic that goes into both products. That value is attributed to plastic manufacturers.

Dividing the FRB index of industrial output into

energy used by mining and manufacturing yields

the first indicator of industrial energy intensity.

As shown in figure 14, all pertinent measures of

energy per unit of output have fallen steadily,

with the exception of a brief reversal around

1970. Based on these data, it is reasonable to conclude that technological advances over the last

20 years have permitted steady, substantial reductions in the amount of energy needed to produce industrial commodities.

A somewhat different view results if another

reputable time series of industrial output is used.

Industrial sector economic product is also measured as “value added” by, or “gross product

originating” (GPO) from industry.9 In 1952 total

9

There is a range of reputable time series estimates for industrial

output since estimation involves many theoretical choices about

what should be measured and problems related to how data are

actually gathered. Discussions with data-base specialists indicate

Figure 14.—lndustrial Energy Intensity

Using the FRB Output Index

I I I 1

0

196 0 1965 1970 1975 1980 1985

Year

SOURCES: Energy Information Administration, State Energy Report, 19600

Through 1981, DOE/ElA41214@l), Washington, DC, June 1983; Month/y

Energy Review, DOE/EIA-0035@3/07); Council of Economic Advisors,

“Report to the President,” app. A, in The 1983 Eccmorrric Report of

the President, Washington, DC, February 1983.

industrial GPO equaled about 38 percent of gross

domestic product (GDP), but has since declined

steadily, to about 31 percent in 1982. This measurement, in dollars, is obtained via two alternative methods. From the perspective of income

generated from production, value added should

equal payments to all workers and investors

engaged in mining, manufacturing, construction,

and agriculture, plus taxes paid by firms that are

also so engaged. In terms of product sales, the

same value should also be obtained by subtracting the sales value of all intermediate products

(as defined above) from total industrial sales.

In fact, because of data limitations, both approaches are used to estimate industrial economic product, whether it is called value added

or “gross product originating, ” and to crosscheck data sources. Differences that arise between the two approaches must be reconciled

by experienced judgment. The last step in the

data analysis involves elimination of general price

inflation by dividing the industrial product time

series by a price deflator, which is based on a

representative sample of industrial products. It

is important to notice that upward or downward

trends in the relative price of industrial products

and changes in the product mix can make this

time series behave differently than the index of

physical output.

Industrial energy intensity as measured by the

ratio of gross energy inputs to gross product

originating is shown in figure 15. Prior to 1972,

industrial energy use and dollar output grew

apace; therefore, the intensity ratio stayed roughly

constant at about 75,000 Btu/dollar. The probable reasons for this constancy, compared to the

steady decline of the ratio of energy used to physical output (see above), are decreasing relative

product prices and changing product mix. After

1972, energy use declined at an annual average

rate of about 1.4 percent, while output continued

to expand on the average of a little more than

1 percent per year. In other words, industrial

that, in general, the FRB index tends to show more rapid output

growth than indices based on the quinquennial Census of Manufactures. The latter includes the estimates for industrial output, which

are published as part of the National Income and Product Accounts

(N I PA).
50 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 15.—lndustrial Energy Intensity

Using Census Data

8

7

1

Year

SOURCES: Department of Commerce, The National Income and Producf Accounts of the U. S., 1929-76, Statistical Tables; and the Survey of

Current Business; and Energy Information Administration, 1982 Annual Review of Energy, Washington, DC, April, 1983.

energy intensity made a sharp break from its past

trend as it declined sharply over the last decade.

Compared to all sources of energy, the use of

oil has moved more in step with industrial activity over the last 30 years, so industrial oil intensity has been relatively stable. This conclusion includes the last decade, when oil prices rose sharply.

While total energy intensity declined by about

24 percent, oil intensity declined by only about

14 percent. Movements in natural gas intensity,

on the other hand, were relatively large. While

the other two intensity indicators exhibited minor fluctuations from 1952-1972, gas intensity

grew by about 28 percent; and while overall

energy intensity declined by about 14 percent

during the last decade, gas intensity declined by

about 35 percent.

INDUSTRIAL PRODUCT MIX SHIFT

When oil or gas prices increase, the costs and

prices of goods and services, which use significant amounts of these fuels as inputs, also rise.

This cost increase for final products can be moderated by investments in fuel efficiency improvements but cannot be entirely eliminated without

technological innovation. Fortunately, higher fuel

prices motivate innovations. Another important

reaction to these rising prices is a shift in the overall mix of goods and services. In some product

markets, rising prices induce sharp reductions in

purchases, and so demand is said to be price

elastic. However, in other markets, higher prices

cause little change in sales volume, and so demand is called price inelastic.

For example, the demand for plastic milk containers is price elastic for two reasons: 1) the cost

of plastic is a significant fraction of the total price

of the milk to the consumer, and 2) paper containers are highly competitive both in cost and

performance. Consequently, if the price of oil

drives up the cost of plastic to bottlers, those bottlers will probably switch to paper. Over time,

the shares of plastic and paper milk containers

follow their relative prices.

In contrast, the demand for plastic in the manufacture of contact lenses is price inelastic. For

this product, the price of plastic is not a major

fraction of total cost and so an oil shock does not

significantly raise the price of contact lenses. Furthermore, there is no good substitute material for

making contacts and the other major alternative

technology, eyeglasses, are also made primarily

from plastic, so those with imperfect vision can

do little else but pay the price.

After the two major oil price increases of the

1970s, large product mix shifts across the entire

economy began to occur, and these shifts will

take years to complete. Attempts to describe empirically the shifts that have accompanied these

past oil disruptions are circumscribed by poor

data and difficulties in isolating the impacts of an

oil disruption from the effects of other disturbances and trends. Nevertheless, a useful snapshot

of product mix shift following the 1973-74 disruption is provided in table 5. These data are based

on industrial data collected by the FRB (see previous section) and on a number of related national indices, as described below.
Ch. Ill–U.S. Energy Consumption Patterns, 1952-82 . 51

Marlay has constructed a number of additional

national indices using other weighting schemes

based on fuel use for the same set of SIC industries. 10 Each industry was given a weight equal

to its share in total industrial use of oil to construct an oil-weighted national index of industrial

output. Similarly, a natural gas-weighted index

was constructed, and so on for other fuels and

combinations of fuels.

These alternative indices of industrial output

are then compared in terms of their growth rates

over time. If indeed there has been a shift away

from oil-intensive commodities since 1974, then

the oil-weighted time series should suffer a more

dramatic decline after that year than the FRB series with value-added weights.

Table 5 reports Marlay’s findings for the aggregate of manufacturing and mining. As shown,

the value-added index lowered its average growth

rate by 1.1 points (comparing the 19 years before

1973 to the 7 years after), while the oil-weighted

index dropped by 1.8 points and the index

weighted by the sum of oil and gas dropped by

2.1 points. Somewhat ironically, the coal-weighted

index dropped the most (2.6 points), but that was

due in large part to the steady decline of the in10 Robert C. MarIay, Industrial Energy Productivity, Ph. D. dissertation, Massachusetts Institute of Technology, May 1983.

tegrated steel industry, which resulted from international and domestic economic events far

removed from oil markets.

Marlay’s analysis confirms that, indeed, industrial sector product mix of manufacturing plants

and mines shifted toward less energy-intensive

goods, including less oil-intensive goods. Although the shift away from oil was slightly smaller

than the average for all fuels, the shift away from

both premium fuels (oil and natural gas) was

slightly greater than the average. The latter shift

is relevant because of the large fuel-switching capability between oil and gas for stationary heat

and steam applications. And as mentioned above,

the relatively large decline in the coal-weighted

index was only marginally related to the rising

price of oil.

Table 5.—Growth Rates for Alternative Indices of

Mining and Manufacturing Output

Average growth rates

Index 1954-73 1973-80 Difference

Coal weighted . . . . . . . . . . 1.9 -0.7 –2.6

Gas weighted. . . . . . . . . . . 4.2 1.9 -2.3

Oil weighted. . . . . . . . . . . . 5.2 3.4 -1.8

Oil and gas . . . . . . . . . . . . . 4.5 2.4 -2.1

Electricity . . . . . . . . . . . . . . 4.2 2.1 – 2.1

Total energy . . . . . . . . . . . . 4.0 2.0 -2.0

Value added . . . . . . . . . . . . 4.0 2.9 – 1.1

SOURCE: Robert C. Marlay, Industrial Energy Productivity, Ph.D. dissertation,

Massachusetts Institute of Technology, May 1983, ch. 7.

ECONOMIC RECESSION AND PRODUCTIVITY DECLINE

A final economic adjustment to an oil supply production process. Similarly, consumers realize

shortfall involves a decline in the overall level of that they are spending too much on oil, given

economic activity. While this adjustment is diffi- their lifestyle objectives and the cost and availcult to isolate from other factors affecting eco- ability of oil substitutes. For both, the period imnomic activity, two basic cause-and-effect mech- mediately after oil prices have risen involves

anisms are clearly operating. retrenchment because producer revenues and

Immediately following an oil disruption, there consumer purchasing power decline. Both reductions in economic activity can interact to amplify is a temporary readjustment process analogous

to a business cycle recession. Within a short time the resulting decline in GNP, at least in the short

term. after a sharp oil price increase, producers realize

that their factor input mix is suboptimal because Although it is extremely difficult to isolate just

they are spending too much on oil, given their how much an oil supply shortfall may have conavailable options to increase profits by changing tributed to a subsequent economic recession, it

their technology or at least by reorganizing the is worth noting that both the 1973-74 and the
52 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

1978-79 disruptions were immediately followed

by economic recessions that apparently were

caused to a large extent by these incidents (see

fig. 16). While a general recession of economic

activity is a negative impact, it also has the effect of lowering demand for oil and thus oil

prices.

Although this short-term adjustment process is

an important stabilizing force in oil markets, the

primary subject of this assessment involves longer

term adjustments, which depend primarily on

technological options for oil replacement and on

the willingness of investors to invest in these options. Investors respond to general economic

conditions as well as to opportunities created by

changing prices and technology. Immediately

after the last two shortfalls, investment activity

declined more than in proportion to GNP (see

fig. 17), but the economy can be expected to

come out of its post-shortfall recession, with investors leading the way, if oil replacement options are attractive.

Needless to say, it is exceedingly difficult to

evaluate these replacement opportunities, even

after the last decade of experience because so

Figure 16.—Gross Nationai Product Over Time

(constant 1972 dollars)

1.6

1.5

1.1

1.0

0

1969 1971 1973 1975 1977 1979 1981 1983

Year

Fig ure 17.—Total Investment and Expenditures for

Durable Goodsa (as percent of GNP)

24

20

16

12

n

“ 1971 1973 1975 1977 1979 1981 1983

Year

aProducer investment in durables is one component of total private investment. Consumer expenditures for durables is not included in total private investment but it is closely related because durables are investment goods.

Both producer and consumer durables are also germaine to the discussion of

investment for oil replacement.

SOURCES: The National Income and Product Accounts of the United States,

1929-76, Statistical Tables; and Survey of Current Business, “National Income and Product Accounts,” Table 1.1, July 1983 and

March 1984.

many other factors besides oil markets have contributed to the performance of the economy over

that period. However, in the 5-year horizon of

this assessment, the net macroeconomic impact

of a permanent loss of oil supplies or permanent

increase in the price of oil is most likely to be

negative.

Barring technological breakthroughs or major

changes in production processes or lifestyle, GNP

and average labor productivity must decline because a permanent oil supply shortfall raises the

cost of producing the prevailing mix of goods and

services. Conversely, a permanent shortfall reduces the availability of a key resource input to

the economy, and thus, everything else being

more or less the same, total output must decline,

Limiting attention only to changes in oil inputs

becomes less realistic as the years pass following the onset of a shortfall. Indeed, based on the

last two shortfalls, one might expect developments in technology and lifestyle to overcome

shortfall losses within the time horizon of a decade, or at least to change expectations about the

future which existed when imported oil was

cheap and plentiful.

The point of this discussion is that oil consumption can be reduced by reducing economic activ-
Ch. III—U.S. Energy Consumption Patterns, 1952-82 ● 53

ity, and that the market economy may decide that technical analysis by showing that the economy

this is a better option than technical replacement. has demonstrated resilience after the last two oil

The main objective of the following discussion supply shortfalls, both in terms of continued ecois to evaluate the technological options for reduc- nomic growth and reduced oil intensity, presuming oil dependence and maintaining growth in ably because oil replacement options have been

the event of a future shortfall. The historical anal- effective.

ysis provides an appropriate introduction to the
Chapter IV

Fuel Switching

Contents

Page

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Options Considered . . . . . . . . . . . . . . . . . . . . . . 58

Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Electric Heat Pumps . . . . . . . . . . . . . . . . . . . . . 59

Conversion to Solid Fuels . . . . . . . . . . . . . . . . 60

Ethanol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Compressed Natural Gas in Motor Vehicles . 64

Liquefied Petroleum Gas in Motor Vehicles . 64

Mobile Gasifiers . . . . . . . . . . . . . . . . . . . . . . . . 66

Fuel and Grain Supplies . . . . . . . . . . . . . . . . . . . 67

Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Wood and Other Solid Biomass . . . . . . . . . . . 69

Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Liquefied Petroleum Gas . . . . . . . . . . . . . . . . . 71

Enhanced Oil Recovery . . . . . . . . . . . . . . . . . . 71

Grain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Deployment of Fuel Switching Technologies 75

Electric Utilities . . . . . . . . . . . . . . . . . . . . . . . . 78

Page

Residential and Commercial Space Heat and

Hot Water, . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Industrial Boilers . . . . . . . . . . . . . . . . . . . . . . . 86

Mobile Engines. . . . . . . . . . . . . . . . . . . . . . . . . 89

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

Environmental Impacts . . . . . . . . . . . . . . . . . . . . 93

Appendix A–Reasons for Excluding Various Oil

Replacement Technologies From

Detailed Consideration. . . . . . . . . . . . . . . . . 94

Fossil Synthetic Fuels . . . . . . . . . . . . . . . . . . . . 94

Active Solar Systems . . . . . . . . . . . . . . . . . . . . 95

Photovoltaics . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Electricity From Wind . . . . . . . . . . . . . . . . . . . 96

Solar Thermal Electric Generation . . . . . . . . . 96

Electric Vehicles. . . . . . . . . . . . . . . . . . . . . . . . 96

Ethanol From Food Processing Wastes . . . . . . 96

Appendix B–Addition Considerations Regarding

Ethanol’s Net Energy Balance ., , . . . . . . . . 96
TABLES

Table No. Page

6.

7.

8.

9.

10

11.

12.

13.

14.

15.

16.

Oil Replacement Technologies Selected for

Screening Evaluation . . . . . . . . . . . . . . . . . . . 58

Categories of Oil Replacement Technologies

Evaluated in Detail . . . . . . . . . . . . . . . . . . . . 58

Potential Wood Energy Production by

Region, Assuming 10 Quadrillion

Btu/yr Increment . . . . . . . . . . . . . . . . . . . . . . 70

Estimated 1985 Oil Consumption by

Region and End Use. . . . . . .. ... . . . . . . 77

Electric Generating Capacity of Facilities

Converted From Oil to Coal and New

Generating Capacity Scheduled for

Completion Between 1985 and 1990 . . . . . 81

Potential Utility Oil Consumption With

Conversion to Natural Gas and Coal. . . . . . 82

Potential Increase in Natural Gas Use for

Space Heating and Hot Water. . . . . . . . . . . 84

Potential Reduction in Oil Use in the

Residential and Commercial Sectors

Through Conversion to Natural Gas,

Electricity, and Solid Fuels . . . . . . . . . . . . . . 84

Potential Reduction in Oil Used in

Industrial Boilers Through Conversion

to Solid Fuels and Natural Gas . . . . . . . . . . 88

Potential Reduction in Fuel Use in

Surface Transportation and

Mobile Industrial Engines . . . . . . . . . . . . . . . 91

Summary of Potential Reduction in

Oil Use Through Fuel Switching . . . . . . . . . 93

FIGURES

Figure No. Page

18. Principle of an Electric Heat Pump . . . . . . . 59

19. Coal Gasification Plant–Block

Flow Diagram . . . . . . . . . . . . . . . . . . . . . . . . 60

Figure No. Page

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31

32.

33.

34,

Schematic Flow Diagram of a Coal-Water -

Mixture Preparation Plant. . . . . . . . . . . . . . . 61

Process Diagram for the Production of

Fuel Ethanol From Grain . . . . . . . , . . . , . . . 63

Components of CNG Vehicle Conversion. . 65

Components of LPG Vehicle Conversion . . 66

Basic Elements of the Mobile

Gasifier-Engine System . . . . . . . , . . . . . . . . . 68

Federal Regions . . . . . . . . . . . . . . . . . . . . . . . 70

Schedule for Accelerated EOR C02

Flooding Project . . . . . . . . . . . . . . . . . . . . . . 72

Schedule for Accelerated EOR

Steam Flooding Project . . . . . . . . . . . . . . . . . 73

Potential Oil Production Rate for

Enhanced Oil Recovery ., . . . . . . . . . . . . . . 74

Schedule for Engineering and

Construction: Utility Boiler Conversion

to CWM-Firing. . . . . . . . . . . . . . . . . . . . . . . . 80

Schedule for Engineering and

Construction: Central CWM Preparation

Plant for Industrial Boilers . . . . . . . . . . . . . . 80

Potential Nonoil-Fired Electric Generating

Capacity and 1990 Peak Electric

Demand for Selected Regions . . . . . . . . . . . 82

Schedule for Engineering and Construction:

Coal- or Wood-Firing Steam Generating

System, Fuel-Handling Facilities, and

Particulate Control System . . . . . . . . . . . . . . 87

Schedule for Engineering and

Construction: Industrial Boiler

Conversion to Solid Fuels. . . . . . . . . . . . . . . 88

Schedule for Engineering and

Construction of a 50 Million Gal/yr

Ethanol Plant , ., ., , , . . . . . . . . . . . . . . . . . . 91
Chapter IV

Fuel Switching

INTRODUCTION

Fuel use patterns in the United States have

changed several times in the past 150 years. During the late 1800s, coal overtook wood as the

principal fuel; and in this century oil and then

natural gas use surpassed coal consumption.

In more recent years, however, the trend

towards more oil and gas use has been reversed,

at least temporarily. Between 1978 and 1982, oil

use in the electric utility sector, as a percent of

their total energy consumption, dropped from 17

percent in 1978 to 7 percent in 1982, while gas

use remained relatively constant. Because electricity sales remained nearly constant, the drop

in oil use was accompanied by an increase in coal

consumption and, to a lesser extent, increased

generation from hydroelectric facilities. (Nuclear

power output remained nearly constant during

the period.1

)

At the same time, residential and commercial

consumption of oil, as a percent of total energy

use (including wood2

), dropped from 1s percent

in 1978 to 9 percent in 1982, while natural gas’s

share of total consumption remained relatively

constant. The drop in oil use was accompanied

by an increase in electricity and, to a lesser extent, wood consumption.

Fuel use patterns in the industrial and transportation sectors, on the other hand, remained relatively constant during this period. In the industrial sector, oil and gas use, as a percent of total

energy consumption, dropped by about 1 percentage point each between 1978 and 1982. The

transportation sector remained primarily depend1 “Monthly Energy Review, ” Energy Information Administration,

DOE/ElA-0035(83/10), October 1983.

“’Estimates of Wood Energy Consumption From 1949 to 1981 ,“

Energy Information Administration, DOE/EIA-0341, August 1982.

ent on petroleum (except for natural gas used to

pump gas through pipelines), although the use

of natural gas and ethanol in cars and trucks increased slightly.

In all, petroleum consumption dropped from

47 percent of the total U.S. energy consumption

in 1978 to 41 percent in 1982. Natural gas’ share

remained constant at 25 percent and coal’s share

increased from 17 to 21 percent in this period.

The remainder was made up primarily of small

increases in the shares of hydroelectric and nuclear generation and wood. These changes in the

mix of fuels used, defined as “fuel switching, ”

together with increased efficiency and reduced

demand for energy services lowered U.S. demand for petroleum from 18.8 million barrels per

day (MMB/D) in 1978 to 15.3 MMB/D in 1982,

or about 19 percent.

In the event of a large oil shortfall, continued

and accelerated fuel switching away from oil will

be an important means of restoring the energy

services formerly supplied by oil. Fuel switching

often involves installation of new equipment, may

require expansion of alternative fuel delivery systems, and always involves increased supplies of

the alternative fuel.

In this chapter OTA considers several types of

fuel switching in order to estimate their potential for replacing the petroleum lost in an oil shortfall. The next two sections summarize the fuel

switching options examined and describe some

of the technologies involved. Fuel supply constraints, including the potential for enhanced oil

recovery, are then analyzed, followed by estimates of the rates that various technologies can

be deployed. The chapter concludes with a brief

summary of environmental impacts.

57

37-833 0 - 84 - 5
58 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

OPTIONS CONSIDERED

The oil replacement potential through fuel

switching was assessed in a two-stage process.

First a comprehensive list of major near-term fuel

switching options (table 6) was screened to identify those options with the greatest potential for

replacing large quantities of oil in a relatively short

period of time. The options surviving the screening process were then examined in detail to estimate more precisely the quantities of oil that each

could replace and the rate at which the technologies could be deployed.

For the purposes of this study, the options that

were eliminated from further consideration were

those that seemed least likely to be able to replace more than about 0.2 MMB/D of petroleum

within 5 years after the onset of an oil shortfall

Table 6.—Oil Replacement Technologies Selected

for Screening Evaluation

Energy supply/

technology-description Remarks/examples

Natural gas in buildings,

industries and electric

utilities

Electricity in buildings

Coal and/or wood in

buildings

Coal and solid wastes in

industries and electric

utilities

Coal-liquid mixtures

Coal gasification

Coal liquefaction

Oil shale, tar sands

Solar energy

Wood in industries and

electric utilities

Biomass liquid fuels in

transportation

Natural gas and LPG in

transportation

Electricity in transportation

Mobile coal and wood

gasifiers for

transportation

Enhanced oil recovery

Increased natural gas

production storage and

delivery

Switch over from distillate/

residual fuel oil to

natural gas

Use of heat pumps,

resistance heaters and

space heaters —

Direct firing of coal

Coal-oil, coal-water

mixtures

Low- and medium-Btu

gasification

Use in buildings,

industries and electric

utilities

Direct-firing both

sectors; gasification in

industries

Use of ethanol from corn

—

—

—

—

—

SOURCE: Office of Technology Assessment

beginning in 1985. Although most of the options

listed in table 6 could replace significant quantities of oil if sufficient resources were devoted to

deploying them, and some of the options eliminated could be important in specific localities,

the screening process identified options most likely to be used extensively throughout the country. Some of the options eliminated and the specific reasons for eliminating them are given in

appendix A to this chapter.

The remaining fuel switching technologies,

grouped into the aggregated categories which

have been considered in more detail, are listed

in table 7. The major options involve converting

stationary uses of oil to electricity, natural gas,

coal, and solid biomass. These fuels can also be

used as replacements for liquid fuels in the transportation sector, but the constraints are considerably more severe than for stationary oil uses.3

Ethanol from grain is also included for more detailed consideration, because it is a well-established technology that produces a high-grade liquid fuel, the Ieadtime for constructing distilleries

is normally less than 3 years, and the distillery

does not need to depend directly on oil or natural gas as a fuel.

3

Electric vehicles were also eliminated from detailed Considersration because of the severity of these constraints.

Table 7.—Categories of Oil Replacement

Technologies Evaluated in Detail

Sector Technologies

Electric utilities Conversions to solid fuels

and natural gas

Completion of new

generating facilities

currently under

construction

Residential and commercial Conversion to natural gas,

space heat and hot electricity, and solid

water fuels

Industry Conversion of boilers to

solid fuels and natural

gas

Transportation Conversion to compressed

natural gas, liquefied

petroleum gas, and solid

fuels (with mobile

gasifiers)

Increased ethanol

production

All Enhanced oil recovery

SOURCE: Office of Technology Assessment.
Ch. IV—Fuel Switching • 59

TECHNOLOGIES

Several of the fuel switching technologies, such

as conversion to natural gas, are widely understood and wiII not be considered i n this section.

Others, however, require some explanation; and

they are described below in order to provide an

understanding of some of the factors that affect

potential oil replacement through fuel switching.

Electric Heat Pumps

Heat pumps are devices for space heating4 that

are based on the fact that the temperature of

many gases increases when they are compressed,

and their temperature drops when they are decompressed. The heat pump works by circulating

a gas through a tube that runs partly inside and

partly outside of the building that is being heated

(see fig. 18). The gas is compressed in the part

of the tube that is inside the building so that it

is hotter than the inside air and releases heat to

that air. The gas is decompressed in the part of

the tube outside the building so that it is colder

than and absorbs heat from the outside air. The

net result is that heat has been transferred or

“pumped” from the outside air to the inside air.

(Obviously, by running the pump in reverse–

compressing the gas in the tube outside of the

building and decompressing it in the inside part

of the tube-heat can be pumped out of the

building, and the device becomes an air-conditioner, )

As long as the difference between the inside

and outside air temperatures is not too great, a

heat pump can pump more energy in the form

of heat into a building than is consumed in the

form of electricity to run the device. Its efficiency,

or heat delivered to the inside air divided by the

energy consumed to run the device, can then be

greater than 100 percent. However, when the

outside temperature drops, the efficiency also

drops; and below certain outside temperatures,

usually around 200 to 300 F, it is more efficient

to use electric resistance heating (which has an

efficiency of 90 to 100 percent). Consequently,

heat pumps are usually equipped with electric

—.—. --— —— 4Heat pumps can also be used for hot water heating, but only

space heating IS described here.

Figure 18.—Principle of an Electric Heat Pump

The function of most heat pumps is based on the fact that the

temperature of most fluids rises when the fluid is compressed and

falls when the pressure on the fluid is reduced,a

In the above diagram the fluid in the tube is compressed by a

mechanical pump (A) as it enters the building. This raises the fluid’s

temperature to a level that is above the inside air temperature, causing heat to flow from the working fluid into the air inside the building

(B), The fluid then passes through the constriction (C) as it leaves the

building, causing the pressure on the fluid to drop. The apparatus is

designed so that the pressure drop is sufficient to cool the fluid to

a temperature which is below the outside air temperature, causing

heat to flow from the outside air into the working fluid (D), The process is then repeated.

aA common example of this occurs in bicycle pumps. When air is compressed

in the pump to fill a bicycle tire, the air’s temperature rises causing the pump

to become hot

SOURCE: Office of Technology Assessment.

resistance heaters, which are used when the outside temperature is low. Nevertheless, practical

heat pumps, which are not designed to double

as air-conditioners in the summer, can usually

achieve an overall efficiency of about 200 percent. Designing heat pumps for both heating and

cooling involves some design tradeoffs, which reduce overall heating efficiency to about 150

percent.

By way of comparison, oil heating has an efficiency of about 65 percent. Consequently, an ef-
60 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

ficient heat pump requires about one-third as

much energy (in the form of electricity) as an oil

furnace requires (in the form of oil) to deliver the

same amount of heat. As long as the electricity

is generated from nonpremium fuels (i.e., coal,

nuclear, or hydroelectric), the heat pump is an

attractive alternative for replacing premium fuels.

if, however, the electricity is generated with natural gas or oil, for which the efficiency of converting fuel to electricity is about 32 percent, this

potential gain in premium fuel replacement is

lost, since it would require at least as much oil

or gas to produce the electricity as would be replaced by the heat pump. Consequently, in terms

of oil replacement, heat pumps are attractive only

where marginal electricity is generated from fuels

other than oils

5

lf the oil used for electric generation is residual fuel oil, the situation is somewhat more complicated. Upgrading residual oil to middle distillates and gasoline is only about 70 percent efficient (Purvin & Gertz, Inc., “An Analysis of Potential for Upgrading Domestic

Refining Capacity, ” prepared for the American Gas Association,

1980). Consequently, in principle, some increase in the supplies

of refined liquid fuels could be achieved by burning residual oil

for electricity and using the electricity for heat pumps to replace

Figure 19. —Coal Gasification

Conversion to Solid Fuels

There are three basic technologies considered

for converting oil-burning boilers to use solid fuels

(principally coal and wood). First, the boilers can

be modified to burn the solid fuel directly. Second, the fuel can be gasified in an onsite, airblown gasifier (see fig. 19). The gasifier partially

burns the fuel to produce a low-energy fuel gas

which is then burned in the boiler. Third, the

boiler can be converted to burn coal-water mixtures (CWMS) (see fig. 20). These are mixtures

containing up to 70 percent pulverized coal in

water. Both direct combustion and gasification

are commercial technologies, although further

development probably could significantly imhome heating oil, as compared to simply upgrading the residual

oil and using fuel oil for space heating. In practice, however, the

region where oil use for electric generation is most likely to continue after an oil shortfall is in the Northeast, where the cold winters

reduce the efficiency of the heat pumps. Consequently, burning

oil to produce electricity for heat pumps would probably lead to

a net increase in oil consumption in this region; and it would be,

at best, a questionable strategy to promote heat pumps as a means

of displacing oil there.

Plant—Block Flow Diagram
Ch. IV—Fuel Switching ● 6 1

Figure 20.—Schematic Flow Diagram of a Coal-Water Mixture Preparation Plant

Coal from

crusher house

CWM mix tank

Burner pump

Recirculating pump

SOURCE: Gibbs & Hill, Inc., “Oil Replacement Analysis, Phase l—The Technologies,” contractor report to OTA, April 1983.

prove the gasifiers. CWM technologies are currently being tested, and they are likely to be commercial by 1985,

All three technologies require the installation

of ash recovery and disposal systems and particulate control systems (to reduce particulate emissions) at the boiler site. Direct combustion and

air gasification also require solid fuel storage and

handling facilities at or near the boiler site.

CWMs, however, can be prepared at off-site

CWM plants. Because the CWM is a liquid, much

of the oil storage and metering system can be

used for the CWM after various valves and pumps

have been replaced. This is a principal advantage

of CWMs over the other technologies because

it reduces the space requirements for conversion

to the use solid fuel.

Converting boilers to solid fuels often leads to

a derating of the boiler—i. e., the boiler’s maximum steam output per unit time is reduced. This

results from various combinations of: 1 ) the need

to reduce the speed with which the combustion

gases pass through the heat exchanger in order

to reduce the abrasive effects of the ash contained

in these gases, 2) lower flame temperatures, and

3) larger combustion gas volumes (as compared

to oil or natural gas). Depending on the boiler

design, the derating can range from negligible

amounts to over 50 percent of the output before

the conversion. Where the derating is large, con-
62 Ž U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

version to solid fuels would be less attractive and

the end users may require the installation of additional solid fuel boilers in order to make up the

lost steam output.

In the utility sector, there are three basic types

of boilers, and each type requires somewhat different modifications. First are the boilers that were

originally designed for coal but were subsequently converted to oil. (These are usually the easiest

to reconvert to coal and generally experience the

smallest debating. ) The oil-designed boilers are

of two types, called type 1 and type 2. The type

1 boilers are similar to coal-designed boilers in

terms of hearth configuration,6 heat exchanger

tube spacing, and other important factors; and

these boilers can also be converted to solid fuels.

However, type 2 boilers (about 35 percent of the

oil-designed boiler population) require such extensive modifications that generally it is not practical to convert them. Consequently, for the purposes of this study, OTA has assumed that only

the coal-designed and type 1 oil-designed utility

boilers would be converted to solid fuels.

The population of industrial boilers has not

been surveyed in the same detail as utility boilers.

Consequently, OTA has simply assumed that 50

percent of the large (greater than 50 million Btu

per hour (MM Btu/hr)) industrial boilers currently

burning oil are suitable for conversion to solid

fuels. Although there will be exceptions,8 OTA

also assumed that most of the small (less than 50

MMBtu/hr) industrial boilers would not be converted to solid fuels because of space limitations

and the inconvenience and extra labor associated

with solid fuel combustion.

Ethanol

Ethanol is a high-octane liquid fuel that can be

used to fuel engines designed or modified for its

6Particularly the size of the hearth, which determines the length

of time that the fuel remains in the combustion zone for a given

air and fuel flow rate. Coal and wood react more slowly than does

oil, so they require a longer residence time in this zone.

7“Survey of Oil-Fired Utility Boilers–Potential for Coal-Oil Mixture Conversion, ” prepared by MITRE Corp. for U.S. Department

of Energy, DOE/FE/531 79-01 UC-90E, July 1980.

SR. Hodam, R. Williams, and M. Lesser, “Engineering and ECOnomic Characteristics of Commercial Wood Gasifiers in North

America, ” Hodam Associates, Inc., SER1/TR-231 -1459, November

1982.

use, or it can be blended with gasoline and the

blends can be used in unmodified gasoline engines. Currently, the major use of fuel ethanol

(about 500 million gallons per year) is as an octane-boosting additive to gasoline. These blends,

which consist of 10 percent ethanol and 90 percent unleaded gasoline, were originally called

“gasohol” but now are usually referred to as

“premium unleaded gasoline with ethanol.”

Ethanol is currently produced from ethylene (a

byproduct of oil refining) and from biomass. U.S.

production of petrochemical ethanol was about

200 million gallons in 1981,9 almost all of which

was used for chemical and pharmaceutical purposes. Although 1981 ethylene production (29

billion pounds10) would have been sufficient for

7 billion gallons of ethanol, using it to produce

fuel ethanol would have diverted it from its higher

value chemical uses. Consequently, this option

has not been considered for fuel production.

Ethanol from biomass, the main source of fuel

ethanol, is produced by fermenting a sugar solution and then distilling the solution to concentrate and purify the ethanol (see fig. 21). The sugar

solution can be obtained from sugar crops, the

starch in grains, or cellulose (contained in wood,

plant herbage, the paper and wood in municipal waste, etc.). However, cellulose-derived sugar

is relatively expensive because the processes

either give low yields of sugar or consume large

quantities of expensive chemicals and require expensive equipment.11 The economics also generally favor the use of grain, principally corn, over

sugar crops as the source of sugar in the United

States, although there are site-specific exceptions

to this.

A byproduct of producing ethanol from grain

is a substance called “distillers’ dry grain” (DDG),

which contains most of the protein originally contained in the grain. The DDG can be used as a

substitute for soybean meal and other protein

concentrates in animal feeds. Above about 2 billion gallons per year of ethanol production, how9Chemical & Engineering News, June 14, 1982.

‘oIbid.

I IEnergy From Biological Processes, Volume 11— Technical and

Environment/ Analyses (Washington, DC: U.S. Congress, Office

of Technology Assessment, OTA-E-1 28, September 1980).
Ch. IV—Fuel Switching ● 6 3

Figure 21 .—Process Diagram for the Production of

Fuel Ethanol From Grain

ever, the U.S. animal feed markets would begin

to saturate; and this would have an adverse effect on the economics of ethanol production and

increase the agricultural impacts of supplying the

grain. (See “Fuel and Grain Supplies” below.)

Another concern is whether ethanol can replace more oil than is consumed in producing it–

i.e., its net oil replacement. This involves three

major areas: 1 ) distillery fuel use, 2) energy credits

for ethanol’s octane-boosting properties, and

3) grain production.

New, large-scale ethanol distilleries are generally fueled with coal, and their oil consumption

is negligible. Experience to date, however, indicates that small, onfarm distilleries are usually

fueled with oil;12 and this is likely to result in

distillery oil consumption that is at least half the

12’’Fuel Alcohol on the Farm–A Primer on Production and Use,”

U.S. National Alcohol Fuels Commission, Washington, DC, 1980.

energy content of the ethanol produced .11 Consequently, unless onfarm ethanol production is

negligible or small-scale distillers begin to use

solid fuels, distillery oil consumption could reduce the net quantity of oil replaced by ethanol

significantly. For the purposes of this study, however, OTA assumes that most of the ethanol will

be produced in large, coal-fired distilleries.

The second factor in ethanol’s oil replacement

potential involves its octane-boosting properties.

Under more or less normal circumstances, addition of ethanol to gasoline enables the refiner

to produce a lower octane gasoline and thereby

reduce the refinery energy use. This energy

“credit” typically amounts to 5 to 50 percent of

the energy content of the ethanol .14 As discussed

in appendix B of this chapter, however, changes

in the product mix and processing needs at refineries following a large oil shortfall could reduce

significantly or eliminate this energy credit. Consequently, OTA does not include a refinery energy credit when calculating ethanol’s net oil replacement under conditions of a large shortfall.

The third factor is the fuel used to produce the

grain, which is discussed in detail under “Fuel

and Grain Supplies” below. When this agricultural energy use is included, the combined results

indicate that ethanol production can, at best, lead

to a net oil replacement equal to about half the

energy content of the ethanol. And if the increased demand for grain leads to unfavorable

(from an energy point of view) shifts in agricultural production and/or the distilleries are fueled

with oil or natural gas, ethanol production will

probably not reduce oil consumption and it could

even lead to an increased demand for oil.

13Fuel consumption reported by the small-scale distillers is less

than this, but the numbers reported probably do not include mash

preparation, distillery sterilization, and DDG drying. OTA’s estimate of the energy consumption is based on the best available technology for all the processes involved in ethanol fermentation and

distillation; and inefficiencies in small-scale operations would probably increase their energy consumption above our estimate.

14Energy From Biological processes, VO/UlT7e 11, op. cit.
64 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Compressed Natural Gas

in Motor Vehicles

Compressed natural gas (CNG) can power existing automobiles and trucks if the fuel system

is appropriately modified. Because natural gas is

a high octane fuel, however, it is best suited for

spark ignition (basically gasoline) engines. Currently, there are approximately 20,000 to 30,000

CNG-powered vehicles in the United States and

300,000 to 400,000 worldwide.ls lb In addition,

there are at least six suppliers of CNG conversions kits in the United States. ’ 7

Conversion of a vehicle to CNG is relatively

simple and can be accomplished in less than 8

hours. IIt consists of installing cylinders to hold

natural gas pressurized at 2,500 pounds per

square inch (psi) together with the requisite fuel

lines, valves, pressure regulators, and carburetor

modifications to deliver the gas to the engine and

to refuel (see fig. 22). Most vehicles are converted

for dual fuel use so that they can run on either

gasoline or CNG. Vehicles typically have a range

of about 100 to 200 miles on CNG between refills.

Some other aspects of CNG vehicles are as

follows:

●

●

Refilling. The time needed for refills varies

from 2 to 5 minutes on a fast-fill device

(which requires a bank of high-pressure storage cylinders) to 4 to 14 hours on a slow-fill

device (in which the vehicle is connected

more or less directly to a compressor). A typical refill station might contain one fast-fill

device together with several of the slower

filling ones.18

Market. Until there are a large number of

CNG vehicles on the road, the most likely

markets for CNG conversions are vehicles

in captive fleets, where all of the fleet vehicles are refilled at a central location. This

Is’’ Compressed Natural Gas (CNG) Vehicle System Information

Paper,” Gas Service Energy Corp., Kansas City, MO, 1982,

‘G’’Assessment of Methane-Related Fuels for Automotive Fleet

Vehicles, ” vol. 2, DOE/CE/501 79-1, U.S. Department of Energy,

February 1982; and “State of the Art Assessment of Methane-Fueled

Vehicles, ” DOE/CE-0026, U.S. Department of Energy, February

1982.

‘71 bid.

laGibbs & Hill, Inc. “oil Replacement Analysis Phase l—selection

of Technologies, ” contractor report to OTA, April 1983.

●

●

would maximize the use of the refill equipment and thereby lower the per-unit costs.

Engine power. Because the engine in a dualfuel vehicle is not optimized for CNG use,

it develops 10 to 20 percent less power with

CNG than with gasoline. When maximum

power is required, however, the engine can

be switched back to gasoline.

Safety. Although there is always the potential for fires that are difficult to control and

explosions if CNG fuel systems rupture, CNG

vehicles have an impressive safety record to

date. Of the estimated 1,360 collisions involving CNG vehicles in the United States,

including 183 rear-end collisions, none

caused a failure of or fire involving the CNG

fuel system.19 The safety record in Italy is also

excellent. Nevertheless, this safety record

could be reversed if designed safety margins

were reduced in order to cut costs or lower

the weight of CNG systems.

Liquefied Petroleum Gas

in Motor Vehicles

Liquefied petroleum gas (LPG) is a mixture of

light hydrocarbons extracted from raw natural gas

at natural gas processing plants or produced as

a byproduct of oil refining. Although the hydrocarbons are gases at atmospheric pressure and

room temperature, they liquefy when subjected

to moderate pressures (e.g., 150 psi), and the resultant LPG has an energy density (energy per unit

volume) that is 72 percent as great as gasoline.

Precise estimates of the number of LPG-fueIed

vehicles in the United States are not available.

The National LP-Gas Association estimates 1.5

million vehicles;20 but calculations based on

Energy Information Administration data for LPG

used as an internal combustion fuel put the number at considerably less than 1 million.21 Neverlglbid.

ZOp. Ayler, National LP-Gas Association, Oak Brook, IL, private

communication to Gibbs & Hill, Inc., Oct. 29, 1982 and Nov. 3,

1982.

Z1 HA (l Jpetroleum SUpply Annual 1982, ” vol. 1, U.S. Department

of Energy, DOE/ElA-0340(82 )/l, June 1983) reports that, in 1982,

644 million gallons of LPG were used as fuel in internal combustion engines. Assuming that the average vehicle (van, truck, and

car) gets 15 miles per gallon (mpg) of LPG and travels an average

of 10,000 miles per year, the number of LPG-fueled vehicles would
Ch. IV—Fuel Switching ● 6 5

Figure 22.—Components of CNG Vehicle Conversion

1.

2.

3.

4.

5.

6.

7.

8.

9.

CNG Storage Cylinders: CNG is stored on board the converted vehicle at 2,400 psi in the U.S. Department of Transportation 3AA rated cylinders.

Manual Shut-Off Valve: Each CNG storage cylinder is equipped with a high pressure ball valve which

allows manual shut-off of CNG as an added safety feature.

Fuel Supply Line: The CNG supply line is made of high pressure steel tubing with a minimum working

pressure rating of not less than 3,000 psi and a test pressure rating of 12,000 psi. It is 1⁄4” thick and is

manufactured to Society of Automotive Engineers specifications.

First Stage Regulator: The primary regulator reduces CNG from 2,400 psi storage pressure down to 60

psi. It is tested to withstand pressures in excess of 15,000 psi.

Second Stage Regulator: The secondary regulator reduces CNG from 60 psi down to less than one

pound working pressure. This regulator design has been used by the gas utility industry for many years

and is rated for inlet pressures up to 125 psi.

CNG Solenoid Valve: A 12 volt DC pilot-operated solenoid, located between the first and second stage

regulators, controls the flow of CNG into the system.

Vapor Hose: The vapor hose supplies CNG from the second stage regulator to the gas/air mixer. It is impervious to CNG and capable of sustaining five times the maximum service pressure.

Gas/Air Mixer This specially designed unit operates on the diaphragm controlled variable venturi principle. It meters CNG into the carburetor as required for combustion and maintains the proper fuel to air

ratio at all levels of engine demand.

Carburetor Adaptor: This unit adapts the gas/air mixer to the standard carburetor in a straight-set or offset configuration.

10. Fuel Selector Control Panel and Gauge: The dash-mounted panel incorporates a sturdy push-pull cable

with a handle for switching from one-fuel to the other. A pressure gauge indicates the amount of CNG

remaining in the vehicle.

11. Gauge Isoiator The isoiator is installed in the high pressure fuel supply line behind the pressure gauge

to prevent CNG from entering the passenger compartment.

12. Combination Valve: The combination check and fill valve allows CNG to flow through the fuel supply

line to the storage cylinders and functions as a relief device to guard against overpressurization. It also

automatically seals the system after refueling.

13. Refueling Connection: The refueling connection is designed to receive a probe-type refueling coupling

and is equipped with an interlock switch to prevent the vehicle from being started inadvertently during

refueling.

SOURCE: “The Dual Fuel BiPac System — Vehicle Conversion,” Dual Fuel Systems Inc., Culver City, CA, 1981
66 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

theless, there have been reports that as many as

300,000 vehicles were converted to use LPG in

1981.22 Furthermore, Ford Motor Co. began selling LPG-fueled cars in 1982, and they expect their

1982 sales of 1,500 vehicles to rise to 6,000 in

1983.23

Converting a gasoline-fueled vehicle to LPG entails installing an LPG fuel tank, fuel lines and filter, a device to vaporize the LPG and regulate

the gas pressure, and a gas air mixer (see fig. 23).

The conversion can be done in a few hours, and

the converted vehicles generally can burn either

gasoline or LPG. Furthermore, the National Fire

Protection Association (NFPA) has developed

be about 966,000. However, some of this LPG is used for stationary

engines, the 15 mpg average fuel efficiency is probably too high,

and 10,000 miles per vehicle year may be too low. All of these potential errors would tend to exaggerate the number of LPG-fueled

vehicles. In fact in its Annual Report to Congress, EIA lists LPG use

in transportation at 0,01 quad/yr or 110 million gallons. This would

put the number of transportation vehicles at perhaps 170,000; but

other vehicles in construction, mining, and agriculture would increase the total. 22’’Vehicle Conversions to LP-Gas Fuel: Is It Worth It?” Public

Wok, June 1982.

23’ Gas Burner, ” 

1982; and R. Nichols, Ford Motor Co., communication to Gibbs

& Hill, Inc., Mar. 17, 1983.

standards governing the installation procedures

and major LPG fuel system components, and the

National LP-Gas Association has a program that

certifies installers to the NFPA standards.

Refueling with LPG is somewhat more complex

than with gasoline, because the filling station and

vehicle tanks are pressurized. However, because

LPG is liquid and the pressures involved are not

great, refueling can be done quickly and presents

no unusual difficulties.

Mobile Gasifiers

Gasifiers are devices that partially burn solid

fuels to produce a low-energy fuel gas. For the

purposes of this report, OTA defines mobile gasifiers as gasifiers attached to motor vehicles in

which the fuel gas powers the vehicle. The gasifier can be mounted directly to the vehicle–e.g.,

on a bumper, inside the vehicle shell, in a truck’s

bed–or it may be mounted on a trailer drawn

behind the vehicle.

During World War 11, mobile gasifiers were

used in several industrialized countries, including

England, France, Italy, Germany, Sweden, and

Japan. By 1943 there probably were several hunFigure 23.—Components of LPG Vehicle Conversion

SOURCE: “Vehicle Conversion to LP-Gas Fuel: Is It Worth It?,” Public Works, January 1982
Ch. IV—Fuel Switching . 67

dred thousand (and perhaps as many as 1 million) vehicles fueled by gasifiers.24 Nevertheless,

additional development is required in order to

optimize designs for modern vehicles and to establish design standards, but this does not present any serious problems. Consequently, while

mobile gasifiers are not a commercial technology at present, there are no fundamental barriers

that would prevent them from becoming commercial within a relatively short time.

A typical gasifier fuel system would consist of

the gasifier, heat exchanger to cool the fuel gas,25

a filter system to remove particulate from the gas,

tubing to deliver the gas to the engine, and a device to mix the gas with appropriate quantities

of air before it enters the engine (see fig. 24). In

most cases, the gasifier system would be installed

in a way that would allow the engine to run either

on petroleum or on the fuel gas. In gasoline engines, the fuel gas would be ignited by the engine’s spark plugs, and no gasoline would be necessary when the gasifier is operating. For diesel

engines, however, small amounts of diesel fuel

would have to be injected in order to ignite the

fuel gas; and modifications to the diesel injection

system might be necessary to limit the power output at full throttle so as to avoid excessive engine wear. The installation and any necessary

24 Rasor Associates, Inc., “Evaluation of Mobile Gasifiers for the

OTA Oil Replacement Analysis Project,” contractor report to OTA,

July 1983.

25The gas has to be cooled to increase its energy density and to

prevent misfiring. Without gas cooling, engine performance would

not be acceptable.

modifications, however, could probably be completed in one day.

The size of the gasifier will depend on the power and driving range needed, but the gasifier for

an average passenger car might be a cylinder that

is about 1.5 ft in diameter and 4 ft long. Such a

gasifier would provide a driving range of about

300 miles on coal or 75 miles on wood.26 The

heat exchanger and filter would be somewhat

smaller than the gasifier and might typically be

the size of the vehicle’s radiator. Other designs

are both possible and likely, however.

After the ash is removed and the gasifier is filled

with fuel, the fuel is ignited with a small flare. Air

then must be drawn through the gasifier for 2 to

5 minutes before the exhaust gas can be ignited,

and full power does not develop until after about

20 minutes of operation. Even with full gasifier

output, however, the power of the vehicle engine

would be less than 60 to 70 percent of its power

when operating on gasoline, or, in the case of

a diesel engine, about 80 percent of the power

(if diesel injection is minimized). In addition, the

gasifier operates best when its power output is

reasonably constant and it responds slowly (relative to gasoline engines) to changes in power requirements. Although petroleum fuel could be

used when the engine is first started and when

full power is needed, the limitations of gasifiers

indicate that they are best suited to long trips with

relatively stable power needs, such as in intercity driving.

ZbRaSOr Associates, Inc., OP. cit.

FUEL AND GRAIN SUPPLIES

Following the postulated oil shortfall, there will

be an increase in conventional oil and gas exploration and development. Enhanced oil recovery projects started before the shortfall will begin

to produce, and any surge production capacity

will be utilized to maximize domestic oil production.

OTA has not assessed the potential quantities

of oil from these sources, but has assumed that

these activities will, at best, keep domestic oil production constant during a 5-year period following the onset of a shortfall. To the extent that actual production differs from this assumption, it

would be roughly equivalent to a less or more

severe oil shortfall.

Beyond this assumed baseline for domestic oil

production, several other fuel sources have been

identified for more detailed study as replacements

for the petroleum lost in an oil shortfall. Domestic oil production can be increased (relative to
68 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 24.– Basic Elements of the

Solid

fuel

Mobile Gasifier-Engine System

Throttle Blower

for starting only

Intake manifold

SOURCE: Rasor

what it otherwise would have been) through new

enhanced oil recovery (EOR) projects. Oil users

can also switch to natural gas, coal, and solid

biomass fuels. And grain can be used as a feedstock, together with coal or solid biomass as a

fuel, for ethanol production.

The more detailed analysis of these options,

however, indicates the following: Supplies of solid

fuels are likely to be adequate. The supplies of

natural gas are uncertain, but it is reasonable to

assume that around 2 trillion cubic feet per year

(TCF/yr) could be available for fuel switching. On

the other hand, although EOR can produce significant quantities of additional oil in the time

period of 5 to 10 years after the onset of an oil

shortfall, its contribution within less than 5 years

is doubtfu1, due to the long Ieadtimes before enhanced production actually materializes. And, although adequate quantities of grains could be

supplied well before ethanol distilleries could be

built, the resultant increased use of energy by

agriculture would greatly reduce the net oil replacement from ethanol.

Potential supplies of each of these fuels and

grain are discussed in more detail below. In addition, where it is an important factor, the interdependence of fuel supplies is also considered.

Availability of electricity is not considered in this

section, however, because it depends heavily on

construction and fuel switching plans of electric

utilities, and it more properly fits into the following section on fuel switching.

Coal

Based on the analysis presented in the section

on fuel switching, full implementation of the fuel

switching options, including the use of coal-water

mixtures and direct coal firing in utility and industrial boilers, would increase coal consumption by up to 115 million tons/yr. Up to 20 million additional tons/yr could be used for new EOR
Ch. IV-Fuel Switching • 69

projects. OTA assumed that to prevent an increase in sulfur emissions without the use of flue

gas desulfurization, those who switch from oil to

coal would use low-sulfur coal (less than 1 percent sulfur), which would account for 65 million

tons/yr of the increase in coal use. The remaining increase would be in new coal-fired powerplants and for increased electricity production

in existing powerplants, together with smaller

amounts for space heating and hot water.

In 1978, U.S. coal production was 665 million

tons,27 of which 219 million tons contained less

than 0.8 percent sulfur and 143 million tons contained 0.9 to 1.2 percent sulfur.28 Consequently, over 40 percent of the total shipments contained less than 1 percent sulfur. Of this low-sulfur

coal, about half was eastern coal .29 By 1982 coal

production had grown to 833 million tons, with

707 million tons consumed domestically and, although explicit data are not available, the proportion of low-sulfur coal and low-sulfur eastern

coal was probably similar to the 1978 data. Furthermore, in 1974 the U.S. Demonstrated Reserves Base30 of low-sulfur coal amounted to

about 200 billion tons, of which 33 billion tons

were estimated to exist in Appalachian and Midwestern coal fields. More recent studies31 indicate

that recoverable reserves (the most restricted category) of Appalachian low-sulfur coal amount to

14 billion tons. Consequently, although low-sulfur

coal production would have to increase by about

25 to 30 percent to meet the maximum projected

demand, coal supplies appear to be adequate;

and, if necessary new mines couId be opened

well within the 5-year time period.

Wood and Other Solid Biomass

Potential supplies of wood and other solid biomass show large variations from region to region.

Wood supplies are greatest in the South, Great —- — -— —— 27Of Which 4 percent went to exports and 11 percent were for

coke plants.

‘

8

’’ Sulfur Content in Coal Shipments 1978,” DOE/ElA-0263(78),

June 1981.

Z91bid.

JOThe Demonstrated Reserve Base represents the amount of coal

contained in coal beds that meet certain criteria of geological

assurance, depth, and seam thickness.

3’ R. L. Carmichael, “Report on Recoverable Reserves and 1978

ProductIon of Low Sulfur Bituminous Coal Fields in the Eastern

States,” Oak Ridge National Laboratory for U.S. Department of

Energy, january 1981.

Lakes region, and the Northeast, with lesser supplies in the Pacific and Rocky Mountain regions.

The potential for energy from crop residues is

concentrated in the agricultural regions of the

Midwest, South, and Pacific coast regions. Potential supplies of forage grasses are mainly in the

regions east of the Mississippi River.32 Supplies

of municipal solid waste are, of course, largest

in the large metropolitan areas.

Wood is currently the largest source of energy

from solid biomass in the United States. Potential future supplies of wood also appear to be considerably larger than those of crop residues,

grasses, and municipal solid waste taken together;

and the technologies for using wood are more

widely disseminated and better understood than

those for the other sources of solid biomass. Consequently, of these sources, wood appears to

have the greatest potential for displacing petroleum during an oil shortfall in this decade.

If harvested as part of an integrated forest management program, the potential wood energy

supplies in each region are more than adequate

to supply the projected incremental demand for

all solid fuels (including coal) as replacements for

oil, although individual States may have to import from neighboring States. (See fig. 25 for the

Standard Department of Energy regions used in

this report and table 8 for wood energy potential

by region.) The tightest supplies would be in the

New York/New Jersey region, where the incremental demand for solid fuel could be about

equal to the potential wood supply; but additional wood could be imported from regions 1 and

3, which have the potential for large surpluses.

if the wood is harvested in a haphazard manner,

however, supplies would be considerably smaller

(following initial clearing of existing forests), wood

energy markets could divert commercial timber

(used for lumber and paper pulp) from the forest products markets, and environmental damage could be extensive.

In practice, market confusion surrounding a

rapid growth in demand for wood would be likely

to cause at least temporary shortages of wood in

numerous locations. However, since wood (and

jzEnergy From Biological Processes (Washington, DC: U.S. Congress, Office of Technology Assessment, OTA-E-1 24, )UIY 1980).
70 ● U.S. Vulerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 25.—Federal Regions

SOURCE: U.S. Department of Energy

Table 8.-Potential Wood Energy Production by

Region, Assuming 10 Quadrillion Btu/Yr Increment

Quantity

Region (1015 Btu/yr)

1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.68

2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.36

3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0

4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8

5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.88

6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2

7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.22

8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.57

9 . . . . . . . . . . . . . . . . . 0.52

10 : : : : : : : : : : : : : : : : : : : : ... , . . . . . . . . . . . . 1.76

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0

SOURCE: Office of Technology Assessment.

other solid biomass) would be competing with

coal for the available markets, it is likely that

wood use would be concentrated primarily in

locations where the potential supplies are very

much larger than the demand, such as in heavily

wooded areas. Thus, it is highly unlikely that the

availability of wood or other solid biomass would

constrain the deployment of technologies for replacing oil with solid fuels.

Natural Gas

The American Gas Association recently estimated that the United States currently could pro-
Ch. IV—Fuel Switching • 71

duce about 2.7 TCF/yr more natural gas than the

18 TCF/yr consumed in 1982.33 OTA’s assessment

of natural gas availability,34 however, indicates

that future supplies are extremely uncertain. Consequently, rather than attempting to derive a

highly uncertain estimate, OTA has assumed that

there will be a 2 TCF/yr of natural gas available

to replace oil. (This amount of gas is equivalent

in energy content to 1 MM B/D of oil.) To the extent that this gas is not available from domestic

production (including unconventional sources)

and various domestic conservation measures,

OTA assumes that imports from Canada and Mexico can be increased to provide the supply. It

should be noted, however, that feasible increases

in efficiency of natural gas use in the industrial,

residential, and commercial sectors, could replace about 2 TCF/yr of gas currently being used

in those sectors (see ch. V). Consequently, if domestic production can be kept constant and the

efficiency changes are implemented, this supply

of gas would be available without increased

i m ports.

Because natural gas availability is assumed to

be limited, it is necessary to postulate how it will

be allocated among the various consuming sectors. To do this OTA first assumed that the residential/commercial sectors would have priority

over the other sectors for the use of natural gas.

Based on this assumption, OTA found that about

0.9 TCF/yr could be used in the residential and

commercial sectors for heat and hot water. The

remaining 1.1 TCF was then distributed between

the industrial and utility sectors in proportion to

amount of oil they would be consuming after feasible conversions to coal had been completed.

This resulted in an allocation of 0.9 TCF/yr to the

industrial sector35 and 0.2 TCF/yr to electric

utiIities.

JJ’’NatUral Gas procfuctiorl Capability in 1983, ” American Gas

Association, May 27, 1983.

34u.s, Natural Gas Availability: Conventional Gas Supply Through

the Year 2000-A Technical Memorandum (Washington, DC: U.S.

Congress, Office of Technology Assessment, OTA-TM-E-12, September 1983).

J51f 5 billion ~[/yr of ethanol are produced (with an energy equ ivalent of 0.2 MMB/D), then natural gas use for fertilizer production

would increase by about 0.05 MMB/D. Although this gas use would

decrease the amount of gas available for other uses in the industrial sector, use of the ethanol would free up some additional 011 that

could be used In the industrial sector. By using a net energy apLiquefied Petroleum Gas

Increased domestic production of natural gas

would also lead to increased supplies of liquefied

petroleum gas (LPG) from natural gas plant liquids (NGPL). In 1981, NGPL production was

about 11 percent of natural gas production, on

an energy basis.36 Newly discovered supplies of

natural gas generally contain less NGPL, however. Assuming that the new gas production is

9 percent NGPL, that 60 percent of the NGPL is

LPG, and that 75 percent of the LPG is suitable

for internal combustion engines, an increase of

2 TCF/yr in natural gas production would result

in an additional 0.04 MM B/D oil equivalent of

LPG suitable for engines. This would also result

in 0.05 MMB/D oil equivalent of NGPL and LPG

not suitable for engines, but which could be used

for some stationary fuel purposes. To the extent

that the natural gas is made available through increased efficiency of natural gas use, however,

less incremental LPG would be available.

Enhanced Oil Recovery

The total amount of oil recovered from some

oil fields can be increased through enhanced oil

recovery (EOR). The process consists of injecting

a fluid (generally carbon dioxide (C02) or steam)

into an oil field through a series of injection holes.

Approximately 2 years after injection begins, oil

production from the field starts to increase,

Two areas of the United States that are major

candidates for EOR are Texas and California. In

Texas the fields would be injected with CO2 that

could come from natural CO2 fields i n Colorado

and New Mexico and the recovery of CO2 from

the effluents of chemical plants (notably ammonia

plants) and, possibly, electric powerplants. The

Ieadtime for constructing the necessary equipment and pipelines and drilling the injection holes

is about 2 years 37 (see fig. 26).

preach (i.e., assuming that this ethanol would lead to a net reduction

in oil consumption equal to 0.1 MMB/D), this Increased agricultural use of gas as well as oil is accounted for; and no inconsistencies are introduced by adding the oil replaced by ethanol (O. 1

MMB/D) to the industrial oil replaced by gas (0.9 TCF or 0.45

MM B/D).

“’’Petroleum Supply Annual, ” op. cit.

‘7Gibbs A Hill, Inc., “Oil Replacement Analysis, phase I l–Evaluation of Selected Tech nologles, ’ contractor report to OTA, August

1983.
72 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

—.-

Year I 1 2

Month 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36

Reservoir

screening -

,

I

Equipment design

● Lab tests

Planning Reservoir modeling

Cost estimates

Permitting

r ● Pressure vessels

SOURCE Off Ice of Technology Assessment

In California, steam would be injected, T he

Ieadtime for erecting the boilers and other equipment and drilling the injection wells would be

about 13⁄4 years without flue gas desulfurization

(scrubbers) and at least 21⁄2 years with scrubbers38

(see fig. 27).

With the time required for construction and the

delay before enhanced recovery materializes, at

least 4 years would be required before any additional oil could be produced through new EOR

projects. Once enhanced production begins,

however, it could increase rapidly to as much as

0.8 MMB/D within a year, as illustrated in figure

28. If oil rather than coal is used to produce the

. .- - .——

‘flbld

3 4

steam i n the California EOR projects, as is now

the practice, net oil production would be reduced by over 0.1 MMB/D.

Numerous complications could easily delay

these projects by a year or more, however. In

Texas there could be delays in securing cooperative agreements with electric utiIities and chemical plants and in securing rights of way for the

pipelines. In California virtually all of the production would occur in Kern County, where the current levels of sulfur dioxide (SO2

, carbon monoxide, particulate, and oxidants in the air all exceed the ambient air quality standards (AAQS).39

~9-Frank T. PrlnCiott~, Director, I ndustnal Enwron mental Research

Laboratory, U S, Environmental Protection Agency, Research

Triangle Park, NC, prikate communlcatlon, July 8, 1983.
Ch. IV-Fuel Switching ● 7 3

Figure 27.—Schedule for Accelerated EOR Steam Flooding Project

Year 1

Month

21

,

Procurement Particulate control system

Coal handling system

Construction

Steam

injection

SOURCE: Office of Technology Assessment.

Furthermore, the ambient nitrogen oxide (NO,)

level is about 95 percent of the AAQS.40 Consequently, permitting delays are likely, particularly

if a large number of projects are started simultaneously. in addition, the EOR projects will have

to compete with the industrial oil users that are

switching to solid fuels for much of the equipment they will need and they will have to compete with conventional oil and gas exploration

and development for drilling rigs.

Because of the long Ieadtime before enhanced

oil production begins and because of the possibilities for delay, the potential for new EOR projects within 5 years after the beginning of an oil

shortfall is highly uncertain. In OTA’s judgment,

—.. — 401 bid.

4

these characteristics of EOR put it more nearly

in the category of long Ieadtime technologies with

high production potentials, such as synfuels, than

in the area of short-term responses, which are being emphasized in this assessment. Therefore, potential oil production from new EOR projects is

not included as one of the short-term responses

in this assessment; although it, together with fossil

synfuels, could provide large quantities of liquid

fuels in the time period of 5 to 10 years or more

following an oil shortfall.

Grain

OTA’s analysis of ethanol production indicates

that distilleries capable of producing up to almost

5 billion gal/yr of ethanol (about 0.2 MMB/D

B7-833 O - 84 - 6
74 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 28.—Potential Oil Production Rate for

Enhanced Oil Recovery

3 4 5

Years after onset of shortfall

SOURCE: Office of Technology Assessment

energy equivalent) could be constructed within

5 years after the onset of an oil shortfall. These

distilleries would require about so million tons

of grain or 2 billion bushels of corn per year.

In 1981, U.S. grain production was about 333

million tons, of which 55 percent was for domestic use and 45 percent was exported. Corn production in that year was 8.2 billion bushels, up

from an average of about 7 billion bushels per

year during the previous few years. Therefore,

supplying the feedstocks for 5 billion gal/yr of

ethanol production would require about a 15-

percent increase in grain production or a 30 percent increase in corn production.41 With the

appropriate price incentives and government pol-

 corn yields on the marginal land are 

bushels per acre and that they are fertilized with 150 lb/acre of nitrogen, 35 lb/acre of phosphorus, and 100 lb/acre of potassium,

then nitrogen, phosphorus, and potassium production would have

to increase by about 20, 9, and 32 percent, respectively (“Agricultural Statistics 1981 ,“ U.S. Department of Agriculture, 1981). This

can probably be accommodated within the 5-year timeframe,

however.

Photo credit: U.S. Department of Energy

Fuel ethanol is produced from corn in this large distillery

in central Illinois

icy (within the authority contained in existing,

legislation), agricultural production of conventional grains could almost certainly increase by

these amounts well before the distilleries could

be built.42

If the ethanol is derived from corn, a byproduct

of the conversion process is distillers’ dry grain

(DDG), gluten, or some other such protein concentrate, which can be used to replace the soybean meal used as a protein supplement in animal feeds. Consequently, soybean production

could be reduced somewhat; and, for 2 billion

gal/yr of ethanol production, the net increase in

cropland under cultivation would be considerably less than 5 million acres. Beyond about 2 billion gal/yr, however, the soybean meal markets

would begin to saturate; and a total of at least

 the hand, increases in the production of crops

that currently have low production volumes could be constrained

by the availability of seed or other material (e.g., shoots, seeding

tubers) needed to plant the crop.
Ch. IV—Fuel Switching ● 7 5

20 million acres of new cultivation would be required to satisfy corn demand for the production

of 5 billion gal/yr of ethanol .43

With this level of increase, one would expect

significant shifts in the quantities of agricultural

commodities produced in the various regions;

and with it there could be subtle, though significant, changes in agricultural energy use. Furthermore, oil refinery operations and needs would

change during the postulated oil shortfall; and this

wouId affect the energy credits that couId be ascribed to ethanol for its octane-boosting properties under more normal circumstances. These effects are discussed in more detail in appendix B

to this chapter.

The net result is that after changes in agricultural energy use are accounted for, production

of 5 billion gal/yr of ethanol (energy equivalent

of 0.2 MMB/D of oil) could result in anywhere

from a 0.15 MM B/D reduction to a 0.12 MM B/D

increase in oil consumption. The former would

occur if only minimal shifts in agricultural production from one region to another occur and

there is a surplus of natural gas (used to produce

farm fertilizers and pesticides). The latter would

occur if there are modest, but unfavorable (from

an energy point of view) shifts in agricultural production and there is no surplus of natural gas (so

~~Note that this additional acreage cannot be accommodated solely with existing set-aside acreage, Additional set-aside acreage would

be needed In order to stabillze year-to-year tluctuat]ons in gratn

prices and In order for the corresponding farm price support programs to function. In fact, because the crop yields from the additional acreage under cultivation would fluctuate more from year

to year than does average cropland, the average amount of setaside acreage probably wou Id have to increase i n order to maintaln the same overall stability In grain prices as exists now.

that use of this fuel in agriculture limits the switching from oil to gas in other sectors).

In OTA’s opinion, it is unlikely that there would

continue to be surpluses of natural gas several

years after the onset of the oil shortfall. And increasing corn production by the quantities

needed for 5 billion gal/yr of ethanol synthesis

would almost certainly lead to some interregional

shifts in agricultural production, such as in the

example given in appendix B. Consequently,

OTA considers it highly unlikely that production

of 5 billion gal/yr of ethanol from corn could replace more than 0.1 MMB/D of oil; and it is possible that it would replace 0.05 MM B/D or less.

(See box on Calculating Ethanol’s Energy Balance.)

Use of significant quantities of other grains as

feedstocks would differ from the use of corn in

two respects. The oil and gas used to grow a given

amount of grain could vary from 20 to 25 percent less than corn (e. g., wheat, oats, barley) to

about 15 percent more than corn (e. g., grain sorghum). But in all cases, the yields per acre cultivated are significantly less than that for corn, and

the amount of cropland under cultivation would

have to increase proportionately more. Depending on how the agricultural system adjusted to

this new demand, the net oil replacement (per

gallon of ethanol) from other grains could range

from about the same as to significantly less than

that from corn.

Consequently, although the agricultural system

could supply the grain needed for the maximum

levels of ethanol production that are technically

feasible within 5 years after an oil shortfall, the

increased energy consumption in agriculture

would greatly reduce the potential oil replacement.

DEPLOYMENT OF FUEL SWITCHING TECHNOLOGIES

The above analysis indicates that, with the ex- In this section, end-use equipment and, where

ception of natural gas, fuel and grain supplies are appropriate, fuel delivery systems are examined

not likely to limit the deployment of the major in order to estimate the rate at which they can

fuel switching technologies studied. In the case be installed and the oil replaced. The general proof natural gas, future supplies are too uncertain cedure is to estimate the market penetration of

to make a definite judgment. each technology and determine the equipment
Ch. IV—Fuel Switching ● 7 7

and manpower needed to deploy that technology. Potential deployment rates are then estimated by comparing the equipment and manpower needs to historical production and fuel

switching data and industry estimates of what

could be accomplished in a crisis.

The starting point for this analysis is OTA’s estimate of 1985 oil consumption by end-use category and sector. These estimates are shown in

table 9 and are broken down into the Department

of Energy regions shown in figure 25. The estimates are based on Energy Information Administration (E IA) projections44 and data,45 OTA’s

assessment of automobile fuel efficiency,46 and

OTA’s judgment.47

44”1 981 Annual Report to Congress, ” DOE/EIA-01 73(81), May

1982.

qSData from Regional Councils submitted to Energy Information

Administration under form EP-411, April 1983.

qb/ncreased Automob;/e Fuel Efficiency and Synthetic Fuels: Alternatives for Reducing Oi/ /reports (Washington, DC: U.S. Congress,

Office of Technology Assessment, OTA-E-185, September 1982).

q~he major difference between EIA projections and the values

shown in table 9 are in the electric utility sector. EIA assumed an

average growth in demand of 3 percent between 1981 and 1985.

However, since demand actually dropped between 1981 and 1982,

demand would have to grow by 4.7 percent annually between 1982

and 1985 to arrive at ElA’s 1985 projections. OTA, on the other

Several categories of oil use are not included

explicitly in table 9, because it would be particularly difficult to switch from these oil uses to alternatives within the 5-year time period considered

in this assessment. These include aviation and

marine fuels, petrochemical feedstocks, asphalt,

petroleum coke, and lubricating oils.da However,

the categories shown, which are the major canhand, has assumed a 1.5 percent annual demand growth between

1982 and 1985. We have also assumed that the conversions and

new powerplants plannned to be completed by 1985, as reported

to EIA under form EP-41 1, will be completed by that date.

48Because of weight and space limitations, aviation fuel substitutes would be limited to high-grade synthetic fuels. Because of

space limitations and, in some cases, boiler derating, substitutes

for marine fuels would require synthetic fuels or extensive end-use

modifications. Substitutions for petrochemical feedstocks and lubricating oils would have to be some forms of synthetic fuel. Although asphalt could be replaced by concrete and other materials,

it would require extensive changes in paving and surface repair

procedures. Moreover, petroleum coke is a normal byproduct of

petroleum refining. Most of it is used for heat at the refinery, while

the remainder is used for metallurgical purposes. Although the metallurgical coke could be replaced with high-grade coal, converting

the coke to liquid fuels would be no easier than converting the

coal to a synthetic fuel. Consequently, although substitutes exist

for all of these uses of oil, the Ieadtimes for replacing large quantities of oil are likely to be considerably longer than 5 years, and,

in some cases, the substitution makes little practical sense.

Table 9.—Estimated 1985 Oil Consumption by Region and End Use (thousand B/D)

Region

Sector Total 1 2 3 4 5 6 7 8 9 10

Electric utilities:

Distillate oil . . . . . . . . . . . .

Residual oil . . . . . . . . . . . . .

Residential and

commercial heat

and hot water:

Distillate oil . . . . . . . . . . . .

Kerosene . . . . . . . . . . . . . . .

LPG . . . . . . . . . . . . . . . . . . .

Residual oil . . . . . . . . . . . . .

Industrial boilers:

Distillate oil . . . . . . . . . . . .

Residual oil . . . . . . . . . . . . .

Surface transportation

and mobile industrial

engines:

Gasoline . . . . . . . . . . . . . . .

Diesel . . . . . . . . . . . . . . . . . .

Subtotal . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . .

50

590

775

110

170

210

250

710

5,700

1,830

10,400

5,600

a

175

160

a

a

15

35

90

270

40

790

—

a 15

170 50

170 145

a a

a 10

65 15

80 25

150 65

445 555

100 155

1,190 1,030

— —

10

80

60

25

35

10

25

160

1,065

315

1,790

—

10 10

15 a

140 45

25 15

35 25

5 55

25 35

75 120

1,130 755

320 375

1,785 1,430

— —

a a

a a 9

15 10 a

15 a a

30 10 10

a a 35

10 a 10

a 20 15

335 215 720

— — 145 105 190—

560 370 1,090 — — —

a

a

25

a

a

a

a

10

215

90

355

—

a

Less than 10,000 B/D.

SOURCE: Office of Technology Assessment,
78 • U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

didates for fuel switching, do include about 70

percent of the oil use projected for 1985.

In the following, each of the major end-use sectors is considered separately to derive estimates

of the rate that oil replacement technologies

could be deployed and the amount of oil that can

be replaced. Electric utilities are considered first

in order to provide estimates of the amount of

electricity not generated by oil that could be available for fuel switching in other sectors. Heat and

hot water in the residential and commercial sectors are considered next, followed by industrial

boiler fuels and mobile engines for transportation and other uses.

Electric Utilities

In 1981, electric utilities consumed about 1.1

MMB/D of oil. Ninety-four percent of this, or

slightly more than 1 MMB/D, was residual oil

used in base and intermediate load utility boilers.

The remainder, or about 60,000 B/D was distillate

oil used in combustion turbines and diesel engines for peak electric generation. With a modest increase in demand for electricity (1.5 percent

per year on average), utility residual consumption could drop to 0.6 MMB/D by 1985 as new

nonoil-fired plants are brought on line, while the

distillate use is likely to remain relatively constant.

Beyond 1985, as in the past, oil consumption

by electric utilities will depend critically on the

demand for electricity. Because oil is the marginal

fuel for electricity generation in many regions,

small percentage changes in the demand for electricity can result in much larger percentage

changes in oil consumption. (For example, a 1.5

percentage point change in the annual demand

growth for electricity between 1980 and 1985

would change the projected 1985 utility oil consumption by about 0.5 MMB/D.) It is notoriously

difficult, however, to predict future demand; and

the difficulties are compounded during times of

rapidly changing energy prices such as those that

would exist following a large oil shortfall. Consequently, for the purposes of this analysis, OTA

performed the calculations using two different

levels of change in demand for electricity, At the

lower end, it was assumed that the depressed

economic climate following the oil supply shortfall would result in relatively constant demand

for electricity between 1985 and 1990. At the upper end, the estimates given by the North American Electric Reliability Council (N ERC)49 were

used. NERC projected that demand for electricity will grow by about 2 percent per year, on

average.

The major actions electric utilities can take to

reduce their oil consumption are to switch to natural gas and coal and to complete construction

of nonoil-fired powerplants that are currently

under construction and scheduled for completion between 1985 and 1990.50 The actual mix

of actions taken will vary among the utilities and

regions, but the broad outlines of a potential response can be discerned.

Utilities can begin almost immediately to use

more natural gas in the boilers that are equipped

to burn both oil and natural gas. OTA estimated

the amount of this dual-fuel capacity from the

1981 utility fuel use profiles51 by assuming that

the powerplants that burned significant quantities

of both oil and gas in 1981 but were not scheduled for retirement or conversion to other fuels

by 1985 would be capable of burning both oil

and gas in 1985. These estimates indicate that,

of the regions consuming large quantities of oil

for electric generation (table 9), regions 2,4, and

9 have by far the most dual-fuel capacity. Regions

1 and 3 have only small amounts of dual-fuel capacity, and much of it is scheduled for retirement

or conversion by 1985.

Based on 1981 oil consumption,52 the dual-fuel

boilers could replace about 60,000 B/D of oil in

region 2, 75,000 B/D in region 4, and 65,000 B/D

in region 9 within a short time, say 6 months, following an oil cutoff. This would require a total

of about 0.4 TCF/yr of natural gas or the energy

equivalent of 0.2 MMB/D. Although this is twice

the 0.2 TCF/yr of surplus natural gas allocated to

49’’ Electric Power Supply and Demand 1983-1992, ” North American Electric Reliability Council, Princeton, Nj, 1983.

SoAnother possibili~ is to construct new power lines frOm utilities with excess nonoil capacity to regions dependent on oil. The

constraints here, however, are primarily institutional; and the uncertainties are large. Consequently, this option has not been included

in OTA estimates.

51 Data from Energy Information Administration form 759.

S* Ibid.
Ch. IV—Fuel Switching • 79

electric utilities (see section on “Natural Gas”

under “Fuel and Grain Supplies”), later replacement of some of this gas through conversions to

coal and so forth could bring the incremental utility consumption of gas down to its allocated level

before the gas would be required by the commercia l/residential and industrial sectors. Consequently, it would be possible for the electric

utilities to use 0.4 TCF/yr of gas initially, without

violating OTA’s allocation of the assumed 2 TCF/

yr of surplus natural gas.

Following this initial response, regional natural gas use will change as new gas pipelines are

built, coal technologies are deployed, and new

powerplants and interties are completed. It is

probable, however, that gas prices will rise as a

result of the increased demand for gas by utilities and other sectors; and much of the increased

use of gas by utilities will eventually be replaced

by other technologies.

A second type of fuel switching available to utilities is to convert oil-burning boilers to coal and

coal water mixtures (CWMS) (see section on

“Technologies”). Some utility boilers currently

burning oil use coal as an alternative fuel and can

switch quickly when oil prices rise, but the total

amount of oil consumed in these boilers is not

great.53 Most oil-burning boilers will have to be

modified to use solid fuels, either directly or as

CWMs.

As explained in the section on “Technologies,”

the boilers that are suitable for conversion to solid

fuels are those that were originally designed for

coal but were subsequently converted to oil, and

those that were originally designed for oil but are

technically similar to coal-designed boilers. Of the

boilers that are technically suitable for conversion, OTA assumed that only those that were

brought into service on or after 1960 will actually

be converted. This assumption reflects the fact

that major investments are not likely to be made

in the older generating plants because the remaining life of the facilities is too short to justify

the expenditures. Based on these assumptions

JJAccOrcflng to EII+ data (I bicf. ), electric utilities in K?glOn 3 COn -

sume the largest amount of oil in boilers that burn significant quantities of both oil and coal. The boilers in this region that were coal

capable in 1981 and are not scheduled to be retired or replaced

by 1985 consumed slightly less than 12,000 B/D of oil on average.

and the survey of utility boilers,54 OTA identified

114 utility boilers in regions 1 through 4 and 9

that are suitable for conversion from oil to solid

fuels.

Provided that the permits needed for the boiler

conversion can be obtained in 10 months, a typical schedule for converting a utility boiler to solid

fuel (including CWMs) might look something like

that shown in figure 29.55A corresponding schedule for construction of a CWM preparation plant

is shown in figure 30. CWM plant construction

requires less time than boiler conversion; and because of this, the fraction of utility boilers that

will convert to CWM as opposed to direct firing

of the solid fuel does not have to be specified.

Both conversions will require comparable leadtimes. As mentioned before, however, plants with

limited space for coal-handling facilities would

be more likely to convert to CWM.

Historically, the boiler industry has sold as

many as 350 electric generating units to foreign

and domestic utilities over a 5-year period; 56 and

manufacturers of particulate control systems (to

control particulate emissions) believe they can

easily supply the necessary systems for 114 boiler

conversions. Based on the historical rate, it is reasonable to assume that the conversion process

could begin on half of the boilers during the first

year after the onset of an oil shortfall, and the

remaining half could be initiated the following

year. The first boilers to be converted would then

come on line a little over 2 years after the shortfall, and the conversions could all be completed

within about 4 years.57

The generating capacity of facilities that can be

converted from oil to coal (assuming that the converted boilers have 65 percent of the capacity

——— 54’’ Survey of Oil-Fired Utility Boilers, ” op. cit.

SsTest burns can Ofien be carried out with considerably shorter

Ieadtimes than those shown in figure 21, For full commercial conversion, however, more permanent and time-consuming modifications are needed.

5Zibbs & Hill, Inc., “Oil Replacement Analysis, Phase 11,” op. cit.

‘To complete the conversions, the boiler wou Id have to be out

of operation for 3 to 6 months while the modifications in the boiler

and (probably) needed repairs discovered when the boiler is opened

are carried out. Generally, however, there is sufficient reserve capacity in utility systems to make up for the lost power as long as

this phase of the conversion is carried out during the utility’s offpeak season.
80 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 29.-Schedule for Engineering and Construction: Utility Boiler Conversion to CWM-Firing

SOURCE: Office of Technology Assessment.

Figure 30.-Schedule for Engineering and Construction: Central CWM preparation Plant for Industrial Boilers

SOURCE: Off Ice of Technology Assessment.

they had when burning oil) is shown in table 10, peak winter and summer demands for the two

together with the capacity of new generating fa- Ievels of 1990 demand described above (fig. 31).

cilities scheduled for completion between 1985 The total amount of electric energy that could

and 1990. The new and converted capacity was be generated by the nonoil-fired facilities (assumthen added to the 1985 nonoil-fired generating ing 60 percent capacity factors for the new and

capacity to determine the total nonoil capacity converted capacity) was also compared to the

in each region. This capacity was compared to 1990 demands for electricity.
Ch. IV—Fuel Switching . 81

..———.— .

Table 10.—Electric Generating Capacity of

Facilities Converted From Oil to Coal and

New Generating Capacity Scheduled for

Completion Between 1985 and 1990

Converted New, nonoil

capacity a

capacity

Region (MW) (MW)

1 . . . . . . . . . . . . . . . . . 4,427 3,484

2 . . . . . . . . . . . . . . . . . 6,321 3,730

3 . . . . . . . . . . . . . . . . . 5,331 3,730

4 . . . . . . . . . . . . . . . . . 5,199 20,098

5 . . . . . . . . . . . . . . . . . — 12,286

6 . . . . . . . . . . . . . . . . . — 15,088

7 . . . . . . . . . . . . . . . . . — 1,702

8 . . . . . . . . . . . . . . . . . — 1,718

9 6,080 10,949

10 : : : : : : : : : : : : : : : : : — 2,979

aAssumes oil boilers converted to coal will be derated to 65 percent of the

capacity they had with oil.

SOURCE: Office of Technology Assessment

This analysis indicates that new capacity and

coal conversions could replace most of the oil

used by electric utilities by 1990, but small

amounts would still be needed in regions 1 and

2, and Hawaii would still be primarily dependent on oil for electric generation. For the higher

level of demand for electricity, a small amount

of oil would also be needed in Florida and California (see fig. 31 ).58

In all, conversions to coal and new capacity

additions could reduce utility oil consumption to

about 0.05 to 0.1 MMB/D, depending on the demand for electricity. Natural gas could replace

much of this remaining oil, except in Hawaii and

possibly region 1, And the reductions in utility

oil consumption might proceed something like

that shown in table 11.

—.—————

sBThe methodology used was to assume that the peak demand

curve is triangular. The amount of oil-fired capacity needed was

then estimated by subtracting the nonoil-fired capacity from the

peak demand. The amount of oil consumed would then be the area

of the triangle, whose height is the amount of oil-fired capacity

needed. Consequently, the ratio of 1990 oil consumption to 1985

oil consumption was estimated as the square of the ratio of the

amount of oil-fired capacity needed at peak demand in 199o to

that needed in 1985, This methodology overestimates the 1990 oil

consumption in those regions where there is significant oil-fired

baseload capacity used in 1985, but the resultant estimates of 1990

oil consumption are sufficiently small that this problem is not significant. The methodology does not, however, result in an estimate

that oil is needed in a region where it in fact would not be. The

amount of oil that could be replaced was also double-checked by

assuming that the new and converted capacity would operate at

an average 60 percent capacity factor, and in all cases the new and

converted capacity was more than adequate to replace the oil.

In order to estimate the amount of residential

and commercial heating oil that could be replaced with electricity from excess nonoil-fired

generating capacity, OTA assumed that this heating load would be centered around the utility’s

winter peak and that it would have an annual capacity factor of 35 percent. In other words, the

total electric energy needed is the peak power

demand times 3,060 hours, or 35 percent of the

number of hours in a year. Peak winter demand

(without the incremental home heating and hot

water load) was subtracted from the total nonoilfired capacity; and the excess capacity was converted to an equivalent amount of heating oil that

could be replaced.

Based on this analysis, regions 1 and 2 and Hawaii wouId not have any excess nonoil-fired capacity for residential and commercial heating. In

all other areas, however, the excess nonoil-fired

capacity would be adequate by 1990 to replace

all of the residential and commercial heating oil

not replaced by natural gas (see below). But region 3 and Florida would be marginal cases; and,

if other demand for electricity increases at the rate

projected by NERC59 (about 2 percent per year),

utilities in these regions might be faced with peak

demands which slightly exceed the nonoil-fired

capacity available through conversion to coal and

completion of new powerplants currently under

construction. Therefore, these utilities may also

have to convert some (otherwise unneeded) oil

capacity to natural gas or delay retirement of

some dual fuel capacity in order to supply the

increased demand (including home heating) without using oil. Furthermore, although California

utilities might still be using small amounts of oil

during their summer peak, nonoil capacity would

be adequate to accommodate the increased load

during the winter peak without increasing their

oil consumption.

In short, through conversions to coal and completion of new powerplants, together with a small

increase in natural gas use, utilities could eliminate virtually all of their oil use by 1 1990, except

in Hawaii and possibly region 1. Furthermore,

these conversions could provide sufficient excess

nonoil-fired capacity to replace all of the residensqNorth American Electric Reliability Council, op. cit.
82 Ž U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 31.– Potential Nonoil-Fired Electric Generating Capacity and 1990 Peak Electric Demand

70

for Selected Regions

Nonoil capacity Shaded area indicates additional power demand if high

Summer peak

Winter peak

Region 1 Region 2

SOURCE: Office of Technology Assessment.

Region 3 Florida

Region

Table 11.—Potential Utility Oil Consumption With Conversion to

Natural Gas and Coal (thousand B/D)

Region/year 1985 1986a 1987 1988 1989 1990

1 . . . . . . . . . . . . . . . . . . . . 175

2 . . . . . . . . . . . . . . . . . . . . 169

3 . . . . . . . . . . . . . . . . . . . . 63

4 . . . . . . . . . . . . . . . . . . . . 89

5 . . . . . . . . . . . . . . . . . . . . 28

6 . . . . . . . . . . . . . . . . . . . . 15

7 b . . . . . . . . . . . . . . . . . . . .

8 b . . . . . . . . . . . . . . . . . . . .

9 98

10 : : : : : : : : : : : : : : : : : : : : b

175

109

63

14

28

15

b

b

33

b

139

67

45

b

18

b

b

b

28

b

62

b

19

b

10

b

b

b

20

b

41

b

b

b

b

b

b

b

16

b

41

b

b

b

b

b

b

b

16

b

Region 9

aThe sharP drop is due to switching to natural gas in dual fueled boilers.

bLess than 10,000 BID.

cAssumes half of the oil used for electric peaking is replaced by naturat gas within 2 Years.

SOURCE: Office of Technology Assessment.
——. —...———

tial and commercial oil not replaced by natural

gas, except in regions 1 and 2 and Hawaii.

The above results are particularly sensitive to

actual developments in regions 1 and 2, however.

Delays in conversions or completion of powerplants currently under construction could increase oil consumption in these regions significantly. On the other hand, construction of new

power lines and increased purchases of electricity from Canada and region 5 would reduce

these regions’ oil dependence and possibly provide some excess capacity for residential and

commercial space heating and hot water.

Residential and Commercial Space

Heat and Hot Water

Almost 1.3 MMB/D of oil was consumed in

1981 for space heating and hot water in the residential and commercial sectors. Over 60 percent

of this, or 0.8 MMB/D, was distillate fuel oil. The

remainder was divided among LPG (0.2 MMB/D),

residual fuel oil in commercial buildings (0.2

MMB/D), and kerosene (0.1 MMB/D).60 Although

demand for oil in these sectors dropped slightly

in 1982 and 1983, it is unclear how much was

due to short-term behavioral changes and how

much was due to fuel switching and increased

efficiency. Consequently, for the purposes of this

analysis, OTA made the conservative assumption

that residential and commercial demand for these

fuels will be about the same in 1985 as it was in

1981.

The major fuel switching options open to the

residential and commercial sectors are conversions to natural gas, electricity (where surplus

nonoil-fired capacity exits), and solid fuels. Natural gas conversions are considered first, followed

by conversions to electricity. Conversions to solid

fuels are then examined for the regions where

the combination of gas and electricity cannot replace all of the oil use within 5 years.

Conversion to Natural Gas

In 1980, about 14 million households in the

United States used fuel oil or kerosene for heat.61

6110EI,4 “Annual Report to Congress, ” Op. cit.

c’ “Residential Energy Conservation Survey: Housing Characteristics 1980, ” DOE/EIA-01 34, June 1982; and “Residential Energy

Consumption Survey, ” DOE/EIA-0262 /l, April 1981.

Ch. IV—Fuel Switching . 83 —

About 36 percent of these are in rural areas,62

which are generally too far from existing natural

gas lines and where the population densities are

too small to justify the cost of constructing distribution lines to these houses. Similarly, most of

the households using LPG are located in rural

areas and are not candidates for conversion to

natural gas.

Many of the urban households that use oil for

heating, however, are already connected to gas

lines and use gas for hot water and/or cooking;

and most of the others are located near existing

gas lines. If 80 percent of the urban households

could be converted to gas, about half of all residential users of fuel oil and kerosene could convert. If we assume a similar market penetration

for commercial users of these fuels, conversions

from oil to gas could replace about 0.44 MMB/D

of oil (see table 9).

These conversions to natural gas would require

the installation of about 7 million burners in residential households and about 1 million burners

in commercial establishments, together with

about 1 million new boilers where the old oilfired ones required replacement.63 In addition,

about 5 million customers would require the installation of new distribution lines, while 2 million to 3 million are already connected to gas

lines. 64

Current production capacity for natural gas

burners is about 1.5 million units per year;65 and

the highest historical rate for connecting new gas

customers is about 1 million per year. Consequently, with only a modest growth in these rates,

all of the potential gas customers could be supplied with new distribution lines (where needed)

and gas burners within about 4 to 5 years. With

this rate of deployment, new gas boilers would

not be a constraint, since current production capacity is about 0.4 million units per year66 and

the needed supply could be provided within 2.5

years.

In addition to these generic constraints, gas use

for heating in New England (region 1) is currently

621 bid.

bJGibbs & Hill, Inc., “oil Replacement Analysis, Phase ],” Op. cit.

b4Gibbs & Hill, Inc., “Oil Replacement Analysis, Phase 11, op. cit.

651 bid.

661 bid.
84 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

limited by the pipeline capacity. During the winter peak, the two main pipelines to the region

generally operate at full capacity; and new trunk

pipelines will have to be built to accommodate

the increase in gas used for space heating. Although the additional capacity can be built in

about 1 year along existing pipeline rights of way,

assuming no permitting delays67 this construction

probably will have to precede any significant replacement of oil by gas in the residential and

commercial sectors in region 1. Trunk pipeline

capacity does not seem to be a constraint in other

regions, however.

Because of the difference in the potential deployment rate in New England and that in other

regions, it is necessary to derive a regional distribution for this new natural gas use in order to

determine the national deployment rates. Owing

to regional differences in electricity generating facilities, this regional break down is also necessary to assess the oil replacement potential from

electricity considered below. In order to derive

this distribution, OTA assumed that the increase

in gas use in each region would be proportional

to 1980 gas consumption in the residential/commercial sectors in that region, or 100 percent of

the urban use of fuel oil and kerosene in that region, whichever is less. This methodology is

based on the premise that regions with a larger

current gas use have a more developed infrastructure (manpower, distribution system, and equipment) and, therefore, will be able to connect a

larger number of new customers in a given time.

With these assumptions, the increase in gas use

for space heating and hot water in each region

is shown in table 12. And, based on a 1-year delay before conversions begin in New England, 4

years to make the end-use conversions (once they

begin), and the regional market penetration in

table 12, natural gas replacement of heating oil

and kerosene could proceed something like that

shown in table 13.

Conversion to Electricity

Most of the remaining residential and commercial oil customers in regions 3 through 10 (except

Hawaii) would be candidates for conversion to

671 bid,

Table 12.—Potential Increase in Natural Gas Use

for Space Heating and Hot Water

Potential increase Increase relative

in natural gas use to 1980 demand

Region (thousand B/D oil equiv.) (%)

26 24

1 . . . . . . . . . . . . . . . 80 24

3 . . . . . . . . . . . . . . 83 24

4 . . . . . . . . . . . . . . 53 18

5 . . . . . . . . . . . . . . 105 9

6 . . . . . . . . . . . . . . 37 10

7 . . . . . . . . . . . . . . 22 7

8 . . . . . . . . . . . . . . 10 7

9 9 2

10 : : : : : : : : : : : : : : 15 24

Total . . . . . . . . . . 440 12

SOURCE: Gibbs & Hill, Inc., “Oil Replacement Analysis, Phase n-Evaluation of

Selected Technologies,” contractor report to OTA, August 1983.

Table 13.—Potential Reduction in Oil Use in the

Residential and Commercial Sectors Through

Conversion to Natural Gas, Electricity, and

Solid Fuels (thousand B/D)

Year

Fuel 1986 1987 1988 1989 1990

Natural gas. . . . . . 40 180 380 440 440

Electricity ... , . . . 110 220 335 445 455

Wood and coal. . . ———— 15 35 50 65 80—

Total . . . . . . . . . . . 165 435 765 950 975

Remaining oil

consumption . . 1,095 825 495 310 285

SOURCE: Office of Technology Assessment.

electricity for space heat and hot water. (Regions

1 and 2 are excluded from these conversions because there would not be excess nonoil-fired capacity to supply the electricity.) In some rural

areas, new power lines would have to be constructed to accommodate the increased load; for

some of the remaining oil customers, the cost of

new power lines would be prohibitive. Assuming that 40 percent of the rural oil customers

(taken to be 36 percent of the distillate and

kerosene customers plus all of the LPG customers) would need new power lines and that half

of these lines would not be built, customers consuming about 40,000 B/D of oil in regions 3

through 10 would not convert to electricity; but

customers consuming a little over 0.4 MMB/D

would be candidates for conversion to electricity.

Excluding the oil customers in regions 1 and

2, those OTA assumed would convert to natural

gas, and those located too far from adequate
Ch. IV-Fuel Switching Ž 85

power lines, a little over 8 million customers

could convert to electricity. Of these customers,

about 35 percent or 3 million also used oil for

hot water.68 Consequently, the switch to electricity would require space heating for 8 million

households and commercial establishments and

about 3 million electric hot water heaters.

In 1980, about 13.4 million portable electric

heaters and 2.8 million fixed electric baseboard

heaters were shipped.69 If manufacturing facilities for these devices were operating at 70 percent of capacity in 1980, current manufacturing

capacity could supply 19 million space heaters

and 4 million baseboard heaters per year.

Furthermore, it has been estimated that, in

1981, about 0.5 million central heat pumps (for

heating) and 1.5 million central air-conditioning

systems were installed .70 Because of the similarity between heat pumps and air-conditioners,

manufacturers of central air-conditioners could

easily convert to making heat pumps. If manufacturing facilities were operating at 70 percent

of capacity and one-third of the air-conditioner

manufacturers can convert to heat pump manufacturing, about 1.5 million central heat pumps

could be manufactured and installed per year.

By an analogous reasoning process, 1981 installations of unitary (window-mounted) heat pumps

and air-conditioners (estimated at 0.5 million and

3.7 million, respectively 7

1) imply a production capacity of 2.5 million unitary heat pumps per year.

Between 1970 and 1980, the number of households with hot water heaters increased by 17 million; and the number with electric hot water heaters increased by 10 million .72 I n addition, an

unknown number of hot water heaters were installed as replacements for existing heaters; and

many of the manufacturers of nonelectric units

could easily convert to produce electric units.

Consequently, the production capacity for electric hot water heaters is probably at least 2 milGBThiS assumes that the prc3pOrt iOn of cOIYImerclal Oil CUStOrTlerS

who use oil for both heat and hot water is the same as it is for residential oil customers.

bq’’Selected Heating Equipment, ” MA34N, U.S. Bureau of the

Census.

70 Gibbs & Hill, Inc., “Oil Replacement Analysis, Phase l,” op. cit.

71 Ibid.

72’’ Housing Characteristics, ” U.S. Bureau of the Census, 1970;

and “Provisional Estimate of Social, Economic and Housing Characterlstics, ’’PHC 80-51-1, 1980.

lion units per year, and perhaps considerably

larger. 73

If 50 percent of the customers converting to

electricity go to central heat pumps, 25 percent

go to unitary heat pumps (4 to 5 units per customer), and the remaining needs are supplied by

electric resistance heating, the necessary equipment for the 8 million space heating conversions

could be supplied in less than 4 years; and the

3 million hot water heaters could easily be supplied in this time or less. If the equipment were

installed within 4 years in each region, the oil

replacement by electricity could proceed like that

shown in table 13. If, however, more electric resistance heating were used, the initial oil replacement could be somewhat greater than that shown

in the table. For example, if 75 percent of the customers go to electric resistance heating, over 70

percent of the total oil replacement shown for

1990 could be achieved by 1987.

Conversion to Solid Fuels

A third option open to residential and commercial oil users is to switch to solid fuels, primarily

wood and coal. This option is most important in

regions 1 and 2 because of the large supplies of

wood and the lack of other options for residential and commercial customers. For these reasons

switching to solid fuels is considered in detail for

these regions. Elsewhere, however, most of the

oil could be replaced by switching to natural gas

and electricity. Consequently, while a detailed

consideration of solid fuel switching would increase the initial rate that oil is replaced in regions 3 through 10,74 it would not significantly

TJlgnoring replacements and assuming that half of the manufacturers of nonelectric hot water heaters converted to the production of electric heaters and that the manufacturing facilities operated at 70 percent of capacity during the 1970s, current production

capacity would be 1.35 + 0.7 = 1.9 million units per year.

‘qBetween 1978 and 1980, the years when residential and commercial use of wood increased the fastest, wood energy use in these

sectors increased by the equivalent of about 40 MB/D (thousand

barrels per day) annually in regions 3 through 10 (EIA, “Estimates

of Wood Energy Consumption 1949 to 1981 ,“ op. cit.). At the same

time coal consumption in these sectors dropped by the equivalent

of 15 MB/D annually. Ignoring the drop in coal consumption and

assuming that this rate of wood use increase could be doubled and

that wood heating is half as efficient as oil heating, then the total

oil replacement shown in table 13 could be increased by about

35 MB/D in 1986, 70 MB/D in 1987, and 105 MB/D in 1988 through

inclusion of this rate of switching to wood in regions 3-10. The 1989

and 1990 totals, however, would be unaffected.
86 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

affect the total amount of oil replaced by 199o.

Therefore, for the purposes of this analysis, OTA

has simply assumed that half of the remaining

residential and commercial oil use in regions 3

through 10, or about 20,000 B/D, could be replaced with solid fuels.

Historically, the largest increase in the use of

wood in the residential and commercial sectors

occurred between 1978 and 1980 and amounted

to the energy equivalent of about 4,000 B/D annual increase in each of regions 1 and 2.75 Assuming that this rate of increase in wood use could

be doubled and that wood heating is half as efficient as oil heating, then wood could replace an

additional 40,000 B/D of oil in regions 1 and 2.

Although national coal use in the residential

and commercial sectors has declined each year

since at least 1950, coal consumption by these

sectors in regions 1 and 2 experienced a 1-year

increase around 1980 by the energy equivalent

of 1,000 B/D of oil in region 1 and 3,000 B/D in

region 2.76 Assuming this annual increase could

be doubled and that coal heating is equivalent

to wood heating in efficiency, then coal could

replace another 20,000 B/D of oiI within 5 years.

As shown in table 13, inclusion of solid fuel

conversions would increase the amount of oil replaced by about 80,000 B/D in 1990. Although

the total increase in the use of solid fuels could

be larger, most of the additional use above 80,000

B/D would probably be a substitute for or an addition to conversions to natural gas and electricity in regions 3 through 10.

The above analyses indicate that, within 4 years

after the onset of an oil supply shortfall, fuel

switching couId virtually eliminate the use of oil

for space heating and hot water in most regions

of the country. Replacing all of the oil used by

the residential and commercial sectors in regions

1 and 2, however, would take considerably longer, owing to the heavy dependence on oil of

these sectors and electric utilities in the regions.

75EIA, “Estimates of Wood Energy Consumption 1949 to 1981 ,“

op. cit.

7“’State Energy Data Report, ” U.S. Department of Energy,

DOE/EIA-0214( 81), june 1983.

Industrial Boilers

In 1980, the industrial sector consumed about

0.7 MMB/D of residual fuel oil, mostly as a boiler

fuel, and another 0.2 MMB/D of distillate fuel oil

for a variety of heat purposes, including process

heat and some boiler fuel.77 78 By 1982, residual

use dropped to 0.5 MMB/D and distillate use also

dropped slightly,79 For the purposes of this study,

however, OTA assumed that, with some economic recovery, Industrial use of these fuels will return to their 1980 values by 1985.

The major replacements for oil used as a boiler

fuel are solid fuels (direct combustion and gasification of coal and wood and CWMS) and natural gas.80 Conversions to solid fuels are considered first, followed by estimates of the rate that

the available natural gas could replace the remaining oil use in industrial boilers.

Conversion to Solid Fuels

In 1979, there were about 146,000 oil-fired industrial boilers in the United States, of which

nearly 142,000 had a capacity of less than 50

MMBtu/hr.el Nevertheless, almost half of the oil

used as boiler fuel was consumed in the 4,000

boilers over 50 MMBtu/hr, and by 1985 these

boilers will consume an estimated 0.4 MMB/D.

Assuming that half of the oil consumed in the

larger (greater than 50 MMBtu/hr) boilers could

be replaced with solid fuels82 83 and that the average boiler being replaced or converted had a

—.—

7Total industrial consumption of disti I late fuel oi I was about 0.7

MMB/D in 1980. However, OTA assumed that 90 percent of the

distillate used in the non manufacturing sectors was used for mobile

engines such as in off-road construction, mining, and agricultural

equipment and machinery. The fuel used by these mobile engines

are included in the next section, together with oil consumption for

transportation.

78EIA,

“ 1981 Annual Report to Congress, op. cit.

79”1 982 Annual Energy Review, ” U.S. Department of Energy,

DOE/ElA-0384 (82), April 1983.

~Oln addition, since some of the steam t’rom boilers is used for

mechanical drive, a portion of the boiler fuel could be replaced

with electric motors; but OTA has not analyzed this option.

‘1 “Population and Characteristics of Industrial Boilers in the U.S., ”

U.S. Environmental Protection Agency, EPA/600/7-79-l 78-A, August

1979,

*~Gibbs & Hill, Inc., “Oil Replacement Analysis, Phase 11, ” op. cit.

~~See also P. C. Kurtzrock, “Planning Objectives, ” proceedings

of the Coal-Water Fuel Technology Workshop, BNL-51 427, Mar.

18-21, 1981.
Ch. IV–Fuel Switching ● 8 7

capacity of 135 MMBtu/hr and operated at a 35

percent capacity factor, then about 1,000 large

boilers would have to be replaced or converted .84

Historically, the highest annual sales of 100 to 250

MMBtu/hr boilers was 248 units in 1973.85 In this

size range, however, most solid fuel boilers are

field-erected, for which the historical high was

57 units sold in 1969; but the major boiler manufacturers estimate that, at full capacity and with

considerable duplication of engineering designs,

up to 550 boilers could be field-erected within

3 to 4 years.86 In addition, many of the boilers

could be converted to burn solid fuels or CWMS

directly or could be equipped with gasifiers; and

the manufacturing constraints are considerably

less severe for these types of conversions. In these

cases, additional “slide along” boilers would be

needed to make up for the lost capacity resulting

from boiler derating. However, these would be

smaller, prefabricated boilers, for which production capacity is about 1,100 units per year.87

gATheSe assur-r-rptlc)rls reflect the fact that, of the boilers for which

conversion is technically feasible, the boilers consuming the largest

amounts of oil are most likely to be converted.

“Gibbs & Hill, Inc., “Oil Replacement Analysis, Phase 11, ” op. cit.

MI bid.

‘The recent historical high for the sales of 10 to 100 MM Btu/hr

solid fuel boilers was 100 units in 1973. However, manufacturers

of gas and oi I boi Iers could easily convert their facilities to produce

Regardless of whether the boilers are replaced

or converted, each system would require a particulate control system (PCS) to limit particulate

emissions. Historically, the largest number of

PCSs sold was 200 units in 1980; but the industrial Gas Cleaning Institute estimates that 1,000

units could be produced in about 3 years.

Based on these production capacities, it appears that 1,000 large industrial boilers could be

converted to solid fuels in about 3 to 4 years.

Assuming 4 years and the engineering and construction schedules shown in figures 32 and 33,

replacement of oil by solid fuels in large industrial boilers could proceed something like that

shown in table 14.

As indicated above, solid fuel boilers to replace

the smaller industrial oil-fired boilers could be

manufactured at a rate of about 1,100 units per

year, and perhaps 5,000 boilers could switch in

5 years.88 Assuming that one-quarter of the small

(less than 50 MMBtu/hr) boilers consume half of

solid fuel boilers; and when these are included, the historical 1 year

high is 800 boilers. Assuming that this is 70 percent of peak capacity, then the latter is 1,100 units per year.

sBThis assumes that 500 of these boilers would be needed in conjunction with the large boiler conversions, in order to compensate

for derating.

Figure 32.—Schedule for Engineering and Construction: Coal” or Wood-Firing Steam Generating System,

Fuel-Handling Facilities, and Particulate Control System

Month

Engineering

Permitting

Procurement

1 Boiler Particulate control system

Fuel handling facility

Construct ion --- - i

1

Startup

.

SOURCE Off Ice of Technology Assessment
88 Ž U.S. Vulnerability to an Oil Impot Curtailment: The Oil Replacement Capability

Figure 33.-Schedule for Engineering and Construction: Industrial Boiler Conversion to Solid Fuels

SOURCE: Office of Technology Assessment.

Table 14.—Potential Reduction in Oil Used in

Industrial Boilers Through Conversion to Solid

Fuels and Natural Gas (thousand B/D oil)

Year

Fuel 1985 1986 1987 1988 1989 1990

Solid fuels . . . . . . . . . . . — O 40 90 150 200

Natural gas . . . . . . . . . . ————— 190 330 420 445 455—

Total — 190 370 510 605 655

Remaining oil

consumption in

industrial boilers. . . . 960 770 590 450 355 305

SOURCE: Office of Technology Assessment and Gibbs& Hill, Inc., “Oil Replacement Analysis, Phase n-Evaluation of Selected Technologies,” contractor report to OTA, August 1983.

the oil used in small boilers, an additional 0.04

MMB/D of oil could be replaced by solid fuels.89

The inconvenience of using solid fuels, however,

could limit the number of small boiler conversions to considerably less than this number.

Conversion to Natural Gas

The other major option is to convert industrial

boilers to natural gas. Based on OTA’s allocation

of the assumed quantities of natural gas, the industrial sector could increase its gas use by the

equivalent of about 0.45 MMB/D of oil. If the new

sgone.qua~er of the boilers would be 35,500 boilers. Assuming

these boilers use 0.25 MMB/D of oil, then 5,000 boilers would use

approximately 0.035 MMB/D.

gas customers consume, on average, the same

amount of gas per customer as current industrial

gas users (i.e., 42 billion Btu/yr90), this increment

of natural gas use would require approximately

22,000 new customers.91

In 1981, there were 187,900 industrial gas customers, down from 209,100 in 1973.92 Many of

these customers switched back to oil while retaining the ability to reconvert quickly to gas. In

addition, the number of industrial gas customers grew by 5,000 to 7,000 customers per year

in the late 1960s. This indicates that, even if some

new distribution lines must be built, the 20,000

industrial customers could probably be converted

to gas in 2 to 3 years. Assuming 2.5 years for the

conversions, the rate of oil replacement by nat-

—.—

“’Gas Facts,” American Gas Association, Department of Statistics, Arlington, VA, 1981.

91An alternative way to derive the number of new customers is

as follows. Assume that all of the 3,000 large boilers not converted

to solid fuels convert to gas. These boilers would consume about

44 percent of the gas increment, or the equivalent of 0.2 MMB/D

of oil. If one-quarter of the small gas boilers consume half of the

remaining 0.5 MM B/D of oil targeted for replacement, then the remaining 0.25 MM B/D equivalent of gas allocate to industry would

involve 142,000 + 4 = 35,500 boilers. Many industrial concerns

with small, package boilers have several boilers in parallel and/or

reserve boilers to improve system reliability. Assuming two boilers

per customer, on average, the total number of new gas customers

would be 35,500 + 2 + 3,000 = 20,750.

92’’ Gas Facts,” American Gas Association, op. cit.
Ch. IV—Fuel Switching ● 8 9

ural gas could look something like that shown

in table 14. Furthermore, it is clear that more oil

could be replaced if natural gas supplies are greater than those assumed, but the rate of oil replacement would taper off as more conversions would

be needed for each additional increment of oil

replaced.

This analysis indicates that almost 0.7 MM B/D

of oil used in industrial boilers could be replaced

with solid fuels and natural gas within 5 years after

an oil supply disruption. About 65 percent of the

total would be replaced by the increased natural gas supplies that OTA assumes will be available to industry. Clearly, the actual oil replacement will depend critically on the quantity of

surplus gas that actually materializes.

Mobile Engines

In 1980, highway transportation consumed

about 6.3 MM B/D (oil equivalent) of gasoline and

0.9 MM B/D of diesel fuel. The gasoline went primarily to automobiles (4.6 MMB/D) and trucks

(1.7 MM B/D), while trucks consumed 92 percent

of this diesel fuel.93 Non highway transportation

consumed an additional 2.0 MM B/D of oil, primarily as jet fuel (0.8 MMB/D), residual fuel oil

in ships (0.7 MMB/D), and diesel fuel in trains (0.3

MMB/D) .94 In addition, off-road vehicles and

equipment in construction, mining, and agriculture (the industrial sector) consumed an estimated

0.5 MMB/D.95

By 1985, increased fuel efficiency in automobiles and light trucks is likely to reduce gasoline

consumption to around 6 MMB/D,96 while the

——_——-

I13G, Kulp and M. c. HOlcOrnb, ‘‘Transportation Energy Data Book,

Sixth Edition, ” Oak Ridge National Laboratory, Oak Ridge, TN,

ORNL-5883, 1982.

941 bid.

gSASSUrning that 90 percent of the distillate and gasoline used in

mining and construction was for mobile engines.

g6Th is assumes that the average fuel efficiency Of new CarS sold

in 1985 will be 27.5 mpg and that the percentage efficiency increase

in Ilght trucks on the road will be half as large as for automobiles.

Also, between 1979 and 1980, gasoline consumption dropped by

0.5 MMB/D; and OTA estimates that 0.3 MMB/D of this drop was

due to people driving less. The 1985 estimate for gasoline consumption, however, assumes that driving levels would have returned to

extrapolations of the pre-1 978 levels. See also /ncreased Au(ornobi/e

Fuel Efficiency and Synthetic Fuels: Alternatives for Reducing Oil

/reports (Washington, D. C.: U.S. Congress, Office of Technology

Assessment, OTA-E-1 85, September 1982. ) (Note, however, that

in the latter report, 1 barrel of oil equivalent is equal to 5.9 MMBtu,

while in the current report it is taken equal to 5.5 MM Btu. )

other categories are likely to be similar to their

1980 values.

The principal technologies studied for replacing the oil used in mobile engines are ethanol

production and conversions to compressed natural gas (CNG), liquefied petroleum gas (LPG),

and mobile gasifiers. These substitutes are best

suited to spark ignition (gasoline) engines, although they can be adapted to diesel engines.

Ethanol can also be used as a fuel for jet engines,

but its lower energy density (energy per unit

weight) as compared to jet fuel and the need for

extensive testing to ensure safety are likely to limit

its use severely in jets in the near future. It is not

necessary, however, to specify the exact end

uses, since the potential for these alternatives is

quite limited relative to the amount of fuel consumed by mobile engines.

Ethanol Production

A 50 million gal/yr ethanol distillery can be constructed in about 2 years, as shown in figure 34.

Each distillery would require a 250 to 300

MMBtu/hr boiler and particulate control system

identical to those discussed in the previous section. To the extent that this equipment is supplied

to ethanol distilleries, the supply for industrial

boiler conversions would be reduced; and both

types of activities could be delayed somewhat.

Each distillery, however, would also require 3 to

5 centrifuge decanters with capacities of 250 to

400 gallons per minute.97 Production capacity for

centrifuges is proprietary, but one leading supplier indicated that, in an emergency, perhaps

500 steel castings could be obtained over a 5-year

period.98 With an average of four centrifuges per

distillery and a l-year delay after the equipment

procurement before the final distillery becomes

operational, perhaps 100 ethanol distilleries could

be completed in 5 years. At this rate of construction, the boilers, particulate control systems, and

other equipment needed for the distilleries could

probably be obtained without significant delays.

One hundred ethanol distilleries of this size

would produce 5 billion gallons of ethanol annually, with an energy content of about 0.2

MMB/D. Because of the energy used in agriculg7Gibbs & Hil[, Inc., “oil Replacement Analysis, Phase I I,” Op. Cit.

981 bid .

37-833 0 - 84 - 7
90 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 34.-Schedule for Engineering and Construction of a 50 Million Gal/yr Ethanol Plant

I I

SOURCE: Office of Technology Assessment.

ture to supply the grain feedstock for the distilleries, however, this ethanol would probably replace less than 0.1 MMB/D of oil, net (see app.

B). Based on these estimates, oil replacement by

ethanol could proceed as shown in table 15.

Conversion to Compressed Natural Gas

The analysis of vehicle conversions to CNG indicates that the factor limiting the rate of conversions is most likely to be the availability of natural gas compressors. A typical compressor with

a capacity of 20 standard cubic feet per minute

(scfm) could service about 20 vehicles, with slow

fill (1 O hour) for 15 of the vehicles and fast fill (3

to 5 minutes) for the remaining 5. Larger fleets

of vehicles would typically be serviced with multiples of this arrangement,99 although they could

use somewhat larger compressors. If the compressor operates at full capacity an average of 10

hours per day, 5 days a week, each compressor

could deliver about 3 billion Btu of CNG per year.

W[bid,

Table 15.—Potential Reduction in Fuel Use in Surface Transportation

and Mobile Industrial Engines (thousand B/D oil)

Year

Fuel 1985 1986 1987 1988 1989 1990

Ethanol . . . . . . . . . . . . . . . . . — o 25 50 75 100

CNG a . . . . . . . . . . . . . . . . . . — 8 16 24 32 40

LPG b , . . . . . . . . . . . . . . . . . — 40 40 40 40 40

Mobile gasifiers. . . . . . . . . — o 0 50 100 100

Total c. . . . . . . . . . . . . . . . — 164 247 280

(48) (121) (244) (367) (440)

Remaining gasoline

and diesel fuel

consumption . . . . . . . . . 7,530 7,480 7,410 7,290 7,160 7.090

%ompressed natural gas. bLiquef ied petrOleum 9as.

cNumber in parentheglg indicates ~tential increase in LPG consumption In vehicles. However. at most ~.~ ~D would be

from new production; the remainder would be a shift In LPG from’ stationary uses.

SOURCE: Office of Technology Assessment.
Ch. IV—Fue/ Switching • 91

In 1980, 5,512 gas compressors were shipped,

which is close to the historical high of 5,770 units

in 1974.100 Assuming that manufacturing facilities were operating at 70 percent of capacity, then

an additional 2,400 compressors per year could

be manufactured.101 If 2,000 of these could be

manufactured to the specifications needed for

CNG vehicle refills and the production increased

by 50 percent per year,102 then about 26,000

CNG compressors could be delivered in 5 years.

These compressors could provide enough CNG

to replace about 0.04 MM B/D of oil with the deployment shown in table 15. If larger fleets use

larger compressors, the total replacement could

be increased somewhat; but in light of the optimistic assumptions about compressor availability, it seems clear that the total potential from

CNG is small.

Conversion to Liquefied Petroleum Gas

As outlined in the section on “Fuel and Grain

Supplies,” an incremental production of 2 TCF/yr

of natural gas would result in about 0.04 MMB/D

oil equivalent of LPG suitable for internal combustion engines; and this would be sufficient to

fuel about 1 million vehicles. The analysis of vehicle conversions indicates that about five times this

many vehicles could be switched to LPG over a

5-year period.103 Nevertheless, the full conversion capacity could be needed if the 0.16 MMB/D

of LPG replaced from the residential and commercial sectors is to be used as a vehicle fuel.

Only the new LPG production, however, would

replace oil; the remainder would simply be a

transfer of petroleum used in one sector to

lm’’Pumps and Compressors,” Current Industrial Reports, MA35P,

U.S. Department of Commerce, Bureau of the Census, December

1981.

101 I n contra5t to this, Over 1.5 million air compressors were

shipped in 1980 (Ibid.). However, natural gas compressors are far

more complex than air compressors because of stricter sealing requirements, higher pressures, and the need for intercoolers, condensate traps, and precautions against sparking. The air compressor

manufacturing capacity, therefore, cannot be used to judge production capacity for CNG compressors.

IOzThiS corresponds to an 1 l-percent annual increase in production capacity for all gas compressors with all of the increase going

to natural gas compressors. This may be overly optimistic in view

of the historical 3.1 -percent annual increase in industry sales over

the past 20 yea~ (I bid.) and the long Ieadtime for some items needed

to manufacture gas compressors (Gibbs & Hill, Inc., “Oil Replacement Analysis, Phase 11, ” op. cit.).

‘03Gibbs & Hill, Inc., “Oil Replacement Analysis, Phase 11,” op. cit.

another. Consequently, the oil replacement potential would be limited by the rate that new LPG

could be produced. Based on the previous analyses of new natural gas use, the oil replacement

by LPG vehicles could develop as shown in table

1 S. To the extent that the natural gas is imported

or made available through fuel switching and

conservation, however, the LPG would have to

be obtained from sources outside of the United

States, which would be roughly equivalent to importing more oil.

Conversion to Mobile Gasifiers

The final technology considered is the mobile

gasifier. The analysis of this technology indicates

that the components needed for mobile gasifiers

are so common that several million units could

be produced annually, following an initial 2-year

delay to establish standard designs and complete

fleet tests.104 Consequently, after the initial period

it is likely that gasifier deployment would be

limited by the potential market for these devices.

In Sweden during World War II, the market

penetration of mobile gasifiers reached 30 percent of the automobiles (but later dropped to 10

percent), 55 percent of tile trucks, and 70 percent of the buses; 105 but this is probably much

larger than could be achieved in the United States

today. Assuming that gasifiers, on average, replace half of a vehicle’s fuel needs and that market penetration reaches one-fifth of that in Sweden during World War II, then mobile gasifiers

could replace about 0.1 MMB/D of oil. The oil

replacement by mobile gasifiers could then proceed as shown in table 15. These estimates, however, are highly speculative.

This analysis of fuel switching in mobile engines

indicates that perhaps 0.2 to 0.3 MMB/D of oil

could be replaced, but the constraints are quite

severe. Ethanol, which can be used with the least

amount of end use difficulty, is derived from energy-intensive agricultural feedstocks. As agricultural production expands, the energy (per unit

ethanol) consumed in supplying the feedstock increases; and the net oil savings drops. CNG use

is constrained by the availability of gas compresIOdRaSOr Associates, Op. cit.

’051 bid.
92 • U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Photo credit: National Academy Press

Mobile gasifiers can be used to fuel a variety of vehicles, but market demand for the devices

during a large oil shortfall is highly uncertain
Ch. IV—Fuel Switching • 93

sors. Oil replacement by LPG is limited by the

quantities of LPG that can be produced from new

natural gas production. And mobile gasifiers

probably will be limited by the inconvenience of

using solid fuels.

Summary

The potential for reducing oil consumption

through the fuel switching options considered

here is summarized in table 16. If these options

are implemented, the major remaining uses of

oil would be for transportation and other mobile

engines, petrochemical feedstocks, asphalt, lubricants, and specialized industrial processes.

There would also be some oil use remaining for

home heating in regions 1 and 2 and some industrial boilers. Replacing large additional quantities of oil, therefore, will require production of

synthetic transportation fuels and chemical feedstocks from coal and biomass.

A critical assumption in this analysis, however,

is that sufficient natural gas would be available

to replace 1 MMB/D of oil. If this is not available,

then space heating and hot water needs in most

regions could rely more heavily on electricity, but

oil consumption by industrial boilers would

crease substantially above these estimates.

Table 16.—Summary of Potential Reduction in Oil Use Through Fuel Switching

(thousand B/D oil equivalent)

Year

Use 1986 1987 1988 1989 1990

Electric utilities . . . . . . . . . . . . . . . . 320 430 500 570 590 

Residential/commercial

space heat and hot water . . . . . 165 435 765 950 975

Industrial boilers . . . . . . . . . . . . . . 190 370 510 605 655

Surface transportation . . . . . . . . . . 50 80 165 245 280

Total . . . . . . . . . . . . . . . . . . . . . . . 725 1,315 1,940 2,370 2,500

Increased natural

gas usea 

. . . . . . . . . . . . . . . . . . . . 440 740 960 1,000 1,020

Increased solid

fuel useb

. . . . . . . . . . . . . . . . . . . . 120 390 780 1,120 1,240

inalncludes Increased use of gas for incremental fertilizer production for the agriculture used to SupPly ethanol feed stocks

blncludes fuel used in ethanol pr~duCti~n and for InCreased electric generation, assuming that 80 perCent Of the increased

electric generation is in coal-fired powerplants.

SOURCE: Office of Technology Assessment.

ENVIRONMENTAL IMPACTS

The major changes in fuel use due to fuel

switching are a reduction in residual and distillate

oil use and an increase in natural gas and coal

consumption. Although there would be a small

decrease in emissions as a result of the reduction

in distillate fuel oil use and a corresponding increase in natural gas consumption, the major impacts are likely to be associated with the changes

in residual fuel oil and solid fuel consumption.

The increased use of coal (up to 115 million

tons/yr) will require that production be increased

by up to 13 percent over 1982 production, with

attendant problems such as acid mine drainage,

subsidence, and other mining-related impacts.

About 65 million tons/yr of coal would be used

in utility and industrial boilers converted from oil.

To avoid increases in sulfur and particulate emissions, these boilers would have to use low-sulfur

coal and particulate control systems, for which

supplies are adequate for the postulated scenarios. However, there probably would be an increase in NOX emissions in some of these

boilers; and to the extent that fuels with higher

sulfur contents are used in converted boilers

(without new scrubbers), SO2 emissions would

also increase.
94 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

An additional 35 million tons/yr of coal would

be used in new and existing coal-fired utility boilers to replace (mostly distillate) fuel oil used in

the residential and commercial sectors, which

would also lead to an increase or at least a delay

in the reduction (through retiring older boilers)

of S02 and NOX emissions.

The remaining 15 million tons/yr would be used

in new ethanol distilleries. Distilleries with a capacity of greater than about 50 million gal/yr of

ethanol supplied with a single boiler (greater than

250 MMBtu/hr) would be subject to Federal New

Source Performance Standards; but there are currently no Federal regulations for smaller boilers.

Furthermore, the Environmental Protection Agency regulations promised for 1986 for boilers rated

at 50 MM Btu/hr and larger will not include regulations on SO2 emissions; and it is unclear how

stringent the other regulations will be. Consequently, it is likely that emissions from most of

the ethanol distilleries will be determined primarily by State and local requirements for emissions

controls, and many distilleries will locate where

these requirements are least stringent. Furthermore, since the ethanol will be used to replace

gasoline (rather than residual fuel oil, as in the

case of boiler conversions above), even if Iowsulfur coal is used, a net increase in SO2 and

NOX emissions will occur.

Production of 5 billion gal/yr of ethanol (which

is capable of reducing U.S. oil consumption by

about 0.1 MMB/D) would require a 15-percent

increase in grain production. This would probably lead to more than a 15-percent increase in

soil erosion and the accompanying pesticide and

fertilizer runoff, because much of the new cropIand used for grain production is more erosive

than average cropland.

The increased supplies of wood for fuel could

be supplied as part of careful forest management

programs without significant adverse environmental impacts. However, if the wood is harvested in a haphazard manner, damage to the

forest and, eventually, forestland productivity

could be substantial. Furthermore, burning wood

without emissions controls (e.g., for home heating) would likely lead to significant local increases

in particulate emissions, including higher levels

of polynuclear aromatics (which are generally not

a problem with either central electric power generation or natural gas or oil combustion); but

sulfur emissions from wood are insignificant.

APPENDIX A–REASONS FOR EXCLUDING VARIOUS

OIL REPLACEMENT TECHNOLOGIES FROM

DETAILED CONSIDERATION

The initial list of fuel switching technologies (table

6) was screened to identify those options with the

greatest potential for replacing at least 0.2 MM B/D of

oil within a 5-year period following a large oil shortfall in 1985. Some of the technologies that were eliminated from further consideration by this screening

process and the specific reasons for eliminating them

are given below.

Fossil Synthetic Fuels

The primary concern of this study is to examine the

technologies that can be deployed within 5 years after

the onset of an oil shortfall. Construction of new, largescale oil shale and coal liquids plants is likely to take

longer than 5 years.106 Although additional modules

could be added to synfuel plants already in operation

by 1985-90, in OTA’s judgment the total additional

output, beyond that already planned, is not likely to

exceed 0.1 MMB/D before 1990. Consequently, largescale oil shale and coal liquids plants are judged to

be longer term options that are beyond the scope of

this study.

True in situ oil shale retorts,107 on the other hand,

can be constructed in a matter of weeks. The retorts,

which are underground cavities prepared with explo-

——

1~/ncreased Automobile Fuel Efficiency and Synthetic Fuels, op.

cit.

“Wbid.
Ch. IV—Fuel Switching • 95

sive charges, cover about an acre each and produce

around 20,000 barrels of shale oil over a 6-to 8-month

period. Achieving 20,000 B/D of production would

require the completion of at least one retort per day,

year round. This would entail a sharp increase in the

number of trained personnel, construction of pipelines

and new roads to remote areas, and considerable new

equipment. (To date about 25 test retorts have been

completed over a 7-year period.) The logistics of accomplishing this expansion, together with the remaining technical uncertainties in the process (notably the

depth of overburden that can be accommodated and

the control of fugitive emissions) would probably limit

production to well below 0.1 MMB/D within a 5-year

time period.

Another possibility is to use methanol produced

from natural gas or to convert the methanol to gasoline. Currently, the United States has the capacity to

produce methanol with an energy equivalent to about

50,000 B/D of oil (i.e., about 1.5 billion gal/yr of methanol). A fraction of this could be diverted to use in

vehicles; and some new capacity could probably be

built in 3 to 4 years, if the appropriate permits could

be obtained quickly. However, the large capital investments needed, the dependence of these plants on

uncertain future supplies of natural gas, the need to

prove the methanol-to-gasoline step in commercial

practice in this country, and (in the case of methanol)

the uncertain demand for the product are all likely

to limit rapid investment in these options. At best, one

would expect potential investors in these technologies to wait until natural gas supplies and prices had

stabilized somewhat, so that they could make reasonable estimates of the profitability of their investments. 108 This delay would probably mean that

only very limited quantities of liquid fuels from natural gas would be produced within the 5-year timeframe, even if natural gas supplies eventually proved

to be adequate. Furthermore, to the extent that surpluses of natural gas are available, more transporta10alt should & noted that potential investors in liquid SynfUelS

from natural gas differ in three significant ways from those who may

invest to convert facilities from oil to natural gas. First, the synfuel

investor has the option not to invest without suffering a loss, while

businesses may require fuel to stay in business. Second, the investment needed to convert from oil to natural gas is usually only a

small part of a business’ total investment, and the direct cost to

the business (per unit oil replaced) of converting is usually considerably less than that of a syr-tfuel project. Consequently, the risk

is lower for the business converting than for a synfuel investor. Even

if the investment proves to be unprofitable, it is not necessarily a

mistake that would lead to bankruptcy for a company converting

to natural gas, whereas it would be for a synfuel project. Third,

a business could convert to natural gas while retaining the ability

to convert quickly back to oil if natural gas supplies became too

scarce. This option is not feasible for the synfuel producer.

tion fuel could be produced in the shortest time by

using the natural gas to replace distillate fuels directly

and converting them to diesel and gasoline.109 Consequently, elimination of a detailed consideration of liquid fuels from natural gas is not likely to affect materially the results of this assessment or underestimate

the oil replacement potential from fuel switching significantly.

Active Solar Systems

Currently there are about 500,000 active solar systems installed for heat and hot water, displacing the

energy equivalent of 3,000 to 5,000 B/D of oil.110 In

1982, about 150,000 systems were installed; 111 and

at this rate of installation, active solar systems of this

type could replace the energy equivalent of 5,000 to

8,000 B/D of oil by 1985. Even if this replacement

could be increased by a factor of 10 between 1985

and 1990 (a highly optimistic estimate), it would still

be less than the equivalent of 0.1 MMB/D of oil; and

only part of the energy directly replaced would be oil.

(Although the electricity and natural gas replaced by

solar systems could be used to replace oil, the uncertainty in the future supplies of electricity and natural

gas are far greater than any potential contribution from

these sources.) Consequently, it is judged that the oil

replacement potential of active solar systems between

1985 and 1990 is too small for a detailed consideration of this option.

Photovoltaics

Current photovoltaics production capacity is about

10 MW peak 112/yr and could grow to 30 MW peak/yr

by 1984. However, even if the production capacity

IOgThe quantity of transportation fuel that can be produced from

a given amount of natural gas by displacing residual fuel oil, however, is closer to the amount that can be produced by converting

the natural gas to liquid fuels, since the efficiency of converting

gas to liquids is closer to that of upgrading residual fuel to diesel

and gasoline, about 70 percent. Nevertheless, it would still take

considerably longer to convert large quantities of natural gas to liquids than to replace and upgrade residual oil, since new natural

gas liquefaction facilities would have to be built, whereas there

would probably be excess residual upgrading capacity during a

shortfall (“Emergency Preparedness for Interruption of Petroleum

Imports into the United States, ” National Petroleum Council, April

1981 ).

‘l”’’The 1983 Renewable Energy Forum: Directions ‘90,”

Renewable Energy Institute, Conference Proceedings, Wye Plantation, MD, June 16-18, 1983; and Gibbs& Hill, Inc., “Oil Replacement Analysis, Phase l,” op. cit.

“’’’Renewable Energy Forum, ” op. cit.

I I 2peak power corresponds to the maximum power output when

the photovoltaic cell is illuminated with the intensity and spectrum

of light produced by the Sun at noon on a clear day.
96 • U.S. U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

were to grow to 500 MW peak/yr by 1990 and all of

the photovoltaic devices sold were used to replace

oil, the total replacement would be less than 10,000

B/D, Consequently, the oil replacement potential of

this option is too small for detailed consideration.

Electricity From Wind

Wind-powered electric generators are being tested

by electric utilities in several parts of the United States.

The devices will have to be tested for several years,

however, so that the utilities can determine exactly

how the wind generators affect the utilities’ total electric system (in terms of stability, reliability, fuels

replaced, etc.). Until this testing is complete, it is

unlikely that there would be any extensive investment

in wind-powered generators. Therefore, their oiI replacement potential is relatively small and is likely to

remain so until at least 1990.

Solar Thermal Electric Generation

The use of solar thermal energy for electric generation is subject to constraints that are similar to those

mentioned above for electricity from wind. Aside from

Hawaii, the most favorable region for solar thermal

electric generation is in the Southwest, a region where

there is considerable generating capacity currently

under construction. Unless demand for electricity in

that region grows much more rapidly than OTA expects, electricity needs through 1990 could be met

and the utility oil use replaced by completing the powerplants currently under construction, converting

some utility boilers to coal, and using natural gas in

the remaining oil boilers (almost all of which are

equipped to burn oil or gas). Even without the coal

conversions, all of the oil could be replaced by new

powerplants and a modest increase (about 0.04 TCF)

in gas use, Hawaiian utilities, however, would continue to use about 20,000 to 30,000 B/D of oil, but

this amount of oil is too small for a detailed consideration of solar thermal electric generation.

Electric Vehicles

Except in special applications, the poor performance

and low driving range of electric vehicles limit their

market and make them most nearly a substitute for

very high efficiency conventional cars. 113 In addition,

electric vehicles are relatively expensive (compared

to other options for displacing oil),114 and it would take

several years to convert automobile production facilities to produce large numbers of these vehicles. Consequently, the oil replacement potential of electric

vehicles is relatively small within the timeframe considered for this assessment.

Ethanol From Food Processing Wastes

OTA’s earlier assessment of “Energy From Biological Processes” included a survey of various agricultural and food processing wastes.115 This survey indicated that even if all the largest sources of food

processing wastes suitable for conversion to ethanol

(cheese whey, tomato pumice, potato peel and pulp,

and citrus rag and peel) were converted, the total

amount of ethanol produced would be considerably

less than the energy equivalent of 10,000 B/D of oil.

Although these may be important energy resources

in specific localities, their total oiI replacement potential is too low for a more detailed consideration in this

assessment.

I I j/ncreas& Automobile Fuel Efficiency and Synthetic Fuels, OP.

cit.

1‘qIbid.

115Energy From Biological Processes, Op. cit.

APPENDIX B–ADDITION CONSIDERATIONS REGARDING

ETHANOL’S NET ENERGY BALANCE

For average corn production, the oil (for cultivation, is consumed as oil and natural gas inputs to grain preharvest, and grain drying) and natural gas (for fertilizers duction. 116

and pesticides) used to produce the corn have an With large increases in corn production, shifts such

energy content that is about 35 percent of the energy as the following could also occur. Corn production

content of the resultant ethanol. For marginal crop- could increase in Nebraska, at the expense of grain

land, which is less productive than average cropland,

closer to 50 percent of the ethanol’s energy content ‘ ‘b Ibid.
Ch. IV—Fuel Switching . 97

sorghum production. Production of grain sorghum

could then increase in Texas. Assuming that marginal

acreage is 70 percent as productive as the average in

each State, the net result of this would be to increase

agricultural consumption of oil and natural gas by 160

percent of the energy content of the resultant ethanol.117

Another aspect of ethanol’s energy balance involves

potential reductions in refinery energy use through

blending ethanol as as octane-boosting additive to gasoline. These savings occur in some refineries by allowing the refiners to reduce the amount of reforming

needed to upgrade the octane of their gasoline pool. 118

While OTA’s analysis indicates that gasoline production, as a percent of total refinery products, would be

only slightly larger in 1990 than in 1985, diesel production would increase from 62 to 81 percent of middle distillate products (see ch. Vi). The increased diesel

production would require additional hydrogen to upgrade the middle distillate fraction. Since this hydrogen normally is produced from reforming a part of the

middle distillates to high octane gasoline, the increased demand for diesel would encourage more

reforming, thereby reducing the incentive to lower the

octane of gasoline being produced. In addition, if the

octane of the refinery’s gasoline pool were reduced,

the hydrogen not produced through reforming would

have to be replaced with hydrogen from other

sources, such as by reacting residual oil with steam,

Although OTA has not conducted a detailed analysis

of the effects of ethanol on refinery energy consumption following an oil supply shortfall, it seems likely

that, under these circumstances, refinery energy sav117BaSed on data from ‘‘Energy and U.S. Agricu Itu re: 1974 Data

Base, ” vol. 11, U.S. Department of Agriculture, Federal Energy

Administration.

118Note that the least sophisticated refineries, which simply distill

crude oil into products, cannot achieve these savings because they

do not do any reforming. But the use of ethanol by these refiners

does increase the fraction of their product which can become gasoline of acceptable octane.

ings from the use of ethanol would be greatly reduced.

Clearly there would be exceptions to this general statement for individual refiners, but the average refinery

savings associated with 5 billion gallons of ethanol production per year (corresponding to 10 percent ethanol

in over half of the gasoline) are likely to be small.

Finally, if ethanol production were expanded much

beyond about 2 billion gal/yr, the energy credit for

not having to produce soybeans (about 10 percent of

the energy content of the ethanol’ 119) would begin to

drop, since the soybean substitution market would begin to be saturated with the available distillers’ dry

grain.

The result of these changes in agricultural energy

use and potential energy credits for ethanol production are as follows. If there were a surplus of natural

gas, increased use of this fuel in agriculture would not

compete with fuel switching from oil to natural gas

in other sectors; and the natural gas usage should not

be counted as a deficit in terms of oil replacement.

In this case, each gallon of ethanol could provide a

net oil replacement equal to 40 to 75 percent of the

energy content of the ethanol. In other words, 5 billion gal/yr of ethanol could replace 0.08 to 0.15

MMB/D of oil.

On the other hand, if natural gas were in short supply, additional use of it in agriculture would compete

with fuel switching to natural gas in other sectors; and

the added agricultural use of this fuel would reduce

the oil replacement in the other sectors. In this case,

ethanol production could result in anything from a net

replacement of oil equal to 50 percent of the energy

content of the ethanol to a net increase in oil consumption equal to 60 percent of the ethanol’s energy

content. In other words, the effect of 5 billion gal/yr

of ethanol production could vary from reducing oil

consumption by 0.1 MM B/D to increasing it by 0.12

MMB/D.

11 g~nergy Ffom f3;O10g;Ca/ Processes, Op. cit.
Chapter V

Increased Efficiency
Contents

introduction. . . . . . . . . . . . .

Buildings . . . . . . . . . . . . . . .

Heating Oil Conservation

Natural Gas Conservation

Transportation . . . . . . . . . . .

Industry . . . . . . . . . . . . . . . .

Technologies Available to

Page

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Reduce Oil Dependence . . . . . . . . . . . . . . . . . . . . .111

Energy Conservation Potential of Industry. . . . . . . . . . . . . . . . . . . . . . ........113

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 115

TABLES

Table No. Page

17. Assumed 1985 Oil Consumption in the Residential and

Commercial Sectors, by Region. . . . . . . . . . . . . . . . . . . . . . ...............103

18.

19.

20.

21.

Potential Oil Replacement by Energy Efficiency Investments in the

Residential and Commercial Sectors . . . . . . . . . . . . . . . . . . . . . ............104

Transportation Oil Use by Mode and Fuel Type, 1980 . . . . . . . . . . . . . . . . ..108

Industrial Users of Residual Oil for Fuel–1 980 . . . . . . . . . . . . . . . . . . ......111

Fuel Use Projections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...114

FIGURES

Figure No. Page

35. Automobile Fuel Consumption Projections, 1985-90 . . . . . . . . . . . . . . .....,109

36. industrial Energy Demand, 1951-81 . . . . . . . . . . . . . . . . . . . . . ............110

37. Total Fuel Use Projection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115

38. Petroleum Fuel Use Projections . . . . . . . . . . . . . . . . . . . . . ...............116

39. Natural Gas Use Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........116
Chapter V

Increased Efficiency

INTRODUCTION

The potential for reducing energy use through

increased efficiency—energy conservation-is

one of the truly new public policy concerns of

the past decade, Historically, the United States

has simply shifted from one supply source to

another as declining supplies or other concerns

shifted consumer preference. Graphs showing

U.S. energy use reflect similar steps from the use

of wood to that of coal and then to oil. While

basic engineering progress ensured the improvement of fuel efficiencies to some degree over

time, the availability of low-cost, high-energy

value fossil fuels in the country meant that there

was little reward for using fuels in a frugal manner. Operating costs of U.S. energy-using systems

—transportation, buildings, industry—were, in

most cases, very small compared to the large firstcosts of cars, homes, and plants. Accordingly,

energy conservation commanded little research

attention and no policy concern until after the

1973 embargo.

The rising prices and the specter of insufficient

supply that followed 1973, however, set in motion a flurry of research, policy effort, and private commitment to pay attention to the cost of

energy and to lower that cost through improved

efficiency in design and process. Substantial research talent was allocated to find ways to meet

energy end-use needs with less fuel. Early analysis indicated that there was in fact a substantial

savings to be had at costs that were much lower

than the likely costs for providing increased supply

—in part because of the historical disinterest in

the issue. This was the case, according to these

analyses, in all sectors of the U.S. economy.

In addition to private investment and marketing efforts throughout the 1970s, the Federal

Government approached conservation through

all policy channels—subsidy, information transfer, and regulation. A wide variety of programs

was authorized and funded.1 State and local

‘Federal R&D Funding for Energy: Fiscal Years 1971-84, National

Science Foundation, Special Report, February 1983. “Energy conservation projects reflected the steepest gain of all energy R&D proenergy offices sprang up as well, and conservation was often a principal emphasis of these

programs.

The rapid learning curve on conservation and

its many positive characteristics made it popuIar

with many policy makers. The positive characteristics of conservation include:

1.

2.

3.

4.

5.

6.

7.

8.

The ability to use a wide range of techniques

to solve the site-specific efficiency problems.

Small scale and an emphasis on existing

technology allowed for quick implementation.

Conservation options that were cheaper

than many supply options to meet heating

needs, and often do not require the large

capitalization of a large-scale supply technology.

Excellent returns or investment in efficiency

options through savings on future fuel cost

increases (the higher fuel costs rise, the faster

the return).

Potential for avoiding protracted conflicts

over the siting of new supply facilities, such

as power lines and generating plants, if requirement for new supply is reduced.

Benign environmental impacts compared to

those from extractive fuel technologies, both

at extraction and use points.

Possibility for local and individual decisionmaking and control.

Creation of jobs in manufacturing, installation, auditing, and related skills.

grams during the 1974-80 period, moving from $9 million to $264

million. The chief thrust was toward improved efficiency of energy

use in transportation, especially automobiles. A substantial share

of the effort was also aimed at buildings and community systems,

and at industrial systems, to be cost-shared with industry. The present administration, in the belief that strong financial incentives exist within the economy to develop technically and economically

promising technologies, has reduced conservation activities to a

single program under the heading of energy conservation research;

industrial, transportation, and buildings and community systems

programs have been completely eliminated. Proposed R&D funding

for energy conservation was $19 million in the 1983 budget. The

average annual decrease of 58.5 percent for conservation support

in the 1980-83 period was the greatest of any energy program. ”

101
102 ● U.S. Vulnerability to an Oil Import Curtiailment: The Oil Replacement Capability

While American energy use for all applications

has been dramatically reduced (on a per capita

or other appropriate basis), the portion of the reduction directly attributable to investments in improved efficiency is the source of some debate.

Methods for measuring actual end-use behavior

are not in place, and the isolation of a single

variable is extremely difficult. For example, consider personaI travel. The 1975 Energy Policy and

Conservation Act set fuel economy standards for

automobiles. Very substantial savings have resulted from these standards and a shift in market demand to smaller (more efficient) vehicles,

and the savings will continue and increase as the

stock of automobiles is turned over throughout

the 1980s. An additional factor in gasoline use,

however, is vehicle miles traveled. A large portion of gasoline savings between 1978 and 1980

appears to have resulted from a reduction in vehicle miles traveled. Similarly, energy use per unit

output in industry has dropped, but it also appears that the market basket of products has

altered to reflect a mix of products that are simply

less energy-intensive.

Without doubt the most complex area of analysis on the impacts of conservation has been in

energy use in buildings, and in particular in the

residential sector. U.S. energy use per household

is now strikingly below the levels predicted even

in the mid-l970s. There is growing evidence,

however, that most of this reduction is due to less

use and not to more efficient homes. Changing

patterns of household formation, shifting work

schedules, and other factors are also important.

All of these factors are strongly connected, however, and difficult to quantify separately.

In fact, one of the principal difficulties associated with conservation policy questions has been

the issue of measurement. While it is quite simple to measure new supply–a fuel is either produced or it is not–the attribution of savings to

specific actions is complex.

These measurement and attribution problems

aside, however, the response to energy conservation opportunity stands as one of the striking

aspects of energy use in 1983, as opposed to that

in 1973. Energy conservation is now a criterion

in many investment decisions. Problems of implementation now substantially outweigh problems in technology development, although there

are still many technical unknowns. Readers interested in detailed analysis of the technical and

implementation issues relating to conservation

are encouraged to refer to the following OTA

publications: Residential Energy Conservation,

The Energy Efficiency of Buildings in Cities, ndustrial Energy Conservation, and Increased Automobile Fuel Efficiency and Synthetic Fuels: Alternatives for Reducing oil Imports.

BUILDINGS

Energy use in the residential and commercial of total sector energy use. The Energy lnformasectors is largely determined by the stock of tion Administration (E IA) projects that natural gas

buildings. In 1980, the residential sector consisted will remain the primary residential fuel through

of 80 million households, an amount expected 1990, but its share will decline. By 1990 electrito increase to 95 million units by 1990. In the city is projected to replace natural gas as the pricommercial sector, there are about 4 million mary fuel in the commercial sector.

buildings, with a total floorspace of 44.7 billion -

Today, electricity use is second only to natu- square feet (ft2

). Total floorspace is expected to

grow to 57.7 billion ft2 by 1990. ral gas in both the residential and commercial sectors. Electricity is used primarily for nonheating

In both sectors, natural gas is the major fuel purposes, for example, in air-conditioning, lightused, primarily because it is relatively inexpen- ing, cooking, and refrigeration, etc. By 1990, EIA

sive, clean, and easy to handle. In 1980, residen- estimates that residential electricity use will intial gas use was equivalent in energy to 2.4 mil- crease to about one-third of all sector energy

lion barrels per day (MMB/D) of oil, or 52 percent used, principally due to greater use of electricity
Ch. V—Increased Efficiency ● 103

for space heating. In the commercial sector, 1980

electricity use was equivalent to 1 MMB/D of oil,

and EIA projects that this figure will increase to

1.4 MMB/D energy equivalent in 1990. This projected rise in commercial sector electricity use

is largely due to an increase in office and retail/

wholesale office floorspace, particularly in the

South and West regions, which are heavily dependent on electricity.

About 14 million residential buildings use oil

(including kerosene) for heating and hot water;

consequently, the total oil used in the residential sector is relatively small. In 1980,0.7 MMB/D

of oil, or 15 percent of all energy, was used in

residential buildings. EIA projects that oil consumption will decrease slightly, declining to a little over 0.6 MMB/D by 1990. On a regional basis,

the highest percentage of heat from oil is found

in New England, followed by the Mid-Atlantic region. EIA data show that the percentage of oil

used for heat in homes is twice as high in urban

as in rural areas. Most of these homes are under

2,000 ft2 and were constructed before 1959.

Like the residential sector, the percentage of

commercial buildings using heating oil is small—

20 percent, or 762,000 buildings—and is concentrated in the Northeast. Moreover, the EIA projects that fuel oil use in the commercial sector

will increase throughout the 1980s. In 1980, this

sector consumed 0.6 MMB/D and is projected to

consume 0.7 MM B/D by 1990. Projected growth

in floorspace will offset the improvements in efficiency and conversion to other energy sources.

By 1985, residential and commercial oil consumption is projected to be about 1.3 MMB/D

with about half being consumed in each sector.

As stated previously, natural gas accounts for

a much larger share of the buildings sector total

than oil. Even though the natural gas share declined in 1982, it still provided almost half (48 percent) of total energy, while oil provided about

17 percent. Furthermore, as discussed in chapter

Ill, oil consumption by residential and commercial users accounted for only about 8.3 percent

of total U.S. oil consumption. Consequently,

energy conservation in homes and commercial

establishments will likely have a much greater impact on demand for natural gas than for oil.

Heating Oil Conservation

To estimate potential oil savings through investments in energy conservation in residential

and commercial buildings, OTA first determined

energy use by fuel for each sector separately from

1981 EIA State energy use data. These totals were

aggregated into the 10 Department of Energy regions (see table 17). Next, OTA assumed that petroleum demand in these two sectors would be

near the 1981 level when the hypothetical disruption occurs in 1985, This assumption means that

oil demand rebounds from its 1983 low. Current EIA projections are in accord with this assumption.

In these two sectors, oil is used primarily for

both space and water heating in buildings. About

80 to 85 percent is used for space heating, and

the remainder for water heating. The calculations

that follow concentrate on the space heating

portion.

OTA will also carry out the calculation of oil

conservation potential independently of the estimate for fuel switching which of course is going

on at the same time. Initially, building owners will

probably invest in either or both conservation and

fuel switching when they see the price of oil

escalate rapidly as supplies are suddenly reduced.

Instead of making any assumptions about the separate contributions of the two types of investments, OTA calculated each alone, as if the other

were not occurring, and then combined the two

and eliminated the overlap. This last calculation

is described in chapter VI.

Table 17.—Assumed 1985 Oil Consumption in the

Residential and Commercial Sectors, by Region

(thousand B/D)

Residential Commercial Total

Region 1 . . . . . . . . . . . . 133

Region 2. . . . . . . . . . . . 145

Region 3. . . . . . . . . . . . 129

Region 4. . . . . . . . . . . . 81

Region 5. . . . . . . . . . . . 151

Region 6. . . . . . . . . . . . 25

Region 7. . . . . . . . . . . . 47

Region 8. . . . . . . . . . . . 18

Region 9. . . . . . . . . . . . 11

Region 10. . . . . . . . . . . . 26

Total 766

50

99

43

50

54

113

16

7

51

9

183

244

172

131

205

138

63

25

62

35

492 1,259

SOURCE: Office of Technology Assessment,
104 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Conservation in buildings can be achieved by

a number of means that reduce the energy requirements of the building and its appliances, increase the efficiency of energy-using equipment,

or some combination of each. For this analysis,

OTA considered only those investments that

would directly reduce heating oil requirements

and that would have the greatest effect in the

largest number of buildings. For residential buildings, analysis and post-retrofit data to date show

that the combined effect of insulation in ceilings

and walls and replacement of existing burner

assemblies on oil furnaces with high-efficiency

burners are the most cost-effective options for reducing oil use. The data indicate that oil use for

space heating can be reduced by about 25 percent for an average unit.

In contrast, the potential for insulation to reduce oil consumption in commercial buildings

is much more limited. For example, owners of

large commercial buildings with clad walls and

flat-roofed buildings with no cavity above the ceiling will find adding insulation to be a rather unattractive investment. Replacement of burners,

however, will be quite cost effective, and will reduce oil use for heating about 20 to 25 percent

on the average. There are other opportunities for

commercial buildings such as conversion of terminal reheat forced-air systems to variable air volume systems and installation of stack heat reclaimers for heating systems that use water. Only

the replacement of burners, however, offers costeffective improvements in heating efficiency for

all types of commercial buildings and heating

systems.

The next step in determining potential oil savings is to estimate the number of buildings that

can be retrofitted2 during the 5-year period. In

the residential sector OTA assumed that onethird, or 4.5 million homes, will be reached, This

number is somewhat arbitrary and recognizes

that many of the oil-burning homes in the country are not capable of being insulated or are

already insulated to the levels OTA assumes. In

the former category, there are many homes for

which wall insulation is not feasible because there

are no cavities in which to place insulation. In

addition, a number of homes would require extensive repairs before insulation could be effective.

For commercial buildings, OTA assumed that

all 762,000 buildings were reached. The much

smaller number of buildings combined with the

limitation on replacing burners in commercial

buildings was the basis for this assumption. Again,

the choice is somewhat arbitrary. As will be seen

in the next chapter, about 80 percent of the oil

used by all buildings is determined to be replaced

by alternative energy sources. Therefore the

amount of oil that is” replaced” by conservation

is small, and errors introduced by an incorrect

estimate of the number of buildings actually

retrofitted with insulation and/or new oil burners

— -.- —

‘Retrofit means to install additional or replacement equipment

in an existing building.

Photo credit: U.S. Department of Energy

Insulation material is blown into the wall cavity to

increase the energy efficiency of this building

Table 18.-Potential Oil Replacement by Energy

Efficiency Investments in the Residential and

Commercial Sectors (thousand B/D)

DOE region 1985 1986 1987 1988 1989 1990

1 . . . . . . . . . . . . . . . . . . . . 8 15 19 21 23

2 . . . . . . . . . . . . . . . . . . . . 0 8 18 25 31 37

3 . . . . . . . . . . . . . . . . . . . . O 6 12 16 20 22

4 . . . . . . . . . . . . . . . . . . . . O 8 10 16 17 19

5 . . . . . . . . . . . . . . . . . . . . o 7 14 18 23 26

6 . . . . . . . . . . . . . . . . . . . . O 8 16 21 27 30

02466 6

8: : : : : : : : : : : : : : : : : : : : o 2 3 3 3

9 0 5 8 10 12 14

10: : : : : : : : : : : : : : : : : : : : 0 2 4 5 5 5

Total = 185,000 B/D

SOURCE: Office of Technology Assessment; base consumption data Energy Information Administration.
Ch. V—Increased Efficiency ● 105

will be even smaller, less than 10 percent of the

oil used in 1985.

Using the above assumptions, OTA calculated

the oil displacement schedule in buildings by region from 1985 through 1990. These figures are

shown in table 18. The total oil displaced at

the end of the 5 years by conservation is about

185,000 barrels per day or about 15 percent of

the total used for space heating in 1985 by all

buildings.

OTA estimates concerning the number of buildings that could be retrofitted over the 5 years

were determined by limitations imposed by the

physical state of the buildings themselves, because the principal source of conservation is the

insulation of the building shell in the case of

residential units. These estimates must now be

compared with the constraints presented by the

manufacturing capacity of insulation and replacement burners and by the personnel needed to

audit these buildings and install the equipment.

Because OTA dealt only with equipment and not

with the physical condition of the structure, we

did not need to go through this two-step process in that case. Personnel limitations, however,

were factored in.

OTA first determined whether sufficient additional insulation could be made available during

an oil disruption to meet the requirements calculated above. Assuming a floor area of 1,200 ft2

and a wall area of 935 ft2 for a typical house, R30 insulation in the ceiling and R-11 in the walls,

about 46,000 R-ft2 of insulations is needed per

house, or a total of 216 billion R-ft2 for all the

residential buildings insulated over the 5 years.

In 1977, estimates of annual production capacity for fiberglass insulation ranged from 100 billion to 160 billion R-ft2

. In addition, the industry

expanded its production capacity in 1979 after

the increase in oil prices. Therefore, no apparent constraints to meeting the insulation requirements for oil-heated homes at least, exist.4

Burner production capacity also appears to be

sufficient. The number of replacement burners

3R-ft2 is a measure of the wall or ceiling area being insulated times

the R value (insulation properties) of the insulating material.

4Residential Energy Conservation (Washington, DC: U.S. Congress,

Office of Technology Assessment, OTA-E-92, July 1979), p. 283.

required is about 5.3 million over the 5 years.

Current production capacity is about 1.5 million

a year. Therefore, as long as the replacement is

phased in over the entire period, there will be

no shortage. It must be noted that the fuel switching calculation for buildings described in the previous chapter required over 8 million replacement burners to switch from oil to natural gas.

This apparent constraint is not real, however,

since only those oil users not converting to other

fuels–less than 1 million–would actually need

new oil burners. In other words, when conservation and fuel switching are combined, about

9 million new, high-efficiency burners are required in total. With a modest growth in production capacity (9 percent per year), this amount

could be supplied in the 5-year period.

Perhaps the greatest constraint to achieving the

oil savings target is the large amount of auditing

and retrofitting which will be needed. This, in

turn, will require a large increase in personnel

over current activities. In recent years, there has

been a decline in the number of private firms offering these services, however. Many have gone

out of business or shifted their efforts to the commercial sector because of decline in demand for

retrofits to residential buildings. Although a shortage of knowledgeable auditors may exist immediately after the disruption, a large number can

be trained and on the job within a short period

of time. The current industry standard for training auditors is about 6 to 8 weeks, including both

specific training and some on-the-job, supervised

time. Quality control, however, both in training

auditors and product installations and performance, may be a serious problem.

To see whether audits and retrofits can be performed at the rate required to achieve the conservation targets, OTA examined the recent history of audit and retrofit programs. Under the

Residential Conservation Service, mandated by

the 1978 National Energy Conservation Policy

Act, nearly 2 million audits were conducted by

local electric or gas utilities from April 1981 to

March 1983.5 This figure does not include many

of the audits conducted by two of the largest and

5Eric H i rst, ~va/uatjon of UtI/Ity Home Energy Audit (RCS) Programs, Oak Ridge National Laboratory, February 1984, p. 3.

37-833 0 - 84 - 8
106 • U.S. Vulnerabj/jty to an Oil Import Curtailment: The Oil Replacement Capability

most active utilities: the Tennessee Valley Authority (TVA) and the Bonneville Power Administration (BPA). Between 1977 and 1983, TVA and

BPA conducted 750,000 and 209,000 audits, respectively. In addition, TVA weatherized 350,000

units during that period. A large number of audits

were also completed by other utilities over the

last 5 years. For example, Pacific Gas & Electric

audited more than 350,000 homes and weatherized over 315,000 of them. Since 1981, the

Mass Save program sponsored by 48 utilities in

Massachusetts and Connecticut conducted 166,000

audits, and Pacific Power & Light conducted

66,000 audits and weatherized nearly 29,000

homes. Many others were probably retrofitted,

too, but were not reported by the utility since

they were done by private contractors or were

done by the homeowners themselves. While a

national total is not available, it appears from this

sample that there will be sufficient personnel to

perform the necessary audits and retrofits. This

is especially likely if the retrofits are confined to

installation of insulation and/or replacement

burners.

For commercial buildings the problems of having sufficient numbers of qualified personnel to

perform the necessary audits and retrofits are

probably lower since there has been much more

interest in investing in commercial buildings than

in residential buildings for greater efficiency. In

fact, it is likely that the potential for lowering oil

use by conservation in these buildings may be

lower than the 25 percent OTA assumed because

substantial changes have already been made. The

error will not be large when fuel switching is accounted for, however, since the net contribution

of conservation will be much lower than in the

case of no fuel switching.

Natural Gas Conservation

Although OTA concentrated its analysis on oil,

OTA expects that building owners who use natural gas will also undertake conservation efforts

during the 5-year period. Because of the large volume of natural gas used by buildings, even a

modest success in conservation will provide a

large quantity of natural gas for use as a replacement for fuel oil. About 46 million households

and 1.9 million commercial buildings use natural gas as a heating fuel. In 1981 about 4.9 trillion

cubic feet (TCF) of natural gas was used to heat

these buildings. An additional 2.6 TCF was used

for other building energy services, primarily water heating and cooking. If 10 percent of the

heating gas were conserved over the 5 years,

nearly 0.5 TCF/yr would become available at the

end of the 5 years, which would be about 25 percent of the total that OTA estimates will be used

for fuel switching. The availability of that conserved natural gas can be very important in easing any pressures that may arise if domestic natural gas production were to drop rapidly by 1990.

Obtaining a 10-percent reduction in natural gas

use, however, will require levels of insulation in

residential buildings and replacement burners in

commercial buildings that may stretch the production capacity limits of those two items. If the

25-percent reduction in heating fuel requirements

per building that OTA assumed for the oil case

can be achieved, about 18.6 million residential

units will have to be insulated. This would amount

to 845 billion R-ft2 of insulation, which, when

added to the requirements for oil, would exceed

the upper end of the range of 1977 production

capacity. The expansion in production capacity

since 1977, however, coupled with the potential for expansion during the 5-year period (the

Ieadtime for capacity expansion ranges from 12

to 36 months) and the production capacity for

other types of insulation—e.g., cellulose, rockwool—should be sufficient to meet the combined

demands of oil- and natural gas-heated homes.

Problems may occur if there is also substantial

demand for electrically heated homes, although

those homes are usually better insulated than

homes heated by oil or natural gas.

Supplying the other major conservation technology, replacement burners, should not present

any problems if one assumes that they will be

needed only for natural gas-heated commercial

buildings. This is a plausible assumption since

residential buildings can achieve the 25 percent

savings with increased insulation alone, while insulation will be far less effective for commercial

buildings, for reasons stated above. The type of

burners that would improve the efficiency of nat-
Ch. V-Increased Efficiency • 1 0 7

ural gas-fired furnaces are somewhat different

than those needed for oil-fired furnaces because

the latter require atomization of the fuel, while

the gas burners do not. The principles behind increasing combustion efficiency, however, are the

same for both types—e. g., increasing flame turbulence and residence time–so there should not

be any significant difference in manufacturing capability between the two. With this assumption,

therefore, about 1.9 million replacement burners

would be required, which would be added to the

9 million for increased efficiency and conversion

to natural gas of oil-heated buildings. The sum,

about 11 million, could be produced over 5 years

if production capacity increased by about 19 percent per year, starting with a 1985 production capacity of 1.5 million units per year. This growth

rate is high enough, however, that there will

probably be some limitations due to burner availability, although manufacturing is sufficiently simple that this growth rate could be achieved. The

result of the burner production limitation would

be to reduce the amount of natural gas available

by conservation. Given that case, conservation

in other uses of natural gas—cooking and water

heating–would have to make up any differences

that may be needed. The large amount used in

those categories, combined with many opportunities to increase efficiency there, makes it reasonable that such gas can be made available.

TRANSPORTATION

In 1980, the transportation sector consumed

about 9.6 MM B/D of oil (see table 19), The main

fuels consumed were gasoline (6.5 MMB/D oil

equivalent), primarily for automobiles (4.6

M M B/D) and trucks (1.7 MMB/D), diesel (1.4

MMB/D), jet fuel (1 MMB/D), and residual fuel

oil (0,7 MMB/D). In addition, OTA estimates that

about 0.5 MM B/D were consumed by the industrial sector in off-road construction, mining, and

agricultural machinery and equipment.

Consumption of gasoline, the dominant transportation fuel, peaked in 1978 at 7.4 MMB/D (including 0.1 MM B/D for nontransportation purposes). By 1979 it had dropped to 7.0 MMB/D

and in 1980 it was 6.6 MMB/D. In OTA’s judgment, only about half of this drop can be attributed to the increased efficiency of vehicles on

the road; the other half must be due to a reduction in the vehicle miles of travel (VMT). Between

1980 and 1983, gasoline consumption has remained nearly constant because the continued

increase in fuel efficiency has apparently been

offset by increases in VMT. By 1983, VMT had

returned to its 1978 level; and unless it continues

to rise, gasoline consumption is likely to drop to

around 6 MM B/D by 1985.6 Consumption of

other transportation fuels in 1985, on the other

hand, is likely to be similar to its 1980 level.

All but about 0.1 MMB/D of the diesel and residual oil used in the transportation sector is for

freight transports. OTA has not assessed potential fuel savings in freight transports, but a recent

Argonne study indicated that fuel consumption

could be reduced by 4 to 8 percent in an oil shortfall, starting in mid-1981 and similar in magnitude

to the one postulated in this study. z The savings

could be achieved through a variety of measures,

including shifts in the mode of transportation

(from air to truck, truck to rail, and rail to marine),

changes in operating practices (e.g., less idling,

compliance with speed limits, fewer empty runs,

improved maintenance), and technical changes

(e.g., different types of air filters, lubricants, tires;

aerodynamic devices; temperature-controlled

fans). Although some of these changes will have

been implemented by 1985, the timeframe considered here (5 years) is longer than that considered in the Argonne study (1 year). Moreover,

some older vehicles can be replaced with newer,

more efficient models. The savings from fleet

turnover, however, is likely to be considerably

less than for passenger cars because transport

b

This assumes that the average fuel efficiency of new cars sold

in 1985 will be 27.5 miles per gallon (mpg) and that the percentage efficiency increase in light trucks on the road will be half as

large as that for automobiles.

7

L. R. Johnson, et al., “Energy Contingency Planning for Freight

Transportation, ” Argonne National Laboratory, ANL/CNSV-34,

August 1982.
108 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Table 19.–Transportation Oil Use by Mode and Fuel Type, 1980

Fuel consumption (M MB/D)

Distillate Residual

Gasoline fuel oil Jet fuel fuel oil

Highway use. . . . . . . . . . . . . . . . . . . . . . . 6.3 0.9 —

Motorcycles and mopeds. . . . . . . . . .

—

0.02 — —

Automobiles . . . . . . . . . . . . . . . . . . . . .

—

4.6 0.03 —

Buses. . . . . . . . . . . . . . . . . . . . . . . . . . .

—

0.03 0.04 —

Trucks. . . . . . . . . . . . . . . . . . . . . . . . . . .

—

0.9 —

Nonhighway use. . . . . . . . . . . . . . . . . . . .

—

0.15 0.4 0.8 0.7

Air. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.03 — 0.8

Water . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

0.1 0.08 — 0.7

Rail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 0.3 — 0.002

Snowmobiles . . . . . . . . . . . . . . . . . . . . 0.01 — —

Military operations. . . . . . . . . . . . . . . . . .

—

0.01 0.07 0.2 —

Total 6.5 1.4 1.0 0.7

SOURCE: Adapted from G. Kulp and M.C. Holcomb, “Transportation Energy Data Book, Sixth Edition," Oak Ridge National

Laboratory, ORNL-5883, 1982.

vehicles are kept longer than carsa and the difference in efficiency between new transport

vehicles and the average transport vehicle already

on the road is less than for cars. Consequently,

savings of the magnitude of 4 to 8 percent are

probably still reasonable.

Although the engines in off-road vehicles and

equipment used in construction, mining, and

agriculture (CMA) are similar in many respects

to those used for some types of freight transport,

many of the adjustments (e.g., shifts in transportation mode) are not available to users of industrial engines. Consequently, the percentage of

savings from increased efficiency in CMA machines

and equipment is likely to be considerably

smaller than that in freight transport; and OTA

has not included any savings in the area of CMA

machines and equipment.

Passenger aircraft consume about 75 percent

of all jet fuel and over 98 percent of the jet fuel

consumed by nonmilitary aircraft. Reductions in

fuel consumption by passenger planes can be

achieved by reducing the weight of interior

equipment (e.g., seats, shelves), operating planes

with fewer empty seats, removing exterior paint

to reduce aerodynamic resistance, and other

changes. Also, some planes will be replaced by

newer, more efficient models. Again OTA has not

assessed potential fuel savings in passenger planes,

but if their fuel consumption could be reduced

*G. Kulp and M. C. Holcomb, “Transportation Energy Data Book,

Sixth Edition, ” Oak Ridge National Laboratory, ORNL-5883, 1982.

by 5 to 10 percent, the total savings in freight

transport and passenger aircraft would be about

0.1 to 0.2 MMB/D.

Considerably larger savings are likely in passenger cars and light trucks. g Because the auto

industry has been changing production facilities

to produce more efficient cars and light trucks

for a number of years, fuel consumption will drop

between 1985 and 1990, with or without an oil

disruption.

To illustrate the probable magnitude of the fuel

savings, OTA has calculated three scenarios for

automobile fuel consumption, shown in figure

35. In each case, it was assumed that the VMT

are proportional to the number of automobiles

on the road (i.e., average miles per vehicle is constant, as has roughly been the case historically).10

It was also assumed that the average fuel efficiency of new cars sold in 1985 will be 27.5

mpg. 11

In the base scenario (A) OTA assumed that the

number of automobiles will increase by 5 percent between 1985 and 1990, that new car sales

will average 11 million vehicles annually, and that

the new car fuel efficiency in 1990 will be 27.5

mpg. For the disruption scenarios (B and C), OTA

glncrease~ AIJrOrnc)~;je Fue/ Efficiency and 5ynthetic Fue/s: Alternatives (or Reducing Oi/ Imports (Washington, DC: U.S. Congress,

Office of Technology Assessment, OTA-E-185, September 1982).

IOKulp and HOlcOmb, OP. cit.

I I EPA composite fuel efficiency, consisting of .55 percent city and

45 percent highway driving cycles. Actual on-the-road fuel efficiency

is assumed to be 10 percent lower than this.
Ch. V—Increased Efficiency ● 109

1985 1986 1987

Scenario

A

— — .

aAt 5.5 million Btu per barrel of oil

SOURCE: Office of Technology Assessment.

assumed that annual new car sales are depressed,

averaging 7 million vehicles, and that the new

car fuel efficiency in 1990 is 36 mpg, reflecting

a market demand for more efficient vehicles. In

scenario B, the automobile fleet size remains constant, while in scenario C, it grows by 2.5 percent between 1985 and 1990.

As can be seen in figure 35, the fuel savings

in each of the scenarios are quite similar, about

0.6 to 0.7 MMB/D. These results show that the

effects of opposing factors influencing fuel consumption more or less cancel one another. In the

base case scenario, vehicle travel increases and

demand for fuel efficiency is low. But new car

sales are high, so many older, less efficient cars

are replaced. In the disruption scenarios, new car

sales are depressed; but travel increases less

rapidly, and those cars that are sold are more efficient than in the base case.

One could postulate other scenarios, in which

high sales and demand for fuel efficiency are

coupled with low or no growth in travel; and the

fuel savings could be increased to about 1 MMB/D.

1988 1989 1990

Year

Scenario Scenario

B c

Or one could combine low sales and no increase

in new car fuel efficiency with increased travel,

in which case the savings could drop to about

0.4 MMB/D. In OTA’s judgment, however, the

scenarios shown in figure 35 represent the most

plausible combinations of circumstances.

If one assumes that the percentage increase in

the efficiency of light trucks is half that of automobiles, due to the slower turnover of the fleet, 12

then fuel consumption by light trucks would drop

by about 0.1 MMB/D under circumstances similar to those postulated for automobiles. Total savings from increased efficiency of automobiles and

light trucks between 1985 and 1990 would then

be about 0.7 to 0.8 MMB/D, and the total reduction in fuel demand for transportation would be

0.8 to 1 MMB/D.13

12KU 1P and Holcombl oP. cit.

I JThiS magnitude of fuel savings is consistent with a relatively constant demand for transportation services. A reduction or change

in demand could also have a large effect, however. For example,

if demand for transportation services drops by 10 percent across

the board, fuel consumption would drop by an additional 0.9

MMB/D; and if 10 percent of the passenger-miles traveled by car

shifts to buses, the savings would be around 0.2 MMB/D.
110 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

INDUSTRY

Since 1951, industrial use of energy in the

United States grew from 17.4 quadrillion Btu per

year (quads/y r), to almost 27 quads/yr by 1979.

Since then, it has decreased rapidly to just over

21 quads/yr in 1983, although there are indications that industrial energy use is beginning to

grow again.

In figure 36, the growth in industrial energy use

reflects increases in the use of natural gas and

petroleum fuels, and a decrease in the use of coal.

The latter occurred because of the economic

advantage of oil and gas compared to coal, including the environmental restrictions imposed

on coal use in the 1970s. In 1950, coal was the

largest source of industrial fuel, accounting for

almost 40 percent of the energy used. Petroleum

and natural gas accounted for approximately 25

percent each. By 1978, these shares had changed

dramatically; coal accounted for only 12 percent

of total industrial fuel, while petroleum had increased to nearly 40 percent. In terms of growth

rates, total industrial energy use has grown at a

Figure 36.–lndustrIal

rate of 1.7 percent per year between 1951 and

1979, and use of petroleum has grown at a rate

of 3.5 percent per year. Coal use decreased at

2.7 percent per year. The absolute amount of petroleum used by industry rose from 1.96 MMB/D

in 1951 to a high of 5.14 MMB/D in 1979.

It is apparent that 1978-79 was a watershed for

energy use in American industry. Total final demand for energy fell from a 1979 high of 26.8

quads/yr (counting electricity at 3,412 Btu per

kilowatthour [kWh]) to a 1982 level of 21.2 quads/

yr. Oil fell from a 5.1 MMB/D industrial consumption level in 1979 to a 1982 level of 4.0 MMB/D.

During this period petroleum’s share of total

energy use stayed approximately constant at 37

percent.

Table 20 lists the 10 most petroleum-intensive

industries, as reported in the Department of

Energy’s 1980 Industrial Energy Efficiency Improvernent annual report. These figures do not

include petroleum basic feedstocks. The greatEnergy Demand, 1951-81

1951 1956 1961 1966 1971 1976 1981

Year

SOURCE: Energy Information Administration.
Ch. V—Increased Efficiency • 111

Table 20.—lndustrial Users of Residual Oil

for Fuel–1980

Petroleum use

Industry (thousand B/D)

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Paper and allied products . . . . . . . . . . . 169

Petroleum and coal products . . . . . . . . 133

Chemicals and allied products . . . . . . . 99

Primary metals ., , . . . . . . . . . . . . . . . . . . 72

Food and kindred products . . . . . . . . . . 34

Stone, clay and glass products . . . . . . 22

Transportation equipment . . . . . . . . . . . 17

Textile mill products. . . . . . . . . . . . . . . . 9

Rubber and miscellaneous plastics . . . 7

Machinery, except electrical . . . . . . . . . 6

SOURCE: /ndustr/al Energy Efficiency Improvement Program: Annual Report to

the Congress and the President 1980, Department of Energy, Office

of Industrial Programs, Washington, DC.

est quantity of petroleum was consumed by the

paper and allied products industry (SlC14 26),

even though this industry was about so percent

self-sufficient through the use of biomass as fuel.

Note also that the top four petroleum-consuming

industries account for over 80 percent of all residual fuel oil used in industry. This means that

if petroleum use is to be curtailed or made more

efficient, these four industries must play a large

part.

OTA has made projections of the trends in fuel

use which shouId occur by the year 2000, given

a set of fuel prices that increase modestly but progressively over that time span. These projections

were reported on extensively in OTA’s report on

Industrial Energy Use.15 OTA projected that total

industrial fuel use will increase above current

levels, but at a rate much lower than the rate of

growth of industrial output. The share of petroleum-based fuel is projected to decline from its

current level of 37 percent of all industrial fuel

to less than 30 percent by the year 2000.

Technologies Available to

Reduce Oil Dependence

A number of technologies are now available

whose widespread implementation could extensively reduce oil use by U.S. industry. Those technologies can be broken down into two broad

areas: general technologies, such as those for heat

IASIC means Standard Industrial Classification of the U.S. Depatiment of Commerce.

I J/ndu5trfa/ EnerW Use (Washington, DC: U.S. Congress, office

of Technology Assessment, OTA-E-1 98, June 1982).

recovery which are applicable to many industries;

and specific technologies for particular industries.

General technologies include the following:

1. Housekeeping covers those things industry

can do to improve the efficiency of energy use

with a minimum of monetary investment. Items

included would be routine maintenance of steam

lines to prevent loss of steam through inoperative

traps, switching off equipment not needed, and

adjusting heat, ventilation, and air-conditioning

systems for optimum performance at minimum

cost .

2. Computer control systems either are added

to improve the performance of an existing boiler

system used to raise steam, or added to an industrial process to monitor a production line to

see that feedstock material is not wasted and to

ensure product quality. Addition of computer

control systems to boilers allows the close monitoring of air and fuel so that unneeded air is not

heated and unneeded fuel is not burned. In a production line, a computerized process control system can be used to optimize such things as paper thickness, polymer color, or petroleum viscosity. A number of parameters can be monitored

simuItaneously.

3. Waste heat recovery systems are available

to improve the overall efficiency of energy use

by recovering heat from combustion gases in a

steam boiler or by recovering excess thermal

energy from a process stream product. For example, when petroleum is first distilled, large

quantities of energy are used to fractionate crude

oil into different boiling-range components. However, the resulting distillates may not need to be

so warm, Therefore, a heat exchanger can be

built into the process stream to allow crude oil

feedstock to absorb some of the thermal energy

from the distillate before being introduced to the

distillation unit, resulting in less energy being

needed to fractionate the feedstock.

Another approach to heat recovery involves

upgrading thermal energy to a level which can

be useful as a heat source. A large amount of industrial energy is lost from process streams at

temperatures less than 300° Celsius. To use such

energy, vapor-recompression or heat pumps are
112 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

needed to raise this low temperature heat to a

more useful temperature and pressure. In terms

of Btu, low-level heat has enormous potential to

improve industrial energy efficiency.

Many industries have energy conservation technologies available to them that are unique to that

industry. Below are some categories of technologies available to four of the most energy-intensive industries.

1. The Chemicals and Allied Products Industry. Technologies available for reducing petroleum dependence in the chemicals industry exist in two broad areas. The first involves improvements in physical separation technology, specifically the modification and possible elimination

of distillation as a chemical separation technique.

Incremental improvements in the distillation

process, retrofitted to existing installations, already have achieved significant (e.g., 25 percent)

savings in many plants. Further improvements of

comparable magnitude could be made.

Alternative approaches to liquid separation are

on the horizon, and could be implemented if

distillation costs were high enough. These techniques include freeze crystallization separation,

vacuum distillation, and liquid-liquid (solvent)

extraction. The latter is a most promising technique, entailing the use of a solvent with a high

affinity for one component of a chemical mixture,

but immiscible with the remaining components.

Using this technique, separation involves two

steps: decanting and closed-loop evaporation/

condensation of the solvent. One company has

already used the technique in a synthetic fiber

plant, saving an estimated 40,000 barrels of oil

equivalent annually.

Production integration technologies also are

available for improving petroleum use efficiency

in the chemicals industry. Perhaps the simplest

example is cogeneration of steam and electricity.16 However, many other opportunities exist,

notably in integrating chemical production into

16Cogeneration is the simultaneous production of both electrical or mechanical power and thermal energy from a single energy

source. A detailed discussion of promising cogeneration technologies can be found in /ndustria/ and Commercial Cogeneration

(Washington, DC: U.S. Congress, Office of Technology Assessment,

OTA-E-1 92, February 1983).

petroleum refining complexes. Also, integration

of the production of ethylene, propylene, and a

wide range of petrochemicals from a naphthabased (aromatics-based) scheme is a strong possibility by 1990. Another option would be to integrate ethylene and acetylene production with

ammonia and/or methanol. Ethylene/acetylene

coproduction will become increasingly attractive

as distillate prices rise and heavier feedstocks are

used.

2. The Petroleum Refining Industry. The petroleum refining industry uses about 10 percent

of its crude oil throughput as fuel for the various

refining processes such as distillation and cracking. Since one of the assumptions of this study

is that there is a sustained shortfall of 2.2 MM B/D

in crude oil (an additional 800,000 B/D of imported petroleum products, mostly residual fuel

oil, are also lost), it follows that the refining industry would use about 200,000 B/D less as fuel.

This is probably conservative, since undoubtedly

the most inefficient refining operations would be

the ones shut down in a curtailment.

In addition to the lowered throughput, many

of the technologies applicable to Chemicals and

Allied Products can also be used in petroleum

refining, And given the large amounts of low-level

heat produced by refineries, there is the possibility of both thermal and mechanical recovery

of heat using either new designs for production

units or heat pumps.

3. The Paper and Allied Products Industry.

The paper industry is now over 50-percent energy

self-sufficient through using wood residue and

spent paper pulping liquor as production fuel.

One of the most efficient means of improving

energy use in the industry would be to retire older

equipment. The paper industry is unique in that

much of its equipment is very long-lived, some

as much as 50 years. New technologies available

to the industry include continuous digesters for

pulp production, cogeneration of steam and electricity or steam and mechanical drive, and new

papermaking processes that reduce the amount

of water that must be removed in drying.

4. The Iron and Steel Industry. Efficiency improvements in the iron and steel industry will involve simultaneous phasing out of older ineffi-
Ch. V—Increased Efficiency ● 113

Photo credit: International Paper Co.

Paper and pulp are made from wood chips in an

energy-efficient continuous digester

cient plants and equipment and the widespread

introduction of the new technologies of electric

arc furnace (EAF), minimills that recycle large

amounts of scrap steel, and continuous casting

(CC), which eliminates the cooling-reheat cycle

for making intermediate steel products such as

blooms and billets. The recent worldwide recession and resuIting manufacturing overcapacity is

forcing steel manufacturing firms to eliminate

open hearth furnace operations in favor of EAF

and CC technologies. However, while these new

technologies will make steel making more efficient, they will not have a dramatic impact on

petroleum use since only 7 percent of the energy

used for steel making is petroleum.

Energy Conservation Potential

of Industry

Industry has the potential to replace about 25

percent of its 1985 evel of fuel oil consumption

through increased efficiency and process changes

over a 5-year period after the onset of an oil shortfall, while maintaining production levels. The

analysis underlying this projection, much of

which was carried out in support of OTA’s recently published IndustriaI Energy Use report, is

based on an engineering and economic computer model called “ISTUM,” the industrial Sector Technology Use Model which OTA used to

examine the four most energy-intensive industries

in U.S. manufacturing. For these industries, potential oil and natural gas savings were calculated

for investments that would minimize total energy

use per unit of production.

In the OTA report, oil and gas prices were

postulated to increase an average of 3.5 percent

per year between 1980 and 2000, while coal and

electricity prices remained relatively constant.

Product output for the entire industrial sector was

assumed to grow at a rate of 2.9 percent per year.

Energy use was then calculated to grow at onethird of this rate—i.e., 1 percent per year.

In the case of an oil supply shortfall, many

anomalies would occur. Oil prices would quickly

and dramatically increase, and industrial output

would likely decline as overall demand for industrial products declined. In addition, the decline

in crude oil supplies would result in a drop in

refining throughput. The effect of these anomalies

on oil consumption has been approximated through

the

●

●

●

following assumptions:

increased prices of oil fuels would accelerate investment in energy conservation projects by manufacturing firms if they choose

to remain in production. This analysis

assumes that energy-efficiency improvements

that took place over 10 years in the original

OTA projection (1985-95) would be achieved

in 5 years—i. e., by 1990.

Output from the major oil-consuming industries (except refining) will remain flat on the

average for this 5-year period.

Opportunities for the improvement of petroleum fuel use efficiency will be roughly comparable to that of the pre-disruption case.

Even though OTA assumed that production

output is not increasing, a certain amount

of capital stock will still be replaced. To the

extent that new equipment is used, it will be

more energy efficient than the old equipment. Therefore, energy consumption per

unit of output will decline over the 1985-90

time span.
114 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability —

● Refinery throughput will have decreased by

about 2.2 MMB/D after 5 years, with an additional 800,000 B/D decline in imported residual oil.

By removing economic growth from the previous OTA results derived from ISTUM (for 1985

to 1995) and compressing those results from 10

to 5 years, we can account for the first two assumptions. We find, in this case, that about

250,000 B/D of distillate and residual fuel oil and

liquefied petroleum gas (LPG) can be replaced

between 1985 and 1990. In addition, the decline

in crude oil throughput accounts for an additional

200,000 B/D, or a 0.4-quad decline in fuel use.

The total of the two factors–conservation and

lowered refinery through-put–is about 450,000

B/D, of which about one-third draws from the

same pool of oil as was considered for fuel switching in the previous chapter.

In addition to oil savings, these conservation

measures will also reduce natural gas use. Natural gas freed in this way can be used to replace

oil requirements in industry and buildings not

eliminated by conservation. Table 21 shows the

projections of industrial energy conservation that

can be achieved with each fuel over the 5-year

period.

The final line in table 21 shows the conservation potential which is available in the event of

an oil disruption. These figures show that 1.3

quads of natural gas could be saved, along with

a total of 0.34 quad of petroleum-based boiler

fuels. Under this scenario, coal, residual oil, and

natural gas use was adjusted to eliminate fuel

switching that was incorporated in the original

ISTUM analysis. In addition, a correction was applied to the petroleum refining industry, to account for a decrease in conservation opportunities that would accompany a decrease in refinery

throughput in that industry.

Projections of energy use for the four most

energy-intensive industries were made for each

technology within each industry, and these were

totaled to project overall energy use by fuel

within each of these industries. These projections

were based on ISTUM modeling that analyzed

energy use by dividing energy use into various

energy service categories, a number of which are

generic to all industries, while others are specific

to a particular industry. Among the former are

such categories as fuel for boiler-generated steam

or fuel for heating, ventilation, and air-conditioning. Among the latter—specific to an industry—

are those fuels for pulping of wood in the paper

industry and crude oil distillation in petroleum

refining. The numbers determined this way were

then subjected to the same manipulation as described above for the energy of the total industrial sector—i.e., 1 O-year conservation measures

are expected to be accomplished in 5, and there

will be zero growth in each industry. In addition,

petroleum refining industry fuel use has been cut

by 200,000 B/D owing to decreased crude oil

throughput.

In figures 37 through 39, OTA presents projections of the changes that are anticipated to occur in petroleum-based energy use, natural gasbased energy use, and total energy use within

each of the four key energy-intensive industries.

In the case of petroleum fuel use (fig. 38), the paper industry is projected to decline from a 1985

level of 130,000 B/D to a 1990 level of 86,500

Table 21.—Fuel Use Projections (in quadrillion Btu)

Total residual

Natural Residual Distillate and distillate

gas oil oil oil LPG Coal

1985 use . . . . . . . . . . . . . . . 6.94 0.98 0.33 1.31 0.46 1.70

1990 use . . . . . . . . . . . . . . . 4.51 0.78 0018 0.96 0.29 2.83

1985-90 change. . . . . . . . . + 2.43 -0.20 + 0.15 + 0.34 +0.16 —

Adjustment for

fuel switching . . . . . . . . + 1.13 — — — — + 1.13

Final fuel use

conservation

Potential . . . . . . . . . . . . . + 1.30 + 0.20 + 0.15 + 0.34 + 0.16 0.00

SOURCE: Office of Technology Assessment.
Ch. V—Increased Efficiency ● 115

B/D, most of which will be used to raise steam. Summary

Much of that oil will be replaced by biomass fuels

derived from wood feedstock. The chemicals in- In summary, OTA has projected that U.S. industry is projected to reduce its petroleum fuel dustry is capable of a 250,000 B/D reduction in

use by about 50,000 B/D over the 5 years, ow- petroleum-based fuels in the 5-year period being primarily to technological changes in the tween a 1985 disruption and 1990, plus an addiindustry-specific categories. tional drop of 200,000 B/D due to reduced refinery throughput. In addition, increased efficiency In steel manufacturing, petroleum fuel use is of natural gas use could save 1.3 TCF/yr of natu- projected to decline from 91,000 B/Din 1985 to

less than 80,000 B/D in 1990, again reflecting ral gas (equivalent in energy to 650,000 B/D of

oil) in the same 5-year period. technological change—i.e., to the penetration of

EAFs.

Figure 37.—Total Fuel Use Projection (energy for four Industries)

50

40

30

20

10

0

Paper

industry

85 90

Chemicals Petroleum

industry industry

1

85 90 85 90

Industry by year

85 90

SOURCE: Off Ice of Technology Assessment.
116 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 3&—Petroleum Fuel Use projections (consumption by four major industries)

30

0

0

28 -

26 —

24 —

22 —

20 —

18 ‘

16 —

14 —

12 —

10 —

8 “

6

4 —

Paper Chemicals Petroleum Steel

industry industry industry industry

1

85 90 85 90 85 90 85 90

Industry by year

SOURCE: Office of Technology Assessment.

Figure 39.—NaturaI Gas Use Projections (consumption by four major industries)

Paper Chemicals Petroleum Steel

industry industry industry industry

SOURCE: Office of Technology Assessment.
Chapter VI

Fuel Use Changes and

Longer Term Effects
Contents

Fuel Use Changes . . . . . . . . . . . . . . . . . . . . . . . . .

Alternative Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...............121

Longer Term Effects

Table No.

22. Changes

Figure No.

40.

41.

● ✎✎✎✎✎✌ ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎

TABLE

Consumption Through Fuel

FIGURES

Replacement of Oil Through Fuel

Increased Efficiency

Potential Reductions

● ☛✎✎✎✎✎ ● ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎ ✎

in Oil Consumption

. .

. .

. . . . . . . . . . . . . . . . . . . . .,., 122

Switching and

Switching and

Page

conservation ..120

Page

. . . . . . . . . . . . . ● ✎✎✎✎✎☛ 119

. . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Chapter VI

Fuel Use Changes and Longer Term Effects

The individual contributions to reducing U.S. be reduced in a crisis. The corresponding changes

oil consumption through fuel switching and in- in the consumption of various fuels are also decreased efficiency of use have been considered scribed, possible alternative scenarios are conelsewhere in this report. In this chapter, the con- sidered, and the longer term implications of the

tributions are combined to provide estimates of shifts are discussed.

the overall rate at which oil consumption could

FUEL USE CHANGES

To estimate the total amount of oil that can

technically be displaced through fuel switching

and increased efficiency, it is necessary to eliminate any double-counting (i.e., the overlap when

the same oil can be displaced by both options),

such as when a residence is insulated and converted from oil to natural gas. In gasoline- and

diesel-fueled vehicles, there is only a small overlap because the potential for fuel switching (4 percent of fuel use) is small. In the industrial sector,

the overlap is only moderate because about twothirds of the oil that is replaced by increased efficiency and saved by reduced refinery throughput is not used in boilers which are the targets

for fuel switching. In the residential and commercial sectors, however, the overlap is much larger

because both contributions are significant, and

fuel switching can essentially eliminate oil use in

these sectors in many regions of the country.

Figure 40 shows the composite oil replacement,

with double-counting eliminated, ’ in each of the

sectors considered and based on the scenarios

derived elsewhere in the report. In electric utilities, fuel switching dominates the changes,2 while

in transporation increased automobile fuel efficiency dominates. In the industrial sector, increased efficiency can replace about one-fifth as

much oil as fuel switching. In the residential and

commercial sectors, about 15 percent of all the

1 Double-counting was eliminated in the following way. If x is the

fraction of a particular type of oil in a given sector that can be

replaced with fuel switching and y is the fraction that can be replaced through increased efficiency, then the composite fraction

is z = x + y(l —x) - y + x(l —y) = x + y—xy.

ZAlthough there are secondary effects resulting from reduction

of electricity use through greater efficiencies, these are accounted

for in OTA’S alternative projections for demand for electricity.

Figure 40.—Potential Replacement of Oil Through

Fuel Switching and Increased Efficiency

4

0

 1985 1986 1987 1988 1989 1990

Year

SOURCE: Office of Technology Assessment.

oil used in these sectors in 1985 can be replaced

by 1990 through increased efficiency alone, while

77 percent of the oil used in 1985 can be replaced

through fuel switching and increased efficiency

combined.

In all, over 90 percent of the oil used in utility

boilers and over 70 percent of that used in industrial boilers could be replaced by 1990. Other

industrial uses of oil could also be reduced significantly. Oil used for transportation could be

reduced by about 11 percent, mostly through reduced gasoline consumption. And in most regions of the country, residential and commercial

oil use could be nearly eliminated. However, in

New England and the New York/New Jersey region, only about 50 percent of the oil use could

be replaced, within a 5-year period. This would

leave the Northeast as the only region consum119
120 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

ing significant amounts of oil in the residential/

commercial sectors in 1990.

In addition to the direct oil savings, increased

efficiency by residential and commercial natural

gas customers could free up natural gas with the

energy equivalent of 0.25 million barrels per day

(MMB/D) and the industrial gas customers could

save an additional 0.65 MMB/D. If, in addition

to these savings, natural gas production or imports could be increased, then additional oil

could be replaced by natural gas. The most likely

uses for this additional gas would be in small industrial boilers and, perhaps, in some residential and commercial buildings in the Northeast,

provided that some additional pipelines were

built. OTA did not, however, include this possibility in estimating the oil replacement potential.

Table 22 compares the consumption of various

types of petroleum products, natural gas, and

solid fuels (mostly coal and wood) before and 5

years after the onset of the shortfall, assuming that

the oil replacement scenario in figure 41 is implemented. Natural gas consumption increases

by up to 11 percent, depending on the extent to

which efficiency of natural gas use increases,

while solid fuel use increases by 13 percent over

this period. With respect to oil products, the most

dramatic changes are the halving of residual oil

consumption (as a percent of total oil consumption), the relative increase in gasoline consumption from 36 to 39 percent, and the reduction in

distillate heating oil from 7 to 3 percent of total

consumption, Also, diesel fuel as a percent of

distillate fuel oil consumption increases from 62

to 81 percent.

Small refiners will have the most difficulty adapting to these changes, since they produce more

residual oil and less high-grade diesel and gasoline than the average. However, a comparison

of the 1990 product slate with recent domestic

production of petroleum products3 indicates that

the larger U.S. refineries could accommodate the

changes, provided that a large part of the reduction in residual oil consumption were accommodated through reduced imports of that fuel.

(Imports of residual fuel oil in 1982 were 0.8

MMB/D.) The most difficult aspect of the changes

may be the increase in diesel production, as a

percent of total distillate fuel; and it is unclear

to what extent this can be accomplished without a significant reduction in the quality of the

diesel fuel produced.

3“Monthly Energy Review, ” Energy Information Administration,

DOE/ElA-0035(83 /10), October 1983.

Table 22.—Changes in Fuel Consumption Through Fuel Switching

and Conservation

1985 consumption 1990 consumption

(M MB/Da) (percent) (M MB/Da) (percent)

Residual . . . . . . . . . . . . . . . . . . . 2.2 14 0.9 7

Distillate

Diesel . . . . . . . . . . . . . . . . . . . 1.8b

11 1 . 7

b

14

Other . . . . . . . . . . . . . . . . . . . . 1.1 7 0.4 3

Gasoline . . . . . . . . . . . . . . . . . . . 5.7 36 4.8 39

Kerosene. . . . . . . . . . . . . . . . . . . 0.1 0.8 0.03 0.2

LPG and ethane. . . . . . . . . . . . . 1.0 6 0.8 6

Subtotal. . . . . . . . . . . . . . . . . . 11.9 74 8.6 69

Other . . . . . . . . . . . . . . . . . . . . . . 4.1 26 3.8 31

Total. . . . . . . . . . . . . . . . . . . . . 16.0 100 12.4 100

1985 oil-consumption 1990 consumption

(MMB/D oil equivalent) (MMB/D oil equivalent) Percent change

Natural gasc

. . . . . . . . 9 9-1o 0-11

Solid fuelsd 

. . . . . . . . 9.3 10.5 13

al B = 5.5 ● 106 Btu.

bln 1985 diesel is 62 percent of the distillate oil while in 1990 it increases tO 81 Percent.

CThe range corresponds t. the possible range of ‘increases in efficiency of natural gas use. The IOwer numbers correspond

to the case where feasible increases in efficiency of natural gas use are implemented.

dcoal and wood.

SOURCE: Office of Technology Assessment.
Ch. VI—Fuel Use Changes and Longer Term Effects Ž 121

ALTERNATIVE SCENARIOS

A number of assumptions were made in order

to derive the scenario for the technical oil replacement potential, shown in figure 40. The

most important of these were that: 1 ) an increment of 2 trillion cubic feet per year (TCF/yr) of

natural gas would be available through increased

efficiency of natural gas use, increased domestic production, and/or increased imports; 2) oil

users would invest in replacement technologies

at the rate that they could be supplied; and 3)

economic recovery in the United States would

increase oil consumption to 16 MMB/D by 1985,

up from 15.1 MM B/D in 1983. In addition, it was

assumed that priority would be given to conversions from oil to solid fuels over conversions from

gas to solid fuels in large industrial and utility

boilers. In the following OTA considers variations

on these assumptions and indicates the resultant

changes in the amounts of oil replaced.

It is possible that capital shortages, unfamiliarity

with alternative fuel technologies, uncertainty

about future fuel prices and demand for industrial products, as well as a general reticence to

make large investments during an (at least temporary) economic downturn, would limit investments to well below that which is technically feasible, unless additional incentives were provided.

The failure to invest in increased efficiency of natural gas use could also lead to lower incremental

supplies of natural gas. In order to illustrate the

effect of a slower investment rate, OTA formulated another scenario (to be called scenario B,

as distinct from the technically feasible response,

scenario A). In this slower response scenario, it

is assumed that oil users will invest in oil replacement technologies at one-third the rate that is

technically feasible, that incremental natural gas

availability would be one-third of the 2 TCF/yr

assumed in figure 41, and that new car sales

would drop to 5 million units per year. Together,

these changes would reduce the amount of oil

replaced at the end of 5 years from 3.6 MMB/D

to 1.7 MMB/D, as shown in figure 41.

Figure 41 .—Potential Reductions in Oil Consumption

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

.5

0.0

After

6 months

0.6

A B

After

2 years

2.0

1.0

A B

After

5 years

3.6

A

1.7

B

Scenario

Industry Residential/ Transportation Electric

commercial utilities

SOURCE. Off Ice of Technology Assessment

37-833 0 - 84 - 9
122 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Another variation on the basic scenario could

occur if U.S. oil consumption does not reach 16

MMB/D by 1985. The most important changes

in oil consumption (as compared to that assumed

in deriving the above scenarios) would probably

be reduced consumption in utility boilers and in

industry. This would reduce the amount of oil that

could be replaced in utility boilers (0.6 MMB/D

in scenario A) and through increased efficiency

of industrial processes (O. 15 MM B/D in scenario

A). On the other hand, switching from oil to gas

in industrial boilers was limited by natural gas

availability; and even if the amount of oil consumed in industrial boilers were lowered by 25

percent through reduced use, the oil replacement

potential from industrial boilers would be nearly

the same as was derived in scenario A (0.7

M M B/D), In all, changes under this variation

might reduce the oil replacement potential to

about 3.1 MMB/D; but the reduced demand for

oil (in 1985) would also tend to reduce the severity of an international oil shortfall and would

thereby reduce the amount of oil that would have

to be replaced in the United States.

A final area to consider is the potential competition for the equipment and engineering manpower needed to convert large oil- and gasburning utility and industrial boilers to solid fuels.

In OTA’s scenarios, it has been assumed that the

oil-consuming boilers would have priority; but

the rise in gas prices accompanying the oil shortfall and the increased demand for gas would also

provide incentives to convert large gas-fired

boilers to solid fuels. OTA’s analysis indicates that

equipment and manpower would be sufficient

to convert industrial boilers consuming 0.2 MMB/D

and utility boilers consuming roughly 0.3 to 0.4

MMB/D4 of oil to solid fuels within 4 years of the

onset of an oil disruption (including a 2-year delay before the first conversions would be complete). At this point, the estimated market for conversions of large oil-fired boilers would be saturated.

Consequently, in the fifth year, large gas-burning

boilers consuming the energy equivalent of 0.2

to 0.3 MMB/D could also be converted. Beyond

this level, however, demand for the equipment

and manpower needed for gas-fired boiler conversions within the 5 years could reduce the number of oil-fired boiler conversions that could be

completed; but it seems likely that the total

amount of oil that could be replaced would still

be around 3.2 MMB/D or more.

4

This number is imprecise because both boiler conversions and

completion of new powerplants currently under construction will

contribute to the replacement of oil used in utility boilers; and there

is no precise way to allocate the fraction attributable solely to boiler

conversions. The estimate given is based on the relative capacity

of converted boilers to that of new powerplants. However, if less

capacity is converted, the amount of oil replaced will not drop in

proportion to the reduction in converted capacity, because the last

increments of nonoil capacity would be used primarily to satisfy

winter and summer peak demand, and their yearly capacity factors would be small. Of course, the same thing would apply to new

powerplants that may not be completed.

LONGER TERM EFFECTS

Five to ten years after the onset of the shortfall, a number of additional things would happen.

Some enhanced oil recovery projects begun after

the onset of the shortfall would begin to produce

oil (an increment of almost 1 MMB/D) and some

synthetic fuels plants might begin producing (perhaps 0.5 MMB/D after 10 years). These projects

might be delayed, however, because they would

have to compete for some of the same resources,

such as for engineering and construction firms

and boilers and particulate control systems, that

are needed for some of the fuel switching that

would occur during the initial 5-year period.

(Needless to say, this competition could also delay the fuel switching projects.) Nevertheless, it

is probable that new and potentially large sources

of liquid fuels would begin to appear.

Because of the decline in conventional U.S. oil

production, however, total domestic supplies of

liquid fuels could still be dropping. In particular,

OTA has projected that, under more or less normal circumstances and with 1.5 to 2.5 MMB/D

of enhanced oil recovery, U.S. oil production in

the year 2000 would drop to 4 to 7 MMB/D,

‘World Petroleum Availability (1980-2000)-A Technical Memorandum (Washington, DC: U.S. Congress, Office of Technology Assessment, OTA-TM-E-5, October 1980).
Ch. VI—Fuel Use Changes and Longer Term Effects ŽI 123 —

down from a little over 10 MMB/D in 1983. Although the drop could be reduced somewhat

through increased exploration and development

of conventional oil, more enhanced oil recovery,

and synthetic fuels production, it is far from certain that these measures would be adequate to

prevent a significant drop in the domestic supplies of liquid fuels. Furthermore, since U.S. oil

consumption in 1990 would be 12 to 13 MM B/D

(after the replacements in fig. 40), oil imports

could still be a significant fraction of U.S. oil supplies in 2000, unless additional measures are

taken in the 1990s to reduce oil consumption.

Aside from the environmental impacts, which

are described in chapter IV, the principal longer

term consequences of fuel switching will be inflationary pressures on natural gas and food and

an acceleration of the shift to non petroleum fuels.

If natural gas production falls sharply in the 1990s,

the increased dependence on gas brought about

by oil replacement will greatly increase natural

gas prices and/or imports. But, if production capacity remains at current levels or higher, or a

slower drop in production is coupled with feasible increases in the efficiency of natural gas use,

price pressures will be lower and a more orderly

transition to increased use of coal, electricity, and

renewable can occur.

As with oil, there is considerable uncertainty

about future supplies of natural gas. OTA estimates that conventional natural gas production

in the United States could range from 9 to 19

TCF/yr in the year 2000.6 The higher limit is

greater than the 1982 consumption of 17.8 TCF

and considerably above the 1983 consumption

of about 16 TCF. In addition, there may be significant supplies of unconventional natural gas,

although OTA has not completed its assessment

of the potential from these sources. Thus, there

is a possibility that natural gas production couId

be maintained at recent levels through the year

2000, but this is far from certain.

Supplying the grain feedstocks for .5 billion

gal/yr of ethanol production (capable of replacing about 0.1 MM B/D of oil) will lead to increases

in farmland and food prices, which will persist

as long as the feed stocks are supplied. Although

the level of the change cannot be calculated

precisely, most estimates indicate that U.S. food

costs would be about $20 billion/yr higher with

this level of ethanol production than they would

be otherwise. (This compares to total civilian expenditures for farm foods of about $300 billion/

yr. ) On the other hand, if ethanol production is

kept below about 2 billion gal/yr, the impact on

food prices probably will be relatively small because most of the increased grain production

could be accommodated by replacing soybean

with corn production. I n this case, the total area

of farmland under intensive cultivation would not

have to increase as sharply (per gallon of ethanol

produced) as would be necessary for the higher

level of ethanol production.7

Finally, over the long term, the forced reduction in oil consumption and the replacement of

oil with nonpetroleum fuels and increased efficiency will accelerate the transition that must occur in the 1990s (as domestic oil production falls)

if the United States is not to remain heavily dependent on imported oil.

fIU.5. Natura/ Gas Ava//abl//ty: Convent/ona/ Gas Suppl)’ Through

the Year 2000–A Techn/ca/ Memorandum (Washington, DC: U.S.

Congress, Office of Technology Assessment, OTA-TM-E-12,

September 1983).

TEnerW From Blo/ogica/ Processes (Washington, DC: U.S. Congress, Office of Technology Assessment, OTA-E-1 24, july 1980); and

Energy From Biological Processes, Volume //: Techn/ca/ and Env/ronmenta/ Ana/yses (Washington, DC: U.S. Congress, Office of

Technology Assessment, OTA-E-1 28, September 1980.
Chapter Vll

Economic Impacts
Contents

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

The INFORUM Macroeconomic Model of the U.S. Economy . . . . . . . . . . . . . . 128

The Macroeconomics Without Energy Detail . . . . . . . . . . . . . . . . . . . . . . . . . . 128

The lNFORUM Energy Skirt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

A Modeling Strategy Based on The OTA Technology Data Base . . . . . . . . . . . . 135

The Energy Sector Guidelines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Guidelines for the Rest of the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

Guidelines for Scenario Integration by Iteration on Fuel Prices . . . . . . . . . . . 141

Economic Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

A Normal Economic Projection: The Reference Case . . . . . . . . . . . . . . . . . . . 143

Two Macroeconomic Projections of Oil Import Shortfall Impacts . . . . . . . . . . 144

TABLES

Table No. Page

23. Petroleum Products and End Uses Common to Many Industries . . . . . . . . . 133

24. Illustrative Energy Skirt Table for 1982: Flows in 1977 Dollars,

Quantities and Btus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

25. Estimated investment Costs for Major Oil Replacement Technologies. . . . . 138

26. Estimated Investment Costs for Selected Oil Replacement

Technologies in Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

27. Petroleum Uses Largely Excluded From Technological and

Economic Analysis of Oil Replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

28. Petroleum Price Projections: Real Crude Price Per Barrel

and Product Price Indices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

29. Product Mix for Personal Consumption Expenditures After 5 Years . . . . . . 151

30. Product Mix for All Economic Activity (GNP) 5 Years After Curtailment. . . 152

FIGURES

Figure No. Page

42. Model of the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

43. 1980 Petroleum Consumption by Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

44. Comparison of Shortfall Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

45. Comparison of Shortfall Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

46. GNP: Two Shortfall Projections, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

47. Unemployment: Two Shortfall Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

48. Inflation: Two Shortfall Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

49. Investment in Producer Durables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

50. Personal Consumption Expenditures ........, . . . . . . . . . . . . . . . . . . . . . . . 150
Chapter VII

Economic Impacts

INTRODUCTION

A permanent curtailment of imported oil would

have widespread economic impacts throughout

the entire U.S. economy. These can be projected

by using a macroeconomic model to aggregate

and integrate information about technology and

investment behavior into a system that simuIates

the national economy.

Macroeconomic models exist with many different levels of detail. Some use the simplest extrapolations of history and, of course, this is what

most people do implicitly when they plan for the

future. Other models have thousands of equations and hundreds of key parameters, The choice

among the many existing models depends on the

blocks of input information available and the analytical objectives. Since this is primarily an assessment of technology, and since technology is

industry- and process-specific, OTA has chosen

to employ a relatively large computer model of

the macroeconomy that can trace fuel inputs to

many economic activities, industry by industry

and end-use by end-use.

The analysis is based on two types of future projections. Both cover the same period, 1985-90,

but one assumes an oil import reduction of 3 million barrels per day (MMB/D), and the other a

normal flow of oil imports. The normal scenario

serves first to test the model and second to establish a baseline or reference case for comparison

to shortfall scenarios. Shortfall scenarios are more

difficult to simulate because macroeconomic

models are based on historical trends and such

trends may be substantially altered by the postulated oil supply shortfall. However, some confidence may be placed in their continuation, despite a shortfall, based on the analysis in chapter

Ill, which showed that the shortfalls in 1973-74

and 1978-79 mainly affected energy consumption patterns by accelerating trends that were

already evident.

Before describing the model, OTA acknowledges that all macroeconomic projections are

uncertain because every projection (either implicitly or explicitly) involves complex trends in

demography, labor markets, technology, consumer preferences, international trade, and so on.

The widely publicized failure of prominent macroeconomic models to forecast events in the early

1980s confirmed once again that such prediction

is very difficult. Nevertheless, despite the difficulties, the exercise of a formal computer model

can be instructive if it illustrates plausible economic relationships that are closely related to the

user’s primary concerns.

One key concern is the 5-year timeframe, because it has significant implications for model

choice. The most familiar macroeconomic models—

Data Resources Inc., Chase Econometrics, Wharton Econometrics–provide more or less detailed,

quarter-by-quarter accounts of national and regional economic activities because most of their

users make private investments or policy decisions within a 2-year timeframe. In these models,

money supply and demand, interest rates, product inventories, and retail sales receive considerable attention because each of these variables

has major impacts on the rest of the economy

in the short run.

For the longer term problem, most cyclic phenomena wash out, and what matters most are

trends in variables such as investment, the rate

of growth in labor productivity, the long-term accumulation of government debt, consumption

patterns, savings rate, technological progress embodied in new capital, average rates of return on

capital, and all of these variables compared to

related trends abroad. The concern with oil dependence also leads to an emphasis on energyusing technologies, the relative prices and supplies of domestic oil and alternative fuels, and

market opportunities for substituting capital and

labor for energy which will become profitable as

the price of oil rises.

The details of OTA’s midterm perspective (5 to

10 years) are presented below, The main point

here is that OTA’s analysis does not consider in

127
128 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

detail important economic impacts and adjust- be roughly estimated, it suggests that short-term

ments immediately following an oil supply short- prices significantly above that level should be

fall. By omitting them, primary attention can be moderated by a drawdown of the Strategic Pefocused on the expected changes in the technol- troleum Reserve. Furthermore, however the

ogy embodied in the economy’s base of capital economy makes it through the short-run turmoil,

stock, how rapidly these changes can occur, and the longer term trends are presumably what

how much they may cost. Such information should matter most when making strategic judg-

(about the long term) can however, play an in- ments about foreign policy (including military destrumental role in organizing emergency behavior ployment), both of which in 1984 are predicated

during the economic crisis immediately follow- to a great extent on the goal of protecting politiing such a disrupting event. For example, if the cal and economic stability in the oil-producing

longer term market clearing prices from oil can Middle East.

THE INFORUM MACROECONOMIC MODEL OF THE U.S. ECONOMY

Among the current, mid- to long-term models

available, the IN FORUM model, resident at the

University of Maryland in College Park, was chosen primarily because of its low-cost flexibility in

simulating technological change. Like all such

models, its structure and initial parameter specification are based on historical experience and

economic theory. At the minimum, the introduction of a formal computer model, with its conventions for the consistent definition of variables

and aggregates, provides a large accounting

framework or map that can be manipulated at

relatively low cost in order to trace economic impacts from an oil supply curtailment. This section

outlines how this accounting is accomplished.

The Macroeconomics Without

Energy Detail

The IN FORUM model like all macroeconomic

models, makes a fundamental distinction between producers and consumers (see fig. 42,

Frame A). Consumers consume goods and services that industries produce, and supply in return

the labor and capital resources necessary for production. This circuit of physical flows is complemented by a parallel system of money flows.

As shown in figure 42A, money flows in the opposite direction from goods and services since

the latter are exchanged for business revenues,

and labor and capital are exchanged for wages,

salaries, profits, interests, capital gains, and other

forms of return on financial assets.

Notice that at this most elementary level the

domestic economy is viewed as an integral or

closed system. The interaction of producers and

consumers (via both physical and monetary

flows) constitutes the basic structure and the basic

dynamics of the economy. The first part of this

section describes the basic structure and dynamics in greater detail and then adds to it foreign

exchange and governmental activities. The second part describes how energy flows enter into

this larger economic framework.

Industrial Input/Output

The core of the IN FORUM model is an input/

output matrix that represents the activities of 78

distinct industries plus final demands. Final demands are purchases by consumers for personal

consumption, by investors for the installation of

plant and equipment, by the Government for implementation of governmental programs such as

national defense, and by exporters for sales

abroad. Numbers in each cell of the matrix (the

input/output coefficients) allow the computer to

track flows of all resources, goods, and services.

OTA adjusted these material flows to incorporate

technological replacement of oil into future economic projections.

Total Consumption and

Consumer Demand Patterns

The model contains econometric demand functions for each of the 78 product categories. These
Ch. VII—Economic Impacts • 129

I

Frame A

a

lncludes both consumption and Investment,

SOURCE: Office of Technology Assessment.

Figure 42.—Model of the U.S. Economy

Frame B

determine the quantity consumed in terms of the will increase demand for the other, and vice versa

product price, personal disposable income, total for complements. These consumption demands

number of consuming households, and in some and the associated consumer goods markets are

cases the prices of products that are either good illustrated as the exchange relationship on the

substitutes or complements. If two goods substi- right hand side of figure 42A. Along with investtute for each other, then a price increase for one ment functions (see below), these demand func37-833 0 - 84 - 10
130 • U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

tions collectively drive the model by determining the volume and composition of goods and

services over time.

Product prices and personal disposable incomes are determined as a result of the modeling exercise. The number of households is given

to the model by assumption. Through 1995, the

U.S. population is projected to grow 0.8 percent

per year, with faster growth in the next few years

and slower later on. This is important in projecting and evaluating economic growth because

population growth tends to expand the economy

and because total personal income must grow

by at least this rate in order to maintain the level

of income per capita.

Rest of the World

Trade with the rest of the world increases the

effective size of the resource base and thus increases potential gross national product (GNP)

and real income. The larger the volume of trade

activity, the greater the base of world resources

made available to U.S. producers and consumers.

In terms of figure 426, other things being equal,

an increase in the size of the circle labeled “Foreign Trade” “Increases industrial production or

household consumption or both.

The U.S. balance of trade (including both services and merchandise) and the technological

composition of exports and imports are becoming increasingly important factors in long-term

prospects for U.S. economic growth because the

volume of trade has increased as a share of total

economy activity and because imports are increasingly competitive in high-growth, hightechnology industries. While there is considerable uncertainty about how these trade patterns

will evolve, OTA derives trade patterns using

behavioral functions included in the IN FORUM

model. As discussed below, these functions call

for a more or less even balance between imports

and exports and for roughly the same composition of exports and imports into the foreseeable

future, with and without an oil supply shortfall.

To evaluate the potential importance of this

assumption, it is noteworthy that exports and imports each amounted to about 11 percent of GNP

in 1982 and that oil imports amounted to just

under 18 percent of the total imports. ’

Inflation and Government Fiscal and

Monetary Policies

The activities of government constitute a second major adjunct to the basic national economy

(fig. 42). Governments (e.g., local, State, and Federal) tax firms and households in order to provide public goods and services (e.g., national defense, public assistance, and schools), and this

affects both the distribution of resources among

productive activities, the size of total economic

activity, and the distribution of income among

households. The net impact on the economy of

taxes and Government expenditures is commonly

summarized under the heading of fiscal policy.

For this study Federal fiscal policy is assumed

to be unchanged from 1982 for all future projections. While this may be unrealistic, as discussed

below in the context of shortfall scenarios, the

purpose in leaving it unchanged is to avoid introducing perturbations other than the oil supply

curtailment and the technological and oil price

responses to it. Please note that although fiscal

policies (tax structure, spending, and transfer programs) remain unchanged, the Government deficit will vary, depending on the performance of

the economy.

The Federal Government also performs a second, unique function when it prints money and

regulates the banking and securities industries.

The principal regulatory agency involved is the

Federal Reserve Board, and its principal policy

instrument is to regulate the money supply. As

illustrated in figure 426 (the shaded area in between producers and consumers), the money

supply is the central medium of business exchange. As money supply expands relative to the

volume of goods and services exchanged, it tends

to increase prices; and such price increases can

‘Survey O( Current Business, National Income and Product Accounts, October 1983, tables 1.1, 4.1, and 4.3. While 11 percent

of the GNP may seem like a small share in a firm’s or household’s

operating budget, it looms large in the context of national income

accounts, From the latter viewpoint, a 1 -percent decline in GNP

is a major political event, one that would result from only a 10-

percent decline in exports.
.

Ch. VII—Economic Impacts ● 131

lower real interest rates and stimulate economic

activity if investors are optimistic and if there are

unemployed resources. A relative expansion in

the money supply can also cause general price

inflation and raise interest rates if investors are

pessimistic or if other resources are not available

to increase production.

While the net effects of monetary policy can

be large, the current academic and political

debate leaves much uncertainty about both monetary policy and price inflation in the future. Because key issues are unresolved, the model makes

the elementary assumption, except for transient

instability, that inflation equals the difference

between the growth in money supply and the

growth in real GNP or the value of output measured in constant prices. In all scenarios, the

supply of money (M2) is assumed to grow at a

constant rate of 8 percent per year. Other rates

might have been used, depending on Federal Reserve policy, but that would only affect this

model’s projected inflation, not the size or structure of economic activity. Because it serves (in

effect) as the bottom-line measure for economic

performance, growth in real GNP will be discussed by itself later in this section.

Gross Investment and Interindustry

Investment Patterns

Firms, households, and governments decide

more or less independently how much purchasing power is set aside and used to increase future

production capacity (i.e., capital stocks), and then

how to divide these capital funds between alternative long-lived material assets and human resources. These decisions or investments determine the future productivity of the economy. The

investment choice, as reflected in aggregate national income accounts, is among residential

structures, nonresidential structures, and

producer-durable equipment.2 The model also

breaks down investment behavior by the 78 pro-

—-———

Zlnvestment in people, via general education and vocational training

, is at least as important for future economic productivity as investment in material assets, but national accounts (in general and

in the model) fail to treat such investment systematically because

education has many noneconomic as well as economic objectives,

and otherwise because it is much more difficult and controversial

to measure human beings in terms of dollars.

ducing sectors, a level of detail that allows

accounting for the capital cost of oil replacement.

Employment and Unemployment

In both the short and long run, the number of

employed people tends to move in step with the

real GNP. The relationship of real GNP to unemployment, however, is more complex. In the

short term, during business cycles, unemployment moves in the opposite direction to the rate

of growth in GNP. In the long term, however,

the GNP/unemployment picture depends on the

relative growth trends of the labor force and the

GNP. As demonstrated during the past 15 years,

even though the GNP grows along a positive

long-term trend, growth in the labor force (including greater participation by women) can be

greater, and thus the unemployment rate can increase. 3

In the long term it is also important to distinguish growth rates among different types of economic activity. Depending on long-term trends

in international competition, in technology change,

and in the product mix for domestic consumption, jobs may be created at a faster or slower

rate per dollar invested, and jobs may be of relatively high or relatively low productivity. In general, however, the greater amount of total investment in productive assets, the more rapidly the

Nation’s base of plant and equipment expands

and thus the more jobs are created.

Real GNP

Real GNP is the commonly accepted principal

measure of national economic well-being. From

the point of view of demand for goods and services, it is the main single factor driving oil consumption. From the point of view of the supply

of goods and services, GNP rises or falls depending on the availability and price of oil. However

bewildering this might seem, the GNP (or the

level and composition of economic activity) is

both the cause and the effect of oil consumption.

In National Income and product Accounts kept

by the U.S. Department of Commerce, estimated

3See survey of Current Business, October 1983, p. 8, table 10,

for GNP/unemployment trends and cycles over the past 30 years.
132 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

GNP amounts to the simultaneous summation

and equilibration of all forces that create demand

and supply for goods and services.

However, as a measure of economic welfare

during an oil disruption, GNP omits important

economic services or activities as well as important elements in the perception of well-being. For

example, it does not measure services of longIived consumer durables such as private automobiles, which would be significantly curtailed

during an oil shortfall by the high cost or actual

shortage of gasoline. To this extent, estimated

GNP decline following onset of a shortfall would

underestimate the true loss in economic welfare.

On the other hand, GNP also does not include

the value of domestic services by family members, production from gardens, direct barter, and

various special sharing arrangements, all of which

tend to expand in times of social stress. These

activities help to explain how most people get

along quite nicely during emergencies despite

apparent hardships, by learning how to get more

utility from the limited material and human resources that do remain available. To the extent

that GNP does not measure the enhanced human

adaptability that such activities represent, its

apparent decline following an emergency such

as an oil import curtailment can overestimate the

actually perceived loss.

The INFORUM Energy Skirt

For this study, OTA disaggregated total energy

consumption (or, depending on one’s perspective, aggregated energy consumption by end-use

technology) into the five major end-use sectors:

residential, commercial, industrial, transportation,

and electric utilities (chs. Ill through V). These

distinctions are maintained in the formal model,

within a larger economic framework.

Sometimes this economic framework calls for

merely changing names, such as when residential consumption of heating oil is called “personal

consumption expenditure” for heating oil. Other

times, it involves a more important reorganization from technological to market relationships,

such as the redistribution of technologically similar transportation activity into SIC (Standard industrial Classification) sectors and other end-user

categories. For example, the chart in figure 43

gives this additional information about how oil

is used.

This type of reorganization of energy flows is

an essential first step in understanding how sharply

rising oil prices can increase the cost of products

with oil inputs and decrease real personal income. In general, translations of engineering into

market concepts is necessary to pursue the economic logic behind what the economy does with

oil-replacing technology and with technology in

general in the event of a disruption.

For example, consider again the two products

made from petrochemicals, plastic contact lenses

and milk bottles, which were initially described

in chapter ill. Both types of manufacturing start

with a commodity chemical (resin pellets) whose

chemistry is adjusted after melting so that it can

be resolidified and molded into the desired chemical structure and physical shape. The plant that

makes milk bottles, however, will be handling a

much larger volume of plastic material, which

means in general that it will be using more petroleum feedstock and process heat (gas or oil)

per dollar of product sales. The plant making contact lenses pays a much higher percentage of its

costs for the precisely engineered machinery and

skilled labor necessary to meet more complex

and precise standards for product quality. Consequently, the bottle plant manager is likely to

be more aware of energy costs and more likely

to switch fuels or to add energy-conserving retrofits as energy costs rise.

It is an important part of this modeling exercise that industry be sufficiently disaggregated to

allow detailed simulation of fuel switching and

conservation, as projected in the previous chapters.

The model also simulates another important path

for oil replacement, product mix shift. The comparison between contact lenses and milk bottles

again illustrates the point.

if products made from chemicals are more like

contact lenses, then oil savings in the chemicals

industry will be difficult to achieve by raising oil

prices because the net affect on the price paid

by the final consumer is relatively small and, in

any case, final consumers have no practical alter-
Ch. VII—Economic Impacts . 133

Figure 43.—1980 Petroleum Consumption by Sector

Industrial (all functions

including transportation)

\

5.90

Commercial (heating

and transportation)

Households

Government

40— Utilities

(gas, electricity,

water, and sanitation)

Commercial transportation

(land, water, and air)

Total 1980 use

17.0 MM BID

oil equivalent

SOURCE: Energy Information Administration, 1982 Annual Review of Energy, Washington, DC, April 1963, table 3, p. 69

native. Just the opposite is true if products made

from chemicals are more like plastic milk bottles.

In that case, oil price increases significantly drive

up the cost of final consumer goods, and furthermore, consumers have good alternatives. While

these two goods are not commonly used as standards for comparison in the chemicals industry,

they nonetheless illustrate the importance of

product mix. The model incorporates a complete

spectrum of product substitutions and calculates

a full set of market-based opportunities for oil savings via product mix shift.

Because of this study’s primary focus on energy-related economic transactions, OTA has

appended an “energy skirt” to the IN FORUM

model. This additional block of data is called a

skirt because it figuratively hangs below the basic

input/output table, providing greater energy detail

for each of the 78 industries and for personal consumption, investment, and government expenditures. Normally, this model identifies only two

petroleum products, fuel oils and all other refined

products, and provides no information about

how these or other fuel products are used. The

skirt identifies six petroleum product categories

and a variety of energy end uses that are common to many industries (see table 23). Both kinds

Table 23.—Petroleum Products and End Uses

Common to Many Industries

Energy end use

functions Petroleum products

1. Transport 1. Light hydrocarbons

2. Space conditioning 2. Gasoline

and lighting 3. Distillate fuel oil (#2)

3. Boilers 4. Kerosene

4. Process heat 5. Residual fuel oil (#6)

5. Other engines 6. Other products

6. Materials inputs

7. Other

SOURCE: Office of Technology Assessment

of additional information clarify opportunities and

constraints for improvement in fuel efficiency and

fuel switching (see table 24 for an illustrative skirt

tableau).

Energy skirt data have been obtained from

many different sources, but the initial specification for base year 1980 was taken from the Energy

Disaggregated Input/Output Data Base provided

by the Departments of Commerce and Energy.4

Because the latter was compiled and documented

4“Detailed Input-Output Energy Make and Use Data: 1977 and

1980; for the Bureau of Labor Statistics I-O Model and the Department of Energy EDlO Model,” contract No. BLS 82-506, January

1983, prepared by Jack Faucett Associates.
134 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Table 24.—illustrative Energy Skirt Table for 1982: Flows in 1977 Dollars, Quantities and Btu

14 Printing

2 3 4 5 6 7 8 9 10 11 12

Coal Crude P Nat gas L. hydr Gasoline Distil Kerosene Resid Oth Petr Elect Gas util

(th tons) (th bbl) (b cu ft) (th bbl) (th bbl) (th bbl) (th bbl) (th bbl) (th bbl) (roil kwt) (b cu ft) Total

Transport

0.0 0.0 0.0 68.4 12.9 0.0 0.0 0.9 0.0 0.0 82.2

Q 0.0 0.0 0.0 1.9 4,359.4 910.5 0.0 0.0 51.2 0.0 0.0 5,323.0

Btu 0.0 0.0 0.0 0.0 22.9 5.3 0.0 0.0 0.3 0.0 0.0 28.5

Boilers

$ 0.7 0.0 0.0 0.0 0.0 10.0 0.0 7.2 0.0 0.0 16.1 34.0

Q 26.8 0.0 0.0 0.0 0.0 680.6 0.0 543.9 0.0 0.0 8.5 1,224.5

Btu 0.7 0.0 0.0 0.0 0.0 4.0 0.0 3.4 0.0 0.0 8.7 16.8

Process

heat

$ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 48.2 48.2

Q 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25.6

Btu 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 26.2 26.2

Other

$ 0.0 0.0 0.0 2.5 0.0 0.0 0.0 0.0 0.0 265.9 0.0 268.4

Q 0.0 0.0 0.0 228.0 0.0 0.0 0.0 0,0 0.0 9,111.3 0.0 228.0

Btu 0.0 0.0 0.0 0.9 0.0 0.0 0.0 0.0 0.0 31.1 0.0 32.0 — .

Total

$ 0.7 0.0 0.0 2.5 68.4 22.9 0.0 7.2 0.9 265.9 64.3 432.7

Q 26.8 0.0 0.0 230.0 4,359.4 1,591.1 0.0 543.9 51.2 9,111.3 34.1 6,775.6

Btu 0.7 0.0 0.0 0.9 22.9 9.3 0.0 3.4 0.3 31.1 34.9 103.4

15 Agriculture fertilizers

2 3 4 5 7 8 9 10 12

Coal Crude P Nat gas L. hydr Gasoline Distil Kerosene Resid Oth Petr Elect Gas util

(th tons) (th bbl) (b cu ft) (th bbl) (th bbl) (th bbl) (th bbl) (th bbl) (th bbl) (roil kwt) (b cu ft) Total

Transport

0.0 0.0 0.0 0.0 2.6 0.6 0.0 0.1 0.0 0.0 9.1

Q 0.0 0.0 0.0 0.4 372.4 185.1 40.7 0.0 0.0 0.0 603.7

Btu 0.0 0.0 0.0 0.0 2.0 1.1 0.2 0.0 0.0 0.0 0.0 3.3

Boilers

$ 4.9 0.0 0.0 0.0 0.0 6.7 0.0 19.9 0.0 0.0 236.3 267.7

Q 260.0 0.0 0.0 0.0 0.0 493.1 0.0 1,760.7 0.0 0.0 185.9 2,253.9

Btu 6.5 0.0 0.0 0.0 0.0 2.9 0.0 11.1 0.0 0.0 190.2 210.6

Process

heat

$ 0.0 0.0 0.0 0.0 1.2 0.0 0.0 0.0 0.0 101.3 102.4

Q 0.0 0.0 0.0 0.0 87.0 0.0 0.0 0.0 0.0 79.7 87.0

Btu 0.0 0.0 0.0 0.0 0.0 0.5 0.0 0.0 0.0 0.0 81.5 82.0

Materials

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 384.0 398.8

Q 0.0 0.0 0.0 530.9 0.0 0.0 0.0 0.0 0.0 0.0 292.0 530.9

Btu 0.0 0.0 0.0 2.1 0.0 0.0 0.0 0.0 0.0 0.0 298.8 300.9

Other

$ 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 203.0 0.0 203.0

Q 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9,483.3 0.0

Btu 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 32.4 0.0 32.4

Total

0.0 0.0 10.5 0.6 19.9 0.1 203.0 721.5 972.1

Q 260.5 0.0 0.0 531.3 372.4 765.3 40.7 1,760.7 5.0 9,483.3 557.6 3,475.5

Btu 6.5 0.0 0.0 2.1 2.0 4.5 0.2 11.1 0.0 32.4 570.4 629.1

SOURCE: Office of Technology Assessment (dollars are in millions, Btu in trillions).

for use in input/output analyses, it is uniquely

suited for OTA’s purposes as the most comprehensive and detailed accounting available of all

energy flows within the U.S. economy.

The energy skirt helps calibrate and analyze

macroeconomic simulations because its greater

detail sharpens associations between economic

activities and energy-using technology. For example, one of the most important distinctions between petroleum products is between distillate

used for engines and distillate used for heat and

steam. This functional distinction, which cannot

be made with the IN FORUM model without the

skirt, is crucial in projecting opportunities for natural gas substitution. Natural gas is relatively easy

to substitute for a large fraction of oil presently

used for stationary heat/steam applications, but

the opportunities for replacing distillate presently

used in mobile engines are considerably more

limited.

The skirt is especially well suited for tracking

“intermediate” oil consumption (i.e., oil used in
C/7. V//—Economic Irnpacts ● 135

the production of other goods and services). In

physical units, it traces oil flows through various

stages of industrial activity so that it is possible

to calculate the oil intensity of each of the 78 final

product categories. In dollars, it tracks backward

from the value of final products to derive the

value of petroleum products used in their production. The two calculations, one in physical

units and the other in dollars, are done in parallel as the model continues to shift the mix and

the prices of final products (and thus intermediate

oil consumption) until production costs for each

of the 78 product sectors are balanced by the

value of the product to consumers.

Before discussing the modeling exercise, however, it is important to mention that this model

does not disaggregate energy and other commodity flows by region, nor does it address many

important issues related to the development of

local energy resources that are too small to be

visible in national accounts (see box).

A MODELING STRATEGY BASED ON THE

OTA TECHNOLOGY DATA BASE

The size and complexity of the INFORUM

model suggests that OTA follow certain guidelines

in order to integrate OTA’s analysis of technology deployment while not losing an accurate,

general perspective on the rest of the economy.

Three sets of guidelines were followed. First,

energy technology deployment rates were explicitly inserted into the energy skirt and the input/output matrix in terms of specific coefficients.

These coefficients serve as basic controls on how

much the economy can produce, given limited

oil supplies. Second, the rest of the input/output

matrix as well as final demand functions and policy parameters of the INFORUM model were

based on: 1) existing econometric work done by

the IN FORUM staff, 2) certain consistency checks

on investment behavior and on overall model

performance, and 3) comparisons to results from

other macroeconomic models. Third, the energy

and nonenergy parts of the model were integrated by a process of iteration where fuel prices

and technology deployment rates were readjusted to be consistent and to achieve the required savings of 3 MMB/D in oil consumption.

All three guidelines are elaborated in this section.

The Energy Sector Guidelines

Of all activities and technologies related to oil

consumption, OTA focused primarily on two fuel

product/end-use combinations or technology

blocks: gasoline for automobile transportation

and fuel oil (both #2 and #6) for heat and steam.

These two technology blocks receive the most

attention, as they have in the technology analysis above, because they offer the greatest economic opportunities to replace oil demand.

As discussed above, auto gasoline accounted

for about 37 percent of total petroleum consumption in 1982, and so even a small percentage improvement in auto fuel efficiency or decline in

vehicle miles traveled can cause a relatively large

reduction in total oil consumption. The analysis

in chapter V showed that recent dramatic improvements in new car fuel economy will steadily

increase the fuel economy of the entire auto fleet

(without further investment by automakers) as old

cars are replaced over time by new cars. The

technological improvements that increase fuel

efficiency and fleet turnover were combined and

programmed into the model, like all other technology and technology change, as fixed coefficients (for any given year) that change gradually

over time.

In addition to changing technology, current

economic studies indicate a strong relationship

between personaI consumption of gasoline and

personal disposable income, and a weaker but

still significant relationship between the same

consumption variables and gasoline prices. s As —- — — SThere ;s exten~;ve econorn;cs literature dealing with the personal

consumption of gasoline. For two recent surveys see Carol A. Dahl,

Survey of the Demand for Gasoline, unpublished draft, Department

of Economics, University of Wisconsin-Milwaukee, April 1983; and

David L. Green, The Aggregate Demand for Casolfne and Highway

Passenger Veh;c/es /n the Urr/ted States: A Rev/ew of the Literature

1938-1978, Oak Ridge National Laboratory, ORNL-5728, July 1981.
Ch. VII—Economic Impacts Ž 137

income rises (falls) vehicle miles traveled rise (fall).

As petroleum prices rise (fall), vehicle miles traveled fall (rise). Both behavioral relationships are

incorporated into the model as functions. For

future projections, the income elasticity of personal vehicle miles traveled is set equal to + 0.5,

and the price elasticity is set equal to – 0.2.6 In

other words, if personal disposable income goes

up (down) by 10 percent, personal vehicular

travel will rise (fall) by 5 percent. Similarly, if the

price of oil rises (falls) by 10 percent, travel will

fall (rise) by 2 percent.

This second mode for oil savings in auto transportation is more appropriately called oil conservation, not oil replacement, because it involves

cutting back an energy service instead of maintaining service by alternative means. As a rational

economic response to higher oil prices, it is an

alternative to technological replacement; and to

the extent that oil is not replaced with greater fuel

efficiency in autos or efficiency gains and fuel

switching anywhere else in the economy, it must

be saved by cutbacks in driving and reductions

in economic activity of all kinds.

Another behavioral relationship is also important, especially right after an oil shock. Experience with much smaller shortfalls during the past

10 years indicates that driving habits contain a

discretionary component that can beat least temporarily eliminated during an emergency.7 Although it can provide considerable savings in the

short run, this opportunity for oil displacement

is not included in the model since the model’s

focus is more long term.

Consumption for stationary heat and steam

services accounted for only about half as much

oil (about 18 percent), but it deserves attention

because it maybe cost effective to replace almost

all of it with a combination of natural gas, electricity, and coal.8 Natural gas is an especially important fuel substitute because, if an existing disb

These elasticities fall in the midrange of recent econometric

estimates.

7For estimates of discretionary oil savings related to personal auto

use see National Petroleum Council, Emergency Preparedness for

Interruption of Petroleum Impacts Into the United States, April 1981,

ch. 2.

8

This end-use category includes virtually all oil consumption by

residential and commercial users, all oil consumption by utilities,

and about 18 percent of industrial demands.

tribution pipeline is nearby, gas can provide heat

and steam service with relatively small capital investment. Furthermore, the energy service to the

full spectrum of heat and steam end users is at

least as valuable as that provided by oil. Electricity is cost effective primarily when heat pumps

can be used efficiently by small residential and

commercial customers; and coal is an attractive

oil substitute mainly in relatively large boilers.

Again, in terms of the model, fuel switching for

heat and steam is accomplished in a manner exactly parallel to that of auto fuel efficiency. For

the 78-sector, input/output matrix, fuel oil coefficients for heat and steam services are reduced

over time to reflect a priori rates of deployment

for fuel switching technologies. Corresponding

increases in coefficients for gas, electricity, and

coal inputs must also be made so that total fuel

inputs are sufficient to supply demands for heat

and steam services.

Unlike auto fuel efficiency, where oil replacement investment pays off into the future as the

fleet follows its normal rate of turnover, most oil

replacement in stationary heat and steam does

require capital investment for that specific purpose after onset of the shortfall, as estimated in

table 25. The broad range of plausible costs per

barrel introduces major uncertainty about cost

effectiveness, and thus major uncertainty about

projections of the rate of replacement. Although

there is also uncertainty about the rate and cost

of oil replacement in transportation (minor, relatively high-cost investment options for replacing

oil use in transportation are shown in table 26),

over 80 percent of the difference in the postulated

high- and low-response scenarios (see ch. Vl) is

due to uncertainties for oil replacement in heat

and steam.

In the model, investment projections are based

on investment functions that have been estimated

from historical data. To some extent, these functions call for investment to rise with oil prices,

in effect to support oil replacement as they have

done in the past, but the primary determinant of

investment is the level of production. If total projected investments for the seven key industries

9

These industries are food and tobacco, paper, agricultural fertilizers, chemicals, petroleum refining, ferrous metals, and nonferrous metals.
138 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Table 25.—Estimated Investment Costs for Major Oil Replacement Technologies

Investment cost

(thousand 1983 dollars

per barrel per day

Option of oil replaced)

●

●

●

●

Fuel switching in industrial and utility boilers:

Conversion to solid fuel

(including coal-water mixtures). . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Construction of new solid fuel boiler

with coal-handling facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Construction of coal-water mixture

production plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Completion of new powerplants

currently under construction. . . . . . . . . . . . . . . . . . . . . ... , . . . . .

Conversion to natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fuel switching in residential and commercial

space heating and hot water:

Natural gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Electric heat pumps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Electric resistance heating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Solid fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Residential and commercial energy conservation:

Building insulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Industrial oil replacement:

Amalgam of efficiency improvements

and product mix shifts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10-20

25-50

2-3

5 0

a

o-5

15-25

35-60b

1O-2OC

5-35

d

40-60e

10-70f

aA~~ume~ $50(1 per kilowatthour to complete and plant operation at 70 Percent of caPacitY.

bBa~edon anin~tallation ~o~tranging from $2,000to $3,500 forasystem used only forspace heatin t0$2,500tO$4,00f)

for a system for space heat and hot water and on the national average oil use of 676 gal and 1,055 gaY per year for homes

in which oil rovides heat only, and both heat and hot water, respective cAggumeg $5 t

0 per household for electric resistance space heaters and 11,000 for a hot water heater,

dA55ume5 $250 t. $750 for wood Stove (including installation) for space heating only or $2,500 for new wood-fired central

boiler for heat and hot water. eThi5 egtlmate represents an average over a number of building types and ages Actual site-specific costs Wili vary frOm leSS

than $1,000 per BID up to over $200,000 per BID. f Industrial replacement involves a broad range for investment ;osts. At the low-cost end, investment is incidental (e.9., ‘or

product mix shifts); and at the high-cost end, investments are large because firms are willing to pay an insurance premium

in order to increase the security or price stability of its fuel supplies.

SOURCE: Office of Technology Assessment and Gibbs & Hill, Inc., “Oil Replacement Analysis Phase l—Selection of

Technologies:’ contractor report to Office of Technology Assessment, April 1983,

Table 26.—Estimated Investment Costs for Selected

Oil Replacement Technologies in Transportation

Investment cost

(thousand 1983 dollars

per barrel per day

Option of oil replaced)

CNGa 

. . . . . . . . . . . . . . . . . . . . . . 40-130 b - –

LPGC . . . . . . . . . . . . . . . . . . . . . . 15-55d

Gasifier. . . . . . . . . . . . . . . . . . . . 35-l05

e

Ethanol production. . . . . . . . . . 70-95f

%ompressed natural gas.

bAssumes $2,3oo to $3,600 per vehicle, including pumpin facilities, and that

vehicle gets 22 mpg of gasoline and is driven 10,000 to 2 ,000 miles per year. 8

cLi uefied petroieum as.

%%00 to $1,500 per ve~icle; vehicle gets 22 mpg of gasoline and is driven 10,000

to 20,000 miles per yr.

e$l,ooo to $1,500 per vehicle; vehicle gets 22 mpg of gasoline and is driven 10,000

to 20,000 miles per r.; gasifier replaces half of the vehicle’s fuel consumption.

f $75to$loomillion roraw million al peryrdistillery, for every 2 Btu of ethanol

displacement, a net of 1 Btu of o I ! repiaced.

SOURCE: Office of Technology Assessment and Gibbs & Hillj inc., “Oii

Replacement Analysis Phase l—Selection of Technologies,”

contractor reporl to Office of Technology Assessment, Aprii 1983.

(which use 90 percent of the oil used for industrial heat and steam) plus electric utilities are insufficient to cover growth requirements plus fuel

switching, the investment function can be disconnected and the total investment level specified

directly. Assumptions and projections of investment patterns will be discussed further in the context of particular shortfall scenarios.

Besides gasoline for automobiles and fuel oil

for heat and steam, there are many other refined

products and end uses that total about 40 percent of total oil consumption (see table 27). However, they are not nearly so attractive as targets

for oil replacement because they serve indispensable functions, primarily in the industrial sector.

For example, as discussed in chapter V, diesel
Ch. VII—Economic Impacts Ž 139

Table 27.—PetroIeum Uses Largely Excluded From Technological

and Economic Analysis of Oil Replacement

1982 consumption

(million barrels

per day)

Distillate for transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.38

Distillate for other industrial engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.35

Residual for water transportation . . . . . . . . . . . . . . . . . . . . ., . . . . . . . . . . . . 0.55

Material feedstocks

Distillate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.13

Residual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0,22

Light hydrocarbons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.00

Jet fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.03

Other (e.g. asphalt, lubricants,

still gas, petroleum coke) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.80

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.46

SOURCE: Energy Information Administration, 1982 Annnual ReviewofEnergy, Washington, DC, April 1963, table 31, p.69; and

Office of Technology Assessment, based on data developed by Jack Faucett Associates. See note above

engines for commercial transportation and for industrial drive are largely irreplaceable and are

already fuel efficient, given load requirements.

Efficiency has been achieved there and not for

personal automobiles because in business applacations fuel cost has been a much larger fraction of total costs and has been otherwise of

greater concern because value is mainly a matter of horsepower and cost, not all the other performance and appearance features that sell cars

for personal property. For similar reasons, jet fuel

and residual fuel for transportation were not

treated.

The two other largest blocks of petroleum—

industrial feedstocks (mainly liquefied petroleum

gas and ethane) and asphalt–were excluded because they have no practical alternatives. However, consumption of all petroleum products, including the 40 percent that have been excluded

from the replacement analysis, will be reduced

during a shortfall, Some of this across-the-board

savings has been simulated via product mix shift

and GNP losses (see below). Beyond that, no

doubt some oil savings have been excluded that

would have occurred with sharp price increases,

but these have been ignored in order to focus

on technological options that provide the greatest opportunities for oil replacement at the least

cost .

Guidelines for the Rest of

the Economy

Unlike energy-related activities in the model,

which are carefully programmed to conform to

prior engineering results, the rest of the IN FORUM

model was calibrated only after initial simulation

results were obtained. At this intermediate stage

in OTA’s analysis, the limited goal for calibration

is only rough consistency of model outputs with

established norms for macroeconomic behavior

and with related simulation outputs from comparable macroeconomic models. Only when certain results appeared to be anomalous was an

effort made to reconsider nonenergy-related assumptions.

Comparisons to 14 other macroeconomic models

could be made relatively easily owing to the recent completion of the Energy Modeling Forum

study of macroeconomic impacts of major energy

shortfalls (commonly called EMF-7).10 Included

in this assessment of energy/economic models

was one scenario calling for a 50-percent in-

————_-——

Iosee f3. c. t-i ickrnan and H. G. Huntington, ‘‘ EM F-7 Study Design,” EMF Report 7.1, and “Macroeconomic Impacts of Energy

Shocks and Overview, ” EMF Report 7.2, Energy Modeling Forum,

Terman Engineering Center, Stanford University, Stanford, CA.

These two reports summarize information contained in 17 companion reports.
140 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

definite increase in the real price of oil. Although

such a shortfall is less severe than the one postulated in this assessment, it nevertheless raised

the same set of adjustment problems and, as discussed below, the general characteristics of that

model’s 14 projections were comparable to the

present model projections.

The first major macroeconomic checkpoint involves investment behavior. Rapid oil replacement may put too great a burden on national capital markets. The extent of this potential problem

can be evaluated by comparing total investment

requirements for oil replacement to certain related financial aggregates. Assuming an average

investment of $50,000 per barrel per day replaced,11 total capital outlays for replacement of

3 MMB/D would amount to $150 billion. Spread

overs years, it would equal $30 billion per year.

While these are large numbers, they are not overwhelming when compared to current private domestic investment.

In 1982, private investment in producer durables was just over $200 billion. Assuming that

80 percent of oil replacing investment would fit

into this category, oil replacement could lead to

a 12-percent decrease in capital available for

other purposes, or conversely, it would require

an overall increase of 12 percent in total investment. (Note also that 1982 investment was relatively low owing to the most severe recession

since the Great Depression, ) Assuming that the

remainder of oil replacement involves structures,

the remaining $6 billion amounts to about 2.5

percent of total 1982 residential and nonresidential investment in structures.

While these appear to be manageable shares

of total investment, given the apparent extremity

of the shortfall, there is one additional comparison that reinforces the expectation of investment feasibility. Assuming that oil prices would

double (from roughly $30 to $60 per barrel, see

below for rationale) and that domestic oil production can be maintained at 8.5 MMB/D, then

domestic oil revenues would increase by $93 billion annually, or three times the annual capital

requirement for oil replacement. Some of this inI IThis is a rough upper boundary for capital costs of oil replacement for technologies which would actually be deployed. See ch. III.

,

crease would undoubtedly be made available via

normal market channels or by a policy of windfall profit taxation and investment subsidy.

The second general macroeconomic checkpoint concerns labor productivity over time.

Growth in labor productivity in the longer term

depends on investment in better tools and new

processes, but the choice among such investment

options and the volume of such investment may

be significantly affected by sharply rising energy

prices. The choice may change because labor will

become relatively less expensive compared to

energy, so the return on labor-saving/productivity-enhancing investments will fall due to the oil

shortfall. Also, as discussed above, the volume

of productivity-enhancing investments may decline generally owing to “crowding out” by investments in oil replacement.12

The net result on growth in labor productivity

during a shortfall is difficult to anticipate. Unfortunately, the IN FORUM model did not project

either investment effect on productivity, so these

were specified by OTA as an input to the model

(in terms of a range of plausibility). At the minimum, given low investment costs for oil replacement and low oil price inflation, labor productivity was set to decline by 4 percent below the

level achieved in the reference case by the fifth

year after the initial curtailment. At the maximum,

given high investment costs and high oil price inflation, labor productivity was set to decline by

8 percent below the reference case. (See below

for further description of assumptions for the two

shortfall scenarios.)

Since OTA was primarily interested in the energy sector, other calibration efforts related to the

rest of the economy were not repotted. However,

integrated into the larger economic framework

were two mechanisms for oil saving that help

achieve a balance between oil supply and oil demand. First, the mix of goods and services shifts

away from oil-intensive products and toward

products that use relatively little oil. Second, total

llThis term usually refers to diversion of private savings from the

private to the public sector in order to finance the Federal debt.

Perhaps another label should be attached here, but the analogy

is appropriate in the sense that expected investment behavior is

interrupted by extraordinary circumstances.
Ch. VIl—Economic Impacts ● 141

economic activity declines in the shorter term in

response to lost real income and thus lower consumer demand, and in the longer term to reflect

the fact that the energy resource base has now

become significantly smaller.

Both of these more indirect means for oil replacement are initiated by rising oil prices, just

as the latter provide incentives for motorists to

buy more fuel-efficient cars or for firms to replace

oil-fired boilers. The price mechanism will be discussed in the next section. At this point it is important to note that the two major model projections of interest for oil consumption are product

mix shifts and GNP adjustments.

Guidelines for Scenario Integration by

Iteration on Fuel Prices

The IN FORUM model is calibrated assuming

two alternative oil supply futures. The first, or

reference case, assumes that total oil consumption will be maintained at about 16 MMB/D for

the period 1985-95. A second type of scenario

assumes that total oil consumption must contract

to about 13 MMB/D from 1985 on. The reference

scenario is run first to provide a performance

check on the general economic characteristics

of the IN FORUM model, and it is then used as

a standard for comparison with subsequent shortfall scenarios.

For both types of projections, the path taken

by oil prices over time determines the rate of oil

consumption because price incentives drive producer and consumer decisions toward efficient

outcomes. Prices of all goods and services serve

as economic drivers but other prices will not be

discussed except to the extent that they are affected by oil prices. Furthermore, the oil price

path is technically inputed into the model, not

derived from the model, because the price of oil

is substantially determined by conditions external to the national economy. (Based on the price

of oil and other primary resources, the model sets

the full range of intermediate and final product

prices.) Careful side calculations, as well as iterations of the model assuming alternative oil price

paths, are necessary to calibrate a final, realistic

oil price path for each prescribed oil consumption scenario. This section describes how oil price

paths were determined for the scenarios presented below.

For the reference case, the oil price path was

set so that oil consumption remains at about 16

MMB/D from 1985 through 1990. This level rate

of oil consumption was achieved with no change

in real oil prices which are held at around $30

per barrel through 1990 (see table 28). While this

single price/consumption projection does not reflect the considerable economic uncertainties

which in fact exist, the latter were not considered

to be significant, given that our primary purpose

is only to establish a single, more or less realistic

baseline for purposes of comparison to shortfall

scenarios.

Table 28.—Petroleum Price Projections: Real Crude Price

Per Barrel and Product Price Indices

Reference case Disruption case A Disruption case B

Year Crude Refine d

a F. Oil b Crude Refined F. Oil Crude Refined F. O i l

1982 c , . . . . . 32

1984 .., . . . 30

1985 . . . . . . 30

1986 ...., . 30

1987 . . . . . . 30

1988 . . . . . . 30

1989 . . . . . . 30

1990 . . . . . . 30

158

158

150

149

148

149

150

148

158 — — — —

151 — — — –

150 55 258 227 77

149 53 249 216 73

148 53 249 213 73

149 55 254 214 75

150 55 256 213 75

148 55 255 209 75

— —

— —

342 301

322 278

319 273

323 272

327 272

320 263

aRefined products include all petroleum products except #2 distillate, 46 residual, and diesel fuei.

bFuel oils include the exceptions m~tioned above. This breakdown was dictated by the IN FORUM model saris ener9Y skifl

With the energy skirt, separate prices are calculated for six petroleum products.

cReferenced to actual priCOS.

SOURCE: Office of Technology Assessment.
142 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

For the simulation of oil shortfall, two oil price

projections were used, both of which yielded approximately 3 MMB/D reductions in consumption in order to illustrate the range of uncertainty

associated with engineering cost estimates and

investor responses. The first shortfall projection

(A) assumes that the capital costs for oil replacement presented in table 25 are indeed accurate

and that investor response to oil replacement opportunities is strong. The second shortfall projection (B) assumes that both of these economic situations are markedly less felicitous. So, in effect,

it takes a much higher price incentive to save oil

in the second case (B) than in the first case (A).

As discussed above, in both shortfall situations,

the schedule for oil replacement is indicated in

simulation runs by adjustments to input/output

coefficients and by oil price responses built into

investment behavior functions.

The ballpark for oil price inflation in both shortfall simulations can be roughly inferred from investment requirements for oil replacement (table

25). While these outlays are only one consideration in the decision to replace oil, for the bulk

of replacement actions taken after the initial curtailment, they are the deciding factor because the

economic tradeoff is essentially capital versus fuel

cost. The following examples illustrate this situation.

First, consider fuel switching to coal in large

boilers. In 1982, the use of oil in large industrial

and utility boilers was about 1 MMB/D, and the

total for oil and gas exceeded 3.5 MMB/D oil

equivalent. Even though limitations on engineering resources and construction Ieadtimes limit

coal substitution for there fuels within 5 years (see

ch. VI), the total for gas and oil is relevant because gas is such a good oil substitute for stationary heating and because the full potential for

switching away from premium fuels in large

boilers is pertinent to long-term expectations for

energy price stability. This fuel switch greatly reduces operating costs for boilers, because coal

costs much less per Btu than the two premium

fuels, and the price of coal is likely to remain

steady due to large domestic reserves.13 To be

1 JDuring each of the earlier shortfalls, the real price of crude oil

approximately doubled, and since 1973 the real price of natural

gas at the well head also has increased by about a factor of 4. Coal,

conservative, however, assume that operating

costs for new or converted coal boilers are equal

to what they are (or were) using oil and gas prior

to the shortfall, then the $50,000 per barrel per

day (upper boundary) investment cost for coal

utilization can be profitably amortised if the price

of oil rises by about $23 per barrel and holds at

that level (or goes higher) .14

To infer the necessary price incentive for switching to gas or electricity in residential and commercial heat and hot water is more complicated

because gas and electricity are also premium fuels

whose price can inflate with the price of oil as

people try to make the easiest (i.e., least capital

cost) oil substations (e.g., resistance space heaters

and replacing oil with gas in dual-fired boilers).

However, within the 5-year time horizon, gas

price inflation will be restrained by several economic adjustments discussed above: 1) increased

fuel efficiency in buildings and industry (ch. V),

2) increased domestic gas production based on

current excess capacity (ch. IV), 3) switching to

coal in large boilers (see previous paragraph).

The price of electricity can be restrained and

the supply increased by increasing generation capacity based on coal or other non premium fuels.

Furthermore, replacement fuel (gas or electricity)

costs for these two stationary heating services can

be controlled by another means–investment in

insulation which has an estimated cost per barrel of oil replaced which is comparable to the coal

switching option described above. However,

even without taking into account increased insulation and other means for increasing fuel efficiency, the upper limit for the increase in gas demand for oil replacement in the “high-response”

case is 11 percent above current consumption

(ch. VI), a very manageable increase.

Finally, behavioral changes can also reduce oil

consumption and limit the need for expensive inon the other hand, doubled in price only during the 1973-75 period.

It remained level or declined marginally since that time and it is

unlikely in the future to experience inflation similar to the premium

fuels due to very large domestic reserves,

Iqlf, t. be conservative, we assume a 10-year lifetime and a 10

percent rate of return (ROI) over that period (a normal lifetime

would be closer to 20 years and a normal ROI would be closer

to 5 percent) then capital costs of $50,000 per barrel per day could

be profitably amortized once oil prices have risen by $23 per barrel (or by about $4 per million Btu).
Ch. VIl—Economic Impacts Ž 143

vestments i n oil replacement. These include turning down the thermostat and driving less, and

they also include the oil savings which occur indirectly when rapid oil price inflation reduces

general economic activity. Unlike oil replacement, these behavioral changes are computed

entirely within the model and their relative importance can be estimated only by running the

model. Since the overall level of investment is

also determined within the model, it means that

shortfall simulation must be done iteratively with

adjustments made in oil price until the net effect

in terms of oil savings equals 3 MMB/D.

In fact, the “high-response” simulation settled

on oil prices in the range of $50 to $55 (1983

dollars, see table 28). In other words, the inferred

price increase based on the investment outlays

of $50,000 per barrel of oil per day replaced appears to be a reasonable estimate for the necessary price incentive to effectively replace the oil

shortfall .

On the other hand, what if the capital costs estimates were too low and the estimated response

of investors to oil replacement opportunities too

high? What if investment requirements were off

by 50 percent? That would raise the necessary

price incentive proportionately. What if perceived

risks in investment were twice as large? That

could be illustrated as a doubling in the required

rate of return and that would raise the necessary

price incentive by another 50 percent. The point

is not to guess errors in the economic projections

but rather to suggest a plausible upper boundary

for oil price inflation as an input to the future simulation. For model iterations leading to the “lowresponse” scenario, the oil price in fact settled

at a level of about $75 per barrel, corresponding

to a price increase approximately twice as large

as that in the “high-response” case.

A much larger study might explore additional

scenarios that incorporate alternative assumptions about rate of technology deployment, investment cost, natural gas supplies, and the key

macroeconomic variables described above. However, these two shortfall projections bracket the

range of economic conditions most pertinent for

this assessment, given OTA’s primary data base

related to oil replacement technology and given

OTA’s goals to establish rough orders of magnitude for shortfall impacts and how they might depend on the rate of technology deployment. The

high-response scenario simulates how easy and

the low-response scenario how hard it might be

to live with 3 MMB/D lower oil imports.

ECONOMIC PROJECTIONS

A Normal Economic Projection:

The Reference Case

In 1983, after many recent predictions by prominent macroeconomic models have proven wrong,

there is obviously much uncertainty about how

the economy will perform in the next decade.

This uncertainty is manifest in serious academic

and political debates surrounding trends in labor

productivity and the even stronger debate over

Federal monetary and fiscal policy.

In this assessment, a single future scenario is

projected for the U.S. economy. Its purpose is

not to predict the future, nor to define some “normal” future projection, but rather to establish a

baseline or reference case that merely illustrates

assumptions made in this assessment regarding

future oil import dependence for the U.S.

economy.

In general terms, the reference case describes

an economy poised to maintain steady modest

growth of GNP over the period 1986-90, after

making a robust recovery from 1983-85. Unemployment falls sharply during the recovery and

much more slowly during the period of modest

growth. inflation also falls sharply during the

recovery but then rises steadily as capacity limits

force the economy into a much lower rate of

growth. There are other key variables, such as

the behavior of investors and consumers, but the

overall impression conveyed by general trends

in GNP, unemployment, and inflation is suffi-
144 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

cient to suggest how the economy is poised at

the onset of the postulated oil shortfall. Further

discussion of these variables and others, in terms

of comparisons between the shortfall and reference scenarios, is presented in the next section.

Within this reference scenario, energy patterns

reflect recent historical trends. Oil and gas prices

hold steady (in constant dollars), and consumption of both premium fuels remains steady because the growth in demand associated with expanding economic activity is offset by capital

investment in new technology (e.g., more fuelefficient cars and fuel switching in boilers as obsolete units are replaced). Electricity grows in step

with the economy, and coal consumption grows

more rapidly as the fuel of choice in new boilers.

Two Macroeconomic Projections of

Oil Import Shortfall Impacts

With the reference case as background, the

model is used to project how the economy might

adjust to a curtailment of 3 MMB/D in oil imports.

Needless to say, the shock to the economy would

be massive, and many important impacts would

undoubtedly be impossible to predict given current knowledge about the economy. In the latter category, especially, would be the emergency

predicaments facing families, firms, industries,

and regions of the Nation during the first year,

when the economy would be highly unstable.

However, OTA’s plan is to consider short-term

conditions only to the extent that they contribute to the economic situation 5 years out, when

the shock will have dissipated and some measure of economic order should have reestablished

itself, much as it has following the shocks in the

1970s. Although the shortfall postulated here is

unprecedented, OTA believes that much has

been learned from the earlier experiences concerning the value and priority of alternative oil

uses and concerning the U.S. ability to do without normal supplies if necessary.

Two shortfall projections are described below.

The first (the high-response case A) simulates an

extremely optimistic scenario where investments

in oil replacement have been large and well targeted to fuel switching for heat and steam applications (where they displace the most oil for the

least cost) and where actual investment costs per

barrel replaced are relatively low. About 2.2

MMB/D of the 3 MMB/D loss in imports are effectively replaced in stationary heat and steam

after 5 years, leaving only about 0.8 MMB/D for

replacement elsewhere.

The second shortfall case (the low-response

case B) is less optimistic about the size and targeting of investment as well as about actual investment cost per barrel replaced. In terms of

oil consumption, figure 44 shows that 0.75 MM B/D

more oil is replaced from stationary heat and

steam applications in case A than in case B, which

means that much less is available for use in engines in case B (see fig. 45). (Note in reading the

figures that the vertical scales change.) It also

means that crude oil prices must be driven up

by more than twice as much as in case A to create

an investment incentive and to displace or choke

down transportation and general economic activity as an alternative means to achieve the necessary total of 3 MMB/D savings (see table 28 for

oil prices).

Note that rates of oil consumption reported in

these shortfall scenarios (figs. 44 and 45) represent the combined effects of technological replacement and behavioral adjustments. Both are

motivated by higher oil prices, but behavioral adjustments also occur as a result of reduced economic activity. This combination of technological and behavioral responses to oil shortfall is a

major extension of the engineering analysis presented in earlier chapters, and it is an essential

aspect of an integrated assessment of potential

macroeconomic impacts from oil shortfall.

As the following discussion of key macroeconomic variables indicates, the two oil replacement scenarios lead to different states of the economy. Although the effective oil savings is the

same in both scenarios, the differences in investment costs and oil prices lead to major differences

in the apparent costs to the economy of the oil

curtailment. These differences are illustrated in

figures 46 through 50.

The following discussion considers five key

macroeconomic variables plus product mix shift.

For each, the implications of a shortfall are presented in the order of their reliability, given that
Ch. VIl—Economic Impacts ● 145

Figure 44.—Comparison of Shortfall Projections (petroleum use for heat and steam)

1.2

0.2

0.1

0.0

Case A

Case A

0.3

Case B

0.4

SOURCE: Office of Technology Assessment

Figure 45.—Comparison of Shortfall Projections (petroleum use by engines)

8

7

t Case A Case B

Bunker ( #6)

SOURCE Office of Technology Assessment

37-833 0 - 84 - 11
146 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

the primary OTA data base pertains to long-term

technology deployment and given the strengths

and weaknesses of the IN FORUM model of the

U.S. economy. Although consideration of each

variable will include its time path during the entire 5-year period following the onset of a shortfall, the year-to-year fluctuations are considered

much less significant in all cases than 5-year averages and trends established after 5 years of economic adjustment.

Gross National Product

While there are many other statistics that describe important dimensions or patterns of national economic behavior, including the five discussed below, a general perspective on potential

economic impacts, from a permanent shortfall of

oil imports, can be obtained most easily by comparing the alternative time patterns for GNP presented in figure 46. This comparison can be made

from several different viewpoints, and these are

discussed in order of their relevance and reliability, given the design of this technology-based

study.

Up to the 5-year horizon after the initial import curtailment, projected GNP lies well below

that in the reference case, but the difference

caused by the shortfall narrows over time, since

the shortfall apparently does not reduce the potential for growth in the economy. Furthermore,

after 5 years, the annual loss in GNP due to the

shortfall may be considered manageable in the

sense that it can be made up in 1 to 2 years by

continued economic growth, which in all these

projections moves around a trend rate of 2 percent annually. This conclusion should not be surprising, given the wide range and large size of

technological opportunities for oil replacement

described in the preceding chapters, but it does

reinforce from a macroeconomic perspective the

conclusion that there is considerable flexibility

in the economy to respond to a large oil shortfall.

A second general observation concerns the

average loss in the level of GNP over the first 5

years after a shortfall compared to that in the

reference case.15 In the high-response replacement scenario, the permanent loss of oil imports

lowers GNP on the average by about 3.5 percent

compared to the reference case. In the lowresponse scenario, the average loss is about 6.2

percent. Note that the differences between the

reference and two shortfall projections are much

larger during the first 2 years and much smaller

during the last 2 years. In part, this unevenness

over time is due to a macroeconomic cycle caused

by the onset of the shortfall (see below), but a

major reason why GNP comes back 5 years later

is because investments in oil replacement have

reduced the burden of high energy costs on the

economy.

A third and less important comparison (from

OTA’s longer term perspective) involves year-toyear change in the GNP during the first 2 years

following the onset of the shortfall (note that this

information is not contained explicitly in fig. 46).

While growth trends and average output over 5

years are most interesting, given the model used,

this shorter term perspective is probably most important for public perceptions of economic hardship. In both shortfall cases, the only actual decline of GNP occurs in the second year after the

curtailment begins. The decline in the optimistic

case A is only 1.3 percent from the previous year

1 Splease note that the model’s behavior at the start of the postulated shortfall in 1985 is strongly influenced by current expectations that the economy will have considerable growth momentum.

If, on the other hand, the United States were mired in recessionary

doldrums, the projections could be quite different.
Ch. VII—Economic Impacts ● 147

and 5.2 percent in case B. This difference can be

appreciated by noting that during the worst recession since the Great Depression, real GNP declined in 1982 by 1.7 percent from 1981. The

recession just prior to that, from 1979 to 1980,

involved only a 0.2-percent decline in GNP.16 I n

other words, case A is within recent historical experience; case B is well outside of it.

A series of test runs with the model indicate

that oil price inflation would be the main factor

driving the economy down into a trough 2 years

after the shortfall begins. While most of these projected losses are made up shortly, the economic

recovery may not in fact be so energetic if the

model has been too optimistic about the dynamics of unemployment and inflation. As discussed further below, macroeconomic instabilities (resulting from a rapid and large oil price

inflation) can become chronic, making it difficult

for investors, managers, and workers to see and

to adjust to new long-term trends. Consequently,

it would be much safer if initial oil price inflation

could be moderated. Based on the technical analysis presented in this study, moderation can be

achieved by rapid and extensive deployment of

oil replacement technologies. When such replacement is reliably expected in the future, this

expectation feeds back to the short-term market

behavior of oil users and price speculators, who

would thus be encouraged not to hoard and

speculate against the prospect of more severe oil

price inflation. Since, in the short run, price expectations appear to be self-fulfilling, the favorable longer term prospects for oil replacement

can cap and otherwise stabilize short-term oil

prices.

Unemployment

On the average, over the 5-year shortfall period, unemployment would be pushed up by the

shortfall by over 1.7 percentage points in case

A (high-response) and by over 2.3 percentage

points in case B (see fig. 47). However, after the

initial, sharp runup associated with the deep recession (in the second year after the start of the

shortfall), the rate of unemployment would drop

sharply until it actually fell below the reference

IGData Obtained from Survey O( Current Business, April 1981 and

April 1982.

Figure 47.—Unemployment: Two Shortfall Projections

Percentage Point Changes From Reference Case

8

6

4

2

0

-2

Year

High-response Low-response

case A case B

SOURCE: Office of Technology Assessment

case. This surprising result raises important questions about labor and capital markets, but before

considering them, it should be emphasized that

the projected differences between 5-year average unemployment rates (among the three future

projections) are the most important and reliable

result from this model.

In this model, the sharp decline in unemployment after the second year is due to a combination of conditions that lead to the substitution of

labor for energy. This happens: 1 ) because of

“crowding out” of investments (which in normal

times would increase labor productivity and reduce labor demand per dollar of output, see note

12 above and the discussion of investment below)

by investments that replace oil; 2) because real

wages decline sharply; and 3) because the rapid

economic expansion following the recessionary

trough (2 years after the curtailment) is driven by

aggressive investment behavior, which increases

labor demand in general. Investment by industry is based on behavioral equations in the INFORUM model. The “crowding out” affect was

programmed into the shortfall cases, and real

wages were assumed to change as necessary to

move the economy toward full employment.

Compared to other macroeconomic modeling

of oil shortfalls, this result about unemployment

and the previous results for GNP are relatively
148 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

optimistic. 17 This is because instabilities associated with unemployment, inflation, and Government deficit (see below) are treated by IN FORUM

as temporary problems, not chronic disorders.

They are temporary, at least to the extent that

they are exacerbated by the oil supply shortfall,

because real wages adjust quickly (downward)

to the level necessary to achieve full employment

and because investment behavior is robust (see

below). If wages were not so flexible or investors

not so responsive, unemployment 5 years after

the shortfall begins could indeed be abnormally

high; and furthermore, it could take much longer

for the economy to recover from the recession

brought on by the onset of shortage.

Comparisons among models, which lead to

rather different projections for shortfall impacts,

suggest that all such projections should be interpreted cautiously. Caution is necessary because

economic uncertainties, which go far beyond

those directly related to oil replacement technologies, are very large. A major permanent loss of

imported oil, such as the one postulated in this

study, could make the chronic macroeconomic

problem of unemployment (and inflation, see

below) much more troublesome than anything

experienced during the last decade; or it could

serve as a catalyst for market reorganization,

which means that workers, firms, and investors,

must compete more vigorously, with the resulting

discipline and efficiency that competition engenders. While the present modeling analysis

does not reduce this uncertainty, its relative optimism is consistent with the preceding analysis of technology, which suggests that market conditions, in general, should be positively affected

by relatively large technological opportunities for

oil replacement.

As a final note about unemployment, the yearto-year changes in unemployment during the first

2 years suggest the potential severity of the shortterm problems for the economy and for workers in particular. Compared to the reference case,

both shortfall cases reverse a declining trend in

the rate of unemployment. Furthermore, the postdisruption peak for case A closely approximates

the 1982 peak annual rate of 9.7 percent, and

in case B the peak exceeds the 1982 peak (which

was a postdepression high) by about 1.3 percentage points.

Inflation and Federal Macroeconomic

Policy

The third major index of macroeconomic health

is inflation, in particular the rate of growth in the

GNP deflator. In a pattern very similar to its impact on unemployment, the path that prices take

over time is shaped Iike a spike, with a peak unprecedented since 1946 (see fig. 48). In other

words, when oil prices shoot upward in response

to reduced supply, they sharply drive up the average price level, but soon after (as oil prices level

off) the rate of inflation falls quickly back down

to the reference case. Over the 5-year shortfall

period, the shortfall increased the average annual

rate of inflation by about 2.7 percentage points

in case A and 5.4 percentage points in case B.

This result must be heavily qualified, however,

because so little is known about inflationary

dynamics and because so much depends on Federal monetary and fiscal policy. Federal policy

depends on changing perceptions about macroFigure 48.—inflation: Two Shortfall Projections

Percentage Point Changes From Reference Case

I zReSul~S rep~~ by the Energy Modeling Forum (EM7) indicate

a range of GNP losses from 2 to 4 percent, 4 years after a disruption, assuming a permanent increase in oil prices of 50 percent.

Since OTA’S price projections are either somewhat higher (70-

percent increase for case A) or much higher (120-percent increase

for case B), OTA’S conclusion that GNP losses fall in the same 2-

to 4-percent range is by comparison optimistic.

- o 1 2 3 4 5 6

Year
Ch. VII—Economic Impacts • 149

economic behavior, international relations, and

the relative strength of concerns about inflation

and investment incentives on the one hand versus

unemployment and inequity on the other. Needless to say, in the event of an actual oil shortfall,

there would be many controversial policy issues

to resolve. This model (and perhaps any current

macroeconomic model) does not attempt to simulate complex, political choices. However, as a

first order approximation, OTA assumes that the

money supply will be held to a constant annual

rate of growth (6 percent) (i. e., no allowance is

made to accommodate inflation caused by the

discontinuous jump in oil prices). This stability

in the money supply is perhaps the main reason

why inflation is forced to moderate quickly. Also,

by adjusting taxation, the Federal deficit was

allowed to increase as a percent share of GNP

in response to the oil curtailment. In both shortfall cases, the share of the Federal deficit in GNP

increased by 1 percentage point over the reference case, from about 3.2 percent to about 4.2

percent.

The optimistic result in the present projections,

that inflation will quickly moderate, figures heavily in limiting GNP losses in both shortfall cases.

It does so by focusing investor attention on plant

and equipment (instead of, for example, gold and

real estate), and thus it makes investment a force

sufficient to drive the economy smartly out of its

initial recessionary trough.

Private Investment

The key to both oil replacement and economic

growth during the shortfall is investment (see fig.

49). As discussed above, the projected strong

recovery 3 to 5 years after the oil cutoff is to a

large extent driven by robust private investment.

In the economy and in this economic model, investment behavior (or the decision to invest)

depends on general economic expectations, including among many other things relative oil

prices, as well as on the set of new technologies

that makes new capital investment more productive than existing capital stock. While the robust

behavior projected by the model was determined

by its investment behavior functions, this result

is consistent with and to an extent corroborates

the technological conclusions of the earlier

Figure 49.— Investment in Producer Durables

Percentage Change From Reference Case

-0 1 2 3 4 5 6

Year

High-response Low-response

case A case B

SOURCE: Office of Technology Assessment.

chapters. 18 That is, by and large, oil and capital

assets are substitutes for each other, and thus

there are many profitable investment opportunities to replace oil by the time crude oil prices

increase by 70 to 140 percent above their current level of around $30 per barrel.

Weighing against this optimistic, longer term

perspective, are short-term obstacles to investment that are caused by a deep recession that

can be expected immediately following the cutlsThe Strikingly rapid recovery 3 to 5 years out is caused also by

a number of other factors typical of a Keynesian, “demand-driven”

macroeconomic model. All of them are self-corrections embodied

in the initial very severe inflation and recession. First, one of the

forces underlying robust investment is the large pool of industrial

profits for oil-related industry. In the model, this pool of liquidity

motivates investment. Second, although high interest rates make

borrowing more expensive, they also increase the income of

creditors, and like oil profits, this enlarged pool of funds becomes

liquidity available for investment. Finally, high unemployment rates

drive down personal savings, since, on the average, people have

lower budgetary surpluses above basic consumption needs. Thus,

as the recession becomes worse, it increases the marginal propensity to consume and thus increases the associated income multipliers

which make a dollar of investment worth more in terms of the economic activity it can generate (i.e., it has a greater impact on GNP).

While all of these demand-side adjustments are no doubt significant, it would have been better to model also the supply-side constraints associated with depletion of corporate funds by high oil

prices, with inflation as investors attempt to shelter their funds

against a depreciating dollar, and with chronic local and region,al

stagnation caused by widespread losses in real personal income.

Unfortunately, neither the IN FORUM model nor perhaps any of

the major macroeconomic models has been able to simulate the

highly complex interaction of both demand- and supply-side factors.
150 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

off. When the economy is headed down or settled

into a recessionary trough, investors, entrepreneurs, and corporate managers understandably

reduce investments in production of most goods

for which demand is stagnant or contracting.

Firms, in particular, do this in order to reduce the

associated financial risks and to build liquidity,

which could, if necessary, be used to shore up

established market positions.

Because of the recession and related obstacles

to investment immediately after the curtailment,

productive capital is not replenished or at least

does not expand at a “normal” rate, and thus

the productivity of the economy cannot grow

normally. (Productivity in this case is measured

as output per unit of labor input.) Furthermore,

following the postulated curtailment, investment

patterns will shift toward oil replacement, at least

temporarily, and away from technologies that increase labor productivity (since labor becomes

relatively less expensive compared to energy).

The latter diversion of funds from normal pursuits

was called above a “crowding out” effect, an effect that reinforces the recessionary drag on labor productivity.19

Indeed, the recovery is so strong by the end

of the fourth year in both shortfall scenarios that

investment in producer durables, the key component of private investment related to labor productivity and oil replacement, exceeds that in the

reference case. This particular aspect of these

shortfall projections, like certain aspects of inflation and unemployment discussed above, appears to be extremely optimistic. While it may

be plausible, it probably would not occur if the

model had incorporated the likely negative “supply-side” conditions.20

Personal Consumption Expenditures

The fifth summary viewpoint on macroeconomic impacts involves private or personal consumption expenditures (PCE). Along with private

investment and government expenditures, personal consumption drives the economy (i.e., it

determines the size and composition of GNP)

190TA has specified exogenously certain reductions in the rate

of growth in labor productivity that have a large impact on projected GNP and unemployment. See p, 140 for further discussion.

Josee note 18 above.

through the decisions of consumers to use income for consumption purposes (see fig. 50) and

through their decisions to allocate their consumption expenditures among alternative products. As

with GNP, the oil supply shortfall interrupts the

pre-1 985 upward trends in total consumption expenditures for 2 years as the economy goes into

a recession, and then growth trends reappear and

make up some of the recessionary losses.

However, the average loss (compared to the

reference case) in consumption over the 5-year

period is greater than that for the GNP. In case

A, PCE averaged 4.7 percent lower than in the

reference case, compared to a loss of 3.5 percent

for the GNP. In case B, PCE loss averaged 8.8 percent, compared to 6.2 percent for the GNP. Consumption losses exceeded GNP losses because

investment led the way to the economic recovery

and thus expanded its share in total economic

activity.

Nevertheless, despite this shift from consumption to investment, the overaIl effect of the oil

shortfall on consumption is more or less similar

to its effect on the GNP. While the short-term

hardships are severe, the longer term effect amounts

to a temporary delay in the achievement of consumption objectives, not a permanent loss. The

delay may be for a bit longer than for the recovery

of the GNP, because the average loss over the

Figure 50.—Personal Consumption Expenditures

Percentage Change From Reference Case

-15

Year

High-response Low-response

case A case B

SOURCE: Office of Technology Assessment.
Ch. VII—Economic Impacts . Ž51

5-year period is somewhat larger, but the robust

investment response eventually pays off in greater

productive capacity and real income, and thus

greater purchasing power for consumers.

Within total consumption, major product categories can be identified that describe consumption and how it changes. Table 29 presents product share data for the three future projections,

5 years after the oil import cutoff. At the first level

of disaggregation, when total consumption is

divided into just three gross categories, the impact of oil shortfall appears to be insignificant.

Overall, durable goods, nondurable goods, and

services share about equally in the lost personal

consumption since they maintain their shares i n

total consumption. However, within each of

these categories, certain changes are noteworthy.

Within consumer durables, the disruption shifts

consumption away from motor vehicles, boats,

recreational vehicles, aircraft, wheel goods,

durable sports equipment, and jewelry but toward furniture and household equipment (especially household appliances, communications,

and entertainment equipment, for which use actually increases significantly). In other words, as

a result of higher energy prices, people may stay

at home more often and wear less expensive

baubles.

With insignificant exceptions, consumption of

all nondurable declines, but two categories decline more and one declines less than others. The

largest change occurs in food consumed at home,

which increases its share of total nondurable by

more than 1 percent. That comes about primarily at the expense of gasoline and oil and clothing.

The 15 other product categories decline more or

less in step with one another.

Among consumption service categories, the

major shift was away from housing and toward

operating activities within households. The two

Table 29.—Product Mix for Personal Consumption Expenditures (PCE) After 5 Years

(in percent, using 1972 product prices)

Gross product mix Reference case Case A Case B

Durable manufactures. . . . . . . . .

Nondurable manufactures. . . . . .

Services. . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . .

PCE durable manufactures:

Motor vehicles and park. . . . . . .

Furniture and household

equipment . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . .

PCE nondurable manufactures:

Food and alcohol. . . . . . . . . . . . .

Clothing ... , . . . . . . . . . . . . . . . . .

Gasoline and oil. . . . . . . . . . . . . .

Fuel oil and coal. . . . . . . . . . . . .

Tobacco . . . . . . . . . . . . . . . . . . . . .

Drug preparations and sundries.

Other . . . . . . . . . . . . . . . . . . . . . . .

PCE services:

Housing . . . . . . . . . . . . . . . . . . . . .

Owner occupied. . . . . . . . . . . .

Tenant . . . . . . . . . . . . . . . . . . . .

Household utilities. . . . . . . . . . . .

Electricity. . . . . . . . . . . . . . . . . .

Telecommunications. . . . . . . . .

Water. . . . . . . . . . . . . . . . . . . . .

Transportation . . . . . . . . . . . . . . . .

Medical services. . . . . . . . . . . . . .

Education . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . .

16.0

35.6

48.4

16.0

35.8

48.2

100.0

37.3

44.1

18.5

49.4

25.2

4.5

.7

3.6

3.3

13.2

38.3

27.9

9.4

14.4

4.3

5.7

1.2

6.7

17.0

2.6

21.0

100.0

34.3

47.9

17.9

49.9

25.3

4.0

.6

3.7

3.2

13.3

37.3

27.1

9.2

15.5

4.7

6.3

1.3

6.5

17.1

2.7

21.0

15.4

36.4

48.2

100.0

32.1

50.9

17.0

50.5

24.7

3.9

.5

3.8

3.2

13.3

36.5

26.4

9.1

16.3

5.0

6.7

1.4

6.3

17.3

2.7

20.8

SOURCE: Office of Technology Assessment
152 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

changes just about offset each other. Declines in

housing stem primarily from high interest rates,

which are driven up by shortfall-induced inflation. However, the effect of inflation and high interest rates on housing in the model may be

somewhat exaggerated because the model reflects problems of “disintermediation,” which

occurred during the last two oil shortfalls, but

which should be less significant in the future due

to structural reforms in financial markets.21 The

increase in household activities mirrors the changes

in consumer durables. The leading growth activity

is telecommunications, with smaller increases in

electricity, water and sanitation, and postage.

Product Mix Shift Over the

Entire Economy

Compared to the previous discussion of consumption mix, product categories for the entire

ZI DiSintermediation refers to the problem experienced in the past

by the savings and loan industry, which has typically concentrated

lending in long-term home mortgages and borrowing in short-term

savings. During unstable periods in the past, when interest rates

were abnormally high, large numbers of depositors sought higher

returns from other financial institutions, leaving savings and loan

institutions unable to make new mortgages and thus drying up the

primary source of funds for residential construction. In the future,

mortgage lending should be more resilient as financial institutions

use variable rate mortgage instruments and otherwise diversify to

minimize their own risks from inflation and to offer depositors

greater investment flexibility,

economy are much less detailed in terms of end

uses, but they include intermediate goods and

services which are entirely omitted from the

classification of consumer products (see table 30).

For example, the gross output mix includes lumber

as well as furniture, ferrous metals as well as autos

and electric appliances, and agriculture as well

as food. While this is a broader classification system than was used for consumption, which leads

to different relative product shares, the interesting point for analysis is the same—how product shares change as a result of the oil supply

shortfall .

From this overall viewpoint on the economy,

most of the product categories that increase their

share in total output (at the end of 5 years) are

related to private investment. This especially includes machinery for mining, metal working, engines and turbines, computers, and communications equipment. Presumably, the latter two types

of machinery are related to the expected shift

from energy-intensive transportation to electronics as means for conducting business and social

relations. All of these producer durables increased

their level of physical output as a result of the oil

supply shortfall, not just their share in total output, The same is true for domestic gas and coal

production because these products are direct

substitutes for oil.

Table 30.-Product Mix for All Economic Activity (GNP) 5 Years After Curtailment

(in percent, using 1972 product prices)

Product category Reference case Case A Case B

Agriculture, forestry, fishery. . . . . . . . . . . . . 6.3 6.3 6.4

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 3.8 3.9

Construction . . . . . . . . . . . . . . . . . . . . . . . . . 5.0

Nondurable manufactures. . . . . . . . . . . . . . 31.0 30.5 30.7

Durable manufactures. . . . . . . . . . . . . . . . . . 37.4 37.3 38.2

Nonelectric machinery. . . . . . . . . . . . . . . . . 7.6 7.7 8.4

Electric machinery. . . . . . . . . . . . . . . . . . . . 5.9 6.1 6.5

Transportation equipment. . . . . . . . . . . . . . . 7.9 7.7 7.7

Transportation services. . . . . . . . . . . . . . . . . 6.4 6.4 6.4

All utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 11.5 11.6

Wholesale trade. . . . . . . . . . . . . . . . . . . . . . . 9.2 9.1 9.3

Retail trade. . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 9.3 9.2

Eating and drinking establishments. . . . . . 4.6 4.5 4.4

Finance and insurance. . . . . . . . . . . . . . . . . 6.4 6.3 6.3

Real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 7.3 7.2

Owner occupancy housing. . . . . . . . . . . . . . 8.3 7.8 7.5

Business services. . . . . . . . . . . . . . . . . . . . . 9.8 11,5 10.8

Medicine, education, NPO. . . . . . . . . . . . . . 7.8 8.6 8.7

Other services. . . . . . . . . . . . . . . . . . . . . . . . 7.3 5.3 5.8

Government industry. . . . . . . . . . . . . . . . . . . 7.8 8.8 9.1

SOURCE: Office of Technology Assessment.
Ch. VIl—Economic Impacts . 153

Other product categories increased their share

in total output by lessor amounts by suffering relatively small declines in physical output. Some of

these, such as stone/clay/glass, ferrous metals,

and paper are obviously related to the investment

in producer durables, either as intermediate

goods in their production or (as in the case of

paper) as a complementary (communications)

product. others increased share because their

use is not highly sensitive to price inflation, such

as medicine and government enterprise.

On the other hand, products losing share in

total output include most other major categories,

and the losses are by and large marginal. However, the most significant losses occur for housing (as discussed above) and for the construction

industry, which suffers because many fewer

homes are built as a result of high interest rates

during most of the postcutoff period. Of course,

the petroleum refining industry suffers a major

loss in output due to diminished crude oil supplies. The production of motor vehicles also loses

significantly in its share due to high fuel prices.
Index
Index

Argonne National Laboratory, 107

automobiles, 28, 29, 107, 108, 109

biomass, 24

boilers, oil, 32, 142

Bonneville Power Administration (BPA), 106

chemicals and allied products industry, 112

coal, 23, 68, 142

demand sectors, 47

electric utilities, 47

industrial, 48

residential and commercial, 47

transportation, 47

economic impacts, 127

IN FORUM macroeconomic model of U.S. economy,

128

energy skirt, 132

industrial input/output, 128

macroeconomics without energy detail, 128

modeling strategy based on OTA technology data

base, 135

energy sector guidelines, 135

guidelines for rest of economy, 139

guidelines for scenario integration by iteration of

fuel prices, 141

projections, 143

normal economic projection, the reference case, 143

two macroeconomic projections of oil import

shortfall impacts, 144

economic recession and productivity decline, 51

efficiency, increased, 101

buildings, 102

heating oil conservation, 103

natural gas conservation, 106

transportation, 107

industry, 110

energy conservation potential, 113

technologies available to reduce oil dependence,

111

computer control systems, 111

housekeeping, 111

waste heat recovery, 111

employment and unemployment, 131, 147

energy consumption by end-use sector, 43

all fuel products, 43

natural gas, 44

oil, 43

Energy Disaggregated Input/Output Data Base, 133

Energy Information Administration (EIA), 102

Federal Reserve Board (FRB), 48, 130

food prices, 123

fuel use changes, 119

alternative scenarios, 121

longer term effects, 122

fuel switching, 32, 57

technologies:

compressed natural gas in motor vehicles, 64

conversion to solid fuels, 60

electric heat pumps, 59

ethanol, 62

liquefied petroleum gas in motor vehicles, 64

mobile gasifiers, 66

deployment of technologies, 75

electric utilities, 78

industrial boilers, 86

mobile engines, 89

residential/commercial space heat and hot water, 83

fuel and grain supplies, 67

coal, 68

enhanced oil recovery, 71

grain, 73

liquefied petroleum gas, 71

natural gas, 70

wood and other solid biomass, 69

reasons for excluding various oil replacement

technologies from detailed consideration, 94

active solar systems, 95

electric vehicles, 96

electricity from wind, 96

ethanol from food processing wastes, 96

fossil synthetic fuels, 94

photovoltaics, 95

solar thermal electric generation, 96

gasoline prices, 137

grain feedstocks, 123

gross investment and interindustry investment patterns,

131

GNP (gross national product), 131, 146

industrial product mix shift, 5 0

industrial sector energy intensity, 48

Industrial Sector Technology Use Model (ISTUM), 113,

114

industrial use, 18

inflation and government fiscal and monetary policies,

130, 148

International Energy Agreement, 9, 33, 34

iron and steel industry, 112

jet fuel, 108

labor productivity, 140

legislation:

Clean Air Act, 27, 40

Energy Policy and Conservation Act of 1975, 102

National Energy Conservation Policy Act of 1978, 105

Public Utility Regulatory Policy Act, 27

local development of energy resources, 136

Mass Save program, 106

157
158 ● U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

natural gas, 27, 28, 64, 70, 106, 123

New Source Performance Standards, 23

Pacific Gas & Electric Co., 106

paper and allied products industry, 111, 112

personal consumption expenditures, 1, 50

petroleum product mix, 45

distillate fuel oil, 45

ethane and liquefied gases, 46

jet fuel, 46

motor gasoline, 45

other petroleum products, 46

residual fuel oil, 45

petroleum refining industry, 112

policy, 24

advance preparation for shortfall, 29

measuring rate of replacement, 31

policy strategy, 26

selected regional and international considerations, 33

private investment, 149

research and development (R&D), 31

residential and commercial use, 18

Residential Conservation Service, 106

response, rapid, 17, 21, 121

response, slower, 20, 121

specific findings, 17

environmental impacts, 23

longer term effects, 23

macroeconomic impacts, 21

replacing oil through energy technologies, 17

stationary heat and steam, 137

Strategic Petroleum Reserve

128

synthetic fuels, 24

Tennessee Valley Authority

trade, world, 130

transportation use, 19

(SPR), 3, 4, 21, 25, 26, 34,

TVA), 106

U.S. Department of Commerce, 32, 133

U.S. Department of Energy, 32, 103, 110, 133

utiIities:

electric, 32

gas, 32

utility use, 17

wood, 24

U . S . GOVERNMENT PRINTING OFFICE : 1984 0 - 37-833