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Full text of "U.S. energy outlook and implications for energy R&D : hearing before the Subcommittee on Energy and Environment of the Committee on Science, U.S. House of Representatives, One Hundred Fourth Congress, second session, March 14, 1996"

bS. ENERGY OUTLOOK AND IMPUCATIONS FOR 

ENERGY R&D 



lY 4. SCI 2; 104/70 



U.S. Energy Outlook and Inplication. . . 

HEARING 

BEFORE THE 

r SUBCOMMITTEE ON ENERGY AND ENVIRONMENT 

OF THE 

COMMITTEE ON SCIENCE 
U.S. HOUSE OP REPRESENTATIVES 

ONE HUNDRED FOURTH CONGRESS 

SECOND SESSION 



MARCH 14, 1996 



[No. 70] 



Printed for the use of the Committee on Science 




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^% ..-. 



' -^-'i . 



; H*"* 



U.S. ENERGY OUTLOOK AND IMPUCATIONS FOR 

ENERGY R&D 



HEARING 

BEFORE THE 

SUBCOMMITTEE ON ENERGY AND ENVIRONMENT 

OF THE 

COMMITTEE ON SCIENCE 
U.S. HOUSE OP REPRESENTATIVES 

ONE HUNDRED FOURTH CONGRESS 

SECOND SESSION 



MARCH 14, 1996 



[No. 70] 



Printed for the use of the Committee on Science 




U.S. GOVERNMENT PRINTING OFFICE 
26-794CC WASHINGTON : 1997 

For sale by the U.S. Government Printing Office 
Superintendent of Document.s, Congressional SaJes Office, Washington, DC 20402 

ISBN 0-16-053992-7 



COMMITTEE ON SCIENCE 



ROBERT S. WALKER, 

F. JAMES SENSENBRENNER, Jr., 

Wisconsin 
SHERWOOD L. BOEHLERT, New York 
HARRIS W. FAWELL, Illinois 
CONSTANCE A. MORELLA, Maryland 
CURT WELDON, Pennsylvania 
DANA ROHRABACHER, California 
STEVEN H. SCHIFF, New Mexico 
JOE BARTON, Texas 
KEN CALVERT, California 
BILL BAKER, CaUfomia 
ROSCOE G. BARTLETT, Maryland 
VERNON J. EHLERS, Michigan** 
ZACH WAMP, Tennessee 
DAVE WELDON, Florida 
LINDSEY 0. GRAHAM, South Carolina 
MATT SALMON, Arizona 
THOMAS M. DAVIS, Virginia 
STEVE STOCKMAN, Texas 
GIL GUTKNECHT, Minnesota 
ANDREA H. SEASTRAND, California 
TODD TIAHRT, Kansas 
STEVE LARGENT, Oklahoma 
VAN HILLEARY, Tennessee 
BARBARA CUBIN, Wyoming 
MARK ADAM FOLEY, Florida 
SUE MYRICK, North CaroUna 



Pennsylvania, Chairman 

GEORGE E. BROWN, Jr., California RMM* 

HAROLD L. VOLKMER, Missouri 

RALPH M. HALL. Texas 

BART GORDON, Tennessee 

JAMES A. TRAFICANT, Jr., Ohio 

JOHN S. TANNER, Tennessee 

TIM ROEMER, Indiana 

ROBERT E. (Bud) CRAMER, Jr., Alabama 

JAMES A. BARCIA, Michigan 

PAUL McHALE, Pennsylvania 

JANE HARMAN, CaUfomia 

EDDIE BERNICE JOHNSON, Texas 

DAVID MENGE, Minnesota 

JOHN W. OLVER, Massachusetts 

ALCEE L. HASTINGS, Florida 

LYNN N. RIVERS, Michigan 

KAREN McCarthy, Missouri 

MIKE WARD, Kentucky 

ZOE LOFGREN, California 

LLOYD DOGGETT, Texas 

MICHAEL F. DOYLE, Pennsylvania 

SHEILA JACKSON LEE, Texas 

WILLIAM P. LUTHER, Minnesota 



David D. Clement, Chief of Staff and Chief Counsel 

Barry Beringer, General Counsel 

TiSH Schwartz, Chief Clerk and Administrator 

Robert E. Palmer, Democratic Staff Director 



Subcommittee on Energy and Environment 

DANA ROHRABACHER, CaUfomia. Chairman 



HARRIS W. FAWELL, Illinois 
CURT WELDON, Pennsylvania 
ROSCOE G. BARTLETT, Maryland 
ZACH WAMP, Tennessee 
LINDSEY 0. GRAHAM, South CaroUna 
MATT SALMON. Arizona 
THOMAS M. DAVIS. Virginia 
STEVE LARGENT, Oklahoma 
BARBARA CUBIN, Wyoming 
MARK ADAM FOLEY, Florida 
STEVEN H. SCHIFF, New Mexico 
BILL BAKER, California 
VERNON J. EHLERS. Michigan 
STEVE STOCKMAN, Texas 



TIM ROEMER, Indiana 
DAVID MINGE. Minnesota 
JOHN W. OLVER. Massachusetts 
MIKE WARD, Kentucky 
MICHAEL F. DOYLE, Pennsylvania 
JAMES A. BARCIA. Michigan 
PAUL McHALE, Pennsylvania 
EDDIE BERNICE JOHNSON, Texas 
LYNN N. RIVERS. Michigan 
KAREN McCarthy. Missouri 
HAROLD L. VOLKMER, Missouri 
SHEILA JACKSON LEE, Texas 



♦Ranking Minority Member 
**Vice Chairman 



(II) 



CONTENTS 



WITNESSES 

Page 

March 14, 1996: 

Dr. Jay E. Hakes, Administrator, Energy Information Administration, 
U.S. Department of Energy 9 

Mr. Glenn R. Schleede, President, Energy Market and Policy Analysis, 
Inc., Reston, Virginia 63 

Mr. Joseph J. Romm, Acting Principal Deputy Assistant Secretary, Office 
of Energy Efficiency and Renewable Energy, U.S. Department of En- 
ergy 97 

Mr. Michael C. Lynch, Research Affiliate, Center for International Stud- 
ies, Massachusetts Institute of Technology, Cambridge, Massachusetts . 127 

APPENDIX: FOLLOW-UP QUESTIONS AND ADDITIONAL MATERIAL FOR 

THE RECORD 

Dr. Jay E. Hakes, Administrator, Energy Information Administration, U.S. 

Department of Energy 171 

Mr. Glenn R. Schleede, President, Energy Market and Policy Analysis, Inc., 
Reston, Virginia 

Answers to follow-up questions 196 

Additional material submitted for the record: 

Letter to the Honorable Dana Rohrabacher, Chairman, Subcommittee 

on Energy and Environment, dated March 17, 1996 206 

Letter to the Honorable Dana Rohrabacher, Chairman, Subcommittee 

on Ener^ and Environment, dated April 4, 1996 213 

Letter to Dr. Jay E. Hakes, Administrator, Energy Information Ad- 
ministration, U.S. Department of Energy, dated February 14, 1996 215 
Letter to Dr. Jay E. Hakes, Administrator, Energy Information Ad- 
ministration, U.S. Department of Energy, dated April 26, 1996 238 

Glenn R. Schleede, "Illustrations of Costs Resulting from High En- 
ergy Price Forecasts That Are Borne by Consumers, Taxpayers, 
and Shareholders," Energy Market and Policy Analysis, Inc., Res- 
ton, Virginia, March 17, 1996 244 

Glenn R. Schleede, "Energy Price Forecasts are Leading Business 
Executives, Regulators, and Other Government Officials to Make 
Uneconomic Decisions, 1996 Edition: An Information Paper for Cli- 
ents and Colleagues," Energy Market and Policy Analysis, Inc., 

Reston, Virginia, February 1, 1996 254 

L.D. Hamlin, Southern California Edison, Presentation at the State 
Trends in Energy and Environment Conference, Sante Fe, New 

Mexico, June 14, 1994 277 

Mr. Joseph J. Romm, Acting Principal Deputy Assistant Secretary, Office 

of Energy Efficiency and Renewable Energy, U.S. Department of Energy 307 

Mr. Michael C. L)Tich, Research Affiliate, Center for International Studies, 

Massachusetts Institute of Technology, Cambridge, Massachusetts 653 

"Success Stories: The Energy Mission in the Marketplace. A Portfolio of 
Successful Investments in Applied Research and Development by the U.S. 
Department of Energy," Annex 3 of the Final Report of the Task Force 

on Strategic Energy Research and Development, June 1995 658 

"R&D Cost and Benefits Analysis: A Case Study of DOE's Industrial Tech- 
nologies R&D Programs, Appendix D of the Final Report of the Task Force 

on Strategic Energy Research and Development, June 1995 682 

Additional material submitted for the record by Representative Zach Warnp: 
Joseph J. Romm and Charles B. Curtis, "Mideast Oil Forever^', 
The Atlantic Monthly, April 1996, pp. 57-74 688 

(III) 



U.S. ENERGY OUTLOOK AND IMPLICATIONS 

FOR ENERGY R&D 



THURSDAY, MARCH 14, 1996 

U.S. House of Representatives 

Committee on Science, 
Subcommittee on Energy and Environment, 

Washington, DC. 

The Subcommittee met at 9:35 a.m. in room 2318 of the Raybum 
House Office Building, the Honorable Dana Rohrabacher, Chair- 
man of the Subcommittee, presiding. 

Members present: Representatives Rohrabacher, Roemer, Volk- 
mer, Johnson, Largent, Jackson-Lee, Wamp, Ehlers, Cubin, Doyle, 
McHale, Brown, Davis, Baker, Olver and Rivers. 

Chairman Rohrabacher. Okay, this hearing of the Energy and 
Environment Subcommittee will come to order. Today, we will ex- 
amine the U.S. energy outlook and its implications for energy re- 
search and development. 

In January of 1985, the Department of Energy predicted that 
crude oil prices would rise to $55 a barrel by 1995. By 1993, that 
prediction for 1995 had been lowered to $21 a barrel. However, the 
actual price in 1995 turned out to be $16.81. 

Similarly, the price projections for the year 2005 have sunk from 
$38 a barrel in 1990 to $21.86 a barrel in this year's forecast. It's 
clear that policy decisions based on those estimates such as funding 
large demonstration projects and synthetic fuels have been faulty. 

In January of 1996, Department of Energy officials predicted — 
that's January 1996, Department of Energy officials predicted "an 
imminent oil crisis," saying increased demand, increased imports 
and instability in the Persian Gulf could lead to an oil crisis. This 
scenario was justification for advocating a massive increase in the 
fiscal year 1997 budget request for energy conservation. 

At this hearing, we will look at the latest mid-term forecasts of 
energy supply and demand and prices by the Energy Information 
Administration. On January 11, EIA extended their projections to 
the year 2015 for the first time. 

We will also examine the accuracy of past EIA forecasts and 
whether we should rely on current projections or how policymakers 
in the industry have used or misused certain energy forecasts. And, 
as well, we will look at what the implications of these forecasts are 
for the Department of Energy programs. 

The world has seen some dramatic changes since the last oil cri- 
sis. Those changes include price decontrol and diversification of 
sources for our U.S. oil consumption. 

(1) 



The question is: do our energy policies and programs reflect those 
changes or do they reflect a 1970's time warp? To get the answer, 
we will hear from EIA officials there. And, we will hear from a pol- 
icy official at the Department of Energy and two respected energy 
analysts with different views. 

Let me also note what my opening statement doesn't say. And, 
that is, I remember the Global 2000 report which predicted that we 
would have a shortfall in just about ever3rthing. 

And, I remember people trying to push that report on the people 
who were running for office in 1980. I remember they went to dif- 
ferent cities and waving this report in their hands and demanded 
that each candidate m^e a statement about what his position on 
the Global 2000 report was. And, that turned out to be a bunch of 
liberal fantasy that could well have damaged decision-making in 
the United States government and some very serious decisions that 
had to be made in this area. 

So, it's important that when we are talking about projections like 
this that we actually look at them in a realistic way and we do not 
ever condone or let people get away with this type of chicken-little 
scare tactics that could end up costing the people of this country 
a lot of money as well as their faulty decision-making in business 
and in government in terms of what needs to be made in terms of 
programming for not only our country but for the various corpora- 
tions of our country. 

Before I introduce our witnesses, I will ask my colleague from In- 
diana, the distinguished Ranking Minority Member, Mr. Roemer, 
for his opening remarks. 

Mr. Roemer. Thank you, Mr. Chairman. And, I appreciate the 
opportunity to have such a distinguished panel of witnesses. And, 
I appreciate your leadership, once again, in having what I think 
will be a very interesting and informative hearing. 

Mr. Chairman, I am looking forward to this hearing. In fact, the 
best news that I've heard all week is that the Energy Information 
Agency has predicted that future energy prices will be lower than 
previously thought. 

This is a conclusion that probably brings good news to consum- 
ers, the stock market and business. Now, I don't want to burst that 
bubble, but I suspect that during this hearing we will also discuss 
the track record of these energy price forecasts. 

Back in the 1960's, energy forecasters thought that we would run 
out of oil in the 1990's. Now, forecasters think that prices will be 
fairly stable in the long term. 

While energy forecasts can be very useful for many reasons, what 
the results tell me as a policy maker is that the future of energy 
prices is, at best, uncertain despite how much I want to believe 
that prices will fall. The policy question, then, is. What do we do 
in the face of such uncertainty? 

The question is especially important since we are talking about 
the future energy supply, which is so important to the American 
economy, to the American people, to the American consumers, to 
the American businesses. I think that the only responsible ap- 
proach to such uncertainty is not to do nothing, but to take a small 
insurance policy out on the future. 



In this case, the insurance pohcy consists of energy R&D. And, 
luckily for us, this insurance policy provides great dividends along 
the way that have helped to keep the price of energy low. 

For example, in 1986, DOE fossil energy R&D helped to develop 
a new drill bit for oil and gas exploration that reduced drilling time 
from 60 days to 8 days and produced savings of as much as $1 mil- 
lion per well. In another example, in the early 1980's, DOE R&D 
developed a new window coating that now captures 36 percent of 
the $4 billion per year new window market. Further research has 
yielded a window that loses less heat than a wall. 

Also, in the 1980's, DOE photovoltaic research developed solar 
cell modules that allow the United States to lead the world in sales 
of this technology with over one-third of the $300 million per year 
market. And, the final example. After 10 years of work, the nuclear 
R&D program fostered new technologies to produce even greater 
energy extraction from nuclear fuels. 

Certainly, these technologies increase energy extraction by 50 
percent. And, new developments are expected to yield 100 percent 
increase in energy production. 

An important point that should not be missed is that these same 
technologies, in addition to reducing energy costs, also help reduce 
pollution. In fact, energy efficiency advances in solar and renew- 
ables technology development are increasingly important parts of 
the fight to preserve the environment. 

These technologies can help us to invent our way out of our pol- 
lution problems, which is surely a better approach than imposing 
federal mandates and new federal regulations. Another bonus of 
such energy technology development may be that the United States 
can become more self-sufficient and cease to depend on foreign en- 
ergy imports. 

Although U.S. companies now eye new reserves discovered off the 
coast of Nigeria and in Venezuela, we don't know if Americans will 
always have access to that oil and gas. I, for one, don't want the 
United States to have to fight another Persian Gulf war if we can 
avoid it. And, I think that spending a little on energy R&D to avoid 
the cost of such a war in the future, even in the distant future, is 
well worth the price. 

The bottom line is that, with all the insurance policies, you don't 
drop them because you think everything is going to be fine for just 
awhile. You might shop around for a better deal to try to cut costs 
yourself, but you don't stop paying on your insurance policy. 

We wouldn't do that with health insurance, so I don't see why 
we should do it with our energy insurance. 

Finally, I just want to give you one thing that happened to me 
yesterday. I had a U.S. businessman from Bechtel in my office talk- 
ing about what they were doing in Egypt and what the Egyptian 
government was doing in energy. 

And, he said that here, in the heart of oil reserves that are so 
proniinent for everybody there, that the Egyptians were pursuing 
all kinds of new solar and renewable energy resources to try to put 
not all their eggs in one basket but to have a myriad of options in 
the future. I think that's the role the United States should play. 

And, I, again, thank the Chairman for the opportiuiity to have 
this important hearing. 



Chairman Rohrabacher. Well, thank you very much for that 
fine opening statement. I just would note that deregulating the 
price has something to do also with development of new tech- 
nologies. 

We went through a struggle to make sure that energy prices 
weren't kept artificially low, which would have impeded the devel- 
opment of new technologies and energy saving concepts like you 
were describing. So, it's not just government research but you have 
to make sure the marketplace is functioning well. 

And, during the 1980's when you had high prices for energy, we 
developed a lot of those technologies — and especially if they can be 
put to use. But, your points were very well made. 

Mr. Volkmer, do you have an opening statement? And, I would 
ask if the members of the Committee who have opening statements 
could keep them to a minimum, because we would like to get to the 
panel as soon as possible. 

Mr. Volkmer. Thank you, Mr. Chairman, I will be very brief. 

I'm sorry I am not going to be able to stay for the full hearing. 
I find that the testimony of the witnesses is very interesting. 

But, I am curious to know — or, at least, I would suggest to the 
Chairman, since there are other programs within the jurisdiction 
of this Subcommittee in regard to energy, that we should have 
hearings also on those programs, the energy research programs 
and energy conservation, before we go to markup. I suggest that 
some of us feel that those are just as important as the hearing here 
today. 

Chairman Rohrabacher. We will be very pleased to consider 
your suggestions. And, I've always been open to having witnesses, 
other witnesses, in other areas that you would like or even another 
hearing if you would like. 

And, we will be very open to your suggestions. 

And, it's either Ms. Johnson or Ms. Jackson-Lee. I don't know 
who arrived first. Okay, Ms. Johnson. 

Ms. Johnson. Thank you very much, Mr. Chairman. And, I want 
to thank you for cedling this hearing. 

Clearly, being from an oil producing state, at least formerly an 
oil producing state, I'm very interested in what the witnesses have 
to say today and wish they would address some of the concerns 
about the reserves. 

We seem to be riding high now. I hope we don't knee jerk and 
think we are on such safe ground. 

We are importing so much of our oil, which is always a guess- 
timate as to whether that's stable. I think that this is the time that 
you prepare. This is insurance time. 

You know, you have insurance policies to be there when you need 
it. And, I hope that we will have an insurance poUcy for our coun- 
try so that we can, if necessary, be independent of energy sources 
from outside our shores. 

The world is a volatile place. And, we just don't know. 

But, I hope that today we will get some guidance and direction. 
And, I thank you for the opportunity. 

[The prepared statement of Ms. Johnson follows:] 



Opening Statement 

The Honorable Eddie Bernice Johnson 

Energy and Environment Hearing 

Energy Outlook 

3/14/96 

I thank you for recognizing me and for calling this hegiring this morning, Mr. 
Chairman. For my home of Texas, the energy market and the outlook for the mar- 
ket in the future are of critical importance. 

As we take a look at this issue today, I am reminded of some staggering statistics 
about energy production in this country. Crude oil production in the lower 48 states 
has now dropped to its lowest level since 1946, while our imports of oil from foreign, 
often somewhat unstable sources continues to hover around the 50 percent level. 
From a labor standpoint, about 500,000 jobs have been lost in the oil industry since 
the early 1980's. 

During this hearing, we will examine models which suggest that the price of en- 
ergy will continue to decline in the near term. Unfortunately, this may lead some 
to urge for a severe reduction in the Department of Energy's energy research and 
development program. I believe this would be a poor choice for this committee to 
make. 

While lower energy prices are indeed a great assistance to the economy, we all 
must be aware that these prices, which are in the hands of foreign oil producers, 
can rapidly change. The lessons of the oil embargo of the 1970's should be well-re- 
membered, as should the example of the recent Gulf War. Despite increased produc- 
tion on the part of Saudi Arabia, and President Bush's use of the Strategic Oil Re- 
serve near the end of the conflict, the price of oil rose to about $33 per barrel. That 
figure accounts for a near doubling of the price in a very short time frame. 

Research and development programs for energy have contributed to the present 
low price of energy. To abandon successful initiatives now is ill-advised. The possible 
costs of this strategy, including increasing our dependence on foreign energy 
sources, are simply too high a cost to pay. 

Chairman Rohrabacher. Thank you very much. Ms. Jackson- 
Lee. 

Ms. Jackson-Lee. Mr. Chairman, thank you, first of all, for a 
rapid series of hearings that we've had since I've joined the Com- 
mittee. And, I am delighted for the focus that we've had the oppor- 
tunity to generate and to sense your commitment and interest in 
continually being apprised of the current agenda and current is- 
sues. 

For that reason, I would like us not to forget our history and rec- 
ognize that about 25 years ago we would not have been concerned 
about the future and availability of our natural energy resources. 
We remember the long lines in the 1970's, however, that not only 
caused policymakers to change their minds but citizens all over 
this nation began to take up a cry against long Unes at gasoline 
stations. 

So, we had faced a crisis. It was out of that climate that was 
spawned the commitment to energy conservation and alternative 
energy production and R&D programs. 

We began to seek out new ways to preserve our sanctity and in- 
security, in fact, of this nation. We've come a long way. 

And, to the credit of those programs, they produced results. The 
rate of energy consumption per capita has been reduced and new 
sources of energy are yielding success. 

But, regardless of our past achievements, Mr. Chairman, the fact 
remains that the United States still depends on foreign countries 



for 50 percent of its oil needs. Oil accounts for a major portion of 
our unbalanced/balance of trade problem. 

And, we are still economically vulnerable. And, that means that 
our national security is at risk. 

For years, as a practitioner of the oil and gas industry, we have 
discussed in the industry the call for a domestic energy policy and 
one that would allow us to be dependent solely or, at least, in the 
majority sense on resources that we produce here at home. I think 
it is still a problem that faces our nation. 

And, so it is important that we maintain a steady hand on re- 
search and development that goes along with conservation but, as 
well, with developing our domestic energy resources in a safe, envi- 
ronmentally safe, and affordable manner. We cannot rely upon the 
good days of today, the low cost and rates of today, for the days 
in the future and the days of tomorrow. 

So, the government must guard against complacency and remem- 
ber the past, for we have come a long way but there is still yet 
quite a distance to go. 

And, I would like to put the balance of my statement, Mr. Chair- 
man, in the record. And, I yield back my time. 

And, I look forward to participating in the hearing. And, let me 
qualify, as well, and say that I might not be able to stay continu- 
ously because of the anti-terrorist legislation on the Floor of the 
House. 

Thank you. 

[The prepared statement of Ms. Jackson-Lee follows:] 

Opening Statement by Congresswoman Jackson Lee 
Subcommittee on Energy and Environment 

March 14, 1996 

Until about twenty-five years ago, not many of us would have been concerned 
about the future and availability of our natural energy resources. The energy crisis 
of the 1970's changed all of that and brought to the forefront, the issue of our lim- 
ited fossil fuel reserves and the dependence this country has on foreign nations for 
its energy needs. 

It was that time of crisis which spawned many of the energy conservation, alter- 
native energy production and R&D programs that were aimed at reducing this coun- 
try's vulnerability to energy shortages like that experienced in 1972. And to their 
credit, those programs have produced results: the rate of energy consumption per 
capita has been reduced and new sources of energy are yielding success. 

Regardless of our past achievements, the fact remains that the United States still 
depends on foreign countries for 50% of its oil needs; oil accounts for a major portion 
of our unbalanced balance of trade problem and we are still economically vulnerable 
and that means that our national security is at risk. 

With these problems still facing our nation, and the environment of competition 
only becoming more ferocious, I believe we must not only lessen our dependence on 
other nations for our most basic of needs, but to do so at a reasonabfe rate. Just 
because a gallon of gas is affordable doesn't mean there is not a problem. This gov- 
ernment must guard against complacency and remember the past, for we have come 
a long way, but there is yet quite a distance to go. 

Chairman Rohrabacher. Thank you very much. And, without 
objection, your full statement will be made part of the record. 

Mr. Largent from Oklahoma, another oil producing state. 

Mr. Largent. Thank you, Mr. Chairman. I just want to make 
very brief remarks and say that I am interested in hearing what 
this panel has to say about what the Department of Energy, in par- 



ticular, is doing in relationship to oil and gas exploration, domestic 
oil and gas production. 

I am sure you all are aware that the State of Oklahoma, in fact, 
my district, Tulsa, Oklahoma, is referred to as the oil capitol of the 
world, that 80 percent of the production, domestic production, 
comes from independent producers, not the Exxons and Texacos 
that so many people think. But, 80 percent, in fact, come from 
independent producers. 

We have lost 500,000 jobs since the 1980's in the domestic oil 
and gas production. That's alarming, not only because I represent 
the 1st District where a lot of those jobs have been lost, but more 
importantly I think that what we have seen — and Mr. Romm I read 
in your remarks — really represents a very grave national security 
problem. When we have come to rely on nearly 60 percent of our 
oil that comes from foreign sources, that is a very real national se- 
curity problem. 

And, the fact is that a lot of the heavy regulatory burden that's 
on the oil and gas industry has really made it cost prohibitive for 
these independent producers, the small ranchers, farmers, that 
have two or three oil wells on their property that are producing — 
they are stripper wells that produce somewhere between three and 
eight barrels of oil a day, the little guy, it really becomes cost pro- 
hibitive because of the regulatory burden that he has to suffer 
under for him to even continue production. And, so we've seen a 
steep decline in those small producers. 

And, so I am going to be interested in hearing the comments 
from representatives from the Department of Energy about what 
we are doing to address this heavy regulation that is placed upon 
the small oil and gas and independent producers so that we can 
make this not so prohibitive, make it more efficient and still pro- 
vide an environmentally sound condition because, as I said, we are 
facing some very grave national security issues if we don't face this 
sooner than later. 

Thank you, Mr. Chairman. 

Chairman Rohrabacher. Thank you very much, Mr. Largent. 
And, Mr. Wamp, do you have an opening statement? 

Mr. Wamp. Mr. Chairman, I won't msLke a statement, but I would 
commend an article in the "Atlantic Monthly" called "Mideast Oil 
Forever?" by Joseph Romm and Charles B. Curtis to the entire 
Committee for their consideration. 

[The article referred to appears on page XX of the Appendix.] 

Chairman Rohrabacher. We will add that to the record. And, as 
you know, Mr. Romm will be testifying. 

[The prepared statements of Mr. Doyle and Mr. Minge follow:] 

OPENING STATEMENT 

HON. MIKE DOYLE [PA-18] 

Energy & Environment Subcommittee 

Hearing on ELA Report 

Mr Chairman, I want to thank you for holding this hearing. Last year, I was 
greatly disturbed by the sweeping policy changes this committee made in energy 
R&D policy without the benefit of a substantial hearing record. Thus, I am grateml 



8 

for this opportunitv to examine these issues before we embark upon significant de- 
partures from established poUcy. 

Today's hearing has been called in order for us to examine the results of EIA's 
annual report, which I believe is a worthwhile endeavor. However, I believe that we 
should be extremely cautious in drawing too many conclusions from this study. First 
of all, I have some serious misgivings about the integrity of the models used by EIA, 
and I expect that this concern will oe explored by myself and other members in de- 
tail during the questioning of the witnesses. Clearly, it would not be responsible for 
this committee to base its decisions on energy policy on flawed models. 

Furthermore, even if we were to accept tne accuracy of EIA's analysis, I am not 
convinced that the scope of their examination — which is primarily economic — pro- 
vides a sufficient basis for developing a long-term energy policy. Energy supply is 
a major underpinning of our economic security, and thus we should look at this as 
a national security concern. In doing so, we must ask ourselves whether or not we 
would be pursuing the same strategy towards our nation's defense budget that we 
seem to be taking towards energy policy by relying on such limited economic analy- 
sis. 



Statement of the Honorable David Minge 
Hearing on U.S. Energy Outlook and Implications for Energy R&D 

Subcommittee on Energy and Environment 

Mr. Chairman, I am concerned that this committee will use this hearing as a pre- 
text to further cut federal renewable energy research and development programs. 
That would be pennywise and pound foolish. 

Most of my colleagues would not disagree on the benefits derived from pursuing 
the development of renewable energy technologies. However, I am concerned about 
the lack of information available aoout renewable fuels. This became apparent to 
me last year during the debate on the Department of Energy budget. Funding for 
renewable energy came under attack — not because it was wasteful over-spending or 
because it would result in "pork-barrel" projects — but because Members of the 
House simply had no knowledge of the benefits of energy technologies. The House 
eventually — almost reluctantly — passed an amendment calling for $45 million for re- 
newable energy funding in the Depsutment of Energy's budget. The lack of informa- 
tion about this debate clearly demonstrates the need to increase exposure to the im- 
portance of renewable energy. 

As the Energy Information Agency points out in its latest midterm forecast, real 
prices for energy remain low and are forecast to remain that way for the next 20 
years, so the perception that renewable energy has lost some of its relevance or im- 
portance to this country pervades. And yet, there are several important benefits to 
finding new sources of energy that are often overlooked. 

The most powerful argument is the opportunity to offset fuel imports. As a nation 
we are tremendously dependent on the Middle East as a source of oil. With each 
new breakthrough in renewable fuels, this country moves closer to the day when 
we can significantly reduce our dependence on imported oil and become more self- 
sufficient in all forms of energy. It will ease our chronic trade deficit problem. 
Roughly 50% of our trade deficit is caused by imports of foreign oil. That also augers 
well for our national security, enabling us to become less vulnerable to interruptions 
in supply from overseas sources of oil. The Gulf War of 1990 was fought in large 
part over the threat to our oil supply. 

Expanding the development or renewable energy is also beneficial to our national 
economy. With the prosperous development of new energies, exports of these tech- 
nologies is a significant opportunity. American entrepreneurs and national labs in 
our country represent the cutting edge of this industry. We must not pull the plug 
on them and lose out on this untapped potential. 

I know first-hand in my own district that the economic benefits of renewable en- 
ergy technologies provide a boost to our rural communities. Ethanol plants have al- 
ready brought new jobs to many declining rural communities who depend on corn 
production. Wind energy is another cutting edge energy technology that is already 
up and running in my district and holds promise throughout the windy Plains 
states. Rural communities are not only in need of innovative approaches to agricul- 
tural production, they are often best suited to develop these expandable tech- 
nologies. One example is the development of biomass energy and feedstock produc- 
tion based on alfalfa leaves and stems. This energy technology will enable many 
communities to find a niche in a new agricultural market. 



We must not overlook the environmental benefits that renewable energy tech- 
nologies provide. As clean technologies like wind, biomass, solar, geothermal and 
hydro continue to displace coal and oil, the air we breathe will improve and the 
iJnited States will be better situated to meet our Rio Treaty emissions objectives. 
Again, my district offers a good example of how renewable energy technologies may 
be able to solve an unpleasant environmental consequence of agricultural produc- 
tion. Large hog feedlots produce strong odors which may contribute to healtn prob- 
lems. A project currently under development captures the manure in a covered feed- 
lot that will both generate electricity from the methane recovered and substantially 
reduce odors. 

In short Mr. Chairman, Congress must look at the long-term when allocating re- 
sources for energy research and development. It would be tragic for our country's 
long-term competitiveness and security if we used this forecast as an excuse to cut 
energy R&D even further. 

Chairman Rohrabacher. As you know, we have a panel of wit- 
nesses today. And, before I introduce you, I would just like to re- 
mind all of you that this is — I handle my situations, my Committee 
meetings, in a different way than a lot of other chairmen. 

I would like there to be a dialogue between the members of the 
Committee and, of course, the witnesses. But, also I would like the 
witnesses to feel free to comment on testimony they have just 
heard and have a dialogue with each other. 

I was always dismayed — and I've said this before, many times 
before — that we would end up with one set of witnesses with one 
mind-set being heard. And, then the other witnesses with another 
point of view would be hours later. 

And, I don't think that that's the way that we are going to deter- 
mine what the facts are. 

And, I would encourage all of you to take notes of what your fel- 
low panelists are talking about and make your comments. And, 
then we will make sure that each of you get a chance to have a 
rebuttal period as well. 

We have a panel of witnesses today — Mr. Hakes, the Adminis- 
trator of the Energy Information Administration at the Department 
of Energy; Glenn Schleede, the President of Energy Market and 
Policy Analysis, in Reston, Virginia; Joseph Romm, the Acting Dep- 
uty Assistant Secretary of Energy Efficiency and Renewable En- 
ergy at the Department of Energy; and Michael Lynch, a Research 
Affiliate with the Center for International Studies at Massachu- 
setts Institute of Technology, MIT. 

So, thank you all very much. And, Mr. Hakes, would you like to 
begin? 

And, if you could, keep your opening statements down to five 
minutes. And, then we can get on to questions and some inter- 
change. 

Thank you. 

STATEMENT OF DR. JAY E. HAKES, ADMINISTRATOR, ENERGY 
INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF EN- 
ERGY, WASHINGTON, DC 

Dr. Hakes. Thank you, Mr. Chairman. I appreciate this oppor- 
timity to appear before the Committee. It has been a number of 
years since EIA has been before the Committee. 

Let me just mention to the Members that we are an independent 
part within the Department of Energy. Our data and forecasts are 
done independently. 



10 

We function somewhat like the CBO functions for the Congress. 
We try not to have an ax to grind in the debate. And, we are pohcy- 
independent in our operations. 

Our data and forecasts are widely used by industry, by govern- 
ment and by the public. The model that we are talking about today 
is the National Energy Modeling System, which is used to put forth 
projections of energy price, supply and demand. 

This model is used extensively by policymakers to do "what if 
games. People want to know what happens if taxes go up, what 
will that do to energy, the energy world. 

Last year, the Congress was interested in what would happen if 
exports from the North Slope of Alaska were permitted. And, we 
did that kind of analysis. 

So, it is a service that is provided to the Congress, to the Execu- 
tive Branch and to the public to analyze energy issues. And, we 
think that it has been a valuable contribution. 

If the issue is were there mistEikes made years ago, we probably 
don't need a real long discussion of that because I think everyone 
admits that is the case. However, we are well prepared, I think, to 
defend the rationale behind our current projections. 

In looking at the world of energy, this is, indeed, a big subject. 
And, I think it is well known to most people that the United States 
is still the major producer of energy in the world today, not just 
the largest consumer. 

And, almost all fuels are available, at least, in the United States 
or in contiguous nations to meet our needs. But, the one exception 
is oil. And, therefore, since oil is a more sensitive issue, I thought 
I would focus just a few brief remarks on oil. 

One of the issues that comes up — and it's in the first poster here 
to my right — is what are the projections for the price of oil. And, 
what the Energy Information Administration shows this year is a 
very gradual increase in the price of oil that would take us in real 
dollars in the year 2015 to a price of about $25 a barrel. 

This is a more moderate increase than has been shown in any 
of our previous forecasts and reflects a perception that even with 
great increases in world demand that the oil is likely to be there. 
This chart does — you will see two parts to this chart, however. 

You will see a historical part, which starts in the year 1970. And, 
the lines are very jagged. They reflect a lot of historical events that 
many of us remember. 

In the future, the line gets to be fairly smooth. And, that's just 
simply because in a model or in a forecast it's hard to anticipate 
where the jags will come. But, history shows us that the lines go 
up and they go down. 

The second issue that I will just address briefly is the issue of 
imports. Currently, net imports in the United States run about 45 
percent. Total imports are in the range of 50 percent. 

Our calculations generally use net imports. And, we project that 
by the year 2015 that the import level will be 56 percent. 

Now, like almost all of our charts that project into the future, we 
have ranges of uncertainty. And, some might even argue these 
ranges are not great enough. 



11 

But, we realize that there are no facts about the future. And, we 
try to show what the world would be like if the price of oil was 
higher or lower or the economy grew faster or slower. 

And, so the range here in our projections would be from the mid- 
1940's up to about 68 percent depending on the rate of economic 
growth and other factors. 

Another issue is the role of the Persian Gulf. You can do calcula- 
tions based on the OPEC or on the Persian Gulf. Today we are 
using the Persian Gulf. 

And, we project that in the year 2015 that the Persian Gulf will 
be producing about 43 percent of the world's oil. The Persian Gulf 
has an abundance of oil. 

It is easy to find and easy to produce. They have constrained pro- 
duction there somewhat, but we feel that they will allow the invest- 
ment necessary to meet rising world demand. 

The role of the Persian Gulf in producing oil is somewhat under- 
stated, I believe, by just a consumption number, because the power 
of the Persian Gulf comes not just from the fact that they produce 
a lot of oil but the fact that they don't consume very much of the 
oil. Because they don't consume a lot of the oil, they have a lot to 
export. 

And, so if we look at the role of the Persian Gulf and the amount 
of oil in the world that is available for export, the numbers go up 
considerably. And, we see that in the year 2015, we project that 
roughly three quarters of the world's exportable oil would come 
fi'om the Persian Gulf. 

Now, this can change based on a number of factors. To make 
these judgments, one has to make assumptions about the rate of 
technological progress, the economic and political environment in a 
number of countries. But, this is our basic estimate. 

I think it is useful, too, in talking about oil to just bring to your 
attention one historical situation that you are all familiar with. 
And, that is the Persian Gulf war. 

And, we have here a time line of what happened in the Persian 
Gulf war. This is history, so we are not dealing here with models. 

But, we see that when Iraq invaded Kuwait that a lot of oil came 
off the world market from the two warring countries and that in 
that period the price of oil basically doubled to $33 a barrel. The 
Saudi Arabian government was strongly supporting the allied posi- 
tion and came in with a lot of excess capacity and started to 
produce quickly. 

So, we had what you will call a short price spike where the inter- 
ruption in world supply did cause a sudden price increase. The 
price then came back down fairly rapidly. 

But, the impact — I think if we can go to the next poster and ac- 
tually my last poster — shows that price spike was associated with 
three quarters of negative economic growth, which some people 
would refer to as a recession. And, the country has had three reces- 
sions in the last 25 years; and, virtually all of them have had a 
pattern very much like that where the price went up in a spike — 
the earlier spikes were of longer duration — and the economy 
seemed to hit the skids. 



12 

Economists and other careful scholars are hesitant to talk about 
causal effects, but there is a very close correlation between the last 
three economic downturns and spikes in the price of oil. 

Chairman ROHRABACHER. I will let you go on, because you have 
overshot the five minutes but you have a lot to say here. And, you 
are the one under the gun. 

But, let me just ask one question. Isn't that also the time period 
when the 1990 tax increase kicked in just at that same time when 
you had the recession? 

Dr. Hakes. Does anyone know the date of the 

Chairman RoHRABACHER. I think it is, but we will go through 
that when we go through the 

Dr. Hakes. It was also reduction in government spending at that 
time. 

Chairman Rohrabacher. Who was President? That was George 
Bush. He said, "Read my lips." There's the recession. 

[Laughter.] 

Dr. Hakes. Well, I put in the caveat of backing away a little bit 
from causal connections. 

Mr. Chairman, this is a convenient place for me to stop. I under- 
stand there is some interest in our nuclear power projections, and 
I can deal with that now or I could deal with that in the question 
period, whatever you prefer. 

Chairman Rohrabacher. Why don't we move on? 

Dr. Hakes. Sure. 

[The prepared statement of Dr. Hakes follows:] 



13 

STATEMENT OF 
JAY HAKES 

ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION 
DEPARTMENT OF ENERGY 
before the 
. SUBCOMMITTEE on ENERGY AND ENVIRONMENT 

of the 
COMMITTEE on SCIENCE 

UNITED STATES HOUSE of REPRESENTATIVES 

MARCH 14, 1996 



14 



Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to appear before you today to discuss the Energy Information 
Administration's (EI A) projections of energy supply, demand, and prices through the year 2015, 
how they have changed in recent years, and some of the uncertainties associated with the 
forecast. I will also address some issues dealing with the uses of our past projections, and what 
EIA and other parts of the Department of Energy are doing to assure that the forecasts are used in 
the most appropriate ways possible. While EIA does not and cannot monitor all of the uses made 
of its data, analyses, and forecasts, we have made significant efforts to assure that users of our 
material are made fully aware of their limitations and the imavoidable uncertainties that underlie 
energy forecasting, as well as alternatives to our projections (such as those made by private 
forecasters, or committed long-term contracts that assume price risks). 

Before continuing, I would like to emphasize that EIA is an independent agency of the 
Department of Energy, charged with providing objective data, and nonpartisan analyses and 
forecasts concerning domestic and international energy markets. We do not take a position on 
policy proposals of the Department or the Administration. Our job is to help the Department, 
Congress, and the public understand the energy implications of such proposals. In keeping with 
this objectivity, all of our mid-term baseline forecasts assume the continuation of current laws 
and regulations as of October 1 of the year prior to the release of the Outlook. In this way, we 
are able to respond to our customers' requirements for balanced and objective analysis of the 
impacts of proposed policy changes, such as changes in energy taxes, carbon mitigation efforts, 
and efficiency standards. The ability to provide such objective analysis is a major strength of 
EIA's program. We are proud that our role in providing objective data has helped to resolve 
many of the debates regarding energy policy that have occurred over the last two decades. We 
also recognize that our forecasts, by necessity, are affected by judgment, but we would maintain 
that our judgment has qqI been partisan. The purpose of our forecasts has always been to 
enlighten our users concerning the impacts of various policies on possible energy futures, rather 
than to guarantee that we know what the future holds. 

2 



15 



The Outlook for Energy Supply, Demand, and Prices Through 2015 

EIA's Annual Energy Outlook is published in accordance with Section 205c of the Department of 
Energy Organization Act of 1977 (Public Law 95-91), which requires the Administrator of EIA 
to prepare an annual report that contains trends and projections of energy consumption and 
supply. These projections are based on current laws and regulations and essentially provide a 
baseline so that the costs and benefits of proposed new policies, laws, and regulations can be 
examined. 

The Annual Energy Outlook 1996 (AE096) is the first Annual Energy Outlook with 20-year 
projections to the year 2015. Key areas of analysis include the availability and economics of 
domestic fossil fiiel resources, the penetration of new, more advanced energy technologies, and 
the projected decline of nuclear generation. Each of these areas has a major impact on this year's 
forecast, with the overall picture being one of lower prices and higher supply than in previous 
outlooks. The following is a summary of our most recent forecast. 



Pricgs 



Because of higher expectations for oil production fi-om the Organization of Petroleum Exporting 
Coimtries (OPEC), oil prices are projected to be slightly lower than in AE095 (Figure 1). In 
2010, the average price is about $24 per barrel (all prices are expressed in inflation-adjusted 1994 
dollars), nearly $1 a barrel lower than last year's projection. The 2015 price is expected to be 
about $25 a barrel, with the low and high price cases ranging fi-om $16 (about 5 percent below 
the estimated 1995 value) to $34 a barrel (Figure 2). Underlying the oil price projection are three 
key factors: 

• OPEC, with its vast store of readily accessible oil reserves, is expected to be the source of 

marginal supply to meet future incremental demand. By 2000, OPEC supply in the 
reference case approaches 35 million barrels per day, a figure that is consistent with 



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18 



announced plans for capacity expansion by OPEC. By 2015, OPEC production in the reference 
case is just over 52 million barrels per day, or about twice its level of production in 1990. Crude 
oil production from the Persian Gulf is expected to be about 40 million barrels per day by 2015, 
compared to about 20 million barrels per day in 1994 (Figure 3). With world oil consumption 
rising to 93 million barrels per day by 2015 (Figure 4), Persian Gulf supplies will provide 43 
percent of the world's oil consumption by 2015 (Figure 5), compared to about 30 percent in 
1 994. In terms of internationally traded oil, the Persian Gulf share should be even higher, 
reaching 74 percent in 2015 (Figure 6), compared to under 50 percent in 1994. 

• Oil production in non-OPEC nations has received boosts from new discoveries as well as 
technical iimovations that have delayed production declines in mature fields. Assuming a 
continuation of this trend, production in non-OPEC nations is projected to continue 
creeping slowly upward, reaching just over 41 million barrels per day in 2010, then 
declining slightly to 40 million barrels per day (near the 1994 level) in 2015. 

• A substantial increase in world oil consumption is expected over the next 20 years. With 
rapid gains in energy demand anticipated for the developing countries, world oil 
consimiption of about 69 million banels per day in 1995 will rise to more than 74 million 
barrels a day by the end of the decade and reach as high as 100 million barrels a day (in 
the low-price case) by 2015. Much of the growth in demand for oil is concentrated in the 
developing nations of Asia, where demand growth greater than 5 percent a year is 
expected. Annual growth in oil demand of less than 1 percent is anticipated for the OECD 
nations. 

Projections of the average wellhead price of natural gas in AE096 are significantly lower than in 
AE095. The AE096 average wellhead price in 2010 is $2.15 per thousand cubic feet (compared 
with ahnost $3.50 in AE095), rising to $2.57 per thousand cubic feet in 2015 (Figure 7). Higher 
assessments of domestic resources, lower drilling costs, and a change in methodology to account 
for more direct investment in future gas exploration and production projects contribute to the 



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reduced price projections. In contrast to domestic oil prices, natural gas prices are less affected 
by changing world oil prices, largely because oil and natural gas do not compete directly in all 
domestic markets. However, wellhead prices are expected to increase from the 1995 }evel of 
about $1 .60 per thousand cubic feet, as increasing demand and the effects of resource depletion 
raise prices, although not as much as projected in AE095. Little change in consumer prices is 
projected through 2008, as declines in transmission and distribution margins generally offset 
moderate increases in wellhead prices. After 2008, the upward pressure on supply prices from 
rapidly increasing demand and resource depletion, and the need for new downstream 
infrastructure, force end-use prices for all sectors to rise moderately. 

U.S. coal minemouth prices, currently about $19 per ton, are projected to decline slightly over 
the forecast horizon, due to increasing productivity, flat real wages, more low-cost production 
from the Western states, and competitive pressures on long-term contracts. In 2010, the 
minemouth price is $17 per ton, compared with $23 in AE095 (Figure 8). Productivity 
improvements fu^st outpace, then lag behind cost growth as thicker, shallower low-sulfiir coal 
reserves are depleted. As a result of productivity gains, the number of coal miners is forecasted 
to decline by 43 percent between 1994 and 2015. The average price of delivered coal to all 
domestic sectors (about 90 percent of which goes to electricity generators), is moderated by the 
decline in minemouth prices and the competition between transporters, particularly the raikoads, 
falling from $1 .39 per million Btu in 1994 to $1.28 by 2015. 

Average real electricity prices, which are expected to remain essentially flat through 2015, are 
slightly lower than in AE095 (Figure 9). The main factors responsible for the projected decline 
include: 

• Capital costs associated with the recovery of investments in power plants and 

transmission and distribution facilities are expected to decline by 0.6 percent annually 
from 1994 to 2015. The decline is made possible by increased utiUty reliance on 
wholesale power purchases (which more than triple over the forecast), lower construction 

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27 



costs for new combustion txirbine and combined-cycle generating technologies, and the 
availability of adequate capacity for current generation needs. 

• A yearly 0.2-percent decline in operating and maintenance costs is also expected, as more 
turbine-based capacity is installed and operated. For a typical 300-megawatt plant, 

- operating and maintenance costs for advanced gas turbines are about half those for 
conventional coal-fired generators. 

• Weighted average fuel costs to electricity generators are essentially flat in the forecast, as 
a 0.3 percent decline in coal prices more than offsets the 1 .4 percent annual rise in gas 
prices between 1994 and 2015. 

Consumption 

Although energy prices in AE096 are lower than those in AE095, total consumption in 2010 is 
expected to be about the same, at 105 quadrillion British thermal units (Btu) (Figure 10). Energy 
consumption in the residential sector is projected to rise by 3.6 quadrillion Btu or 20 percent 
between 1994 and 2015, with most of the increase due to heating requirements for new homes, 
and continued growth in appliance use. Projections for the commercial sector depict growth 
slowing overall, with shares for all fuels essentially stable over the forecast horizon, for two 
reasons: 1 ) Commercial floorspace growth increases .by only 1 . 1 percent a year between 1 994 
and 2015, compared with an average increase of 1.5 percent a year over the past two decades; 
and 2) energy consumption per square foot declines by 0.3 percent a year, due to efficiency 
standards, volimtary government programs aimed at improving efficiency, other technology 
improvements, and efficiency gains in electricity generation. Primary energy use in the 
commercial sector is expected to equal about 1 6 quadrillion Btu in 201 5. 

Primary energy use in the industrial sector is projected to increase by 18 percent over the 
forecast, from 34 quads in 1994 to 40 quads by 2015, a modest increase in comparison with 

15 



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growth in manufacturing output and gross domestic product, as improvements in efficiency 
continue to drive energy requirements per unit of industrial output down. By 2015, total energy 
demand for transportation will exceed 30 quadrillion Btu, compared with 23 quadrillion Btu in 
1994. Petroleum products continue to dominate energy use in the transportation sector through 
2015, but with the emphasis of current environmental and energy legislation on reducing oil use, 
alternative fuels (such as ethanol) are expected to displace nearly 400,000 barrels of oil 
equivalent per day by 201 5. 

Electricity. Fossil Fuel Production, and Renewables 

In general, electricity and other domestic energy supply sources are expected to grow sufficiently 
to meet the increasing demand for energy, with the notable exception of crude oil. Declining 
reserves and lower-cost foreign supplies will cause domestic crude oil production to continue its 
long-term decline. However, after 2005, higher prices and improving technology should arrest 
that decline, with production in 2015 gaining more than half a million barrels per day over the 
2005 level. Natural gas and coal, with fewer ties to world markets, will continue to show 
moderate growth in production. In terms of percentage growth, renewables should show the 
greatest improvement, but less than in AE095 because of lower fossil fuel prices in AE096. 

« 

Electricity: Fossil fuels, which in 1994 accounted for 70 percent of electricity generation, are 
projected to account for 79 percent in 2015 (Figure 1 1). Much of the increase is in the use of 
natural gas, which ciurently fixels 14 percent of total generation but grows to 27 percent by 2015, 
supplanting nuclear energy as the Nation's second largest electricity source. The outlook assumes 
that 37 gigawatts of nuclear capacity are assimied to be retired by 2015, with no new nuclear 
orders on the horizon. The retirements take place under the assumption that, on average, existing 
nuclear generating units retire at the end of their 40-year license periods. 

Oil and Gas Production: Although projected world oil prices in AE096 are almost $ 1 a barrel 
lower in 2010 than they were in AE095, the projection for domestic crude oil production is 

17 



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similar to last year's. Production declines from 6.7 million barrels per day in 1994 to 5.3 million 
barrels per day in 2005, then rebounds from 2005 to 2015 as a result of technology 
improvements and rising prices (Figure 12). In 2010, estimated domestic oil production is 5.4 
million barrels a day (the same as last year's projection), rising to 5.8 million barrels a day in 
2015. Of the sources of domestic production, the output from Alaska is expected to decline the 
fastest^ to about 700,000 barrels per day by 2015, less than half of current levels. Overall, U.S. 
oil production declines over the projection period, and the share of petroleum consumption met 
by net imports reaches 57 percent (measured in barrels per day) in 2005 and remains at about that 
level through 2015, compared with 45 percent in 1994. As a share of U.S. oil consumption, net 
imports range from 45 percent in the high world oil price case to 68 percent in the low world oil 
price case (Figure 13). 

Driven primarily by the growth in consumption, natural gas production increases at an average 
annual rate of 1.3 percent between 1994 and 2015. By 2015, total dry gas production is almost 
25 trillion cubic feet (tcf), compared to less than 19 tcf in 1994 (Figure 14). In terms of the 
components of supply, the largest contributor to the growth is non-associated conventional 
production in the lower-48 states; however, a significant increase in offshore production is also 
seen. 

Coal Production: In 2015, production is forecast to reach 1,240 million tons (Figure 15). Most 
of the growth in production, historically and in the forecast, stems from the growing market share 
of western mines. Production in the West is projected to reach 623 million tons in 2015, as the 
demand for low-sulfiir coal to meet the requirements of the Clean Air Act Amendments of 1990 
is met largely by low-cost surface-mined coal from Wyoming's Powder River Basin. 

Renewables: With lower prices projected for fossil fuels, renewable energy production, 
including hydropower, is 0.8 quadrillion Btu lower in AE096 in 2010 than it was in AE095 
(Figure 16). Lower prices, particularly for natural gas, delay the penetration of some renewable 
technologies. In the AE096 forecast, renewable energy production is 7.8 quadriUion Btu in 2010, 

19 



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rising to 8.5 quadrillion Btu in 2015. The bulk of renewables is used for electricity generation, 
with wind, solar, and municipal solid waste showing the largest percentage increases over the 
forecast horizon. Wind in particular, because of increasing efficiency and declining costs of 
\vind turbines, increases its contribution to electricity generation at an annual rate of 1 1 percent 
from 1994 to 2015. Its outlook is less robust than in AE095, however, as lower natural gas 
prices negatively impact the penetration of wind power. 

Changes from Previous Years' Outlooks 

The AEO (and the modeling and analysis tools used to produce it) is a document that evolves and 
responds to changing conditions and improved information in world and domestic energy 
markets. When the first AEO was published in May of 1983", the energy community was still 
reeling from the effects of two major oil price shocks, both of which had occurred within the 
previous decade. Not surprisingly, many of the themes of that first AEO dealt with the reaction 
of energy markets to price and supply imcertainty, although even then the outlines of OPEC's 
demise as a monolithic price-setter were begiiming to be seen. 

■» 

In contrast, more recent AEOs have concentrated on topics more relevant to today's situation, 
including the increasing pace of technological improvements in both supply and demand, the 
emergence of renewables as a viable supply alternative, and efficiency improvements leading to 
lower projected growth rates (or even declines) for both demand and prices. EIA has never 
considered the AEO and its associated modeling constructs to be static or "finished" in any sense. 
In order to be a relevant policy tool for government and the public, EIA has sought out and acted 
upon constructive comments and criticisms of its assumptions and methodology. 

As an example of how the forecasts have changed over recent AEOs, Table 1 presents changes in 



'Prior to 1983, EIA published its mid-term forecasts in other documents, particularly the Annual Report to 
Congress. 

25 



38 

prices, demand, and supply for key variables from the last five forecasts: 

Table 1 . EIA Forecasts of Key U.S. Energy Variables, 20 1 



hn^ssL AEQ22 


AE093 


AE094 


AEQ2S 


A£Q2^ 


Imported Crude 37.17 

Oil Price 

(1994 dollars per barrel) 


31.42 


29.37 


24.63 


23.70 


Lower 48 Gas 5.18 3.95 

Wellhead Price 

( 1 994 dollars per thousand cubic feet) 


3.62 


3.46 


2.15 



Coal Minemouth 35.20 33.21 32.20 23.25 17.43 

Prices (1994 dollars per short ton) 

Total Energy 106.1 106.7 105.2 103.9 104.7 

Consumption (quadrillion Btu) 

Oil Production 5.51 5.66 5.10 5.39 5.44 

(million barrels per day) 

Natural Gas 19.30 20.07 20.19 20.88 22.83 

Production (trillion cubic feet) 

Coal Production 1445 1362 1223 1137 1184 

(million short tons) 

As the table shows, while there has been a downward trend in the 2010 projections for fossil fuel 
prices, the record on supply and demand is decidedly mixed. Total energy consumption 
projections for 2010 have been very stable, with current projections only slightly lower than 
those from four years ago. Oil production has varied, with the view of 2010 today only slightiy 
lower than in AE092, but somewhat higher than the more pessimistic forecasts mside two years 
ago. Natural gas production forecasts have risen steadily; however, projections for coal 
production declined over the four Outlooks from AE092 through AE095, then rose in the most 
recent release. Projections of natural gas production have risen as demand for gas, particularly in 
the electricity sector, has been seen as an economic alternative to other sources of energy. 

26 



39 



Similarly, as gas has been projected to displace coal in electricity generation, and as electricity 
demand projections have declined, the forecasts for coal production have also declined, until 
AE096. The main reason for the reversal this year is a shift in favor of Western coal production- 
-which on average has a lower energy content per ton than Eastern coal—due to the low-sulfiir 
coal requirements of the Clean Air Act Amendments of 1990. 

Price forecasts have tended to show relatively strong patterns of decline. A major reason, among 
others, is that the pace of technological improvement and new discoveries has been under- 
estimated in past AEOs. Improved technology in oil, gas, and coal production has enabled those 
industries to produce more domestic energy at lower prices than was initially projected. As 
examples of the factors that have affected our 2010 forecasts in AE096 compared to AE095, 
consider the cases of natural gas and coal: 

Natural gas: For natural gas, the factors include the incorporation of the recent reassessment by 
the: U.S. Geological Survey (USGS) of ultimate recovery from known fields (primarily inferred 
reserves), reduced drilling costs, and a revised representation of the domestic oil and natural gas 
supply industry. 

In February 1995, the USGS released its latest assessment of U.S. oil and gas resources, almost 
tripling the conventional onshore inferred reserves estimate from the 1989 USGS assessment. 
Because EIA had previously increased the inferred reserve estimates to levels higher than the 
1989 USGS assessment, incorporating the new USGS estimate roughly doubled the inferred 
reserve base for onshore nonassociated gas, from 1 14 trilhon cubic feet in AE095 to 232 trillion 
cubic feet in AE096. 

Drilling costs for natural gas were reduced to reflect current conditions and refined to better 
portray the economics of a representative project. The rates of technological progress applied to 
drilling and production costs were also reestimated, yielding lower costs throughout the forecast 
period than previous estimates. The greatest rates of technological change are expected to occur 

27 , 



40 



in offshore regions, wiiere new technologies are continuing to be introduced in the Gulf of 
Mexico, and many large gas prospects are expected to be found. 

Finally, a revised representation of the oil and gas supply industry was used in producing the 
AE096 forecast. Historically, most oil and gas drilling was motivated by the search for oil; gas 
was usually viewed as a byproduct of oil-directed efforts. However, the increasingly prevalent 
view of gas as an abundant energy resource, coupled with its enviromnental advantage, has 
tended to place natural gas on a more equal footing with oil, so that levels of drilling activity are 
now determined by the economics of each fuel separately. For AE095, expenditures for oil and 
gas combined were estimated at an aggregate level and then disaggregated on the basis of 
econometric estimates that simulated their interfuel and regional allocation according to relative 
profitability. For AE096, expenditures were estimated at regional levels separately for oil and 
gas. 

Coal: In the area of coal minemouth prices, AE096 assumes flat wage rates for miners 
throughout the forecast, compared with an annual increase of about 1 percent in AE095. Both 
recent history and the anticipated shift of production to more productive western mines 
precipitated the more conservative wage assumption. AE096 also assumes lower increases in 
transportation costs for coal originating in Western States, an assumption that increases the 
amount of production from those States, which have lower minemouth coal prices. Finally, in 
AE095, new mines were constructed only ^^ilen existing production capacity was fully utilized. 
In AE096, new mine construction is triggered at lower utilization levels. This change was made 
to reflect the industry practice of developing reserve capacity that would be needed if long-term 
contract options for higher tonnages were exercised. 

Comparisons with Other Forecasts: As a further example of changes in the outlooks, we have 
examined changes in projections for world oil prices and wellhead natural gas in the year 2010, 
both for the AEO and for other forecasters. For world oil prices, forecasts from Data Resources, 
Inc. (DRI) and WEFA, two private forecasting firms, and the Gas Research Institute (GRI), were 

28 



41 



compared to EIA's forecasts. For natxiral gas prices, those forecasts and additional ones from the 
American Gas Association (AGA) were also included. 

The most salient featxire of projections of world oil prices (Figure 17) has been the steady decline 
in the expected price in year 2010. From a range of $35 to $43 per barrel for forecasts released 
in 1990 to $16 to $25 for the most recently released forecasts, the projections of world oil prices 
by all forecasters have shown a steady progression downward with each successive forecast. 
Typically, EIA has been near or on the high side of the range of the four forecasts compared. 
However, EIA is also the fu'st to publish in a given year and so tends to lag the other forecasters 
in the drop in projected prices. 

A principal reason for the lowered expectations has been the stability and even a slight increase 
in the current and expected future production from non-OPEC nations, compared to our previous 
assessments for declining non-OPEC production. Improvements in technology have extended 
the life of maturing fields and reduced development and production costs in new areas. 
Profitability for oil investment has been increased through govenmient policies affecting taxes 
and royalties and by profit sharing agreements and financial restructuring within the industry. 
The Middle East is still expected to provide the major portion of oil required to meet increasing 
demand into the next decade, but its share of total supply is expected to increase more slowly 
than projections several years ago. 

EIA's natural gas price projections for 2010 declined by more than two-thirds from the 1990 
forecast through the 1996 forecast. Over these seven forecasts, the 2010 reference case 
projections for natural gas wellhead prices were generally higher than the two commercial 
forecasting services, and were always higher than the industry forecasts (Figure 18). The closest 
forecast to EIA's was that of Data Resources, Inc. In some cases, significant year-to-year drops 
occurred in forecasts of the 2010 price, because of reassessment of methodology, new data, a 
changing market, or other factors. EIA's natural gas wellhead price forecasts for 2010, for 
example, showed a significant decline in the 1993 forecast, because of a reassessment of the 

29 






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availability of Canadian imports and the costs of shipping Alaskan gas to the Lower 48 States. 

The Accuracy of the A£0 

On an ongoing basis, ELA monitors its year-to-year performance, and makes appropriate changes 
in assumptions and methodology in order to assure that its representation of energy markets is 
relevant and current as possible. Clearly, an examination of past AEOs would show areas of 
strengths and weaknesses. The strengths, based on preliminary work on a more complete 
evaluation of the AEO record, would likely be in the areas of domestic energy consumption and 
production. The weaknesses would be in the area of prices, especially the world oil price and the 
wellhead price of domestic natural gas. Both of these variables are extremely volatile, and many 
of the assumptions made in the early 1980s concerning the strength of OPEC as a cohesive unit, 
and the pace of the transition of the natural gas industry from highly-regulated to less-regulated, 
did not prove to be correct In general, the closer to the year being forecasted, the better the 
accuracy. This was not, however, always the case. 

As a part of its internal audits, EIA has performed two formal analyses of its accuracy for 
specific models. The first was performed for the Electricity Market Module (EMM) in 1992, and 
analyzed the results for the four AEO projections from 1985 through 1988 for the years 1985 and 
1990 (only the AE085 was analyzed for 1985). Overall, the EMM projections of utility 
generating capacity were very close to the actual values for 1985 and 1990. The average forecast 
error nationally was less than 2 percent for the projection of 1985 siunmer capability and just 
over 1 percent for the projections of 1990 summet capability. The average error nationally for 
utility generation for 1985 was less than 1 percent and the average error for the six forecasts of 
1990 is just over 2 percent. However, the forecasts of 1990 electricity prices were consistently 
overestimated by the EMM. The average error nationally for the four forecasts was 1 3.0 percent. 
As might be expected, the EMM forecasts produced larger model errors for longer period 
forecasts. 



32 



45 



The second analysis was performed for the Transportation Energy Demand Model (TEDM) in 
1993. In that report, five AEO forecasts for 1990 were compared with the actual data. Overall, 
the average error for total transportation consumption was 2.9 percent. Errors for specific fiiels 
were 6.1 percent for jet fiiel; 3.6 percent for distillate; and 2.1 percent for gasoline, by far the 
most important fuel in this sector. The fuel prices used by the TEDM had higher average errors, 
ranging fi-om 10.3 percent for gasoline to 11. 7 percent for jet fuel, and were consistentiy 
underestimated, except for AE085. ' •- 

Finally, a recent analysis^ of the long-term accuracy of the AEO projections concluded the 
following: 

• In the last twenty years mid-term energy projections have improved dramatically, in part 
because of the conversion of the energy industry fi-om an industry that is highly-regulated 
to one that is characterized by more competition. Projections for natural gas production 
in 1995, for example, have improved fi'om a 23 percent error for a forecast made in 1980, 
to less than five percent in a 1990 forecast 

• Prices have always been much more difficult to forecast than quantities, and this is likely 
to continue. Even as late as 1990, forecasts for the world oil price in 1995 were 
overstated by 40 percent The corresponding forecast «rror for petroleum production was 
less than 4 percent 

• The relative inelasticity of energy supply and demand with respect to prices means that 
other factors, such as the rate of penetration of new technologies and demographic trends, 
are more important in the projections of those quantities. 



^ Cohen, Barry; Peabody, Gerald; Rodekohr, Mark; and Shaw, Susan, "A History of Mid-Term Energy 
Projections: A Review of the Annual Energy Outlook Projections," Febniaiy 199S, ui^)ublished manuscript 

33 



46 

Disruption Analysis 

Although EIA has not assumed that a disruption will occur over the forecast horizon of its mid- 
term outlook, EIA monitors current developments in oil markets to facilitate its short-term 
forecasts, and to provide contingency analysis in the event of a supply disruption. EIA has also 
performed analysis of potential disruptions that could occur in 2000. The following summarizes 
our most recent evaluation of current supply issues in the Middle East, and also of the impacts of 
a supply disruption in 2000. 

Recent Trends: Since the 1950's, there have been 13 disruptions of Middle East oil supply (Table 
2). Major disruptions (defined as an initial shortfall of at least 2 million barrels per day) have 
occurred six times since 1956. The largest disruption during this period in gross terms was 
associated with Iraq's invasion of Kuwait in August 1990, which led to an initial shortfall of 4.6 
million barrels per day. Within 2 months of the invasion, world oil prices reached above $35 
(nominal dollars) per barrel (Figure 19), more than double their pre-invasion levels. But by • 
October, prices peaked and began to fall again, as the U.S. troop buildyp brought a measure of 
psychological stability to world oil markets, and as surge production fi-om other oil producers 
offset the initial loss. The greatest impact of the loss in production was not felt until after the 
first month, since oil already in transit continued to reach markets (Figure 20). Most surge 
production came from Saudi Arabia, which had (and still has) most of the world's excess 
production capacity. By November, world crude oil trade had returned to a level higher than its 
pre-invasion level. 

Most of the world's measured excess capacity to produce crude oil is located in the OPEC 
nations (Figure 21). In 1995, OPEC (outside of Iraq) had an estimated 3.2 million barrels per 
day of excess production capacity (more than 90 percent of the estimated 3.5 million barrels per 
day worldwide). Most of the excess is in the Middle East. Saudi Arabia and Kuwait alone 
accoimt for almost two-thirds of the world's excess capacity. Today, OPEC is producing at more 
than 90 percent of capacity (assimiing sanctions on Iraq continue and its capacity is not counted), 

34 



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compared with only 63 percent in 1985. Thus, the cushion to increase production in the event of 
another supply disruption may be significantly smaller than it was as recently as 1 989. 

World oil market disruptions have traditionally hurt economic growth. High world oil prices in 
1990-91 corresponded to a period of declining GDP in the United States (Figure 22). In the past 
25 ye»s, there were 3 periods of negative economic growth in the U.S.—each preceded by a 
major increase in world oil prices due to a disruption. 

The real cost of oil imports into the U.S. is now less than half the value during the Iranian 
Revolution of 1979-80. While real GDP has continued to grow, the oil import bill in real terms 
is roughly the same today as it was in 1986 (Figure 23). The main reason for the stability has 
been the decline of crude oil prices. Based on the AE096, future trends are expected to see a 
return to higher levels of oil import costs, reaching annual costs similar to those of the early 
1980s by 2015. However, while high prices were the main reason for the high import bills of the • 
1980s, the main reason for the expected increase through 2015 is higher levels of petroleum 
imports, with the U.S. importing almost 12 milUon barrels per day by 2015, compared to only 8 
million barrels per day yi 1994. 

The Impact of an Oil Supply Disruption in 2000: ' This section outlines possible reactions to 
several hypothetical disruptions. While it is not possible to predict the timing, size, and duration 
of a disruption, these assimiptions are necessary to develop a meaningful disruption scenario. 

The analysis of the impacts of an oil supply disruption is based on several alternative 
assumptions about the magnitude, timing, and response to the disruption: 

Two different levels of supply disruptions in the Persian Gulf- 4 and 6 million barrels per 



^This analysis is an updated version of that appearing in the International Energy Outlook 1994, DOE/EIA- 
0484(94), Washington, D.C., July 1994. 

39 



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52 



nominal dollars per barrel 
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day (MMBD) - were evaluated, with the disruption assumed to take place in 2000. The 4- 
MMBD loss of supplies is comparable to the historical experience during the 1990 Persian Gulf 
War. The use of the year 2000 is arbitrary. Over the past 20 years, a major supply disruption has 
occurred every 7 to 10 years. 

o - The disruptions are assiuned to last 6 months. While the duration of supply disruptions 
can vary, these assimiptions are consistent with a major supply disruption caused by some 
political event that is not easily resolved. 

o Prices are assumed to return to Base Case levels within a year after the disruption has 

ended, reflecting the fact that markets do not instantly adjust to a new production 
environment. Tanker sailing times and stock rebuilding could all contribute to the delay 
in returning to Base Case levels. 

o For each level of supply disruption, two cases are considered involving the use of 

strategic stocks. In one case, it is assimied that no strategic stocks are used. In the 
second, it is assumed that the U.S. Strategic Petroleum Reserve (SPR) is drawn down by 
the maximum amount possible during the disruption, but not exceeding the net 
disruption. The maximimi drawdown rates assumed in this analysis are 3.1 MMBD in 
the first quarter and 1 .4 MMBD in the second quarter. For purposes of this analysis, it is 
assumed that the strategic stocks in Japan and Germany are also drawn down. These two 
contrasting cases illustrate the potential impact of using the strategic stocks during a 
disruption. 

The impacts of the various disruptions on annual oil prices are shown in Figure 24. The 4- 
MMBD disruption has a price rise of $13.19 per barrel if the strategic stocks are not used. Using 
the strategic stocks would result in a price of $20.36 per barrel, a decrease of $12.10 per barrel. 
For the 6-MMBD disruption, the price increases to $40.78 per barrel with no strategic stock 
drawdown. Use of the strategic stocks would lower the price to $25.35. The use of the U.S. SPR 

42 



55 




43 



56 



• and our allies' strategic stocks to offset some of the disruption in supplies significantly reduces 
the impact of the disruption. 

Historically, supply disruptions have been associated with more negative impacts than just an 
increase in petroleum prices. Typically, major supply disruptions have also been associated with 
increases in consiuner prices, increased unemployment, and a decline in gross domestic product 
(GDP). A smaller disruption (4 MMBD), and the effective use of the OECD strategic stocks, 
including those of the U.S., would result in less than a 0.1 percent loss in GDP. At the other end 
of the spectrum, if the economy were to experience a larger disruption of 6 MMBD, the annual 
loss of GDP could be 1.1 percent. The use of the strategic stocks helps to ameliorate the price 
shock and the impact of GDP. In the 6 MMBD case, use of the strategic stocks lowers the one- 
year GDP impact from $40 billion to $10 bilUon, a difference of $30 billion. 

Uncertainties 

As previously stated, although the AEO baseline assumes no policy changes, it is often used by 
some as a "best guess" predictor of the future. In fact, however, periods when energy policy has 
remained stable are rare. It is reasonable to believe that policies will continue to change and as a 
result, the assiunption of no policy change is probably the largest uncertainty in the forecasts. 
Other sources of uncertainty include: 

• The AEOs are published once a year. Ehiring the annual cycle, new information about 

legislation and market conditions becomes available that could change the forecast. For 
example, industry restructuring has had a major impact on the projections for natural gas 
and electricity, with additional competition creating lower costs and greater efficiencies 
for gas-fu-ed technologies in the electricity sector, resulting in greater consumption of 
natural gas and less coal in this year's AEO as compared to last year's projection. Other 
policy examples that have had significant impact on the projections include the National 
Appliance and Energy Conservation Act of 1987, the Clean Air Act Amendments of 

44 



57 



1990, the Energy Policy Act of 1992, and the Administration's Climate Change Action 
Plan, among others. 

Nearly all energy forecasts, including our own, in past years have overestimated the 
future prices of fossil fuels. This tendency was most notable in the 1970s and early 
■ 1980s: predictions of energy prices made during those years have been proven to be 
dramatically overstated. Major factors that were not incorporated or not well understood 
at that time and which produced sharply lower prices include (1) decreased government 
regiilation of energy markets, leading to (2) increased competition among energy 
suppliers, (3) significant penetration of new exploration and drilling technologies that 
reduced costs and increased the size of the U.S. domestic resource base for oil and natural 
gas, (4) the demise of OPEC as a monoUthic force in setting world oil prices, and (5) the 
response of non-OPEC cotmtries to make their production more competitive (i.e., 
lowering domestic taxes) in light of OPEC's market power. 

Growth in Gross Domestic Product and industrial output have often been overstated and 
have resulted in higher than achieved energy demands and higher rate of projected energy 
consimiption. The principal factors that influence U.S. economic growth include 
changes in demographics; federal fiscal and monetary policies; relative prices of capital, 
labor and materials; the productivity of capital and labor; the U.S. industrial mix; and the 
world economy and international trade. 

Demand also has been reduced because of high energy prices, policy initiatives, and the 
use of more efficient technology. Electricity demand, for example, grew 2.5 percent 
aimually from 1984 to 1994; in the forecast, we are expecting an annual growth rate of 
1.4 percent due to changing demographic trends and improving efficiencies of electric 
appliances and equipment However, greater market penetration of new uses of 
electricity (e.g., electric cars) could in fact change the composition of demand. 



45 



58 



• There is substantial uncertainty in the estimated level of fossil fuel resources. TheAEO 
is based on point estimates drawn fix)m the best current information. If actual resources 
differ significantly from the AEO's point estimates, then actual future values for energy 
production levels, consumption levels, and prices may also differ significantly from the 
AEO projections. The uncertainty surrounding such point estimates arises because the 

• measurement of energy resources is an inherently imcertain process based on sampling 
techniques, indirect observation, and differing geological and historical interpretations. 

• The projections contained in the AEOs do not reflect the volatility contained in the 
historical record. Models are based largely on smooth economic adjustments and no 
unexpected disruptions. Changes in the future could come in sudden spurts rather than 
gradual adjustments resulting in much more pronounced impacts on consumer choice and 
other economic variables. 

This year's AEO displays part of the underlying uncertainty by publishing high and low cases for 
economic growth, the world price of oil, and penetration of more efBcient technologies, a higher 
demand case for electricity, and the impact of different assumptions for nuclear retirements. 
While alerting readers to the ranges of imcertainty, these alternative cases do not necessarily 
provide the "right" assumptions for a particular decision that would be impacted by future energy 
supply, demand, or price. There is merit in using a variety of projections and information, such 
as those provided by futures markets or long-term contracts, when making such decisions. Also, 
EIA can provide political decisionmakers with other cases that examine proposed policies within 
the appropriate context 

Uses of EIA Forecasts 

Policymakers in the public and private sector have used EIA's forecasts, or more appropriately 
the tools upon which they have been based, to examine the impacts of proposals for 
environmental protection, changes in level of taxation, new import/export regulations, and 

46 



59 

changes in energy-using and producing technologies. Examples include: 

• EIA was asked in January 1990 by the House Committee on Energy and Commerce to 
evaluate various proposals of acid deposition control. EIA's work helped to frame the 
Clean Air Act Amendments of 1 990, which required SOj emissions to be reduced by 1 
million tons from 1990 levels in two phases of which the first occurred in 1995, and the 
second will take effect in 2000. 

• EIA was asked by DOE's Office of Policy, Plaiming and Analysis to participate, using its 
analytical tools, in the analysis of the 1991/1992 National Energy Strategy. EIA's 
analysis of options helped to frame the Energy PoUcy Act of 1992. 

• EIA was asked again by the Office of Policy, Planning and Analysis in 1 993 to assist in 
the evaluation of alternate tax proposals on the energy market and the economy. While 
various tax proposals were considered with EIA's assistance. Congress and the 
Administration eventually passed a Federal tax on highway ftiels, which was contained in 
the Omnibus Reconciliation Act of 1993. 

• EIA was also asked in 1995 by the Office of Policy, Plaiming and Analysis to provide 
updated projections of Alaskan crude oil production (North Slope and other) under 
various price assumptions. These projections were used as the basis for environmental 
impact scenarios required by November 1995 legislation to lift the ban on Alaskan North 
Slope oil exports. The scenarios were provided to an interagency team including the 
National Economic Council, the Council on Environmental Quality, the Office of 
Management and Budget, and the Department of Commerce. Results of the interagency 
reviews will be provided to Congress by the President on March 28, 1996. 

• EIA is currently working with the Environmental Protection Agency (EPA) to look at 
various cases of technological improvement which may have beneficial impacts on 

47 



60 

reducing carbon emissions. 

EIA is currently supporting the General Accounting Office (GAO) in looking at the costs 
and benefits of oil imports to the U.S. energy economy. This is part of a request for 
analysis to GAO from Congressman Kasich, Chairman of the House Budget Committee. 

EIA has supported a number of offices within the DOE to examine the impact of various 
technological programs on energy supply and demand. EIA's modeling system which 
integrates the various energy sectors is able to avoid potential double-counting that occurs 
when programs are evaluated on an independent basis. 

Many Government agencies use EIA's forecasts as input to their own specific analysis. 
For instance, the Department of Labor's Employment Standards Administration uses 
regional projections of U.S. coal production and prices to estimate the level of the Black 
Lung Disability Trust Fimd. These are updated periodically as coal production and price 
forecasts change. 

DOE's Federal Energy Management Program (FEMP) uses EIA price forecasts to 
calculate energy price indices, energy price escalation rates, and discount rates for life 
cycle cost analysis. The report, which is published by the National Institute of Standards 
and Technology in Energy Price Indices and Discount Factors for Life-Cycle Cost 
Analysis each October, is released approximately 10 months after EIA's AEO. Several 
actions have been taken by DOE to make this report more timely and to offer alternative 
price projections. First, FEMP has agreed to do an update upon the release of EIA's AEO 
each year. Second, users will be encouraged to input their own contract or utility specific 
prices for energy or to use an alternative set of prices to EIA's forecasts. 

One electric utility has used EIA's forecasts to publicly advertise delivered prices of 
natural gas and electricity to residential end users. However, the advertisement neglected 

48 



61 



to include other important Actors for evaluating the life cycle cost of alternative heating 
technologies, including capital and operating costs as well as the efficiencies of the 
technologies. EIA will be publishing a paper shortly on a comparative analysis that 
includes these costs as well as other factors of importance to consumers. 

• The Pemisylvania House Appropriations Committee is using gasoline price elasticities of 
demand from ElA's transportation model to evaluate the effects of a gasoline tax upon 
gasoline prices and consumption. 

• The U.S. Enrichment Corporation is using EIA's industrial electricity price forecasts to 
evaluate the possible impact of having its current electricity rates changed as a result of 
privatization. 

• A private firm is using EIA's regional forecasts of wholesale electricity prices to evaluate 
potential sales of nuclear power generating plants in the United States. 

In February, the Professional Audit Review Team (PART), which is chaired by the General 
Accounting Office, released its evaluation of the performance of the Energy Information 
Administration, as required by the Department of Energy Organization Act (P.L. 95-91, August 
4, 1977). In its report, PART reported on a survey it conducted of 601 recipients of the Aimual 
Energy Outlook to obtain respondents' comments on the reports' usefiilness, reliability, and 
timeliness. About 80 percent of the respondents were extremely to moderately confident in the 
iiiformation in the AEO. Over 75 percent said that the AEO was extremely or moderately usefiil 
for trend information, basic facts, and forecasting, with over 85 percent reporting that it was also 
timely for these purposes. On the basis of the responses and comments to its questionnaire, 
PART believes that the AEO is "of high quality, usefiil, and timely for multiple purposes." 

Although there are many users of forecasts for the purposes which are illustrated by the above 
examples, there is no way for EIA to know who all its users are. EIA serves to provide unbiased, 

49 



26-794 97-3 



62 



objective, and independent forecasts for use by Government and the public. In this regard, EIA 
has the responsibility to publicize its forecasts, to make them easily available to the public, and 
to highlight methodological differences from past forecasts. Annually, we hold (1) an annual 
press conference to release the AEO followed by a briefing for industry groups; (2) a conference 
to discuss the analytical tools, the forecasts, and energy markets; and (3) focus groups on specific 
topics and industries. The forecasts are not only published in the AEO, but appear in multiple 
formats, including the World Wide Web, CD ROM, and in a pocket brochure. We document to 
rigorous standards the data, assumptions, and methodology behind our modeling constructs and 
encourage reviews by academia and industry experts. Until recent budget cuts, the model itself 
was even being distributed on diskette. My staff is open to questions and suggestions from users. 
However, ultimately the user must take responsibility for his or her use of the forecasts by 
updating the analysis as the forecasts change due to new information, energy market changes, 
technological improvements or breakthroughs, and/or passage of new laws and regulations. 

We have not evaluated whether high energy prices have contributed to faulty investment 
decisions by private and public institutions nor have we calculated the associated costs. 
Obviously, these decisions would have benefited from having perfect information about the 
fiiture, as opposed to the projections contained in the AEO. So would we. But by defmition, the 
future is unknown. However, we believe decisionmakers are much better off with the AEO 
projections than without them. If nothing else, they provide a way for users to systematically 
develop their own forecasts by judicious replacement of the assumptions we have made in our 
forecasts. In fact, it is very difficult to discuss major energy issues without using these 
projections. It is incumbent upon responsible users performing analyses of alternative 
investment strategies to review the variety of forecasts available to them to insure that they use 
the ones most consistent with the assumptions of their analysis and to include an assessment of 
the risks associated with alternative choices. 

Thank you very much for this opportunity to present our forecasts. I would be happy to take any 
questions you may have. 

50 



63 

Chairman ROHRABACHER. We will have some questions for you 
later. 
Mr. Schleede. 

STATEMENT OF MR. GLENN R. SCHLEEDE, PRESmENT, EN- 
ERGY MARKET AND POLICY ANALYSIS, INCORPORATED, 
RESTON, VIRGINIA 

Mr. Schleede. Mr. Chairman and members of the Subcommit- 
tee, thank you for this opportunity to present comments this morn- 
ing. My name is Glenn Schleede, and I am an energy market con- 
sultant. 

But, I am appearing today as a private citizen and taxpayer, not 
on behalf of any other interests or clients. My comments are based 
on some 30 years of government and private sector experience in 
energy matters. 

I want to commend you for holding these hearings and for enter- 
taining views from witnesses who do not have a direct financial in- 
terest in maintaining the flow of tax dollars to their organizations 
via the Department of Energy. I have provided a detailed state- 
ment that I hope you will consider for the record of this hearing. 

In that statement, I present views on U.S. and world energy 
markets and on government energy pohcies and programs that dif- 
fer from the views that often come from DOE, its laboratories, con- 
tractors and grantees, trade associations representing contractors 
and grantees and other groups dependent on DOE funding, which 
I refer to hereafter as the DOE/Contractor Complex. I also identify 
issues and questions that I hope your Committee will pursue as 
witnesses from the DOE/Contractor Complex appear to seek au- 
thorization for their programs. 

In summary, my detailed statement makes and supports the fol- 
lowing six points. 

First, U.S. and world energy markets have changed dramatically 
and favorably since current government energy policies and spend- 
ing programs were conceived. These changes in energy markets 
need to be taken into account as you consider DOE's proposals to 
spend another $2 bUhon to $2.5 biUion on energy supply and con- 
servation technologies. 

Second, past energy market forecasts have drastically overesti- 
mated energy prices. These high price forecasts have distorted gov- 
ernment and private sector decisions and have resulted in billions 
of extra costs for consumers, taxpayers and investors. 

Recently, EIA and other forecasters have substantially lowered 
their price forecasts. These revised forecasts dictate the need for a 
new look at government and private sector decisions based on pre- 
vious forecasts. 

Specifically, for this Committee, the lower forecasts mean that a 
new look should be taken at the rationale for DOE's energy tech- 
nology development programs, for DOE's claimed energy savings 
from energy conservation and renewable energy programs and the 
economic analysis that DOE and its contractors use to justify their 
spending and regulatory programs. 

If I may just mention, off my written statement, I became aware 
yesterday of a report put out by an organization called the Amer- 



64 

ican Council for Energy Efficient Economy. And, it says that we are 
going to save $132 billion due to appliance efficiency standards. 

The report is very vague on how that number was calculated. 
But, it does refer back to some numbers calculated in 1993. 

Since then, energy forecasts have come down dramatically. So, 
this number, if you ever hear it from anyone, I would urge you to 
question it. 

It has got to be much, much, much lower based on current en- 
ergy price forecasts. And, that's just one of the documents that is 
floating around making large claims that I believe are unsubstan- 
tiated. 

My third point, we should not overreact to recent DOE officials' 
warnings about a looking energy crisis. There are many reasons to 
believe that another energy crisis is less likely today than pre- 
viously. 

These reasons deserve the Committee's consideration. I hope that 
the recent DOE officials' warnings are not merely an attempt to 
scare the Congress into authorizing a larger role for DOE and more 
tax dollars for its programs. 

Fourth, we need more candor in Washington policy debates about 
energy matters. Specifically, we should recognize that most energy 
market decisions are those made — the most important energy mar- 
ket decisions are those made outside Washington. 

We should freely admit the failures of many government energy 
policies and spending programs. And, there have been many. 

We should recognize that the most effective Washington-based 
energy policy decisions are those that have reduced the federal role 
in energy. Ajid, we should learn from past mistakes rather than re- 
peat them. 

Fifth, it's time to reconsider thoroughly the federal role in energy 
supply and technology development, demonstration and deployment 
activities and the spending associated with those programs. My de- 
tailed statement outlines nine specific questions that should be ad- 
dressed. 

Many of these nine questions have been asked before, but the an- 
swers are seldom convincing. They need to be addressed again by 
this Committee. 

The questions deal with such issues as the appropriate role of 
DOE in energy technology development, demonstration and deploy- 
ment as opposed to basic and applied research; the potential that 
DOE spending is displacing private sector investments in tech- 
nology development and, perhaps, delaying the emergence of tech- 
nologies that could compete in the private, competitive economy; 
the benefits or claimed benefits fi-om massive spending for energy 
technology development by DOE and its predecessor agencies, 
which now apparently add up to about $100 billion; and, finally, 
the ability of DOE to select the right technologies for taxpayer sub- 
sidization. 

The sixth point, I believe the Committee and the taxpayers de- 
serve much more critical and objective analysis of the costs and 
benefits of federal energy policies and RDD&D investments than 
has been provided by DOE. Also, I suggest that the Committee look 
CEirefuUy at a potential conflict of interest within DOE that flows, 
on the one hand, from its responsibility to assure wise use of tax 



65 

dollars and, on the other hand, from its heavy emphasis on assur- 
ing a broad role for DOE in energy matters and on assuring a 
steady flow of tax dollars for DOE programs. 

In conclusion, my detailed statement suggests six specific actions 
for the Committee's consideration. In addition to my detailed state- 
ment, I have provided for the record three recent documents that 
deals with some of the specific questions that are outlined in the 
letter I received from you. 

Thank you for the opportunity to appear. And, I would be glad 
to answer questions. 

Chairman RoHRABACHER. Your entire testimony will be made 
part of the record, without objection. And, I am sure we will have 
some questions later as well. 

[The prepared statement of Mr. Schleede follows:] 

Statement for the Subcommittee on Energy and Environment, Committee on 

Science 

U.S. House of Representatives 

BY Glenn R. Schleede 

March 14, 1996 

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to present comments this morning. My name is 
Glenn Schleede. I am an energy market consultant but I am appearing today as a 
private citizen and taxpayer, not on behalf of any other interests or clients. My com- 
ments are based on some 30 years government and private sector experience with 
energy matters. 

I want to commend you for holding these hearings and for entertaining views 
from witnesses who do not have a direct financial interest in maintaining the flow 
of tax dollars to their organizations via Department of Ener^ (DOE) programs. I 
have provided a detailed statement that I hope you will consider for the record of 
this hearing. In that statement: 

• I present views on U.S. and world energy markets and on government energy poli- 

cies and programs that differ fi-om views that often come from DOE, its labora- 
tories, contractors, and grantees, trade associations representing DOE contrac- 
tors and grantees, and other groups dependent on DOE spending (referred to 
hereafter as the "DOE/Contractor Coniplex"); and 

• I also identify issues and questions that I hope your committee will pursue as wit- 

nesses from the DOEVContractor Complex appear to seek authorization for their 
programs. 

In summary, my detailed statement makes and supports the following six points: 

• First, U.S. and world energy markets have changed dramatically and favorably 

since current government energy policies and spending programs were con- 
ceived. These changes in energy markets need to be taken into account as you 
consider DOE's proposals to spend ainother $2 to $2.5 billion on energy supply 
and conservation technologies. 

• Second, past energy market forecasts have drastically overestimated energy prices. 

These high price forecasts have distorted many government and private sector 
decisions, and have resulted in billions of dollars of extra costs for consumers, 
taxpayers and investors. 

Recently, ELI and other forecasters have substantially lowered their price fore- 
casts. These revised forecasts dictate the need for a new look at government and 
private sector decisions based on previous forecasts. Specifically, for this Committee, 
the lower forecasts mean that a new look should be taken at: 

• The rationale for DOE's energy technology development programs, 

• DOE's claimed energy savings fi"om energy conservation and renewable energy pro- 

grams, and 

• Economic analyses used by DOE and its contractors to justify proposed spending 

and regulatory programs. 



66 

• Third, we should not overreact to recent DOE officials' warnings about a looming 

"energy crisis." There are many reasons to believe that another "energy crisis 
is less likely today than previously. These reasons deserve the Committee's con- 
sideration. 1 hope that the recent DOE officials' warnings are not merely an at- 
tempt to scare the Congress into authorizing a larger role for DOE and more 
tax dollars for its programs. 

• Fourth, we need more candor in Washington policy debates about energy matters. 

Specifically: 

• We should recognize that the most important energy market decisions are those 

made outside Washington, 

• We should freely admit the failures of many federal government energy policies 

and spending programs, 

• We should recognize that the most effective Washington based energy policy deci- 

sions are those that have reduced the federal role in energy, and 

• We should learn from past mistakes rather than repeat them. 

• Fifth, it is also time to reconsider thoroughly the federal role in energy supply and 

technology development, demonstration and deployment activities and the 
spending associated with those programs. My detailed statement outlines nine 
specific questions that should be addressed. Many of these nine questions have 
been asked before but the answers are seldom convincing. They need to be ad- 
dressed again by this Committee. The questions deal with such issues as: 

• The appropriate role of DOE in energy technology development, demonstration and 

deplojonent activities — as opposed to basic and appliea research. 

• The potential that DOE spending is displacing private sector investments in tech- 

nology development and, perhaps, delaying the emergence of technologies that 
could compete in the private, competitive economy. 

• The benefits — or claimed benefits — from the massive spending for energy tech- 

nology development by DOE and its predecessor agencies. 

• The ability of DOE to select the "right" technologies for taxpayer subsidization. 

• Sixth, I believe the Committee and the taxpayers deserve much more critical and 

objective analysis of the costs and benefits of federal energy policies and 
RDD&D investments than has been provided by DOE. Also, I suggest that the 
Committee should look carefully at a potential "conflict of interest" within DOE 
that flows: 

• On one hand, from its responsibility to assure wise use of tax dollars, and 

• On the other hand, from its heavy emphasis on assuring a broad role for DOE in 

energy matters and on assuring a steady flow of tax dollars for DOE programs. 

In its conclusion, my detailed statement suggests six specific actions for the Com- 
mittee's consideration. 

Mr. Chairman, in addition to my detailed statement, I am providing for the record 
three recent documents^ dealing with energy forecasts and their impact on govern- 
ment and private sector decisions. These documents address many of the specific 
questions posed in the charter for this hearing. 

Thank you for the opportunity to appear before your Committee today. I would 
be pleased to answer questions on botn the detailed statement and this brief sum- 
mary of it. 



1 My January 30, 1996 letter to the Directors of the Office of Management and Budget and 
the Congressional Budget Office; My February 1, 1996 paper, Energy Price Forecasts are leading 
Business Executives, Regulators, and Other Government Officials to Make Uneconomic Decisions; 
and my February 14, 1996 letter to Dr. Jay Hakes, Administrator of the Energy Information 
Administration. 



67 

It is Time to Reconsider the Role of the Federal 

Government in Energy Markets and in Spending 

for Energy Research, Development, Demonstration 

and Deployment (RDD&E) Activities 

A Statement for 

The Subcommittee on Energy and Environment 

Committee on Science 

U.S. House of Representatives 

by 
Glenn R. Schleede* 

Washington, DC 

March 14. 1996 

*Energy Market & Policy Analysis. Inc.. P.O. Box 3875. Reston. VA. Phone; 703. 709-2213 



68 



Statement for the Subcommittee on Energy and Environment, Committee on Science 

U.S. House of Representatives 

by Glenn R. Schleede 

March 14, 1996 

- Contents - 

£ags 

Introduction and Summary 1 

Detailed Analysis and Comments 2 

A. U.S. and world energy markets have changed dramatically and favorably since 

current government energy policies and spending programs were conceived 2 

1. Real energy prices have declined steadily since the early 1980s 2 

2. U.S. energy efficiency has improved even though energy prices have continued 

to decline in real terms since the early 1980s 2 

3. Several factors have contributed to reduced energy intensity and improved 

e;iergy efficiency in the U.S 3 

4. Facts about oil import dependence and relationship to U.S. exports are 

, often ignored 3 

5. Proved world oil and gas reserves have grown significantly 4 

6. Non-OPEC production is growing 4 

7. Projected growth in developing nations' energy requirements is less than certain 4 

B. Energy market forecasts have drastically overestimated energy prices, resulting 
in distorted government and private sector decisions, and billions in extra costs 

for consumers, taxpayers, and investors 5 

1 . Forecasts play an important role in business and government decisions 

and actions 5 

2. Nearly all forecasters, including EIA, have been wrong 5 

3. Recently, most forecasters have substantially lowered price expectations 5 

4. Program decisions (including energy technology), analyses, budget estimates, 

and efficiency standards based on previous forecasts need to be reconsidered 6 

5. DOE energy market forecasts used to justify RDD&D programs need scrutiny 6 

C. We should not overreact to recent DOE warnings about a looming "energy crisis" 7 

1. Many developments in U.S. and world energy markets militate against 

another 1970s-type energy shock 7 

2. If an oil supply interruption and price run-up were to occur, it may not last long 8 

3. Would existing or proposed government energy spending programs really help 

prevent or mitigate an "energy crisis"? 9 

D. We should recognize that the most important energy market decisions are not made in 
Washington and that federal government programs often distort energy markets 9 

1 . The most important energy decisions are made outside Washington 9 

2. The ability of DOE or any central government to understand energy markets is limited 9 

3. Energy policy decisions made in Washington have often been counterproductive 10 

4. The most effective government energy actions dealing with energy, in terms of 



69 



efficiency and lower energy prices for consumers, have been actions to reduce 

the government's role in energy 11 

E. The federal role in energy technology development, demonstration, and deployment 
activities and the spending associated with those programs should be reconsidered 11 

1. Do proposed energy RDD&D programs distinguish appropriately among 
support for basic research, applied research, development, demonstration, 

and deployment activities? 12 

2. Has spending on energy development, demonstration and deployment projects 

displaced funding for promising basic and applied research? 12 

3. Are all the projects proposed by DOE really worth funding? 12 

4. Can we justify the billions in tax dollars that have already been spent on 

energy RDD&D, let alone continued spending? 13 

5. Do federal agencies really have the capability to carry out a cost-effective 

"industrial policy"? 13 

a. Failure of previous U.S. government industrial policy experiments 13 

b.. Questionable ability of federal agencies to pick "winners" when the 

technology must compete in private, competitive markets 14 

6. Does DOE adequately address fundamental questions concerning the 

, appropriate role of government in supporting energy technology projects? 14 

a. Would the technology development occur without a federal subsidy? 14 

b. Do federal subsidies inevitably flow to "second best" projects? 15 

c. Do federal subsidies for energy technology projects displace potential 

private investment? 15 

d. Do federal energy technology subsidies delay, rather than speed up, the 
development of technologies? 15 

7. Will DOE's capability be improved with its proposed "Portfolio" approach? 16 

8. Who in the Executive Branch is responsible for assuring that tax dollars for 

energy technologies are spent wisely? 16 

9. If DOE has responsibility for guarding public and taxpayer interests, does it 

have the capability and will to do so? 16 

F. DOE's recent attempts to defend a major federal role in energy and defend its energy 
technology spending lack the objertivity that the Committee and the taxpayers deserve 16 

Concluding comments and specific suggestions 18 

Attachments: 

# 1 Average Annual Energy Prices in Constant 1 994 Dollars: 1 773- 1 995 

#2 U.S. Energy Consumption by End Use Sector: 1773-1995 

#3 Indices of Change fi^om 1973 in U.S. Energy Consumption and GDP: 1973-1995 

#4 Oil Imports Make up a Declining Share of Total U.S. Merchandise Imports: 1973-1995 

#5 DOE/EIA Annual Eno-gy Outlook reference case price forecasts: 1 984-96 - Crude oil 

#6 DOE/EIA Annual Energy Outlook reference case price forecasts: 1 984-96 - Natural gas 

#7 Comparison of Energy Price Forecasts: DOE Policy Proposal and EIA 

#8 Federal Outlays for the Conduct of Energy-Related RDD&D Activities: FY 1 949-96 



-n- 



70 



Statement for the Subcommittee on Energy and Environment, Committee on Science 

U.S. House of Representatives 

by Glenn R. Schleede 

March 14, 1996 

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to present comments this morning. My name is Glenn Schleede. I am 
an energy market consultant but I am appearing today as a private citizen and taxpayer, not on behalf 
of any other interests or clients. My comments are based on some 30 years government and private 
sector experience with energy matters. 

I want to commend you for holding these hearings and for entertaining views from witnesses who do 
not have a direct financial interest in maintaining the flow of tax dollars to their organization via 
Department of Energy (DOE) programs. In my statement today, I will: 

• Present views on U.S. and world energy markets and on government energy policies and 
programs that differ from views that often come from DOE, its laboratories, contractors, and 

, grantees, associations and coalitions representing DOE contractors and grantees, and other 
groups dependent on DOE spending (the "DOE/Contractor Complex"); and 

• Identify issues and questions that I hope your committee will pursue as witnesses from the 
DOE/Contractor Complex appear to seek authorization for their programs. 

In summary, my detailed statement makes and supports the following six points: 

• U.S. and world energy markets have changed dramatically and favorably since current 
government energy policies and spending programs were conceived. 

• Energy market forecasts have drastically overestimated energy prices, distorted government and 
private sector decisions, and cost consumers, taxpayers and investors billions of dollars. Recent 
downward revisions in price forecasts require a new look at government and private sector 
decisions based on prior forecasts, including decisions on DOE energy programs. 

• We should not overreact to recent DOE officials' warnings about a looming "energy crisis." 

• We should recognize where truly important energy market decisions are made, admit failure 
when federal government energy policies and programs do not work, and to learn from — rather 
than repeat — those failures. 

• It is also time to reconsider the federal role in energy research, development, demonstration and 
deployment (RDD&D) activities and the spending associated with those programs. 

• The Committee (and the taxpayers) deserve more objective analysis of the costs and benefits of 
federal energy policies and RDD&D investments than it is now getting from the DOE. 



71 



-2- 
DETAILED ANALYSIS AND COMMENTS 

A. U.S. and world energy markets h ave changed dramatically and favorably since current 
government energy policies and spending programs were conceived. 

Perhaps the best and least controversial place to start is to present data illustrating the dramatic 
changes that have occurred in U.S. and world energy markets since the 1970s and early 1980s 
when perceptions were formed about the need for a large federal role in energy matters and 
massive federal spending for energy supply and energy conservation RDD&D. 

The following seven points are examples of many changes that have occurred in energy markets 
since the oil price increase shocks of 1973-74 and 1979-81. These points often seem to be 
ignored by those who want to maintain a 1970s-early 1980s era perception of an "energy crisis." 

I. Real energy prices have declined steadily since the early 1980s. Attachment #1 is a 
chart demonstrating that U.S. average prices for various forms of energy in constant or 
"real" 1994$ (i.e., adjusted for inflation) have declined significantly since the high points 
cached in the eariy 1980's. Specifically, in 1995: 

Crude oil prices were down by 71% fi'om the high reached in 1 98 1 . 

Natural gas wellhead prices were down by 57% fi-om the high reached in 1983. 

Retail gasoline prices, including taxes, were down by 45% fi'om 1 98 1 . 

Refinery gasoline prices (which do not include taxes) were down by 64% fi-om 1981. 

Residential heating oil prices were down by 56% fi'om 1981. 

Residential natural gas prices were down by 31% fi'om the high reached in 1983. 

Residential electricity prices were down by 21% fi'om highs reached in 1984-1985. 
Increasing competition and restnjcturing now underway in the gas and electric industries are 
likely to push prices even lower. 

U.S. energy efliciency has improved even though energy prices have continued to 
decline in real terms since the early 1980s. Attachment #2 is a graph showing U.S. 
energy consumption in the industrial, transportation and residential and commercial sectors 
fi-om 1973 - 1995. Attachment #3 is a graph showing chaiiges since 1973 in U.S. energy 
consumption and real GDP. Among the key points revealed by these two charts are that: 

• During the 22 year period fi'om 1973 to 1995, U.S. energy consumption increased by 
17.5% while Gross Domestic Product (GDP) increased by 72.8%. 

• U.S. energy consumption reached its lowest point (since 1973) in 1983. 

• From 1973 to 1983, U.S. energy consumption decreased 5. 1% while GDP increased 
by 23.3%. 

• From 1983 to 1995, U.S. energy consumption increased by 23.7%, while GDP 
increased by 40.2%. 

Energy consumption per dollar of GDP has decreased fi-om 22,730 Btus in 1973 to 
approximately 15,800 Btus in 1995, a drop of 30%.' 



'U.S. Energy Infonnatioa Administratian, Monthly Energy Review, Table 1 .9. 



72 



-3- 

3. Several factors have contributed to reduced energy intensity and improved energy 
efficiency in the U.S. Among the key factors that have contributed to reduced energy 
intensity and/or improved energy efficiency are: 

• The improving average miles per gallon of fuel used by passenger cars, which has 
increased from 13.3 miles per gallon in 1973 to 21.5 in 1994, a 61.5% improvement.^ 

• Very stable energy use by U.S. industry, even though the value of output has increased, 
in part due to more eflBcient energy use and in part to changes in industrial mix toward 
less energy intensive products. 

• Technological advances in many areas including: 

• Products targeted for improved energy efficiency such as appliances, motors, 
building materials, aircraft, vehicles and improved industrial processes; and 

• Products and services in areas such as electronic controls, communications, 
materials, and computers that provide improved energy efficiency as a by-product. 

It is important to note that reduced energy intensity and improved energy efficiency have 
continued and private industry continues to produce increasingly efficient products even 
though real energy prices have declined. 

4. Facts about U.S. oil imports and their relationship to U.S. exports are often ignored. 

DOE officials and others who contend that the U.S. faces an "energy crisis" or a "national 
security threat" often point to a rise in U.S. dependence on imported oil. Clearly, 
dependence on oil imports has been rising and, despite the rhetoric, there is very little that 
can be done to change the trends in the near future. However, it should be noted that those 
who advance "energy crisis" perceptions tend to ignore four key facts that should be a part 
of an objective analysis of our oil import situation: 

• First, oil imports make up a declining share of total U.S. merchandise imports, declining 
from a high of 32. 1% in 1980 to 7.3% in 1995. (See Attachment #4) 

• Second, a large share of the outflow of dollars for our oil imports comes back to th« 
U.S., directly or indirectly, as payments for the merchandise and services that we 
export. Both sides of our trade pictures should be considered in any objective analysis, 
but DOE seems uninterested in the relationship of oil import dollars to our export 
markets.^ 

• Third, the dollar outflow for oil — in constant dollars — has declined sharply since the 
high of $138 billion (1994$) reached in 1980 to $53 billion in 1994.' 

• Fourth, most alternatives to market pricing of oil that are proposed by "energy crisis" 
advocates would be more costly to the economy than continued reliance on imports.' 



2 



U.S. Energy Information Adnunistration, Monthly Energy Review, Table 1.10. 

Purchases of aircraft recently announced by Saudi Arabia are but one example. 

* The outflow has remained quite stable in constant 1 994S smce 1 99 1 , due in part to lower real oil prices. Specifically, the 
cost of imports in billions; 199! - $55.4, 1992 - $53 8, 1993 - $52.2, 1994 - $50.8. and 1995 - $53.0. 

Tanfife or quotas for imported oil, for example, would push up the price of both imported and domestically produced oil. 
Or, for those proposmg synthetic fuels, would we really be better off by paymg (or subsidizmg) $35 to $70 per barrel for 
synthetic fuels or by unportmg crude oil at $ 1 8, $20. or even $25 per barrel? 



73 



-4- 

Proved worid oil and gas reserves have grown significantly. World oil and gas 
consumption has continued to grow, but so too have proved oil and gas reserves." 
Specifically: 

• World proved oil reserves have been estimated at 1 trillion barrels as of January 1, 
1996, compared to 664 billion barrels as of January 1, 1973 — an increase of 50%. 

• World proved natural gas reserves have been estimated at 4.9 trillion cubic feet as of 
January 1, 19%, compared to 1.9 trillion cubic feet as of January 1, 1973 — an increase 
of about 160%. 

Non-OPEC production is growing. Those who wish to create a perception of a 
forthcoming energy crisis often point to the prospects of growing world dependence on oil 
from OPEC and, more specifically, on oil from middle eastern nations. However, it is 
important to note that: 

• Not all oil from OPEC is insecure. 

• Oil production is increasing in countries that are not members of OPEC. In fact, during 
the past two years oil production from non-OPEC nations has grown faster than 
production from OPEC. 

• The late 1980s-early 1990s shifting of focus of major oil companies from exploration 
in the U.S. to other areas of the world where oil can be discovered more readily and 
recovered more cheaply has had a salutary effect on oil markets (from a consumer's 
point of view). Their activities undoubtedly have contributed to the growth in non- 
OPEC oil production. 

Projected growth in developing nations' energy requirements is less than certain. 

Another factor often cited by those seeidng to create the perception of a looming "energy 
crisis" is that oil demand is growing in developing nations and that this demand will 
"explode" in the fiiture. We should be careftil in relying on these projections since: 

• The assumptions underlying them are not always clear, and 

• It is far from clear that developing nations that are projected to increase economic 
growth and energy consumption rapidly: 

• Will be able to attract the capital that would be required; 

• Will make the changes in their laws, institutions, and policies that would be needed 
to attract foreign expertise and investment; or 

• Will have market-based economies. 

• Developing countries may be able to make use of more energy efficient capital 
equipment and facilities than are now in place in industrialized nations. If so, 
developing nations may be able to attract energy intensive industrial activities from 
industrialized nations, thus exerting downward pressure on total world energy demand. 



6 



Oil and Gas Journal, January 1 996. Estiinates of proved reserves have continued to grow even though producers in some 
regions, such as the U.S. and Canada, arc no longer required or otherwise find it necessary or desirable to demonstrate 
proved reserves many, many tunes their annual production. 



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B. Energy market forecasts have drastically overestimated energy prices, resulting in 
distorted government and private sector decisions, and billions in extra costa for 
consumers, taxpayers, and investora.^ 

The role of energy market forecasts is particularly important to this committee because forecasts 
of rapidly increasing demand and prices are often used as a part of the justification for large 
expenditures on DOE energy technology and conservation programs. Several points about 
energy forecasts are important in your committee's deliberations: 

1. Forecasts play an important role in business and government decisions and actions. 

Many decision makers contend that they "do not believe any energy price forecast" and this 
skepticism is justified. However, all decision makers should recognize that any time they 
use an economic analysis in evaluating a long-term contract, capital investment, or 
investment in RDD&D they are, in fact, relying on somebody's energy price forecast. All 
too often the important role played by the forecast is not recognized and its validity is not 
questioned. 

2. Nearly all forecasters, including EIA, have been wrong. Energy price forecasts 
produced by government and commercial forecasting organizations have been wildly 
inaccurate ~ on the high side. These high forecasts have been used as the basis for 
thousands of decisions by business executives, regulators, and other govenunent officials. 
Many of those decisions have proven to be uneconomic and have cost consumers, taxpayers, 
and investors billions of dollars. 

Attachments #5 and #6 show in 1994$ EIA's reference case forecasts made each year fi-om 
1985 through 1996. The third column on these charts show that: 

• EIA had forecast in January 1985 that crude oil prices in 1995 would be $55.40 per 
band. Almost each year thereafter, EIA reduced its forecast price but always remained 
on the high side. EIA estimates that the actual price of crude oil in 1995 was $16.81 — 
70% below the forecast made in 1985. 

• EIA had forecast in January 1985 that wellhead natural gas prices in 1995 would be 
$6.99 per Mcf . EIA reduced its forecast price each year thereafter but always 
remained on the high side. EIA estimates that the actual price of natural gas in 1995 
was $1 .60 per MCF - 77% below the forecast made in 1985. 

3. Recently, most forecasters have substantially lowered price expectations. During the 
past two years forecasters have begun "catching up with" changing fundamentals in energy 
markets and have lowered their forecasts substantially. For example, as shown on 



' The problems caused by energy price forecasts that have proven to be faulty and the possibility that energy demand and 
price forecasts have a systematic upward bias is discussed in detail in my paper, Energy Price Forecasts are Leading 
Business Executives, Regulators, and Other Government Officials to Make Uneconomic Decisions, 1 996 Edition, Febniaiy 
1, 1996. 



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Attachment #5, the forecast issued by the Eno^ Information Administration (EIA) in 
January 1996 lowered its forecast of wellhead natural gas prices for 2010 by 38% from its 
January 1995 forecast (from $3.46 to $2. 15 per thousand cubic feet - Mcf in 1994$). 

4. Federal prognun decisions (including energy technology), economic analyses, budget 
estimates, and efficiency standards based on previous forecasts need to be 
reconsidered. Private sector and government decisions made on the basis of previous 
forecasts, even those made recently, should be reconsidered. The significant changes 
reflected in recent forecasts are likely to have a major impact on estimates of project costs 
and/or benefits. With the federal government, all energy programs, including energy supply 
and conservation technology programs, budget estimates, economic analyses, energy 
eflSciency standards, claims of energy cost savings, valuations of oil and gas reserves and 
leases, and other actions that were based on past energy price forecasts need to be 
reconsidered. 

5. DOE energy mailtet forecasts used to justify energy technology programs need careful 
scrutiny. While not a primary interest of your committee, you should be aware that there 
is a need to reevahiate energy market forecasting activities and methods conducted by EIA 
and by other policy and program offices in DOE. I will supply additional information for 
the record on this matter. For your committee's purposes, it is important to note that 
forecasts from DOE have often overestimated energy demand and prices and underestimated 
energy supplies that would be available even at prices well below those forecast by DOE. 
Such forecasts have been used to help justify DOE's energy supply and conservation 
programs and spending proposals. Attachment #7 shows DOE's very high forecast of 
future energy demand that was used in 1991 to support the Department's proposed 
"National Energy Strategy" in contrast to much lower estimates of future demand in a 
forecast issued one month later by the EIA. 

Remaining questionable aspects of EIA's latest energy price forecasts that could affect 
estimates of the b^iefits of DOE's energy supply and conservation programs include: 

► EIA's assumption in four out of five of its cases that oil and gas prices will increase in 
the fiiture. Its "low oil price" case assumes, approximately, that prices would drop in 
the near term but then rise to current levels in real dollars by 201 5. However, EIA 
presents no case that allows the possibility that real prices will continue to decline. 

► The strong possibility that EIA has not adequately reflected in its latest forecast the 
probability that end users electricity and natural gas prices will decrease in real dollar 
terms as competition in the electric and gas industries increases. 

► EIA's expectation that the delivered cost of natural gas for electric generators will 
increase while the delivered cost of coal will decrease. 



76 



C. We should not overreact to recent DOE officials' warninga about a loo miny '♦engrgv 

Unfortunately, declaring the existence of a "crisis" and then offering a government program to 
deal with that "crisis" has long been a standard way to gain public, media, and Congressional 
support for starting or expanding government-run programs. Whether the claimed "crisis" was 
real or not, or whether it was being resolved without federal action has been immaterial. It has 
been the ability to create the perception of a "crisis" that has counted. 

This standard practice needs to be kept in mind as you evaluate recent statements by DOE 
officials that we are facing another "energy crisis." The exact nature of the DOE-expected 
"energy crisis" does not yet seem to be clear but, presumably, it would include some kind of 
energy shortage, a sharp increase in energy prices, and negative economic impacts.' 

Additional claims of a looming "energy crisis" may be a part of the justification that DOE offers 
for its energy supply and conservation technology spending programs and you will be faced with 
the task of evaluating those claims. 

Whether we do face some looming "energy crisis" cannot be known with certainty since none 
of us has a good record in predicting the sharp changes that have occurred in energy markets 
during the past 22 years. Perhaps DOE officials have some inside intelligence information that 
is not available to the public to support their latest "crisis" warnings. 

In any case, I would like to offer several suggestions and questions that you might keep in mind 
as you evaluate claims and spending program justifications coming from the DOE/Contraaor 
Complex. 

1. Many developments in U.S. and worid energy markets militate against another 1970s- 
type energy shock. Surely, witnesses from the DOE/Contractor Complex will present 
reasons why uiey believe we face a potential "crisis." I'd like to identify several conditions 
that suggest we may, instead, have relatively stable U.S. and world energy markets for the 
foreseeable future. (Several of these conditions were described earlier in this statement and 
are supported by data in attachments.) 

a. Proved worid oil and gas reserves have increased. 



These are oooditions often attributed to "energy crises" of 1 973-74 and 1 979-80 when oil prices rose sharply. However, 
some ecoDcmists have questioned why Japan, which is more dependent on imported energy than the U.S., did not suffer the 
same adverse economic impacts m 1973-74 as the U.S. See Bohi, Douglas, Energy Price Shocks and Macroeconomic 
Performance, Resources for the Future, 1 989. 



77 



-8. 

b. Large reserves of natural gas, increasingly efficient technology for using gas,' and the 
demonstrated ability to liquefy natural gas (LNG) for ocean transport has opened up 
very promising sources of energy for world markets (particularly electric generation). 

c. Oil and gas is being found in significant quantities in heretofore unexplored areas, in 
part because major oil companies are now focusing on areas not previously explored 
that offer the potential for lower costs. 

d. New technology is being developed that permits oil and gas exploration and produrtion 
in deeper water (e.g., in the U.S. Gulf of Mexico). 

e. New technology is bringing down the costs of oil and gas exploration and 
production.(e.g., 3-D seismic, horizontal drilling, improved drill bits, improved well 
completion technology). 

f Non-OPEC proved oil and gas reserves and production has increased, weakening the 
ability of the OPEC cartel to control the level of world oil production and prices. 

g. Potential world oil productive capacity can be increased if Iraq once again becomes a 
major producer and if former Soviet Union countries develop their potential to produce 
and export oil. 

h. Energy eflBciency has improved in a wide range of production processes and products: 

• Where energy efficiency has been a goal (e.g., motors, appliances, building 
materials, vehicles, and aircraft), and 

• Where energy efficiency has been a byproduct (e.g., communications, information, 
materials, electronic controls, computers, teleconferencing). 

i. Efficient futures markets are now available for oil and natural gas (and probably soon 
for electricity) that help consumers protect against future price risk. 

j. Forecasts of rapid growth in world oil demand, heavily driven by developing nation 
consumption, may not occur as fast as forecasts suggest. 

k. A majority of U.S. oil imports comes from relatively secure countries and regions.'" 

2. If an oil supply interruption and price run-up were to occur, it may not last long. 

Since we cannot absolutely guarantee that there will not be some energy supply interruption 
(perhaps some interruption of oil supplies fi-om the Middle East) and oil price run-up, it is 
appropriate to ask how significant the interruption and price run-up would be and how long 
it will last. Those who need an "energy crisis" or the perception of one to justify their 
proposals may contend that it would last for a year or more. Perhaps they are right but it 
is useful to keep in mind that other reasons suggest an oil supply interruption and price 
increase may not last long. These reasons include: 
• The relatively short life of the oil price run-up that occurred when Iraq invaded Kuwait. 



' For example, combined-cycle electric generating units make use of gas turbine technology developed under DOD-fmanced 
aircraft engine R&D and by pnvale sector companies. New combined-cycle units are nearly doubling the efficiency of older 
units (i.e., efficiency in converting Btus mto kilowatt hours). See EIA's Annual Energy Outlook 1 996, p. 32. 

'" During the first 1 1 months of 1995, U.S. grass oil imports averaged 8,855,000 barrels per day. Principal sources of these 
imports included Venezuela - 16.7%, Saudi Arabia - 15.2%, Canada - 14.9%, Mexico - 12.1%. North Sea (UK, Norway, 
Netherlands) - 7 7%, Other Western Hemisphere (Virgin Islands, Colombia, Ecuador, Trinidad & Tobago, Puerto Rico, 
Brazil) - 8.5%. Total for these: 75%. 



78 



• The very strong need of most oil producing and exporting countries (including most 
OPEC members) for oil export revenue to satisfy domestic economic needs, including 
the demands of their people, and their other ambitions. This need for hard currency 
provides a very strong incentive to restart any interrupted oil production and exports. 

• M^or investments made by OPEC members in downst'eam ventures in other countries, 
including refineries and service station chains. 

3. Would existing or proposed government energy spending programs really help 
prevent or mitigate an "energy crisis"? When evaluating the potential for an "energy 
crisis" and the appropriate actions that should be taken now to deal with that potential, it 
is important to ask two additional questions: 

• Did govonment policies and programs instituted in the 1970s and eariy 1980s 
contribute significantly in dealing with the situation or, alternatively, did those policies 
and programs: 

• EMstort markets and prolong adverse economic impacts? 

• Waste large amounts of tax dollars on RDD&D programs that produced very little 
in benefits? 

• Do the policies and spending programs now being advocated by those in the 
DOE/Contractor Complex ofifer more promise than those of the 1970s and early 1980s? 

These points are discussed below. 

We should recoyniM that the mo st important energy market decision s are not made in 
Washington and that federal go vernment programs often distort en ergy markets. 

Often, there appears to be a strong tendency in federal agencies to avoid admitting it when 
federal programs &i], and to learn fiom — rather than repeat — past mistakes. On the other hand 
there appears to be fairiy widespread agreement, at least outside Washington, that many past 
federal energy policies and programs were ineffective, disruptive, counterproductive, and 
wastefiil. It is usefiil to explore why this might be the case. 

1. The most important energy decisions are made outside Washington. First, despite 
perceptions to the contrary, the most important decisions about energy are not made in 
Washington. Instead, they are made by millions of individuals and organizations each day 
as they decide which car to buy, where to live, how to heat and cool their homes, whether 
to drill a well to explore for or produce oil or gas, whether to extend a pipeline, or which 
energy source should be used when a new electric generating plant is needed. 

2. The ability of DOE or any central government to understand energy markets is 
limited. This is not 'a critidsm of indivithals in DOE or other federal agencies. It is simply 
the case that people in Washington are severely limited in their ability to understand, let 
alone control or dictate, which energy decisions are best because: 

• Energy markets are diverse and complex, involving millions of individual decisions. 

• Information on market details is seldom available or, when available, late. 



79 



-10- 

• Federal govemment employees seldom have real world energy market experience. 

• Many govemment oflBcials underestimate the ability of people "outside the beltway" to 
understand market signals and to develop creative responses that are more effective and 
less disruptive than those developed by a centralized govemment. 

For these reasons, energy market solutions developed in Washington often do not fit real 
problems. Furthermore, political considerations will often skew govemment "solutions" — 
with the result that there is little chance that govemment action will solve problems rather 
than exacerbate them. 



3. Energy policy decisions made in Washington have often been counterproductive. 

Experience since 1973 has shown that govemment policies have all too often exacerbated — 
not prevented or mitigated — energy problems. One only need recall: 

Oil import fees (taxes) and quotas, particularly those that made up the protectionist- 

"drain America first" Mandatory Oil Import Program of 1959-1973." 

Natural gas wellhead price controls following a 1954 Supreme Court decision that 

severely distorted markets for gas for nearly 30 years, resulting in both wasting and 

under-producing gas and, probably, over reliance on oil. 

Policies of the late 1970s and early 1980s that prohibited construction of gas-fired 

power plants and industrial facilities and discouraged new residential and commercial 

gas hookups based on the false perception that the U.S. was running out of gas. 

The pricing provisions of the Natural Gas Policy Act that helped drive up prices for 

natural gas and delayed the arrival of lower, competitively determined prices. 

The disastrous oil allocation and price controls of the 1970s that severely distorted 

market incentives, distorted refinery economics, misallocated oil product supplies, and 

contributed to gasoline shortages in some areas while creating excess supplies in others. 

The delays by the Atomic Energy Commission (AEC) and its contractors in addressing 

nuclear waste issues, thus contributing to the demise of civilian nuclear power. 

The billions in tax dollars wasted in ERDA, Synfiiel Corporation, and DOE subsidies 

on projects that were intended to develop and demonstrate technology to produce oil 

fi-om oil shale, synthetic ftiels form coal, and alcohol fiiels. 

The billions in expenditures for energy technologies by DOE and its predeces.sor 

agencies that have produced little and probably have displaced private sector efforts and 

delayed innovation (discussed in more detail later). 

Decisions by TVA and Bonneville Power Administration ~ based on overestimated 

electricity demand — that led to overbuilding of nuclear power plants. These decisions, 

respectively, have resulted in billions in non-performing assets now resting on the books 

of TVA, and the largest municipal bond default in U.S. history, in the case of 

Washington Public Power. 



' ' See Bohi, Douglas and Milton Russell, Limiting Oil Imports: An Economic History and Analysis. 1 978; and Bradley, 
Robert L.. The Mirage of Oil Protection. 1 989. 



80 



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4. The most effective government actions dealing with energy, in terms of economic 
efllciency and lower energy prices for consumers, have been actions to reduce the 
government's role in energy. There are several well known examples demonstrating that 
market forces and competition are superior to government actions in assuring adequate 
energy supplies at reasonable prices. These include: 

• Removal of oil allocation and price controls during the Ford, Carter, and Reagar 
Administrations permitted oil markets to perform more efficiently and helped reduce 
prices. 

• Removal of wellhead natural gas price regulation which first held prices artificially low 
during the 1950s, 1960s, and 1970s and then pushed prices to artificially high levels 
during the period fi-om 1979-1985 after enactment of the Natural Gas Policy Act of 
1978. Since do-egulation, wellhead prices have &llen by 57% fi-om the artificially high 
levels of 1983. 

• Increased competition in natural gas transportation and marketing as a result of Federal 
Energy Regulatory Commission actions (particularly FERC Orders 436 and 636) has 
resulted in lower gas transportation costs and paved the way for further changes by 
state PUCs that can result in reduced costs for gas users. 

• Increased competition in the electric industry as a result of the Public Utility Regulatory 
Policy Act of 1978, the National Energy Policy Act of 1992, and reduced regulation 
under consideration in FERC, state legislatures, and state public utility conunissions 
(PUCs) virtually assures that electric rates will continue their downward trend and, 
most likely, stimulate further reductions in natural gas and electric rates for end users. 

Clearly, consumers have benefitted when increased competition replaced government 
attempts to control energy markets. 



The federal role in energy technolo gy development, demonstration and deployment 
activitica and the spending assoc iated with those programs should he reconsidered. 

Most of us have great respect and appreciation for the contributions that science and technology 
have made to our national security, our standard of living, our quality of life, and our ability to 
compete in world markets. At the same time, we need to recognize that not all RDD&D that 
has been funded by the federal government has equal merit and not all of it deserves or requires 
federal involvement or subsidization with our tax dollars. 

The issue of the appropriate federal role in research, development, demonstration, or deployment 
activities is controversial. Debates about government "industrial policy" have raged for years 
and views vary widely fi-om one administration to another and among individuals with differing 
political philosophies. All the key questions deserve another thorough review. Clearly, the 
Committee will have to address the issue of appropriate federal role in energy RDD&D as it 
considers requests for authorization of spending for various DOE energy supply and 



81 



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conservation programs. At least the following nine key issues deserve the Committee's 
attention: 

1. Docs proposed energy RDD&D program spending distinguish appropriately among 
support for basic research, applied research, development, demonstration and 
deployment activities? As members of this subcommittee know, there are fundamental 
differences among basic research, applied research, development, demonstration, and 
deployment activities in terms of: 

• The objectives being pursued, and 

• The incentives, or lack thereof that private sector firms have to pay for those activities. 

While many private sector organizations fund basic research, agreement is quite widespread 
that the private sector is unlikely to have an incentive to support the fiiU level and range of 
basic research that is needed in the national and public interest. 

However, as work moves fi-om the basic research end of the spectrum toward development, 
demonstration, and deployment, the objectives (producing a useful product or service) and 
the incentives for support (e.g., making a profit when producing and selling the product) 
changes. Furthermore, in the case of products and services intended for the private, 
competitive economy," understanding of potential markets is critical. As indicated earlier, 
government officials seldom have a good understanding of private sector markets. 

2. Has spending on energy development, demonstration and deployment projects 
displaced funding for promising basic and applied research? Recognizing the greater 
incentive for private sector funding for development, demonstration and deployment 
projects (as opposed to basic and applied research) that private firms find promising, the 
Committee should determine whether funding for DD&D projects may be displacing 
promising basic and applied research that is less likely to be privately funded. 

3. Are all the projects proposed by DOE really worth funding? As federal budgets have 
become tighter, some observers have behaved as if all RDD&D is really high priority and 
worthy of subsidies. In fact, the federal government has supported RDD&D projects that 
were unsuccessful and were wasteful of our tax dollars. Cutting out low priority and 
wasteful projects will not harm the national interest even if the total dollars available for 
RDD&D go down. Those who favor spending of tax dollars for RDD&D activities have 
a responsibility to help limit funding to the best and highest priority work, and to avoid 
spending tax dollars for work that can be funded by the private sector. 



The situation is different when the intended function is a unique govenunent function (e.g., national defense or, until 
recently, space programs and weather forecasting). 



82 



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Can we justify the billions in tax dollars that have already been spent on energy 
RDD&D, let alone continued spending? As indicated in Attachment #8, approximately 
$66 billion ($109 billion in 1994$) has been spent on energy RDD&D by DOE and its 
predecessor agencies ance 1955. An additional $17 billion ($37 billion in 1994$) has been 
spent on "Non-defense Atomic Energy General Sciences" since 1949. Based on information 
provided by DOE," it is hard to reach any conclusion other than that DOE-claimed 
successes in energy technology development, demonstration and deployment (as opposed 
to basic research) fall far short of what could reasonably be expected for the money spent. 

Do federal agencies really have the capability to carry out a cost-eflective "industrial 
policy"? Those who &vor spending of tax dollars for the development, demonstration, 
and/or deployment of technologies that must compete in the private, competitive economy 
assume that federal government oflScials have the ability to select the right technologies for 
support. You will undoubtedly hear from witnesses who will defend this assumption or 
who will contend that requiring matching contributions from private sector "partners" 
provides the protection needed for taxpayers that the "right" technology development 
projects will be selected for support. 

As you hear these arguments, I suggest that the Committee keep several other points in 
mind as well: 

a. Failure of previous U.S. government industrial policy experiments. Many 
observers of federal government-sponsored efforts to develop economically competitive 
technologies have pointed out the spending on projects to produce synthetic fiiels from 
oil shale and coal as classic examples of wasted tax dollars and the failure of federal 
"industrial policy" experiments. 

However, the Committee should not overlook the &ct that federal government attempts 
to develop and promote a civilian nuclear power industry is probably the all-time largest 
experiment in "industrial policy." Civilian nuclear power development was inextricably 
related to concerns about the potential proliferation of nuclear weapons technology. 
Nevertheless, it would be hard to argue that attempts by the Atomic Energy 
Commission, its laboratories, its contractors, and the Congressional Joint Committee 
on Atomic Energy to promote a civilian nuclear power industry were anything but a 
full-blown "industrial policy" effort. 

Of course, the nation has benefitted from electricity generated from nuclear power 
plants and private sector firms have exported nuclear power plant equipment and 
technology.'* However, we are now faced with: 



''' References listed in Section F of this statement 
Often with Export-Import Bank financing arrangements. 



83 



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• The predicted demise of the civilian nuclear power industry within the next 20+ 
years, 

• The absence of a broadly acceptable method to manage nuclear wastes from 
nuclear power production, 

• Lingering concerns about the safety of nuclear power plants and the difi5culty of 
safeguarding nuclear materials so that they are not turned into weapons, and 

• Potentially enormous decommissioning costs when nuclear power plants are shut 
down. 

One caiuiot view this situation without wondering whether the future of civilian nuclear 
power might look quite dififerent if its development had been allowed to occur in the 
private sector without the massive government attempts to promote and speed its 
development and deployment. For example, would earlier, truly independent regulation 
of civilian nuclear power have provided greater assurance and greater public acceptance 
of the claims that safety concerns had been adequately addressed? Would the task of 
long-term management of nuclear wastes have been addressed in a more timely maimer 
and resolved before we reached the current stage of apparent impasse? Would nuclear 
power, though somewhat delayed, have remained as a promising source of electricity 
for generations to come? 

b. Questionable ability of federal agencies to pick 'Vinners" when the technology 
must compete in private, competitive markets. There is little evidence that the 
govenmient has this capability. It remains to be seen whether requirements for 
significant private sector sharing of costs in government supported technology 
development, demonstration, and deployment projects results in greater success in 
industrial policy efforts Further, it appears that the magnitude of the risk accepted by 
the private "partner" in such cost-shared ventures may be less than is claimed when the 
value of tax credits, in-kind contributions to project costs, residual value of equipment 
and facilities retained by the private "partner," and experience and training for 
employees that remain with the partner are taken into account. 

Docs DOE adequately address fundamental questions concerning the appropriate role 
of the government in supporting energy technology projects? The taxpayers deserve 
better answers than have been provided by DOE to the following fundamental questions 
concerning tax dollars that have been or are proposed for energy supply and conservation 
technology projects: 

a. Would the technology development occur without a federal subsidy? If the federal 
government is standing by with cash to support an energy technology project, it's hard 
to blame a private sector firm that steps forward to get a piece of the cash. However, 
the acceptance of tax doUars is not convincing evidence that the technology would not 
have been developed without the government subsidy. Therefore, it is quite appropriate 



84 



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for the Committee to ask DOE: Assuming that there are some examples of successful 
federal efforts to promote the development of energy technologies that are competing 
in the private sector, is there hard evidence that the technology would not have been 
developed without federal subsidies? 

b. Do fedeni subsidies inevitably flow to "second best" projects? Most truly private 
sector firms are generally aware of the difficulties and delays, extra paperwork, 
contractual burdens, and administrative costs typically &ced when dealing with federal 
agencies. The private firms may also be required to give up important information 
about technologies that would normally be proprietary if the project was developed 
without government fimding. Furthermore, truly private sector firms are likely to be 
better equipped than a federal agency to understand potential markets, the promise of 
the technology, and the technical and market hurdles that would have to be overcome 
before a technology could be developed and sold profitably. 

Recognizing these factors, a truly private sector firm seems likely to pursue its most 
promising tectmoloffcai opportunities without taking on the burden of dealing with the 
government. Is it inevitable that the technologies offered for federal support or 
participation are likely to be "second best" projects that a private firm finds unworthy 
of its independent pursuit? 

c Do federal subsidies for energy technology projects displace potential private 
investment? What really would happen to energy technology development projects 
proposed for federal support if the federal government was not standing by with ready 
cash to pay all or part of the technology development costs? The availability of federal 
subsidies may simply be too great a temptation for the technology developer to pass 
up. Is there any evidence that energy projects supported by DOE that have been 
successful would rmt have been developed without DOE funding or participation? 

Furthermore, a truly private firm that wishes to pursue development of an energy 
technology would be reluctant to make the investment if there was a possibility that a 
competitor could obtain federal funds to pursue the same technology. In such 
circumstances, the private firm that would prefer to proceed without federal 
participation would be &ced with three unsatisfactory alternatives: proceeding with 
only its own fimds, hiring the lobbying staff needed to obtain federal funds, or stopping 
work on the technology. 

d. Do federal energy technologic subsidies delay, rather than speed up, the 
development and commercialization of technologies? Is there a possibility that, for 
all the reasons identified above, federal involvement in energy development, 
demonstration and depk>yment activities results in delaying the successful development 
and real commercialization of energy technologies? 



85 



-16- 

7. Will DOE'S capability be improved with its proposed "Portfolio" approach? A 

recent letter from Acting Assistant Secretary of Energy Daniel Reicher indicates that: 

"DOE is developing a 'portfolio' approach to R&D which, among other things 
will not use a single resource price scenario, but rather, a set of scenarios that 
incorporate different levels of risk and uncertainty. This approach is under 
development and review, and includes participation by all parts of DOE, national 
laboratories and private contractors. We expect that the process will first be 
applied to the Fiscal 1998 budgets." 

Development of this, approach should not be left primarily to "DOE, national laboratories, 
and private contractors," since those organizations are all parties at interest in continuing 
the flow of tax dollars to their projects. Certainly, they should not be the ones to judge 
whether DOE has an adequate approach to assure wise use of tax dollars. 

8. Who in the Executive Branch is responsible for assuring that tax dollars for energy 
technologies are spent wisely? As illustrated in Section F, below, it is difficult to 
determine whether DOE officials see their primary energy technology program 
responsibilities role as: 

• Guarding the public and taxpayer interests, or 

• Assuring the continued flow of tax dollars to the DOE/Contractor Complex. 

9. If DOE has the responsibQity for guarding public and taxpayer interests, does it have 
the capability and will to do so? In theory, DOE officials and staff, as employees of the 
federal government, probably have a greater responsibility to protect public and taxpayer 
interests than employees of DOE contractors. In practice, it seems doubtful that DOE 
officials and staff have the capability to exercise effective control over such a large, well- 
financed, politically astute and connected contractor complex. 



F. DOE'S recent attempts to defend a mi^jor federal role in energy and defend its energy 
technology spending lack the objectivity that the Committee and the taxpayers dest^ve. 

DOE now spends about $3 billion of our tax dollars each year on energy RDD&D programs. 
There should be clear evidence that this money is well spent, but the evidence is unclear. During 
the past year, DOE has issued several documents that present its rationale for a major federal 
role in energy and that attempt to defend DOE's spending on energy supply and conservation 
development, demonstration, and deployment projects. These include: 

• Sustainable Energy Strategy, Clean and Secure Energy for a Competitive Economy, 
July 1995 National Energy Policy Plan. 



86 



-17- 

• Annexes to the report of the Task Force on Energy Research and Development, 
Secretary of Energy Advisory Board, U.S. Department of Energy, June 1995. 

• Success Stones: The Energy Mission in the Marketplace, A Portfolio of Successful 
Investments in Applied Energy Research and Development by the U.S. Department of 
Energy, prepared by the Office of Policy. 

• FY 1996 Congressional Budget Request, Budget Highlights, February 1995. 

These documents help explain why taxpayers have a right to wonder who they can look to in the 
Executive Branch to protect their interests. Specifically, it's hard to read these documents 
without coiKhiding that' 

• They are merely a pan of a rather expensive public relations program designed to keep tax 
dollars flowing to the DOE/Contractor Complex. 

• DOE has a "conflictof interest" between its fiduciary responsibility and its effort to defend 
a large role for itself and continuing the flow of tax dollars. 

Perhaps the best example of a document that raises doubts about DOE's role is the one titled. 
Success Stmies: The Energy Mission in the Marketplace. 

1 . The document claims partial credit for DOE for claimed "economic successes," and "a key 
and enabling role in the resulting technology development" (p. 2), but is unclear ~ to the 
point of being evasive — concerning: 

• The specific role played by DOE. 

• The relative shares of the total cost of developing the technology borne by taxpayers 
via DOE and DOE's commercial "partner." 

• The likelihood that the claimed technological successes would noi have occurred 
without spending tax dollars. 

2. The document claims large fiiture "savings" without any supporting evidence; e.g. : 

"Four technologies m one building technologies R&D program are expected to net more 
than $16 billion in economic savings to U.S. taxpayers by the year 2015." (p. 2)" 

3. The document, on nearly every page, makes claims of "energy savings," cost reductions, 
and/or job creation without any documentation. 

4. The document makes other claims without evidence to support them; e.g. : 



'' For example, were EIA's older, now outdated energy ptke forecasts used in estimating the S 1 6 billion? 



87 



- 18- 

a. "More fundamentally, the Department's record of RifeD productivity has steadily 
improved over nearly two decades of R&D investment. Management techniques for 
R&D have become more sophisticated and less congressionally directed. They are 
squarely rooted in competition, driven by technical merit, and scientific peer review, 
and aligned with the needs of cost-sharing industrial partners." (p.2) 

b. "The Department's programs support high-risk, precompetitive research. The 
Department's applied energy R&D investments are guided by a set of R&D 
management principles, which limits and carefully guides the use, and guards against 
the misuse, of public funds for R&D." (p. 3) 

c. "Accordingly, a case can be made that an investment in the Department's applied 
energy R&D programs should not be viewed as a current operating expense on the 

/ deficit side of the Federal budget account, but rather as a high-risk portfolio of capital 
investments in the Nation's future, with a predictable portion resulting in significant 
economic paybacks that are already adding net revenue to the income side of the 
Federal ledger. These R&D investments not only produce public benefits, but make 
money for the U.S. Treasury." (p. 3) 

The key question remai&s: Would the billions in tax dollars that have been spent by DOE and 
its predecessor agencies have been justified even if one accepted all the claims at face value and 
also gave DOE credit for the alleged "hundreds of scientifically and technically important 
developments" (p. 2) that DOE claims were omitted fi"om the report? 



Concluding Comments and Specific Suggestions 

You have a formidable task, particularly since you and others in Congress may be the only line of 
defense that taxpayers have against an excessive federal role in energy and excessive spending of our 
tax dollars via DOE's energy technology development, demonstration, and deployment programs. 

I'd like to conclude with several suggestions for specific actions that you might take: 

1 . Pursue the nine tough questions identified earlier in this statement concerning the appropriate 
role of the federal government in energy matters and the need for massive DOE spending that 
seeks to promote development, demonstration and deployment of technologies for the private, 
competitive economy. DOE probably will contend that they have been answered before. But, 
they should be asked again and again until convincing answers are provided. 

2. Insist the DOE and its contractors present hard evidence and documentation of claims to support 
their requests for tax dollars — not public relations documents. Insist on more candor and 
objectivity. 



88 



- 19- 

3. Address the fundamental question of determining who, if anyone, in the Executive Branch has 
the responsibility and the capability to protect taxpayer interests in the wise use of money that 
flows through DOE for energy technology projects. 

4. Watch closely the development of the planned "portfolio approach" to energy technology that 
is being developed within the IX)EyContractor Complex and take steps to assure appropriate 
public and Congressional review of it. 

5. Require that an analysis be done by an objective, non-government organization (perhaps one of 
the "think tanks") of the rdadonship between the dollars that flow out of the U.S. for oU imports 
and the payments that flow back to U.S., directly or indirectly, for merchandise and service 
exports. 

6. Determine, perhaps with assistance of the GAO, the extent to which tax dollars administered 
by DOE are finding their way into lobbying efforts designed to continue the flow of tax dollars 
to DOE programs, including: 

• Lobbying carried out by DOE laboratories and other contractors. '" 

• Dues payments by DOE laboratories and other contractors to coalitions, trade associations, 
professional sodedes, advisory committees, and other groups that work in support of DOE- 
administered programs. 

• Lobbying by ofBcials of state energy offices that receive funds from DOE. " 

• DOE contributions to conferences that are used, in whole or part, to generate support for 
DOE programs." 

• Washington offices of DOE laboratories and other contractors where the staff spend a 
significant portion of their time lobbying DOE staff or the Congress for fiinds for the 
laboratories and other contractor activities. 

• Payments to contractors to help DOE or DOE contractors develop statements, testimony, 
fact sheets, issue papers, or other documents that are used to help support DOE RDD&D 
programs. 



Thank you for the opportunity to appear today. I would be pleased to answer your questions. 



'* For example, a program director at the National Renewable Energy Laboratory in Colorado infonned a visiting advisory 
committee (Febniary 8-9, 1993) that one of the first steps that an eflfective program director must take is to engage a 
contractor who can take on the job of lobbying for fiinds for the program. 

" Press reports indicate that Secretary O'Leaiy in a speech to the National Association of State Energy Officials on February 
27, 1 996 asked her audience to lobby Congress for insreased fimds for DOE energy efficiency and renewable programs. 

'* For example, speakers at a "White House Conference" on global climate issues, partially ftmded by DOE, that was held 
at George Washington University on April 21, 1994, exhorted attendees to help win Congressional approval for DOE's 
massive S 1 -*- billion in proposed spending for renewable energy and conservation programs. 



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Federal Outlays for the Conduct of Energy-Related Research, Development 
Demonatration. & Deployment (ROD&O) Activities 

DoM not indud* capital ipanding for conatructlon and major aquipmanl 

Outlay* for tha Conduct of RDDtO - In Mllllona of Dollara 



3/12/S6 



Fiacal 
Yaar 

1949 
1950 



19S1 
19S2 
1953 
1954 
1955 



1956 
1957 
1958 
1959 
1960 



Non-Oafansa Atomic 
Enargy Ganaral Sclanca 

Conatant 
Currant $ 1994$ 



$40 
49 



50 
60 
63 
64 

73 



78 

91 

126 

157 

183 



$207 
250 



253 

299 
311 
312 
351 



371 
427 
583 
719 
825 



Enerny RDDAD 



Currant $ 



$27 



42 

77 

109 

129 
159 



Conatant 
1994$ 



$130 



200 
361 
505 

591 
717 



1961 


214 


952 


173 


770 


1962 


231 


1,015 


397 


1.744 


, 1963 


264 


1,146 


462 


2,006 


1964 


288 


1,232 


502 


2,148 


1965 


309 


1,297 


478 


2,006 


1966 


339 


1.382 


452 


1,843 


1967 


359 


1,419 


478 


1.890 


1968 


281 


1,065 


515 


1.952 


1969 


365 


1,394 


469 


1.698 


1970 


393 


1,349 


451 


1.549 


1971 


380 


1.240 


454 


1.482 


1972 


370 


1,158 


329 


1.030 


1973 


372 


1,102 


379 


1.123 


1974 


292 


796 


525 


1.431 


1975 


310 


771 


933 


2.321 


1976 


257 


605 


1,424 


3,353 


TQ 


72 


160 


521 


1.154 


1977 


267 


592 


2.197 


4,868 


1978 


274 


564 


2,542 


5.232 


1979 


305 


579 


3.304 


6.270 


1980 


345 


600 


3,289 


5,718 


1981 


501 


797 


3,681 


5,858 


1982 


401 


600 


3,330 


4.984 


1983 


464 


666 


2.728 


3,919 


1984 


505 


698 


2.762 


3,817 


1985 


510 


682 


4,249 


5,685 


1986 


510 


664 


2,622 


3.416 


1987 


576 


728 


2.321 


2,932 


1988 


618 


753 


2.287 


2,787 


1989 


680 


795 


2,454 


2,870 


1990 


784 


879 


2,342 


2,627 


1991 


834 


899 


2,501 


2,697 


1992 


784 


823 


2.593 


2.721 


1993 


789 


807 


2,517 


2.575 


1994 


669 


669 


2,654 


2,654 


1995 


700 


683 


2,959 


2.886 


1996 


708 


673 


3.060 


2.907 


Totals 


$17,374 


$37,143 


$65,877 


$109,424 


Data Source: Budget of the United States Government, Fiscal Year 1 996, Table 9.8.; Constant $ for 1 949-58 estimated. 1 



97 

Chairman ROHRABACHER. Mr. Romm. 

STATEMENT OF MR. JOSEPH J. ROMM, ACTING DEPUTY AS- 
SISTANT SECRETARY FOR ENERGY EFFICIENCY AND RE- 
NEWABLE ENERGY, U.S. DEPARTMENT OF ENERGY, WASH- 
INGTON, DC 

Mr. RoMM. Mr. Chairman, members of the Subcommittee, I am 
deHghted to be here. The decisions that you make about energy re- 
search and development today will have a profoimd impact on the 
nation's security, our economy and our environment. 

I do want to clear up one misconception. I don't believe the world 
is running out of oil or that there is an imminent world shortfall. 

What I believe is that most of the world's easily recoverable oil 
is in one place. And, it's a very unstable place. 

The issue, I think, is of importance, because our last war, the 
Persian Gulf war, was fought in the region that contains most of 
the world's oil, the reserves. And, our last recession and, indeed, 
our last three recessions, all followed oil price spikes. 

And, the trade deficit is also of great concern to me. Most projec- 
tions have it doubling to $100 billion per year just for oil in a 10 
to 15 year time period. 

But, I think, from the security point of view, the biggest concern 
is that the Persian Gulfs share of the world oil export market is 
projected to hit about 67 percent in 10 to 15 years. And, if prices 
are actually lower than EIA forecasts in their reference case, then 
the situation will be even worse. 

And, the Persian Gulf will control three-quarters of the world 
market for export. And, this is far higher than their highest level 
ever, which was 67 percent in 1974. 

At the same time, what you would see is the Persian Gulf reve- 
nues would triple from $80 billion per year today to $250 billion 
per year over the next 15 years. That would be more than $1 tril- 
lion of extra money flowing into one of the most unstable regions 
in the world. 

So, it is the scenario of growing control and dominance of the 
world oil market by the Persian Gulf coupled with the region's in- 
herent instability that creates, I think, a risk of a price shock and 
a crisis that, as responsible holders of the public trust, we need to 
care about. Other plausible scenarios exist, but I wouldn't want to 
bet America's security or economy on them. 

I would like to clear up another misconception. This is not just 
the Department of Energy's view. Many, many experts share our 
concern. 

Don Hodel, Reagan's Energy Secretary, said last year, "The 
world is on the brink of another oil shock." We are, "sleepwalking 
into a disaster." 

Irwin Stelzer, of The American Enterprise Institute, said last 
year the next oil shock "will make those of the 1970's seem trivial 
by comparison." 

And, finally. Senate Majority Leader, Robert Dole, said last 
March, "The second inescapable reality of the post-20th century 
world is that the security of the world's oil and gas supplies will 
remain a vital, national interest to the United States and of the 
other industrial powers." 



98 

So, I think the Department of Energy is in pretty good company 
in being concerned about energy security. 

As for price, both Dan Yergin and James Schlesinger have pre- 
dicted that prices will rise in the coming years, as have a number 
of petroleum geologists. And, a recent "Fortune" magazine cover 
story, "Your Last Big Play in Oil," listed several billionaires and 
big mutual fiind managers betting heavily that oil prices would 
rise. 

Considering that the last war we fought was in the Persian Gulf 
and the number of experts warning us of the dangers, as respon- 
sible holders of the public trust, who among us is prepared to an- 
swer the following question some time in the next decade. Why did 
you fail to take inexpensive and prudent actions when you heard 
the warnings and understood the dangers? 

Energy R&D is clearly one of those actions. On the supply side, 
in the area of fossil energy R&D, we work to reduce the finding and 
developing costs for oil and gas. 

On the demand side, we have a comprehensive strategy to de- 
velop triple efficiency cars that will use petroleum in automobiles 
much more efficiently and then to develop a number of alternative 
fuels for cost competitive use, including electricity as a transpor- 
tation fuel, to advance battery research, using biofuels from crops, 
crop waste and municipal solid waste, gas turbine engines that 
would nin on natural gas and light duty vehicles and, of course, 
fuel cells which are nearly pollution free and could run on a variety 
of sources. 

By 2010, this diversified investment portfolio, we believe could 
reduce oil imports by 1.5 million barrels of oil per day, a $1 billion 
per year savings to the country. It would help counter the foreign 
threat to raise prices and would limit the economic and geopolitical 
impact of the Persian Gulf. 

Were Congress to make the cuts that they are thinking about, it 
would make the oil crisis scenario more likely. If a crisis were to 
come, our nation's response would necessarily be more reactive and 
burdensome. Clearly, the private sector has been scaling back R&D 
in general and energy R&D in particular. 

I think that, as Mr. Roemer says, it's worth pointing out that we 
don't just do energy R&D for one reason, such as reducing oil im- 
ports. We have a variety of other goals that we try to meet at the 
same time. 

In particular, forecasts of low energy prices does not mean that 
we don't need energy R&D. Quite the reverse, as Mr. Roemer said. 
Energy R&D has helped keep energy costs low. 

He mentioned the Sandia polycrystalline drill bit. He mentioned 
the electronic ballasts, the heat mirror window, which I brought. 

Twenty-five million dollars in federal R&D spending in the late 
1970's and early 1980's have saved American consumers and busi- 
nesses $5 billion. These are well documented savings. 

What I think is interesting for the Committee is that all of these 
technologies were developed in the late 1970's and early 1980's, a 
time when mginy were forecasting steadily rising energy prices. 
Yet, they have proven astonishingly cost effective, achieved signifi- 
cant market share, racked up their huge national savings in the 
past 10 years, a time of relatively low energy prices. 



99 

So, I think you see the leap-frog technologies that the Depart- 
ment has been investing in are worth pursuing really irrespective 
of price forecasts. 

I think that what low prices fundamentally mean is that techno- 
logical optimists were right. And, to achieve low costs in the future 
will require a constant stream of new, more efficient supply and de- 
mand technologies. 

Let me just show one chart, if I could. This renewable energy 
cost curve, this comes from Royal Dutch Shell, which is the world's 
most profitable oil company and widely regarded for its scenario 
planning. And, as "The Economist" magazine noted, "The only oil 
company to anticipate both the 1973 oil price boom and 1986 price 
bust was Royal Dutch Shell." 

What is interesting about this chart is that it shows that Shell 
believes a very plausible scenario is that photovoltaics, wind power 
and biomass will continue to decline in costs faster than traditional 
sources of energy and that even if the cost of electricity from tradi- 
tional sources declines, renewable energy will out-compete it within 
two to three decades. And, they actually project numbers as high 
as a $150 billion per year annual market in sales for renewable en- 
ergy within 30 to 40 years. 

So, you can see, we have completely changed the program design 
of the Department of Energy's programs. And, we are quite well 
aware that energy prices could decline. 

We think photovoltaics, we think that our work in fossil energy, 
gas is going to be price competitive even with declining prices. 

I thmk the last point that needs to be made, again, is the mul- 
tiple goal. Pollution has a very high cost to the nation. 

The Department of Energy R&D is the single most cost effective 
way to prevent pollution. And, this fact alone would justify the in- 
vestment. 

Gutting these programs would mean a higher environmental cost 
in the future. And, I think that's a terrible burden to pass on to 
our children. 

Thank you. 

[The prepared statement of Mr. Romm follows:] 



100 

STATEMENT OF 
JOSEPH ROMM 



ACTING PRINCIPAL DEPUTY ASSISTANT SECRETARY 
OFFICE OF ENERGY EFFICIENCY AND RENEWABLE ENERGY 



UNITED STATES DEPARTMENT OF ENERGY 

before the 
SUBCOMMITTEE on ENERGY AND ENVIRONMENT 

of the 
COMMITTEE ON SCIENCE 

U.S. HOUSE OF REPRESENTATIVES 

MARCH 14, 1996 



101 

Introduction 

Mr. Chairman, members of the Subcommittee, I am delighted to appear before you to 
discuss a subject of paramount importance to our national security, our economic well- 
being, and our environmental quality of life: energy research and development (R&D). 

Before elaborating on the main focus of my remarks today — the possibility of an oil crisis 
in the next decade and its implications for energy R&D — one point deserves mention. 
America's growing dependence on imported oil and the world's growing dependence on 
Persian Gulf oil are not the only justification for our energy R&D portfolio. That is but 
one of many important goals of our nation's energy policy. 

We are working to maximize U.S. energy productivity; that is, to keep the costs of 
consuming energy low for American businesses and consumers. Since this is a hearing on 
energy forecasting, it seems worthwhile to examine the thinking of the Royal Dutch/Shell 
Group, which in the past has been remarkably successful in anticipating our energy future, 
and which believes that continued advances in renewable energy technology will be the 
key to keeping the costs of using energy low in the next century. 

A third goal of energy R&D is improving the national and global environment by 
preventing pollution. As The Economist magazine has noted, "Using energy in today's 



102 

ways leads to more environmental damage than any other peaceful human activity." In 
other words, energy production and consumption imposes other costs on society beyond 
what people pay at the pump or in their utility bill. Energy R&D can lower environmental 
costs while also lowering energy bills. Supporting a clean environment means supjtorting 
energy R&D. 

Finally, as with all prudent federal R&D investments, we are partnering with the private 
sector to maintain U.S. scientific and technical leadership and to develop advanced 
technologies that can serve as the engines of economic and job growth in the next century. 
Our energy R&D is aimed at achieving all of these goals simultaneously. Fortunately, 
most of the technologies DOE invests in support multiple goals and then produce multiple 
benefits. Efforts to achieve the first goal, keeping America secure by reducing our 
dependence on foreign oil, will be discussed first. 

The Oil Crisis Scenario 

Predictions are always risky, especially where oil is concerned, but fundamental trends in 
oil demand and supply underlie a growing consensus among energy experts that energy 
security concerns are reemerging. It is now generally agreed among forecasters that 
global demand, mainly from developing nations, will grow by 22-34 percent over the next 
15 years. According to the DOE's independent Energy Information Administration 
(EIA), the world will consume another 20 million barrels of oil a day by the year 2010. up 
from 69 MMBD in 1995. The International Energy Agency projects even higher growth 



103 

in demand, following the inexorable tide of population growth, urbanization, and 

industrialization. As but one example. Fortune magazine noted last October that if China's 

and India's per capita energy consumption rose to that of South Korea, and their 

population increased at currently projected rates, "these two countries alone will need a 

total of 1 19 million barrels of oil a day. That's almost double the world's entire demand 

today." 

I 

The Persian Gulf, with two-thirds of the world's oil reserves, is projected to supply more 
than three-fourths of the growth in world oil exports, according to the EIA. Within ten 
years, the Gulfs share of the world export market may surpass its highest level to date, 
619c. which was attained in 1974. The EIA predicts that in the face of increased demand, 
oil prices will rise slowly to $24 a barrel in 2010. If, instead, they remain low, the Gulfs 
share of the world export market may rise to 75% in 2010. 

America's growing dependence on imported oil, and the world's growing dependence on 
Persian Gulf oil, have several potentially serious implications for the nation's economic and 
national security. First, this same forecast holds that the United States will be importing 
nearly 60% of its oil within a decade (and. if oil prices turn out to be lower, our 
dependence on imports will be higher). Our trade deficit in oil is expected to double to 
nearly $100 bilUon a year by that time, a large and chronic drag on our economy. 



104 

To the extent that the Gulfs recapture of the dominant share of the global oil market 
makes price hikes more likely, the U.S. economy, indeed the world economy, will be at 
risk. Since the 19S0s there have been six oil supply disruptions of two million barrels a 
day or more, an average of one every five to ten years, all originating in the Middle East. 
Although oil imports as a percent of gross domestic product have decreased significantly 
in the past decade, our economic vulnerability to rapid increases in the price of oil persists. 
Since 1970, sharp increases in the price of oil have always been followed by U.S. 
economic recessions. One analysis by DOE's Oak Ridge National Laboratory in 
Tennessee put the cost to the U.S. economy over the past 25 years of over reliance on 
OPEC oil, including the cost of price shocks, at $4 trillion. Oak Ridge has estimated that 
a price shock in 2005 could cost the U.S. economy hundreds of billions of dollars. 

Second, if current energy forecasts prove out, the Persian Gulf nations' oil revenues may 
triple from $80 billion a year today to nearly $250 billion a year in 2010 — a huge 
geopolitical power shift of great concern, especially since some analysts predict increasing 
internal and regional pressure on Saudi Arabia to alter its pro- Western stance. This could 
represent more than a SI trillion increase in wealth for Persian Gulf producers over the 
next decade and a half. And the breakup of the Soviet Union, coupled with Russia's 
difficulty in earning hard currency, means that for the next decade and beyond, pressure 
will build to make Russia's most advanced military hardware and technical expertise 
available to well-heeled buyers. 



105 

The final piece in the geopolitical puzzle is that during the first oil crisis in the early 1970s, 
the countries that were competing with us for oil were our NATO allies, but during the 
next oil crisis, a new important complication will arise: the competition for oil will 
increasingly come from the rapidly growing countries of Asia. Indeed, in the early 1970s, 
East Asia consumed well under half of the oil used by the United States; by the time of the 
next crisis, however. East Asian nations will probably be consuming more oil than we do. 
These nations are already establishing stronger diplomatic ties with Persian Gulf producer 
countries. 

Will all of these factors trigger an energy crisis? No one can say for sure, but it is clearly a 
plausible scenario. A report released last June on energy R&D by a Task Force of 
independent energy analysts, led by oil expert Dan Yergin, the Pulitzer-winning author of 
The Prize, noted several factors that are more favorable since the turmoil of the 1970s, 
including a "more flexible and diversified" oil supply system, including the Strategic 
Petroleum Reserve and the rise of futures markets, and "technological innovation that has 
driven down costs and brought new efficiencies to the entire spectrum of energy supply." 
The Yergin panel noted "energy efficiency has also had a dramatic impact. Today, the 
United States is 30 percent more energy efficient than in 1973 — the equivalent of saving 
17 million barrels per day of oil." 

The Yergin Panel also discussed new challenges to our energy security, such as the rapid 



106 

growth in oil and energy demand in the developing world, particularly Asia, "pointing to 
new competition for supply"; a tightening world oil maricet; declining production in the 
United States and Soviet Union; and "few major discoveries since the middle 1980s." I 
would add one more concern: while many sectors of the economy have reduced their 
dependence on oil, such as electric utilities, the transportation sector remains almost 
wholly reliant on oil use, and fuel-switching options in that sector will remain limited until 
we develop new technologies and infrastructure. 

Thus, the threat to our security remains a serious one. This is not merely the view of the 
Department of Energy. Consider what a variety of energy experts from every end of the 
political spectrum have said recently. President Reagan's Energy Secretary Don Hodel 
said last year "The world is on the brink of another oil shock," and we are "sleepwalking 
into a disaster." He predicts a major oil crisis within a few years. The American 
Enterprise Institute's Irwin Stelzer says the next oil shock "will make those of the 1970s 
seem trivial by comparison." Oil exp)ert Dan Yergin says, "People seem to have forgotten 
that oil prices, like those of all commodities, are cyclical and will go up again." James 
Schlesinger, President Carter's Energy Secretary has said, "by the end of this decade we 
are likely to see substantial price increases." Last March, Senate Majority Leader Robert 
Dole delivered a speech at the Nixon Center for Peace and Freedom and said: 



"The second inescapable reality of the post-20th century world is that the security of the 
world's oil and gas supplies will remain a vital national interest of the United States and of 
the other industrial powers. The Persian Gulf... is still a region of many uncertainties.... 



107 



In this "new energy order," many of the most important geopolitical decisions — ones on 
which a nation's sovereignty can depend — will deal with the location and routes for oil and 
gas pipelines. In response, our strategy, our diplomacy and our forward military presence 
need readjusting." 

In July testimony before Congress, Federal Reserve Chairman Alan Greenspan, not known 

for being an alarmist, raised concerns that the rising trade deficit in oil "tends to create 

questions about the security of our oil resources." 

Concerns about new oil market trends have even made it into financial magazines. In an 
October 1995 article entitled "Your Last Big Play in Oil," Fortune magazine listed several 
billionaires and "big mutual fund managers" who were betting heavily that oil prices would 
rise significantly. The magazine goes on to suggest an investment portfolio of "companies 
that are best positioned to profit from the coming boom." 

The Energy R&D Solution 

Considering that the last war America fought was in the Persian Gulf a little over five 
years ago, and that there are a number of experts warning us of the dangers, as responsible 
holders of the public trust who among us is prepared to answer the following question 
sometime in the next decade: Why did you fail to take reasonable and prudent actions 
when you heard the warnings and should have understood the dangers? This is especially 
true since the energy R&D needed to respond to growing dependence on Persian Gulf oil 
achieves many other national benefits, each justification enough for the investment, 
including making more efficient use of energy, a reduced trade deficit, more American 



8 



108 
jobs, and an improved national and global environraenL 

Since the focus of the hearing is energy R&D, I will focus on the technological response 
to growing energy security concerns, which draws on America's traditional leadership in 
research and development. Here there has been tremendous progress. Given the 
uncertain nature of long-term high-risk R&D in leap-frog technologies, the prudent 
approach is to explore a number of possibilities on both the supply and demand side.- 

The Department has invested in exploration and development technology and related 
programs designed to enhance industry competitiveness by reducing the costs of finding 
and developing oil and gas resources within the United States. Advances in 3-D seismic 
exploration technology and the polycrystalline drill bit developed in DOE laboratories are 
two examples of this effort. We are also in the continuous process of consulting research 
managers from industry to ensure the Department's oil and natural gas R&D portfolio is 
properly focused and structured to contribute to industry's needs. 

The Department has also been investing in developing cars and trucks that are highly fuel- 
efficient as well as ones that would run on fuels other than petroleum, including electricity, 
biofuels from crops, crop waste, and municipal solid waste, and natural gas. 

Consider biofuels. Last year, research sponsored by the Department created a new 



109 

genetically engineered organism that enhances the fermentation of cellulose, increasing the 
rate of conversion and yield of ethanol. This advance, described in the prestigious journal 
Science, was named as one of the 100 most technologically significant advances of the 
year by R&D magazine. This and other federally-supported advances have brought the 
projected cost of making ethanol from $3.60 per gallon 15 years ago, to about $1.00 
today. If biofuels R&D continues to be funded at current levels, ethanol from fast- 
growing dedicated crops, crop waste, and wastepaper could be produced for as little as 
sixty to seventy cents a gallon by 2005. 

Technologies are also being developed to make possible a superefficient hybrid vehicle 
that has both a small engine and an energy storage device, such as a battery or flywheel. 
Supporting technologies include lightweight, super-strong materials, and advanced 
engines. This research is part of a collaboration among several federal agencies, selected 
national laboratories, and the auto industry. The goal of this Parmership for a New 
Generation of Vehicles is to design and construct a prototype clean car by 2004 that has 
three times the fuel efficiency of existing cars and very low emissions, but comparable or 
improved performance, safety, and cost. Such a car would replace imports of oil with 
brainpower - domestically produced advanced technologies. 

Another direction that research is taking is toward advanced batteries for use in electric 
cars — among them the nickel metal-hydride battery — ^which promises to double the range 

10 



110 



of vehicles now using existing lead-acid batteries. In conjunction with the advances in 
clean power generation described below, such batteries hold out the promise of replacing 
imported oil with domestically produced electricity. 

Along with ethanol and electricity, the Department is seeking to expand natural gas as a 
transportation fuel. Since 1992, the DOE has significantly increased its budget for R&D 
into enhancing the supply and efficient use of natural gas. We are developing gas turbine 
engines for light duty vehicles. In general, the DOE is seeking to encourage the wider use 
of a variety of alternatively-fueled vehicles and help to establish a nationwide 
infrastructure for fueling those vehicles. 

Probably the one technology most experts would agree has the best chance over the long 
term of significantly reducing petroleum use in the transportation sector is fuel cells. 
These are compact, modular devices that generate electricity and heat with high efficiency 
and virtually no pollution. They run on hydrogen converted from fuels such as natural gas 
or methanol. NASA developed early versions of fuel cells for use on space missions. 
Over the past two decades the DOE has invested considerable resources to develop 
several types of fuel cells that will soon be used to power cars, trucks, utilities, 
commercial buildings, and industries. The Japanese government has been increasing its 
fuel cell R&D budget at 20% per year for the past five years, and Japanese companies are 
less than five years behind U.S. companies in this technology. The Europeans are 
considering significant increases in fuel cell funding. Sustained federal support might well 

11 



Ill 

give America the lion's share of a multi-billion dollar annual global market 



The likely outcome of all of the above mentioned programs should not be overstated: We 
will not achieve energy independence in the next fifteen years. Moreover, we do not need 
to. What this investment portfolio does offer is a chance in the coming years to counter 
foreign threats to raise the price of oil dramatically, and place some restraint on the 
economic and geopolitical impact of the increased dependence on Persian Gulf oil. At the 
same time, domestic jobs are created when money that would have gone overseas to 
purchase foreign oil goes instead to U.S. workers manufacturing technologies for highly- 
efficient cars and trucks, or for growing domestic biofuels. 

What's more, the rapid population growth and urbanization of developing nations, coupled 
with the harsh pollution that characterizes most major urban centers in those nations, 
ensures a tremendous market for low-emission, super-efficient automotive technology. 
Our industrialized competitors have one inherent advantage in the race to develop the 
supercar: much higher gas prices of $3 to $4 a gallon. Fuel-efficiency matters more in 
their economies, and vehicles that use alternative fuels will be cost-competitive in the 
market sooner. The primary counterbalance to that advantage is U.S. technological 
leadership in most relevant areas. 



12 



112 

Severe cuts in energy R&D Budgets would bring an end to that counterbalance. The last 
time America ignored the warning signs of growing dependence on imported oil, the 
Japanese were able to seize a significant share of the U.S. auto market with fuel-efficient 
cars. We already spend a hundred times as much money on military forces in and around 
the Gulf than we do on technologies to minimize dependence on Gulf oil. Yet as the 
independent commission led by Daniel Yergin noted last June, "unlike the Allied Coalition 
in the Gulf Crisis, innovation and technological creativity cannot be summoned into 
service on short notice." 

That our Nation's and the world's dependence on Persian Gulf oil will grow over the next 
decade seems inevitable. This is particularly true since most projections assume 
continued, significant technological progress in bringing down the cost of domestic 
production, in developing alternatives, and in using oU and other energy resources 
efficiently. Those projections have not yet factored in the possible withdrawal of the 
Federal government from its significant role in fostering the development and deployment 
of those technologies. 

Keeping energy costs low 

Unlike some DOE programs of the late 1970s that required oil at $80 a barrel to be 

competitive, current DOE energy programs are aimed at making alternatives competitive 

even if oil prices decline. Indeed, in addition to our efforts to improve America's energy 

security, another key goal of the nation's energy policy is maximizing energy productivity 

13 



113 
to help keep the costs of consuming energy low. 

Some might argue that the fact that EIA projects low energy costs over the next two 
decades means that energy isn't a major national problem and therefore we don't need to 
keep investing in new technologies. I've already argued that we will be getting 
increasingly dependent on Persian Gulf oil in the next decade, but there is a much more 
important point. Low energy prices don't argue against energy R&D. Quite the reverse. 
Energy R&D has helped keep energy prices low, and can do so in the future. 

The Yergin Task Force noted many such examples. On the supply side, for instance, 
Sandia National Laboratory in New Mexico solved a drill-bit problem that industry 
scientists had tried for two decades to solve. The resulting polycrystalline diamond drill 
bit lowers the cost of drilling by as much as $1 million per well, reduces lost-time 
accidents and fatalities, has annual sales in excess of $200 million, and has delivered a total 
national benefit in excess of $1 billion. 

On the demand side we have had equally remarkable successes. For instance, four 
building technologies — ^fluorescent lamp electronic ballasts, advanced energy-efficient 
windows, analytical software for energy-efficient building design, and a high-efficiency 
refrigerator/freezer compressor — developed with DOE support of about twenty-five 
million dollars, have already saved consumers and businesses a net of more than $5 billion 

14 



114 

in lower energy bills. And, this does not even count the reduction in other costs to the 
nation, such as reduced pollution. 

What is striking about these technologies is that they were all developed in the late 1970s 
and early 1980s, at a time many were forecasting steadily rising energy prices. Yet they 
have all proven astonishingly cost-effective, achieved significant market ishare, and racked 
up their huge national savings in the past decade, a time of relatively low energy prices. 
This demonstrates that the kind of leap-firog technologies the DOE invests in are worth 
pursuing regardless of price forecasts. Because the Department has learned from 
experience, our R&D portfolio is much more focused today on this kind of small-scale 
technologies. 

Keeping the nation's costs of consuming energy low requires a constant stream of new, 
more efficient supply and demand technologies; otherwise, the inexorable tide of increased 
energy demand at home and around the world will lead to higher energy prices. Some of 
the energy technologies we rely on today resulted from government support, some from 
the private sector's natural response to high energy prices. Unfortunately, recent studies 
make clear that private sector R&D has been fairly flat since 1991. and U.S. companies 
have been shifting away from basic and applied research toward a focus on incremental 
product and process improvement. Increased international competition and downsizing of 
corporate laboratories have shortened the time horizon of most private sector R&D. 

15 



115 

Low energy prices have further undercut private sector investment in new energy 
technologies. Since the mid-1980s, real private sector investment in energy R&D has 
dropped 35 percent. 

Continued federal funding in advanced gas turbine technology, fuel cells, and other high- 
efficiency fossil fuel combustion technology is essential for keeping the costs of consuming 
energy low. as is continued funding for energy-efficient transportation, building, and 
industrial technologies. Most of the technologies that reduce dependence on imported oil 
also lower our energy costs. Federal research and development for example, has placed 
this Nation on the path toward electricity generating options that are twice as efficient as 
today's technology, up to 10 times cleaner, produce 40% less carbon dioxide and at the 
same time are 10-20% less expensive in terms of power generating costs. 

Some of the most important investments the Department makes to ensure that future 
energy costs stay low are in the area of renewable energy. Consider what Chris Fay, 
Chairman and CEO of Shell UK Ltd recently said: "There is clearly a limit to fossil fuel. I 
showed how Shell analysis suggests that resources and supplies arc likely to peak around 
2030 before declining slowly." He said, "But what about the growing gap between 
demand and fossil fuel supplies? Some will obviously be filled by hydroelectric and 
nuclear power. Far more important will be the contribution of alternative, renewable 
energy supplies." 

16 



116 



Fay presented a detailed analysis of future trends in oil supply and demand, noting that the 
fossil fuel peak in 2030 would occur at a usage level 50% higher than today. Shell's 
analysis does not rely exclusively on supply limits, but also incorporates a recognition of 
the tremendous technological advances that have been made in renewables over the past 
two decades and that are projected to be made over the next two decades. 

Although these advances in renewables have been receiving very little public attention, 
they have been sufficient to convince Shell planners that renewables may take over the 
market for electricity generation in a few decades even if electricity from fossil fuels 
continues to decline in costs (See Figure 2). Shell bases its analysis in particular on the 
remarkable decline in costs of photovoltaics, biomass energy, and wind power, much of 
which stems from Department of Energy R&D funding, and anticipated future declines 
due to further technology improvement and economies of large-scale manufacturing. 
Their scenario does not assume price hikes in fossil fuels, which, as we have seen, is also a 
plausible hypothesis. Nor does Shell assume any attempt by governments to incorporate 
environmental costs into the price of energy, even though every single independent 
analysis has found much higher environmental costs for fossil fuel generation than for 
renewable energy. According to Shell's strategic-planning group, "The Energy in 
Transition future can claim to be a genuine 'Business as Usual' scenario, since its energy 
demand is a continuation of a long historical trend, and the energy is supplied in a way 
which continues the [historical] pattern." 



17 



117 

In this scenario, three to fout decades from now more than a third of the market for new 
electricity generation will be supplied by renewable resources; the renewables industry 
could have annual sales of $150 billion; and the fastest growing new source of power 
would be solar energy. Shell expects photovoltaics (along with fuel cells and small gas- 
fired power plants) to be key drivers of the growth of distributed power systems, which 
may increasingly be the power source of choice as opposed to the large, expensive, 
polluting power plants of the past. In developing nations, such distributed sources can 
obviate the need for huge power lines and other costly elements of a huge electric power 
grid, aside from their own environmental benefits. 

Shell is worth listening to because it has perhaps been more successful than anyone else in 
the tricky game of anticipating our energy future. According to The Economist magazine, 
"The only oil company to anticipate both 1973's oil-price boom and 1986's bust was Royal 
Dutch/Shell." Anticipating the oil shocks of the 1970s helped Shell move from being the 
weakest of the seven largest oil companies in 1970 to one of the two strongest only ten 
years later. Anticipating the oil bust was apparently even more lucrative. According to 
Fortune magazine's ranking of the 500 largest corporations, Royal/Dutch Shell is not only 
the most profitable oil company in the worid, it is also the most profitable corporation of 
any kind in the world. Thus Shell has succeeded both when other forecasts had projected 
oil prices far too low, and prices far too high. 



18 



118 

Their Energy in Transition scenario is tantalizing not only because of Shell's reputation, 
but because it offers the serious possibility that the world could within a few decades 
begin to realize the dream of nearly pollution-free energy. Consider also that the United 
States, which is now the leader in most areas of renewable technology, could 
simultaneously reduce dependence on foreign energy supplies, turn our energy trade 
deficit into a surplus, and capture a large share of what promises to be perhaps the largest 
new job-creating sector of the international economy. 

This is only a scenario, it probably won't occur exactly as described. However, our 
actions today can have an impact, both positive and negative. Fay notes that "new 
technologies cannot leap from laboratory to mass market over night They must first be 
tested in niche markets, where some succeed but many fail. Costs fall as they progress 
down the 'learning curve' with increasing application." The long term nature of the 
research, and the real potential for failure, is why many options must be pursued at once 
and why private sector companies are reluctant to invest Fay observes that "renewables 
will have to progress quickly if they are to supply a major proportion of the world's energy 
in the first half of the next century.... They can only emerge through the process of 
widespread commercial experimentation and competitive optimization." 

Federal investments clearly make a difference in technology development and global 
market share. Consider the case of photovoltaics. In 1955, Bell Laboratories invented the 

19 



119 

first practical PV cell. Through the 1960s and 1970s, investments and purchases by 
NASA for space use helped sustain the PV industry and gave America leadership in world 
sales. In 1982, federal support for renewable energy was cut deeply, and within three 
years Japan became the world leader in PV sales. The Bush Administration began to 
increase funding for solar energy and, in 1990, launched a voluntary collaborative with the 
American PV industry to improve manufacturing technology; three years later, the United 
States regained the lead in PV sales in this rapidly growing industry. The Clinton 
Administration has further accelerated funding for PVs. 

Sadly, however, the deep cuts of the 1980s have taken their toll: in the past decade, 
German and Japanese companies snapped up several major American PV companies that 
accounted for 63% of the PVs manufactured in the United States. Such purchases 
represent a huge savings for our foreign competition. They don't have to spend hundreds 
of millions of dollars to see which technologies succeed. They need only let the United 
States do the basic research and early development and then spend a few tens of millions 
of dollars plucking the winners when the federal government abandons funding for applied 
research, demonstration, and deployment. While some argue that the cuts in federal R&D 
will be made up for by the private sector, historically this hasn't happened. When the 
government puUs out of a promising long-terra technology area, it sends a signal to the 
industrial and financial community that the area has no long-term promise and that the 
federal government is not a reliable partner. 

20 



120 

Finally, while low U.S. electricity prices are a boost to us economically, they create one 
disadvantage. Renewable energy wiU be cost-effective in foreign countries before it is in 
America. Countries like Germany and Japan not only have far larger government financial 
incentives for the use and export of renewable energy, they typically pay far more for 
electricity: In 1991, the price for electricity in Germany's industrial sector was 8.8 cents 
per kilowatt-hour, whereas in the United States it was 4.8 cents per kilowatt-hour. 

The primary competitive advantage the United States has had in renewables is 
technological leadership driven by federal research and development support. That 
advantage is being taken away by current and proposed Congressional budget cuts. These 
cuts will have two effects. 

First, the transition to low-cost renewables that Shell envisions will likely be slowed, since 
America remains the leader in most relevant renewable technologies, and U.S. government 
funding remains a sizable fraction of total world R&D funding. The transition, however, 
even if slowed, seems inevitable at some point in the middle of the next century. 

Second, when the transition occurs, the United States will miss what could be a very large 
new source of jobs in the next century. Using Shell's numbers, annual sales in renewable- 
energy technologies may hit $50 billion in 2020, and almost $400 billion in 2040. In the 
later year such an industry would support several million jobs. 

21 



121 

Moreover, as noted above, the United States will be importing $100 billion worth of oil 
annually 10 to IS years from now. With prudent federal investment today that might be 
the peak, followed by a gradual decline as U.S made technology and domestic fuels, 
including home-grown biomass with its implications for rural economic development, 
substitute for imported oil. With proposed Congressional cuts, however, we could end up 
only augmenting our debilitating trade deficit in oil with a dollop of oil-replacing 
technologies. 

We cannot know today which technologies will deliver the lowest cost energy in the 
future, which is why the DOE pursues a variety of approaches. Indeed, a widely held 
view, which I share, is that diversity of supply itself minimizes overall cost. That way, the 
nation is protected from global shocks that only affect some of its sources of energy, such 
as an oil crisis, or an unanticipated national or global environmental crisis. 

Low-cost Environmental Solutions 

What is so remarkable about the renewable scenario is that federal energy R&D might 
ultimately demonstrate that the lowest cost form of power is also the one that generates 
the least pollution. The key national goal of improving the environment would then be an 
automatic byproduct of our effort to achieve a low cost, diversified, and secure energy 
portfolio. In this sense, renewable energy may do in the future what energy efficiency 
does today — cost-effectively lower the energy bills of businesses and consumers while 
avoiding pollution. Energy R&D reduces both the economic cost of energy and many of 

22 



122 



the societal costs too. 



The environmental goal is an essential one for energy R&D because pollution and energy 
use are inextricably linked. Most urban air quality problems in this nation and around the 
world are linked to the production and consumption of energy. Some 54 million 
Americans live in areas that regularly violate air quality standards. The American Lung 
Association estimates that Americans spend $50 billion each year on health care needs that 
result directly from air pollution alone. As much as 80% of urban air pollution is caused 
by transportation energy use. Energy efficient transportation and alternative fuel 
technologies can substantially cut these emissions — improving local environmental quality, 
and cutting health care costs as well. Energy efficient technologies in homes, offices, and 
industry reduce emissions from power plants, further improving local and regional air 
quality and further cutting health care costs. And the global market potential for clean 
technologies in the next century is tremendous, exceeding $400 billion. 
The half-dozen most energy-intensive industries in the country are responsible for the vast 
majority of the industrial pollution: steel, aluminum, petroleum refining, chemicals, pulp 
and paper products, glass, and metal casting. These industries account for about 80% of 
the energy consumed in U.S. manufacturing and more than 90% of U.S. manufacturing 
hazardous waste. They represent the biggest opportunities to increase energy and 
resource efficiency while reducing pollution. That's why the DOE has been forming 
partnerships with these industries to develop clean technologies. 

23 



123 



Funding for pollution prevention is the best opportunity for the nation to avoid the need 
for costly environmental regulations. The government has a role in advancing pollution 
prevention for several reasons. First, pollution prevention technologies often benefit many 
companies only a small amount, so no one company has the incentive to spend the money 
by itself. Second, prevention has so many public benefits not fully captured in the 
marketplace: reduced resource consumption, improved environment, reduced energy 
consumption, and increased jobs and competitiveness. Thus the private sector will 
inevitably under invest in R&D on clean technologies. Third, while it is certainly possible 
that the 120 governments represented in the Intergovernmental Panel on Climate Change 
were wrong in December when they concluded, "the balance of evidence ... suggests a 
discernible human influence on global climate," it seems imprudent to base federal energy 
R&D policy on that hope. Fortunately, the same investments that prevent industrial 
pollution and urban air pollution while lowering the nation's energy bills, also minimize 
greenhouse gas emissions. 

World-Class R&P 

The fmal goal of national energy R&D policy is maintaining America's leadership in 
science and technology, since that is the engine of productivity and job growth essential to 
our economic well-being in the next century. Here the Department of Energy has 
demonstrated unique success by winning more R&D 100 awards (given annually to the 
most innovative and important technologies) than any other organization since 1963. The 
DOE has won 386 R&D 100 awards, more than all other federal agencies combined and 

24 



124 

more than General Electric, Westinghouse, Dow Chemical, Dupont, and Hewlett-Packard 
combined. In the past five years, projects supported by the Office of Energy Efficiency 
and Renewable Energy have won 31 R&D 100 awards representing more than 6% of the 
total number of awards given during that time, which is especially remaricable given Aat 
the Energy Efficiency R&D budget represents under one half of one percent of the 
nation's total R&D funding . 

In the past two years, the Department has achieved major breakthroughs in high-efficiency 
lighting, super-insulating material, photovoltaic energy conversion, high-temperature 
superconductivity, and conversion of biomass to ethanol. As industry scales back its 
longer term, higher risk R&D in response to increased domestic and foreign competition 
and low energy prices, the federal government must redouble its efforts if we are to ensure 
a steady stream of technologies that enhance productivity, create jobs, avoid pollution, 
lower energy costs, and reduce dependence on imported oil. Such basic and applied R&D 
delivers so many societal benefits that it cannot in any respect whatsoever be considered 
"corporate welfare." a term implying a giveaway with no societal benefits. 

We must invest in a spectrum of technologies because we cannot know which investments 
will pay off in the future. For example, when the original government-funded research 
was done on jet engines, who could have guessed that decades later it would lead to the 
turbine technology that is today generating electricity and helping to keep down electricity 

25 



125 



rates? 



Conclusion 

No one can predict the future with certainty. But a great many experts have examined the 
inexorable forces of supply and demand and concluded that while energy prices are low 
today, energy security is a growing concern. Fortunately, a modest investment in energy 
R&D-especially investments in oil and gas R&D, advanced transportation technologies, 
and alternative fuels-can help mitigate our vulnerability to future oil shocks. 

At the same time, these and other investments in renewable energy and energy efficiency 
hold the key to ensuring that the costs of consuming energy are as low as possible for 
consumers and businesses in the coming decades. If low energy prices today, and lower 
energy price forecasts in the future mean anything, they mean that the technological 
optimists were right: energy R&D makes a difference to consumers and businesses. 

These same energy investments also reduce or eliminate pollution, thereby making it 
possible to have an improved environmental quality while delivering the kind of low 
energy costs that spur U.S. economic growth. In this way, energy R&D lowers not just 
the direct economic cost of energy, but also its many societal costs, such as damage to the 
environment or public health. Stable or growing funding for energy R&D holds the 
prospect of dramatically reducing pollution in the lifetime of our children. 



26 



126 

Americans today have a duty to eliminate the deficit, rooted in their obligation to future 
generations, but the country needs to acknowledge that public investment in R&D, far 
from being corporate welfare, is an investment in America's own future. As the Yergin 
task force wrote, Americans have an obligation to "assure for future generations that our 
Nation's capacity to shape the future through scientific research and technological 
innovation is continually being renewed." 

There are credible warnings about growing dependence on Persian Gulf oil and about 
national and global environment problems, as well as credible scenarios explaining how we 
can minimize that dependence, how we can capture the huge maiicet potential for 
renewable energy and other clean energy technologies, and how we can cost-effectively 
prevent pollution. Long after the federal budget is balanced, the nation and the world will 
remember if we failed to act on the warnings and if we failed to seize the opportunities. 



27 



127 

Chairman ROHRABACHER. Thank you very much for that very ag- 
gressive, straightforward testimony. And, I'm looking forward to 
hearing the dialogue between Mr. Schleede and yourself. 

Mr. Lynch. 

STATEMENT OF MR. MICHAEL C. LYNCH, RESEARCH AFFILI- 
ATE, CENTER FOR INTERNATIONAL STUDIES, MASSACHU- 
SETTS INSTITUTE OF TECHNOLOGY, CAMBRIDGE, MASSA- 
CHUSETTS 

Mr. Lynch. Thank you, Mr. Chairman, and members of the Sub- 
committee for the opportunity to speak. I have been asked to testify 
about long-term oil forecasting and especially DOE's, which is my 
primary area of expertise. 

I don't think it will surprise you that someone from MIT is not 
going to come down and say that R&D is a bad thing, generally. 

[Laughter.] 

Mr. Lynch. You mentioned, Mr. Chairman, that the forecasting 
has been very bad. I have published a number of papers on this, 
and it's summarized in my written testimony. 

And, it's true. It has been very bad. And, everyone, or almost ev- 
eryone, was very wrong in the late 1970's and early 1980's. 

But, that doesn't mean that it can't be done, because there have 
been very specific errors, which I think address some of the con- 
cerns of some of the members of the Committee. The first thing is 
that, as you can see in Exhibit 1 of my written testimony, the fore- 
casts have always been that prices rise by a few percent a year. 
And, since the early 1980's, they have declined by a few percent a 
year. 

And, the forecasters have tended to correct their forecasts by 
showing that the prices will rise from the current point at the new 
lower oil price. The mistake is the trend of prices, but the correc- 
tion has been to the initial point. And, that's wrong. 

Secondly, on the supply side, people have been much too pessi- 
mistic about non-OPEC and non-Middle East production. In the 
early 1980's, everyone said the North Sea would peak in a few 
years. People have been way too low on Alaskan production and so 
forth. 

The result has been that the Persian Gulf has been predicted to 
recover market share really since the early 1980's. They have 
gained somewhat since the price collapse, but it has been quite a 
struggle for them. 

And, it's important to realize that the arguments on behalf of the 
rising price forecasts and the falling oil production forecasts have 
seemed logical. There has been a lot of data supporting them, but 
that hasn't prevented them fi*om being wrong. 

There have been many experts who have been sajdng literally for 
15 years, including a couple fi"om MIT, I have to confess, that we 
are facing an imminent crisis, an imminent gap between supply 
and demand. And, they have been wrong. 

The consensus has not proven very valuable in telling us about 
the validity of a forecast. It has told us more about the psychology 
of the forecasters. 



128 

I would also say that what people have said many times is incon- 
ceivable has actually happened. What people have said is inevi- 
table has not happened. 

So, perhaps it s a little foolish of me, as an expert, to tell you to 
be careful in listening to experts. But, frankly, that's just the hon- 
est truth. 

[Laughter.] 

Mr. Lynch. The reality is that prices may go up in the future. 
And, Persian Gulf oil production and exports will rise. 

However, the most likely scenario, given what we know about oil 
supply and demand and what we have learned about forecasting in 
the last 10 to 15 years, is that OPEC is going to be under contin- 
ued pressure for at least the next 10 years, possibly for much 
longer, that they will be fighting with each other for market share. 
And, it's going to require some very substantial changes in the 
world to see prices rising. 

In terms of thinking about R&D spending, that's important. It 
suggests that OPEC's power, the price of oil and the costs of im- 
ports are going to be lower than the official forecasts and the fore- 
casts that a lot of people make. 

But, I'm not sa5ring there won't be an oil crisis, because an oil 
crisis is a short-term political event. If there were a civil war in 
Saudi Arabia today, we would have a big oil crisis. 

But, all I'm tr3dng to say is that the crisis is not really related 
to the level of U.S. oil imports or the level of world oil demsuid. It's 
related to other short term factors, including the structure of the 
market, including things like the SPR, which are crisis manage- 
ment policies. 

It's not really related to R&D spending. R&D spending, I think, 
needs to be justified on the grounds of long-term or even medium- 
term scientific and economic benefits. 

That's not really my area of expertise. And, I'm not going to ad- 
dress that. 

But, I certainly think the Committee should consider those much 
more than it should concerns about a future oil crisis. Thank you. 

[The prepared statement of Mr. Lynch follows:] 



129 



THE LONG-TERM PETROLEUM OUTLOOK 

Testimony to the Subcommittee on Energy and Environment 

of the Committee on Science 

U.S. House of Representatives 

March 14, 1996 

Michael C. Lynch' 

INTRODUCTION 

Although the importance of oil prices to both the world economy and other energy prices has 
declined in recent years, there is renewed concern about future trends and especially rising 
OPEC power and U.S. vulnerability. The current debate is between the opposing viewpoints 
of those (like DOE) who expect rising prices and those foreseeing flat or declining prices 
(adjusted for inflation). The primary disagreement is over expectations for non-OPEC 
supply. Both groups expect that growing oil demand, especially in the Third World, will 
require higher production. Rising price forecasters argue that flat or lower non-Middle East 
oil production will necessitate a significant increase in market share for Middle East 
producers, as well as higher prices to cover rising capital needs. Weak price forecasters 
believe that new technologies will continue to lower costs and add reserves, even in the 
mature producing areas. They believe that this will prevent OPEC from regaining the 
dominance it had in the 1970s. 

In previous work, I have shown that past oil market forecasts were biased towards rising 
prices and declining non-OPEC production.- Correcting for the supply pessimism leaves a 
forecast in which oil markets remain in surplus over the long-term, suggesting that oil prices 
will remain weak for the indefinite future. 

THE FORECASTING RECORD: THE FAILURE OF CONSENSUS 

The expert community's inability to predict oil prices in the past two decades is well 
documented. In Exhibit 1, a review of the Department of Energy's oil price forecasts shows 
the way in which their forecasts have consistently been too high.^ In the early 1980s, ever- 
increasing prices were projected, typically reaching $80/barrel by 1995. (In fact, during this 
period almost no forecaster thought long-term prices could actually fall, even as an 



' Research Affiliate, Center for International Studies, Massachusetts Institute of Technology. The 
views expressed herein are the author's and do not reflect the opinions of any other person or 
organization. 

- See "Bias and Theoretical Error in Long-Term Oil Market Forecasting," in Advances in the 
Economics of Energy and Natural Resources . John R. Moroney, ed., JAI Press, 1994; and "The Analysis 
and Forecasting of Petroleum Supply: Sources of Errors and Bias, ' delivered to the Eighth International 
Symposium on Energy Modeling, Institute of Gas Technology, Atlanta, Georgia, April 1995. 

' Note that the great majority of oil market forecasts have, until recently, resembled those published 
by the Depanment of Energy. This consensus has led to many sheep-related metaphors. 



130 



Exhibit 1 



a 

< 

ffl 



Ol 



DOE OIL PRICE FORECASTS 




1975 1980 

_ ACTUAL 
t- 1908 



1990 1995 200C 

1981 FORECAST _^_ 1984 

1992 _«_ 1995 



alternative scenario.) Actual market behavior has fallen far outside the consensus 
expectations, discrediting forecasts and forecasters. 

The Nature of the Errors 



One underlying error introduced into oil price forecasting in the 1970s was the belief that 
rising mineral prices were inevitable and could be demonstrated by economic theory. Exhibit 
2 shows oil prices in both nominal and inflation-adjusted dollars. No rising trend is visible 
in real oil prices, which in 1970 were below those of most of the previous century. But the 
misconception that resource depletion would cause prices to rise several percent a year above 
inflation resulted in rising price expectations becoming an inherent part of most oil price 
forecasts for nearly two decades. Whether prices were low or high, markets weak or tight, 
demand rising or falling, the typical forecast called for oil prices to rise a few percent above 
inflation each year. 

This rising trend was the primary error in the forecast, as Exhibit 1 so clearly shows. Yet 
the correction was typically to the initial point not the trend. As prices dropped over the past 
fifteen years, the forecasts like DOE's have retained the same rate of increase, only the 
beginning point has changed. DOE's reduction of $l/barrel in 2010 from last year's forecast 



131 



Exhibit 2 



HISTORICAL U.S. OIL PRICES 




1905 1915 1925 1935 1945 

NOMINAL m 1994$ 



is a continuation of this practice. 

Pessimism about non-OPEC oil supply has been another element behind the rising price 
forecasts. Prior to the mid-1970s, most organizations were optimistic about the prospects for 
oil supply, even in the United States. Before the second oil price shock, concerns about 
resource limits and geological depletion led to increasing pessimism about the outlook for 
non-OPEC supply. Rising costs were empirically demonstrated in the U.S., the only region 
with good data, but this proved to be due to inflation in costs related to the rapid increase in 
drilling, not geological factors. The two oil price shocks in the 1970s were cited to support 
arguments of resource scarcity, despite their transient nature. 

This pessimism affected virtually all supply forecasts. Exhibit 3 shows the DOE forecast for 
non-OPEC Third World oil production, which has been consistently pessimistic and has been 
repeatedly raised. The continued forecast of an imminent peak which has had to be regularly 
corrected demonstrates an underlying bias, inasmuch as the Third World's petroleum basins 
are far less mature than any other region of the world. Other producing regions, such as the 
North Sea, Alaska, and the smaller OPEC countries were similarly viewed by forecasters as 
mature producers facing imminent decline, and forecasts of their production have also been 
consistently too low. 



132 



Exhibit 3 



DOE FORECASTS OF NON~OPEC LDC PRODUCTION 

15 




The oil market forecasting errors appear to be the result of mistaken assumptions and 
theories, and correcting them should improve forecast accuracy. Conservative but less 
pessimistic non-OPEC production forecasts should generate a more reliable estimate of 
OPEC's market position in the long-term and allow an unbiased assessment of prices. 

GENERAL FORECASTING LESSONS 

Many lessons can be drawn from this review, some generally applicable to forecasting, 
others of which are more specific to the oil industry. Those most relevant to this discussion 
are listed below. 



Consensus is not equated with validity 

First, the consensus appears to tell us nothing about the accuracy of the experts' beliefs. 
Instead, it seems to demonstrate the political, bureaucratic and psychological difficulties that 
many forecasters have in disagreeing with the consensus. Indeed, on a complex issue with 
many uncertainties, the existence of consensus should be viewed skeptically. 



133 



The iacoDceivable is quite possible 

Many of the actual market occurrences of the past two decades, whether price spikes or 
crashes, the sharp drop in demand of the late 1970s, or the continually increasing non-OPEC 
oil supply of the 1980s and 1990s, have been repeatedly described by forecasters as 
"inconceivable"." The corollary to this rule is that the supposedly inevitable has often failed 
to come to pass, including the "inevitable" price increase and various "inevitable" production 
declines. Again, usage of terms like inconceivable and inevitable seems primarily suggestive 
of the mindset of the analyst. 

Confusing type of effect 

The tendency to misunderstand the nature of effects has left observers frequently confused. 
Examples include mistaking economic effects for geological ones, policy decisions for 
economic constraints, and transient events for long-term trends. In oil production, for 
example, the increase in factor prices in the U.S. due to the drilling boom of the early 1980s 
was interpreted as a sign of resource depletion and extrapolated indefinitely, and the effects 
of wellhead price regulations on oil and gas were said to demonstrate resource scarcity. 

Analysts are heavily influenced by prevailing moods 

A number of previous works have referred to the "Zeitgeist," "vintages of consensus," or, 
more academically, "intellectual regimes" to describe how prevailing moods can influence 
projections and decision-making. Those moods, in turn, can be affected by short-term or 
transient effects. In effect, when there is consensus about finite resources inexorably driving 
prices upwards, it becomes difficult for an individual to produce a differing view and all but 
impossible for a large organization to do so. 

SPECIFIC LESSONS FOR PETROLEUM FORECASTING 

Beyond the lessons which are generally applicable to research and forecasting, there are 
certain points specific to oil market forecasting which should be considered when judging a 
forecast. 

Prices forecasts are too high, the error is in the trend 

Oil price forecasters have consistently been not just too high, but unable to even foresee the 
trend in prices. Actual prices are about 20% of where they were widely predicted to be a 
little over a decade ago. Since the late 1970s, the consensus price forecasts have been for a 
3% real price increase, even while prices have fallen steadily. 



' My own 1989 forecast of declining long-run oil prices was described as heretical by the Petroleum 
Economist (9/89), but has proved fairly accurate. 



134 



Demand forecasting suffers from exogenous effects, but also misspeciflcation 

Although demand forecasting has hardly been perfect, it appears to have primarily suffered 
from an inability to pred'Ct prices and economic growth rates. However, most analysts seem 
to have been too conservative in their beliefs about the potential price response of demand. 
Very substantial improvements in energy' efficiency have taken place, far beyond what most 
experts, even the most ardent r;onservationist, anticipated. Oil turns out to be very much like 
other commodities. 

Supply is misspecified 

One of the most glaring errors in petroleum, forecasting has been the post- 1980 need to revise 
supply upward while lowering price projections. The fact that lower price expectations have 
resulted in higher demand expectations is logical and consistent with basic economic theory. 
But lower prices and higher production are not normally consistent with basic economic 
theory, and are a strong indication that the underlying premises are incorrect. 

Maithusian Bias 

One of the primary problems which has permeated oil market forecasting for the past two 
decades has been the tendency towards a Maithusian bias.^ It might be posited that this 
reflects the natural tendencies of environmentalists advocating conservation, oil companies or 
OPEC requesting special treatment, but the bias has seemed to permeate all forecasts for 
nearly a decade and a half. 

This is significant because one of the most important elements of past forecasting error has 
been the problem of bias. In any complex system, and especially in the social sciences, there 
remain significant uncertainties or areas where detailed analysis has not been, or cannot be, 
done. As a result, the influence of uncertainties and assumptions means that every forecaster 
must make many choices. In theory, an economic forecast will be unbiased, meaning that 
the errors average out, or the aggregate of all forecasts is unbiased, meaning that the 
community of forecasters is, on the whole, unbiased. 

Such has not been the case for oil price forecasting, as is demonstrated by examining the 
forecasts of the 1990 price of oil submitted to the lEW survey in Vienna. (Exhibit 4) From 
1981 to 1985, only one of 84 forecasts was too low. It was not until 1988 that the average 
forecast was approximately correct and the 1990 Gulf War may have contributed to that. 



' Malthus was the political economist in the 19th century who extrapolated from rather sparse data 
to conclude that the world's agricultural productivity could not keep up with population growth. Fears 
of limited resources predate him by millennia, but he formalized the theory. 



135 



Exhibit 4 



FORECASTS OF 1990 PRICE OF OIL 



a 
a: 
< 



01 



C lEW SURVEi-:) 




19B4 1985 1986 1987 

YEAR OF FORECAST 



1988 1989 1990 



Conclusion: Forecasting is an Art, not a Science 

The lessons above are not intended to suggest that forecasting cannot be done. But it is 
important to recognize the many difficulties and uncertainties, rather than implying precision. 

THE LONG-TERM OIL MARKET OUTLOOK 

What might happen in the oil market includes a broad range of possibilities. Prices could 
collapse to $5 per barrel and stay there for two decades. They could begin to rise more or 
less continuously. However, these are relatively unlikely events, and if we correct for the 
errors and biases described above, the result is a much more accurate picture of the long- 
term market. 

Demand 



If low oil prices prevail as anticipated, then demand forecasts should be increased relative to 
those containing rising price forecasts. The OECD nations have reversed their demand trend 
since the 1986 oil price collapse, from a 1.4% per year decline from 1973 to 1985 to a 
growth rate of 1.6% from 1985 to 1994. Recent strong economic growth in Asia and Latin 



136 



America should result in high growth in oil demand in the Third World overall, even though 
the same cannot be said for the Middle East and Africa. 

Thus, the expectations that oil demand will rise rapidly are not misplaced, and this forecast 
anticipates particularly high levels of demand. But demand alone will not determine prices. 

Supply 

Evidence of resource abundance and low costs support optimistic interpretations of future 
non-OPEC oil supply. The density of wells drilled in the non-OPEC Third World is 2% of 
the density in the U.S. in 1970, the year lower-48 production peaked. Average per-well 
production outside North America and the FSU is approximately 320 barrels per day, versus 
12 in the United States. 

Anticipated production peaks have been repeatedly overcome throughout the world, with only 
the United States experiencing a decline as the result of geological maturity. Most areas are 
seeing increased investment and production, with the non-OPEC Third World growing by 
4.8% per year over the past decade and the North Sea adding 1.2 mb/d in the past two years 
alone. The Former Soviet Union (FSU) has numerous undeveloped fields over 1 billion 
barrels in size which are likely to be developed upon resolution of legal and fiscal questions. 
Heavy oil from Canada and Venezuela could add several million barrels per day over the 
next two decades. 

These facts suggest that the surplus of oil which has plagued OPEC for the past dozen years 
is likely to continue for many years, as smaller producers continue to expand, complementing 
the larger producers such as Russia, the North Sea, Venezuela, Iraq, and Mexico, all of 
which are likely to add significant volumes beyond today's level. 

The Supply /Demand Balance 

My most recent forecast (Exhibit 5) projects a 56 mb/d increase in oil demand over the next 
quarter-century. This may appear daunting, but only reflects a 2.2% per year increase, far 
below pre- 1973 growth rates. With the projected production increase from the Third World, 
the North Sea and the FSU, the growth in supply needed from OPEC only amounts to about 
2.5 percent per year. The large OPEC producers, Abu Dhabi, Iraq, Iran, Venezuela, Kuwait 
and Saudi Arabia have all indicated a desire to increase production much more rapidly. 

Price-Setting 

Prices in the oil market are influenced, but not determined, by the balance of supply and 
demand and the long-run marginal cost of production. The OPEC oil cartel maintains prices 
above long-run marginal costs and its ability to do so is the primary influence on long-term 
price trends. Policy-makers in most OPEC countries recognize that the prices of the late 



137 



Exhibit 5 





LONG-TERM OIL MARKEl' BALANCE 










TB/D 






Average 




1992 


2000 


2010 


2020 


Annual 


DEMAND 










Increase 


OECD 


37,500 


41,500 


46.700 


49,600 


1.0% 


LDC 


20,200 


29,510 


44,050 


62,960 


4.1% 


FSU/ECE 


7,800 


6.100 


7,500 


9,200 


0.6% 


WORLD 


65,500 


77.110 


98,250 


121,760 


2.2% 


SUPPLY 












OECD 


19.195 


22,173 


23.663 


24,946 


0.9% 


LDC 


11,320 


13,465 


18,530 


24,363 


2.8% 


FSU 


6,500 


9,000 


11,000 


13,400 


2.6% 


UNCONVENTIONAL 


300 


750 


1,250 


2,500 


7.9% 


TOTAL NON-OPEC 


37,315 


45.388 


54,443 


65,209 


2.0% 



DEMAND FOR OPEC OIL 



28.185 



31,722 



43,807 



56,551 



2.5% 



NOTE: OECD INCLUDES MEXICO. LDC INCLUDES CHINA. 
Source: Lynch, Michael C, International Petroleum FYice, Supply 
and Demand: Projections Through 2020, GRI, 1996. 



1970s were unsustainably high, implying that even a recovery in their marlcet power will not 
necessarily result in higher prices. In the forecasts of DOE and the lEA, neither OPEC's 
market share or its oil revenues recover to the level of the mid-1970s until 2010. Even 
should the cartel decide to raise real oil prices in the future, their power to do so will remain 
limited. Forecasts of rising prices beginning in the late 1990s thus appear to be too 
optimistic. 



Conciusions: Prices are much more likely to be weak than strong 

The world oil market will most likely continue to experience excess supplies, as smaller oil 
producers add reserves and capacity, and the medium-sized producers like Venezuela, 
Mexico, and the Former Soviet Union absorb a large share of the increase in oil demand. 
The major Middle Eastern OPEC producers will see rising demand for their oil, but at such a 
low growth rate that they will have no difficulty adding capacity to meet it. 

The factors which drove oil prices higher in the 1970s were transient in nature, but the effort 
necessary to overcome them created an underlying pessimism about the industry's ability to 
provide oil at reasonable prices. However, the ongoing technological revolution in the 



138 



Exhibit 6 





THE LONG-TERM CONTEXT OF OIL PRICE 


FORECASTS 




50 


i 






40 


\ 




_1 

UJ 

a. 
ct 
< 

CD 

Ol 

<J> 

T- 


30 

CO 


\\ 


yp 




10 


1 . . . . 1 1 1 1 1 . ■ 






1920 1930 19-10 1950 I960 1970 1980 1990 


2000 2010 2020 




.ACTUAL _»_DOE BASE 






_fc_ lEA CAPACITY CONSTRAINED _j,j_ FLAT PRICES 





industry, combined with managerial improvements and a more friendly fiscal environment in 
oil exporting countries, will keep real oil prices flat for the next two decades. As Exhibit 6 
shows, a flat oil price forecast appears to be much more consistent with historical behavior 
than the rising price forecasts of DOE and the lEA. A declining price, or flat at a lower 
level, would hardly be unrealistic. 

POLICY RECOMMENDATIONS 

This more benign forecast should not be interpreted to mean that there will be no problems 
in the future. Specifically, the argument that rising OPEC market share will lead to an oil 
crisis is a fallacy, as is the inverse: weak oil markets and pressure on OPEC does not 
preclude oil crises. Neither does optimism about oil supply and prices directly lead to an 
argument in favor of lower R&D spending. 



10 



139 



OU Crises' 

Oil crises are not a function of resource scarcity and are largely unrelated to long-term 
market trends. They reflect short-term disruptions of supply, which are hardly abnormal 
events. A crisis is not a function of the level of world oil demand, OPEC oil production, or 
U.S. oil imports, but rather reflects: a) the size of disrupted supply; b) the availability of 
replacement supplies; c) the organization of the oil market; and d) the response of consumer 
governments, particularly in releasing strategic inventories. 

The economic impact of an oil crisis is a function of the change in prices and the level of 
imports and consumption in consuming nations. Reducing oil consumption or developing 
alternative supplies has a very minor impact on the possibility that an oil supply disruption 
will lead to higher prices. Certainly, lower imports will reduce the impact of crisis-induced 
higher prices on the domestic economy, but, the cost of reducing oil imports by 10% over a 
long period is probably much higher than say, the impact of a 50% price increase for one 
year. 

R&D Spending 

Presumably, no one will be surprised to hear an M.I.T. researcher speak in support of 
research. An increase in knowledge is, all else being equal, something to be sought after. 
New technologies have been one of the major factors in the development of American 
economic strength. Although basic research has only vague, long-term payoffs, the benefits 
should not be ignored. 

But it is always better to maximize accuracy, whether in forecasting or providing a rationale 
for R&D expenditures. Clean coal technology, fusion power, or photovoltaics will not 
prevent another oil crisis from occurring, and are likely to provide only a slight moderating 
effect on the crises which do occur. This is not to say that R&D in these areas should not 
go forward, just that they need to be justified in some other way. 

Questions about the optimal level of R&D spending, the balance between basic and applied 
research, and the appropriate split between private and public sector research are important 
ones. However, the answers are beyond my area of expertise and I would not presume to 
provide them here. My only recommendation is that the Congress consider all arguments 
(both pro and con) with a healthy dose of skepticism and recognize the value of a balanced 
strategy. 



' For a discussion of the nature of oil crises, see Michael Lynch, "Fighting the Last War: 
Preparations for the Next Oil Crisis," MIT Energy Laboratory Working Paper MIT-EL 86-009WP, 
October 1986. 

11 



140 

Chairman ROHRABACHER. Thank you very much, Mr. Lynch, Ms, 
Cubin will have to be leaving shortly, so we are going to pay her 
the courtesy of being the first one to offer her questions to the 
panel. 

Ms. Cubin, Thank you very much, Mr, Chairman. I will be brief. 

But, it occurs to me that — and I would like Dr. Hakes and Mr, 
Romm to respond to this, I live in Wyoming, and if I were to read 
in the newspaper about a plant closure or a partial closure of an 
automobile plant in, you know, Ohio and 10,000 jobs are gone, you 
know, that's a big concern for the coimtry and in a lot of ways for 
the economy, the people involved plus the ramifications to all of us. 

Well, there have been 500,000 jobs, good paying jobs, lost in the 
oil and gas industry because, I believe, of government policy and 
other reasons obviously. 

Has the Department of Energy done anything at all to try to 
help, other than R&D to try to help, the domestic oil industry? 

We have plenty of oil right now all over the oil producing states. 
They are closing in marginal wells if they can't get some sort of tax 
incentive or if there isn't some reason that they want to spend the 
extra money for tertieiry production. 

And, I haven't seen anything out of the Department of Energy. 
But, I would like you to respond to that. 

Dr. Hakes. I can answer the data side of it. In looking at jobs, 
I think it's important to analyze what are the factors involved. 
And, in fact, I think there's a multitude of reasons. 

But, if you look at the coal industry, for instance, there has been 
a lot of loss of jobs in the coal industry. It's largely because of auto- 
mation. 

Basically, mining is done much more mechanically than it has 
been done 

Ms. Cubin. I'm talking just about oil and gas. Wyoming is the 
largest energy producer in the country. 

We have hydro power. We have uranium. We have solar. We 
have wind. We have oil. We have gas. We are the largest coal pro- 
ducer. 

I am talking about oil and gas. 

Dr. Hakes. Yes. And, the other point I would make is that some 
of the technologies that have been developed in the private sector 
and the public sector are creating a somewhat more optimistic look 
for oil^-domestic oil production. 

We are showing later in the forecast period that domestic produc- 
tion will actually rise over some period. And, that's a different sce- 
nario than has been in the past. 

And, that's largely driven by technology, basically things like 3- 
D seismology, the ability to drill deeper, the ability to do horizontal 
drilling. Those things are all creating a more optimistic view for do- 
mestic oil. 

Ms. Cubin. But, is all you do predict? You don't do anjiihing ac- 
tive? 

I'm 

Dr. Hakes. I'm from the data part of the Department. Joe is best 
prepared to deal with the policy side. 

Ms. Cubin. Okay, Joe. 



141 

Mr. ROMM. Yeah. I would say on the non-R&D side, among the 
things the Administration is doing is supporting legislation to 
lower industry costs by reforming the Oil Pollution Act of 1990. We 
are changing regulations to allow reduced royalties on declining 
production. 

The Department of Interior has granted most of the royalty relief 
requested on stripper wells on federsd land and is in the process 
of reforming its procedures for calculating the royalty payments 
due for natural gas. And, we are now close to agreement on the 
Royalty Fairness Act pending before the Congress. 

And, I would be happy to get you more information, because my 
area is a bit more energy efficiency than fossil energy. But, I — ^we 
can 

Ms. CUBIN. Well, I am on the Resources Committee where we are 
doing the Royalty Fairness Act. And, while we thought we had an 
agreement with the Administration, we don't, because after we had 
agreed to the bill and brought the bill forward the Administration 
said, "Uh-oh, the bill has a fatal flaw, and that's delegation to the 
states." 

So, I just have to say that whatever things you are doing are 
minuscule in helping the industry as compared to, number one, the 
money we spend on the Department of Energy and, number two, 
the need out there. 

And, why wouldn't it be a policy of the Department of Energy, 
why wouldn't it be part of the reason you exist to help the domestic 
industries instead of allowing us to become reliable to the point 
that it could cause a national security interest, supposedly, under 
certain scenarios? 

I don't understand — I don't iinderstand why you are there, I 
guess. 

[The following information was received for the record:] 

INSERT FOR THE RECORD 

The Administration and the Department of Energy have a number of successes 
that will help the domestic oil industry. These successes have been documented in 
recent testimony by C. Kyle Simpson, Associate Deputy Secretary for Energy Pro- 
grams, before the House Resources Committee, Subcommittee on Energy and Min- 
eral Resources, on March 21, 1996. The following highUghts the accomplishments 
contained in the full statement: 

ALASKA NORTH SLOPE EXPORTS: Based on a study undertaken by the De- 
partment of Energy, the Congress passed and the President signed legislation that 
will permit the export of Alaska North Slope crude oil. The prohibition on these ex- 
ports has been in place for more than 23 years. The Department's study indicated 
that domestic oil production will increase by about 100,000 barrels per day due to 
increased wellhead revenues; American jobs will increase by about 25,000 primarily 
in California and Alaska; and domestic reserves will increase. 

ROYALTY RELIEF: The Administration worked tirelessly to support royalty reUef 
legislation that will bring more of our domestic resources within economic reach in 
the deep water of the Central and Western Gulf of Mexico. Legislation signed by 
the President in November of last year will provide royalty reUef over the next five 
years for all new lease sales in the Central and Western Gulf in water depths of 
200 meters or more. We have estimated that this relief will add up to 15 billion bar- 
rels of oil equivalent to our domestic reserves; will provide as many as 160,000 new 
American jobs, especially in the Gulf Coast states, and will provide increased reve- 
nues to the industry and the federal government. In addition, the law provides the 
opportunity for royalty relief on existing leases where development has not taken 
place without the economic incentive provided by royalty reUef Onshore, the Admin- 



142 

istration has provided royalty relief to stripper wells and heavy oil wells producing 
on federal lands. 

OIL POLLUTION ACT OF 1990 FINANCIAL RESPONSIBILITY: The Depart- 
ment of Energy and the Administration have worked closely with the Congress to 
implement the Oil Pollution Act (OPA 90) requirements for financial responsibility 
for offshore facilities in a manner that protects the environment while reducing the 
financial burden on operators. The Secretary of Energy commissioned a study by the 
National Petroleum Council and has acted on its recommendations by supporting 
the efforts of the industry and the Department of the Interior to develop a rational, 
risk-based approach to financial responsibility requirements for OCS faciUties. 
While this effort has been slowed due to the inability of the Congress to work out 
differences between the House and Senate, the Administration is nopeful of a posi- 
tive resolution to the situation. 

BUREAU OF LAND MANAGEMENT NATIONAL PERFORMANCE REVIEW: 
The Department of Energy has worked closely with the BLM on the Bureau's On- 
shore Oil and Gas Performance Review in order to make its regulatory structure 
more efficient and responsive to oil and gas operations on public lands. Regulatory 
streamlining is ongoing and will result in improved access to public lands as well 
as reduced regulatory burden on those areas already under lease. 

ROYALTY FAIRNESS: The Administration is working with the Congress on pro- 
posals to improve the fairness of the royalty collection process for onshore and off- 
shore oil ana gas production. The process has grown increasingly complex and con- 
tentious as changes arise in how these commodities are marketed. The Administra- 
tion and the Congress have made progress, and we will continue to work with the 
Congress in an attempt to resolve these issues. 

ACCESS TO PUBLIC LANDS: 

• Lease Sales in the Outer Continental Shelf and Five Year Plan: The Department 

of Energy supports the work of the Department of the Interior and its Minerals 
Management Service (MMS) as they promote the orderly, environmentally re- 
sponsible development of the natural gas and oil resources of the Outer Con- 
tinental Shelf (OCS). The success of the latest lease sale on the OCS is an ex- 
ample of how government and industry can work together to ensure the timely 
development of the Nation's offshore resources. In addition, we support the size, 
timing and location of leasing as described in MMS' Proposed Leasing Program 
(1997-2002). 

• Green River Basin Initiative: The Department of Energy is providing its technical 

and analytical expertise as an ex-officio committee member to the Bureau of 
Land Management's Green River Basin Advisory Committee. This committee 
will make recommendations to the Secretary of the Interior as to how to develop 
the oil and gas resources in the Green River Basin of Wyoming and Colorado 
without compromising the environment. 

These are the most important of the non-R&D initiatives under way in the De- 
partment of Energy to provide assistance to the domestic oil and gas industry. In 
addition, there are many international initiatives that will assist our domestic com- 
pginies and provide jobs for American workers. For example, we have been working 
with U.S. firms and our counterparts in the Caspian Region's private and public sec- 
tors on ways to develop Caspian Region oil and gas resources and acceptable meth- 
ods of transporting the proaucts to world markets. Finally, there are many R&D- 
related initiatives that will assist in lowering the cost of production for domestic oil 
and gas companies, making it possible for them to operate in the present market 
environment. 

Mr. ROMM. Well, I think I'm here mainly — let me, let's get back 
to you as much information on what the Department is doing out- 
side of energy R&D. Energy R&D is mainly what I can speak to. 

I think the Department is working pretty hard to develop tech- 
nologies that would lower the finding costs and would help particu- 
larly small producers do a better job of finding oil cheaply and then 
getting it out as much as possible, such as the advanced seismic 
and advanced computing 

Ms. CUBIN. I'm sorry, my time is up. And, I'm sorry to interrupt. 

But, the greater harm that you are doing, while I agree that 
there have been some areas where the royalty — there have been 
tax breaks by the Federal Government on federal land for tertiary 



143 

production, but the biggest problem is the lack of permitting — ^the 
time that it takes, by the time someone decides they want to per- 
mit, and all of the hoops that someone has to jump through in 
order to be able to drill that are set up by the Federal Government, 
it is so expensive because of the Federal Government's action — and 
I don't know how much of this action comes from the DOE. I know 
it comes from the Forest Service, the Park Service, the Endangered 
Species Act. And, that's all outside of you. 

But, the benefits to the domestic industry from the Department 
of Energy, I don't see them out there. And, I've been involved in 
this business for 14 years. 

So, I would hope that somewhere someone would want to do 
something about the domestic energy. Five hundred thousand jobs 
have been lost. 

Thank you, Mr. Chairman. 

Chairman Rohrabacher. Thank you, Ms. Cubin. And, I think I 
will proceed at this point and then go to Mr. Roemer. 

Dr. Hakes, I would just like to have a better understanding of— 
I mean, you admit in your testimony that your forecasts have been 
off. And, I would say they have been off by not just a small amount 
but they have been off the chart. 

What's the missing part of the equation? How come? How come 
your predictions have been so far off? 

Dr. Hakes. It's the price side where there has been the greatest 
error in areas like predicted demand and consumption and things 
like that. I think the forecasts have been in the ball park. 

I think basically a lack of understanding of the impacts of decon- 
trol of the market and the beneficial impacts that that would have. 
Most of the — most erroneous forecasts were in the late 1970's and 
early 1980's when that transition was going on. 

In the area of gas, there continues to be deregulation. During the 
1980's, that was very beneficial to the gas industry and to the cus- 
tomer. 

Second, I think a lot of people, including us, underestimated the 
impact of technologies. A lot of the good news on the price side is 
technology-driven . 

Many countries in the world still haven't applied this modem 
technology. But, they are being applied in the United States and 
it has made a big difference. 

Chairman Rohrabacher. Let me be presumptuous here when 
you say that and just suggest that what you are really saying is 
that it's very difficult for the people within perhaps a government 
agency making predictions to understand how the market will 
react to higher prices and that development of new technologies 
and new approaches will become available as a result of high 
prices. And, that isn't part of your equation. 

Dr. Hakes. Well, it is part. Now, we've, I think, developed our 
skills considerably over the years. 

We now have a number of years dealing with a less controlled 
market. And, you know, this is not something that has been done 
for decades and decades, so I would feel much more comfortable de- 
fending the types of methodologies and the sensitivity to the mar- 
ket, the sensitivity to technology in our current forecasts than I 
certainly would of forecasts that were made 10 years ago. 



144 
Chairman ROHRABACHER. Okay. Well- 



Dr. Hakes. I think the market has confidence in a lot of the EI A 
data and, at least, a short-term confidence in the short-term fore- 
casts because they tend to move the market. And, the market re- 
acts to this kind of information. 

Chairman Rohrabacher. Well, Mr. Romm, for example, was 
stating about the political instability and some of the things that 
we, you know, have to worry about in terms of the Middle East. 
But, let me give you an example. 

I mean, here we have Iraq, who is a major producer, who is out- 
side now, who has been kept outside the world market. Why 
wouldn't your forecasts suggest that there is going to be a dramatic 
reduction in the price of oil in the long run because Iraq eventually 
is expected to become part of the world market again? 

Dr. Hakes. Well, it does. I mean, we — some of our scenarios are 
assuming — particularly the low-price scenario assumes that Iraq is 
back on the market. 

To some extent, the market has already incorporated some expec- 
tation that Iraq will be coming back on the market in the next few 
years. So, what — the impact it has on prices is its relative impact 
to what the expectations were of what that would do. 

Certainly, that's a factor in the way oil is priced today and the 
way we do our projections. But, we do — you have identified what 
is a sensitivity in our forecasts. 

And, that's why they have to be looked at in conjunction with 
other factors. And, that is, we do assume current policy in our ref- 
erence case. We don't try to guess what the Congress is going to 
do or what the United Nations is going to do. 

And, therefore — and that's clearly explained to the reader. 

Chairman Rohrabacher. But, it sounds like also you aren't fig- 
uring out what new technologies will do. 

Dr. Hakes. No, we do that. 

Chairman ROHRABACHER. If it becomes profitable for new tech- 
nologies to come on market or come on line, I mean, it would be — 
it seems to me that when you are making — I don't know how many 
people suggested that the automobiles would be — maybe that was 
part of your predictions. Was that part of your predictions that 
automobiles, after a certain number of years, were to become so 
much more fuel efficient? 

Dr. Hakes. Right, because it was required by law. So, that was 
easy to predict. 

Chairman ROHRABACHER. All right. 

Dr. Hakes. But, the — we do a lot of work on technology. And, 
this is, I think, an enhancement of the last couple of years. 

We do, for instance, high- and low-technology penetration cases. 
And, we can show that if, for instance, technology in the natural 
gas industry improves faster than we anticipate that would show 
lower prices and more supply. 

And, I think the industry and others that we consult with on is- 
sues like this are pretty comfortable with how we have treated a 
lot of those technology issues. But, again, as you've pointed out, 
particularly in our early forecasts, we did not do as good a job with 
those issues. I think we do a much better job today. 



145 

Chairman Rohrabacher. Okay. Mr. Schleede, what's the cost of 
this? 

I mean, when we have predictions that are off by a significant 
amount, how does that really impact the rest of us? What is the 
cost of those bad predictions? 

Mr. Schleede. I don't have a total number. But, I can give you 
a few examples. 

These high forecasts find their way into many, many decisions. 
For example, electric utilities are required to buy power from non- 
utility generators as a result of the Public Utility Regulatory Policy 
Act of 1978. 

In order to determine the price that had to be paid for that 
power, utility commissions and utilities calculate what they call 
avoided costs, basically how much would it have cost the utility to 
produce this power if they were not bu5ring it from the non-utility 
generator. When those calculations were being made, they were 
using forecasts such as EIA's and those produced by commercied 
forecasters. 

They were using estimates — I heard President Fessler of the 
California Public Utility Commission just last week say that Cali- 
fornia was using an oil price of $118 per barrel. Those numbers 
found their way into the prices that the utilities were required to 

pay. 

As a result, consumers and electric utilities are now stuck with 
these long-term contracts. In some cases, they built power plants 
that weren't needed, expensive nuclear power plants. 

Consumers and the utilities are now stuck with these huge costs. 
I've heard an estimate from Southern Cal Edison of $2 billion per 
year as the extra costs that their customers 

Chairman Rohrabacher. Was this from Southern California 
Edison? 

Mr. Schleede. I've heard that number. 

Chairman Rohrabacher. Two billion dollars a year? 

Mr. Schleede. I've heard that number. I can't verify it. I can 
give you the papers that I got it from. 

Now, as we move towards less regulation of electric utilities 

Chairman Rohrabacher. Well, before you move on, let me just 
ask. And, you think that's possibly an accurate figure? 

I mean, even if it's $1 billion a year for one company, I mean, 
that is an amazing figure. 

Mr. Schleede. It is a huge number, I will admit. But, I would 
have to go back and look at it. And, I suspect there's good informa- 
tion available on this from the California Public Utility Commis- 
sion. 

Chairman Rohrabacher. So, you are suggesting that the actual 
cost of this to our society, if this is one company, is in the tens of 
biUions of dollars that we are paying that is basically needless? 

Mr. Schleede. Yes. Estimates that have been made of how much 
stranded costs — ^you've heard the phrase "stranded costs" associ- 
ated with the changes that are unaerway in the electric utihty in- 
dustry, these stranded costs or stranded assets. That means invest- 
ments that have been made, contract commitments that have been 
made, may not be recoverable as the market becomes more com- 
petitive. 



146 

Estimates of that stranded cost run to $200 billion, 10 times the 
stranded costs that occurred when the natural gas pipeline indus- 
try was deregulated. No one knows exactly what that number will 
be, because it makes an assumption about the market price of elec- 
tricity. 

If the market price of electricity goes down, as I suspect will hap- 
pen, that cost could even be larger. But, a lot of those stranded in- 
vestments are directly due to using these very high-priced forecasts 
and making long-term capital investments and long-term contract 
commitments based on that. 

Chairman Rohrabacher. Well, I would like to get Mr. Romm in 
on this, because one of the points he made was actually that there 
were some benefits, some side benefits, here that the society was 
actually enjoying because some of these technologies that you've 
mentioned would not have been developed had not these forecasts 
believed that we were going to actually have higher prices. And, 
now with lower prices, we are still enjo5dng the benefit of those 
technologies. 

What about this? Is it conceivable that these things are giving 
us $100 billion or $200 billion a year worth of benefit, meaning to 
offset the cost that Mr. Schleede just mentioned is a burden that 
we are bearing? 

Mr. Romm. Well, I wouldn't want to compare apples and oranges. 
I wouldn't want to compare 

Chairman RoHRABACHER. Well, if you have to carry apples and 
oranges on your shoulder, still that's a burden that somebody — who 
cares if one's a different color or not if it happens to be the same 
burden? 

Mr. Romm. I just wouldn't want to compare the costs to the na- 
tion of incorrect forecasts, most of which were made by the private 
sector, with the benefits of government R&D. 

The last nuclear plant ordered in this country was 1973. The last 
central power plant ordered in California, I believe, was 1975. So, 
this was long before EIA came into existence and could have con- 
fused the — you know, could have led to misperceptions on what the 
future trends were. 

I think it's also worth saying that I personally think it's a mis- 
take to only go back 16 years and say future forecasts have consist- 
ently been too high. If you go back to the late 1960's and early, 
very early, 1970's, many people were predicting that prices 
wouldn't be so high, which is why they predicted the huge demand 
growth that led them to buy all the power plants to produce power 
that ultimately wasn't needed because price went up and demand 
came down. 

So, my point is just that people have been wrong in both direc- 
tions. I thmk it's important to not bet the future economy and secu- 
rity of the country on someone saying, "I know which way the price 
is going to be. I know what the future is going to be." 

The question is: what is a plausible scenario for the future? And, 
I think that a growing dependence on Persian Gulf leading to secu- 
rity and trade deficit concerns is a very plausible scenario. 

Chairman RoHRABACHER. Well, Mr. Romm, let me ask you about 
that growing dependency. And, I have friends who are independent 



147 

oil producers, and they are always telling me about how horrible 
it is that we are more dependent on foreign oil. 

If the price of oil is expected to go up in the future, isn't this the 
time that we should be using more foreign oil rather than depleting 
our own domestic resources? 

Mr. ROMM. Right. And, my scenario — using inexpensive oil is 
good for the economy. 

Having the world become very dependent on one of the most un- 
stable regions in the world is a great risk to the nation's security. 
And, that's what we are trying to avoid. 

We are not trying to avoid people using inexpensive oil. We be- 
lieve that the Department's R&D programs have helped keep the 
cost of using energy overall low. 

I think the issue is just the geopolitics of increased dependence 
on the Persian Gulf. 

Chairman ROHRABACHER. Mr. Schleede, do you have a comment? 
You seem like you are ready to jump on that. 

Mr. Schleede. I think it would be useful to just look back a little 
bit in history and figure out why we are so dependent upon foreign 
oil. We had an energy policy in this country for a long time that, 
in effect, led to the draining of America first. It was a protectionist 
policy of the 1920's and 1930's and particularly in the mandatory 
oil import quarter, which provided tariffs and other incentives to 
make sure we drained America first. 

We ignored the possibility of using lower-cost foreign oil. Now, 
we've got ourselves in a situation where the lowest-cost oil avail- 
able is elsewhere. 

And, it has been government policy that got us into this mess, 
not that has gotten us out of it. 

Chairman Rohrabacher. Mr. Ljuch, are you comfortable now 
that some of the predictions that we are going to get are going to 
be more accurate than the predictions we've had in the past? 

Mr. Lynch. You mean, from EIA? 

Chairman Rohrabacher. EIA and generally. 

Mr. Lynch. Mr. Romm quoted a number of experts who have re- 
cently sort of backtracked on their earlier lower forecasts. I have 
noticed sort of a cycle of a couple of years where people see there's 
too much oil and they get embarrassed about their high price fore- 
casts and they sort of backtrack and then somebody writes an arti- 
cle and says, you know, "Oh, there really is a problem in a few 
years." 

T. Boone Pickens is now pretty much bankrupt, because he be- 
lieved that U.S. gas prices would go very high. I doubt if he was, 
you know, buying into the EIA forecast. 

So, I think what you are seeing — for instance. The World Bank 
has recently come out with a low price forecast — the U.N. and oth- 
ers. 

I think the EIA is moving in the right direction. But, especially 
in the oil price forecast, it should be substantially lower, more flat 
rather than rising in the long run. 

Chairman Rohrabacher. You know, I am going to ask you to re- 
peat that last sentence, because I am having a little trouble, after 
this message is done here. 



148 

Mr. Lynch, could you repeat what you said in those last couple 
of sentences? 

Mr. Lynch. I think the EIA forecasts, they still are tending to 
show an oil price increase of a couple percent a year, whereas most 
of the experts — certainly the oil industry has come to a flat or even 
declining price forecast. And, I would like to see them do that. 

I don't know how much that influences, you know, utilities and 
so forth. 

Chairman ROHRABACHER. All right. Mr. Roemer, would you like 
to proceed? 

Mr. Roemer. Thank you, Mr. Chairman. You know, I couldn't 
help but think. Dr. Hakes and Mr. Romm, as we talk about these 
models and how easy they are to criticize and critique what a 
tough job you have. 

I was looking in the back of the room as we were talking about 
how far off some of these models have been in the past by saying 
that oil was going to disappear in the next few decades and then 
now how we are going to have sufficient access to energy prices. 
And, I was looking in the back of the room and I saw somebody 
reading the sports page. 

Wouldn't it be nice if we had a model to accurately predict our 
NCAA pools and then bring our witnesses up here and say, "Gee, 
you were way off. You were really way off." 

For the stock market, to bring T. Rowe Price and Vanguard and 
Fidelity up here and say, "You didn't predict that the market was 
going to be at 5600 right now. You said 4800." 

I wish we had an accurate model that could tell us the effect of 
Iran and Iraq and Mexico and a host of different foreign countries 
and how that's going to affect our price of oil in this country. It is 
a very difficult job to do. 

And, you know, with all due respect, Mr. Schleede, I wish you 
had a better model. I wish anybody had a model that could tell us 
with accuracy to the year 2015 or 2020 what precisely are going 
to be the key variables. 

Now, I think this model helps us illustrate the forces at work. 
I think it helps us illuminate what we need to consider. 

But, how do we improve that? How do we get a better model 
when there is so much volatility? 

And, certainly, I think, one of the lessons that we learn is one 
of the things that we've heard from the Republican side and the 
Democratic side is let's try to cut some of the regulatory burdens 
on some industry. Let's try to make efficiency one of the key words, 
but let's not say, based upon a model in the 1970's or the 1990's 
that says oil is going to be high or low, that we cut R&D monies 
for valuable efforts in solar and renewable and fusion and nuclear 
and other things that really could determine our security when we 
are getting an5rwhere from 48 to projections of 70 percent of our oil 
from the very, very volatile Middle Eastern region. I think that's 
very difficult. 

Mr. Schleede, do you have a model that you can present to the 
Committee 

Chairman Rohrabacher. Before Mr. Schleede moves forward 
with his answer, I have a — there is a markup in International Re- 



149 

lations that I'm also a member of, and I am going to have to leave 
for a few moments. 

And, Mr. Wamp will be chairing while I'm gone. And 

Mr. ROEMER. I was going to say, Mr. Chairman, I would be 
happy to 

[Laughter.] 

Chairman Rohrabacher. But, I also would like to acknowledge 
the presence of former Chairman Brown. 

Mr. Brown. I thought you were going to invite me to be chair. 

[Laughter.] 

Chairman Rohrabacher. All right. And, Mr. Brown will be rec- 
ognized after Mr. Roemer. 

Thank you very much. I will be back as soon as I can. Thank 
you. 

Mr. Roemer. Thank you, Mr. Chairman. Mr. Schleede, do you 
have an accurate model that could give us more precise and defini- 
tive information projecting into the year 2015 or 2020? 

Mr. Schleede. Clearly, I don't have a model nor do I have the 
$60 million that EIA has to spend on the Energy Information Ad- 
ministration. But, what I would suggest you look for in the model — 
and here I think Mr. Romm's comments illustrate the problem 
pretty clearly. And, I separate his comments from Dr. Hakes. 

I think EIA has done a lot better in recent years. Particularly 
this last forecast is a step forward. There are still things that I 
think are real problems with the model that I would be happy to 
talk about. 

But, what I am looking for and what I suggest the taxpayers de- 
serve and the consumers deserve from the Department of Energy 
is greater objectivity in the analysis. We listened to Mr. Romm sit 
here and tick off all sorts of "Chicken Little" kind of scenarios that 
we should worry about in order to support DOE R&D programs. 

As a taxpayer, I would like to see the folks in DOE be a little 
more objective and recognize that there are reasons why this per- 
ceived energy crisis may not occur and to present some balanced 
arguments rather than emphasizing all the time that the sky is 
about to fall. We need some objectivity from 

Mr. Roemer. So, I guess what you are advocating in terms of ob- 
jectivity is that we, as decision-makers in Congress, have a host of 
hearings on these matters so that we can best ascertain and judge 
what should be funded and what shouldn't be and whether legiti- 
mate "Chicken Little" theories and what aren't and that this Com- 
mittee should have extensive hearings on these kinds of matters? 

Mr. Schleede. I would hope so. 

Mr. Roemer. And not just one or two hearings. 

Mr. Schleede. There are good reasons to suspect that there are 
systematic, upward biases that have affected price forecasts for the 
last few years. I've got a detailed paper to put in the record that 
helps explain some of those. 

But, there are a lot of good reasons to worry about that system- 
atic, upward bias on commercial forecasts and on the older EIA 
forecasts. Again, EIA's latest forecast is better than what they have 
done before. But, there are still problems with it, I beheve. 

But, your idea of getting viewpoints from both sides and getting 
some objectivity back into this and getting the folks at DOE to stop 



150 

acting like their only mission in the world is to get more authority 
for DOE and more money for its programs would help. 

Mr. ROEMER. Mr. Romm, how would you respond to some of 
those suggestions that Mr. Schleede made? 

Mr. ROMM. Yeah. I will try to repeat that I'm not predicting the 
sky is falling. I am predicting that we've seen what happens in the 
past when there are crises in the Middle East and don't — and we 
haven't prepared for them. 

We had a war five years ago. We've had three recessions in 20 
years; all followed price spikes. 

It is possible to hope that the future is going to be great. It's not 
the job of people who work for the government. Our job is to take 
an insurance policy, as you would say. 

What is a plausible scenario for the future? It is possible and I 
hope the prices remain — ^you know, that we don't have a price prob- 
lem and that we don't have a problem with a growing dependence 
on Persian Gulf oil. 

I wouldn't want to bet the future of the country on this. 

Mr. ROEMER. Can you just repeat, Mr. Romm, what were the 
variations in terms of our imports from the Middle East Persian 
Gulf area based upon the different projections? 

They went anywhere from 45 percent to 75 percent. Is that accu- 
rate? 

Mr. Romm. Yes. 

Mr. ROEMER. With that kind of volatility in where we are getting 
our oil, I'm not sure how you can't say — one of the models might 
say, you know, there could be another recession based upon energy 
prices. And, for you guys to outline that possibility is certainly not 
a "Chicken Little" theory but something that would warn us that 
we need to have alternative energy sources. 

Mr. Romm. Right. I mean, I would make two points, one of which 
is that we see, in these projections, that the world's dependence on 
Persian Gulf oil could exceed its highest level ever. And, this would 
be accompanied by a subsequent huge amount of influx of dollars 
into that region. 

And, I would just, you know, point out that this is a very unsta- 
ble region. I would — you know, let me read from a recent "Congres- 
sional Research Service" report: "This is an area with a history of 
wars, illegal occupations, coups, revolutions, sabotage, terrorism 
and oil embargoes. To these possibilities may be added growing Is- 
lamic movements with variance grievances against the west and 
particularly the United States." 

So, we 

Mr. ROEMER. So, "Chicken Little" wouldn't necessarily be moving 
to 75 percent. "Chicken Little" might be, to the American people, 
in Indiana or Tennessee or Oklahoma, that we are currently 50 
percent. And, that is somewhat dangerous to be relying on 50 per- 
cent. 

And, we should continue to have an insurance policy and many 
options and many alternatives. 

Mr. RoMM. Indeed. And, I would say that I'm not here asking — 
the Department isn't here asking for huge increases in energy R&D 
spending. 



151 

The nation spends so little on energy R&D. The nation's energy 
bill is $500 billion a year. Energy R&D is two-tenths of 1 percent 
i of our entire energy bill. 

I'm here before a Committee that is contemplating a 50 percent 
cut in advanced transportation, efficiency technologies and ad- 
vanced alternatives, you know, fuels, advanced renewable tech- 
nology. So, I'm pleading. 

This is an important program for both national security as well 
as other goals. Again, we've been focusing on oil. 

The sole goal of the Department is not just to reduce dependence 
on Persian Gulf oil. We are concerned about reducing the environ- 
mental impacts of energy. 

We want to keep energy costs low. And, we want to maintain 
U.S. scientific and technological leadership. 

We can do all those simultaneously while keeping dependence 
low. 

Mr. ROEMER. For two-tenths of 1 percent? 

Mr. ROMM. For two- tenths of 1 percent of what the nation spends 
on energy. It's a very small amount of money. 

Mr. RoEMER. Thank you, Mr. Romm. 

Mr. Wamp. The Chair recognizes the distinguished Ranking 
Member of the Full Science Committee, Mr. Brown of Cahfomia. 

Mr. Brown. Thank you very much for giving me the opportunity 
to ask a few questions. 

I am concerned that we don't get into a hysterical mode over the 
fact that oil forecasts and oil price forecasts are not very accurate. 
I think of other forecasting that is in the same category, going back 
to Malthus, for example, forecasting the supply of food £ind decided 
the whole world would starve to death within a fairly short time. 
Fortunately, he was proven to be wrong. 

But, the same tendencies, the same effort to evaluate long-term 
trends persist today with very dynamic and unstable systems. And, 
I think that's at the root of most of our forecasting errors. 

And, I would like to point out also that the Department of En- 
ergy isn't the only agency that tries to justify its budget by even 
a small amount of crisis thinking. You know, I can't help but go 
back to the Intelligence Agency and the Defense Department who 
made such a miserable job of forecasting the threat potential of the 
Soviet Union for so many years. And, that is acknowledged today. 

But, forecasting a huge threat there is very healthy for your 
budget if you are in the inteUigence business or the military busi- 
ness. So, what I would like to see — and I think it's developing 
here — is a more restrained approach to this. 

We don't want to be crisis-driven. We want to continue to im- 
prove the system, but I don't think that you need to depend upon 
the threat of a crisis if you have a stronger underlying motivation, 
which is the total quality improvement of the American economic 
system. 

If you are driven by that — and I don't know anybody who dis- 
agrees with the need to continue to focus on that if we are to sur- 
vive as a great economic power — then you will try to improve en- 
ergy efficiency, you will invest in energy R&D. You will try to do 
everything possible to achieve the kind of economies and savings 



152 

that we are trying to achieve. And, it's part of our goal here in this 
Committee. 

Now, the question is. Does anybody disagree with that? That's a 
very self-serving question. 

[Laughter.] 

Mr. Brown. No? All right. Where do I go from here, then? 

I think I will yield back the balance of my time. 

Mr. Wamp. Thank you, Mr. Chairman. In the order of those that 
appeared, not including those in higher authority like Mr. Brown, 
I'm next. So, if I might, I want to make a statement and lead to 
a question. 

This morning, I had breakfast with Secretary of the Army, Togo 
West, talking about the military budget. And, the word is out on 
the President's request for 1997 for the military, including the 
Army. And, it's a reduction. 

And, there are many folks on the Republican side of the aisle 
that think that just because we are at peace and the Cold War is 
over that we shouldn't reduce those budgets too rapidly and that 
we should be careful about these reductions. And, to me, this issue, 
if we are consistent, is somewhat similar. 

I have friends on all three sides of this issue. And, Mr. Schleede, 
you stated earlier in your testimony — and I looked for it in the 
written testimony, but I think you just said it in your testimony 
earlier — and I'm paraphrasing, that you hoped that the threat of a 
future oil crisis would not cause a call for a larger role for DOE. 

But, as Mr. Romm pointed out — I asked my staff to go get the 
numbers. And, from the 1995 budget to the 1996 budget to the 
1997 budget, these numbers continue to come down, continue to 
come down dramatically. 

I don't think that even the Secretary of Energy herself is calling 
for increasing these funding areas. I think she's calling for de- 
creases internally. 

Now, the President's request continues to tick up. But, he is, in 
fact, requesting less last year than the previous year's budget. 

So, he's recognizing, too, in his request — and I think it's tradi- 
tional for the President to always request more than he expects so 
that when he gets what he gets, it's still not quite as bad as they 
thought it would be. And, you all know how that works. 

So, my question is — and I think Mr. Brown's right. We need to 
be reasonable. 

I think Mr. Roemer is right. We might need to have more hear- 
ings before any of these votes come on these significant reductions 
in these energy R&D accounts, which I'm certainly very reluctant 
to support. 

But, I would like to know how much is enough? From each of 
your perspectives, what is a reasonable reduction? 

And, think as if it is a national security issue, as if I were sitting 
with Secretary West at breakfast this morning about exactly what 
we can do. 

Since we have missed some of our estimates and predictions and 
since clearly there is an abundance of foreign oil right now, how 
much is a legitimate reduction over the next two or three years? 
I personally believe that no reductions is not enough and the reduc- 
tions that our Chairman proposes are way too much. 



153 

So, what should we come together at? 

Mr. SCHLEEDE. Would you like a response? 

Mr. Wamp. Yes, from each of you, please. 

Mr. ScHLEEDE. In my past history in different places in govern- 
ment and in the private sector, I've had some budget responsibil- 
ities. So, my bias usually is to start with zero and then see how 
much rather than see how much we spent last year and see wheth- 
er we should increase or decrease from that. I Uke the zero-based 
approach to evaluating any budget proposal. 

A couple of points. How much of this R&D that we are talking 
about is really being — ^how much of the money is really being spent 
productively and how much of it is being wasted? 

Each week in the mail, I get piles of papers. And, here's one 
called, "The Directory of United States Coal Technology and Export 
Resources," paid for out of the Clean Coal program, not one of your 
committees but another one. 

This, presumably, is paid for out of an R&D budget. It is a collec- 
tion of, in effect, advertisements for anyone involved in coal or coal 
technology, paid for by the taxpayers, msdled out at the expense of 
the taxpayers and information on individual companies that some 
private company out there could have just as well put together and 
probably made some money on it. 

Instead, that is paid for out of an energy R&D budget at tax- 
payer expense. So, one question I would like to suggest you focus 
on is how much of this money that is being spent for R&D is really 
for advancement of technology — or advancement of knowledge and 
in the creation of new products that compete in the private econ- 
omy; or, how much of it is for overhead and sheer waste like I 
think this is? 

A couple of years ago, I didn't get just one of these, I got three 
of them, followed by a letter from DOE sajdng, 'Would you Hke to 
advertise in this, because we have a huge circulation of this docu- 
ment?" If it's free and it's mailed out in multiple copies to a lot of 
people, I can understand why they have a huge circulation for it. 

But, that's one point. 

Mr. Wamp. Thank you, Mr. Schleede. Let me add one antidote 
that I think supports the notion that we've got to be very careful 
here. 

In Oak Ridge, Tennessee, which I represent, the research and de- 
velopment that was brought out of these transportation programs 
actually led to the development of the technology in east Tennessee 
to build electric buses. There is now a compginy in Chatt£inooga, 
where I Uve, in east Tennessee that builds electric buses. It is 
called "Advance Vehicle Systems." 

That technology came from the embryonic stage in our region 
through the Department of Energy through the national laboratory 
system into applied technology, on the streets. It's now creating 
jobs, building a lot of buses. 

And, it has led to a lot of good things in our part of the world. 
That is kind of from cradle to grave, the way this can work. 

And, a zero around energy R&D programs won't allow that life 
cycle. And, I would just suggest that we look at, as we have these 
hearings, situations where it has actually borne the fruits of its 



154 

original investment and not just talk about go to zero and start 
over. 

You can't go to zero and start over when you are talking about 
programs that have advanced. They are not efficient. They need to 
improve. 

I wholeheartedly agree that we've got to do more with less, but 
let's not throw the whole thing out the window. 

Mr. ROMM. If I could comment on that? I think that's a very im- 
portant point. 

The nature of R&D is that you have some losers and some — you 
know, some technologies don't pan out and some do. The question 
is. Are your successes so successful that they justify the entire in- 
vestment? 

In the case of Oak Ridge, just one example, which is advanced 
refrigerator/freezer compressors, a $1 million investment in Oak 
Ridge has saved the U.S. economy $5 billion in the 1980's. And, 
this is very well documented. 

I think the question is — most people think that R&D is one of 
the most important investments the coxintry can make. The energy 
efficiency in the energy renewable program has already taken last 
year a 30 percent cut. That is deeper than the cut in domestic dis- 
cretionary funding that most people think is needed to get to a bal- 
anced budget. 

This Administration thinks that we can increase the budget and 
still balance the overall federal budget in seven years, because it 
recognizes the importance of R&D to the future of this country. The 
reason to cut costs in the Federal Government is because of our ob- 
ligation to future generations, that we don't burden them with ter- 
rible deficit costs. 

We have another obligation to future generations, and that is to 
keep energy costs low and to improve the environment. That's what 
R&D does. 

And, that's why I don't think we need further cuts in these pro- 
grams at all. And, I think one would be hard pressed to find many 
technologies that--and many investments that have such a high 
rate of return. 

One last number, which I give in my testimony, and that is that 
the nation spends 100 times as much money on military forces in 
and around the Persian Gulf as it does on R&D to prevent the next 
oil crisis. So, it's really, again, a drop in the bucket. 

Mr. Wamp. Mr. Schleede. 

Mr. Schleede. You hit on the critical question, evaluating gov- 
ernment spending in R&D. And, that's when you can point to some 
successes; they sound very good. 

One question you need to focus on — and it's a very difficult ques- 
tion to answer and perhaps not answerable — and that's. Would 
that technology have been developed had it not been for the tax 
dollars that went into the Oak Ridge program? 

And, I submit it's very difficult to argue either way on that. But, 
I'm not sure that technology would not have been developed. Per- 
haps if that money had not gone into Oak Ridge, those scientists 
and engineers involved in it would have been out in the private 
sector and would have developed it earlier. 



155 

But, even if you take all these success stories that can be 
claimed — and here's a document that DOE put out last year that 
chronicles the success stories, "Energy Mission in the Market- 
place." And, it goes back over the last, I don't know how many 
years, 20, 30 or 40 years of energy R&D spending. 

Now, is that worth $100 billion that's in there, that has been 
poured into energy R&D? 

And, I think there is a reasonable basis for questioning whether 
all the money that is focused — that's funneled in through govern- 
ment programs is producing that. And, I think it's difficult to argue 
that the successful technologies would not have been developed by 
the private sector if the government had not gotten in the way. 

Mr. Wamp. This is very beneficial. And, I commend the Chair- 
man for allowing these alternative views to appear at the same 
time. 

Before I yield to Mr. Ehlers, as one parting shot here for the De- 
partment of Energy, I don't think you do the overall energy options 
and portfolio justice to turn your back from nuclear energy. And, 
I say that everywhere I go. 

I think that our fear of waste is so exaggerated that it does not 
serve this country well for us to withdraw from the nuclear capa- 
bilities that we have for energy production. 

And, the Chair yields to Mr. Ehlers. 

Chairman ROHRABACHER. I know that Zach is going to be here 
permanently one day, so 

[Laughter.] 

Chairman Rohrabacher. Mr. Ehlers, go right ahead. 

Mr. Ehlers. I think someone else might be in there for a little 
while before him, however. 

[Laughter.] 

Mr. Ehlers. I don't want to make you feel insecure in your chair, 
Mr. Chairman. 

[Laughter.] 

Mr. Ehlers. Thank you, Mr. Chairman. I appreciate the oppor- 
tunity to respond to this panel. 

This is an area I've had an interest in for a very long time. And, 
I regard energy supply as one of the most important issues before 
our nation, let alone this Committee. 

I was reminded, in listening to the arguments about the fore- 
casts, of a comment made by Neils Bohr, who is a famous physicist 
and developer of the first reasonable theory of the atom. And, he 
had a unique way of using language. 

And, I remember his comment once in a discussion. He said, "It's 
awfully difficult to make predictions, especially about the future." 

[Laughter.] 

Mr. Ehlers. And, I think he went down in history with that 
comment. 

Mr. Olver. Would the gentleman yield? 

Mr. Ehlers. Yes. 

Mr. Olver. Were you present at that time? 

[Laughter,] 

Mr. Ehlers. Well, I hate to reveal my age, but— actually, I don't. 
I'm in my 60's, as you know. 



156 

But, no, I have had personal conversations with Neils Bohr. And, 
he does have a unique way of using language. 

In any event, just one side comment before we get into my full 
comments. Mr. Schleede, I find those directories very useful. Or, 
when I did research in this field, I found them very useful. 

I would be delighted if they were produced by the private sector. 
And, perhaps we have to put a price on them from the DOE. 

But, I hesitate to castigate government agencies for producing in- 
formation that is useful for those in the field. And, this is an ongo- 
ing problem — what should we do and what should the private sec- 
tor do. 

But, I don't totally agree with your condemnation of the produc- 
tion of that. I just wanted to get that on the record. 

The real issue, however, to my mind — and most of this discussion 
has been about energy prices and predictions of that, whereas the 
Hearing Charter says to focus on energy supply, demand and 
prices. And, I am particularly concerned about energy supply long- 
term. 

And, that is where I believe the government has a role. And, 
that's where most of my questions will go. 

It seems to me that the most important issue facing this nation 
in regards to energy is to maximize the efficient use of energy. 
And, it has always been a surprise to me that many in industry 
don't pay enough attention to that, because we worry a great deal 
about efficient use of manpower or womanpower. 

That's a big issue. How can we increase productivity? How can 
we operate more efficiently? 

But, I found, in my experiences, that American commerce and in- 
dustry has not paid enough attention to maximizing efficient use 
of energy. 

I would even give a little indictment of the DOE of its not having 
done enough in this area. And, I think the indictment that I've 
mentioned on the DOE is that one of the most effective program, 
the Green Lights program — and, in fact, was originated by the EPA 
rather than the Department of Energy and it should have been, I 
believe, originated by the Department of Energy. They should have 
been concerned about that long before the EPA was. 

The question is. How can we maximize efficient use of energy? 
And, that's through some R&D to find out better ways of using en- 
ergy, to improve the efficiency and getting the word out. 

I think we do a reasonably good job in the R&D. I don't think 
we do a very good job on getting the word out to the manufactur- 
ers, to the users, so that they CEin make intelligent decisions. 

I happen to be a strong supporter of energy appliance, not nec- 
essarily standards but information, so that the consumer knows 
when they buy an appliance what the energy efficiency is. I think 
that's a governmental function, in my mind, to let the consumer 
know in a very objective fashion what the energy costs of their par- 
ticular appliances are so they can make wise consumer decisions. 

The real issue though, I believe, is what is the long-term energy 
supply. And, perhaps the most useful chart here is the Shell Oil 
chart. 



157 

I hope it's accurate in their projections, because I'm not worried 
about 2015 as yet. I'm worried about 2025, 2035, 2045 and what's 
going to happen then. 

And, my questions are directed to anyone at the table. I'm sure 
you are all familiar with M. King Hubbard's curves. I'm certainly 
familiar with them. 

I'm not familiar with what is happening in that field now. One 
of the disadvantages of being a congressman is that you don't even 
have time to think, let alone read. So, I am a little out of touch 
with the field. 

But, I'm curious what each of the members of the panel think 
about when is the bell-shaped curve or approximate bell-shaped 
curve of M. King Hubbard going to peak, because it seems to me 
that also has a very important bearing on prices. The difference be- 
tween an energy glut and an energy crisis is only 2 percent. 

If you have 1-percent extra oil, you have a glut, or at least the 
papers call it a glut, which I find a strange term. If you have 1- 
percent shortage and you get the lines at the gas station, they call 
it an energy crisis. 

And, I can assure you, when we start reaching the peak of the 
Hubbard curves with respect to the fossil fuels, we are — the public 
is going to regard that as a crisis. It's also clear to me, based on 
the last 20 years of history, that when we have had these energy 
shortages, which people call crises, it does have a dramatic effect 
on the economy. 

That one graph shown — although it may relate, Mr. Chairman, 
with the tax hike as well, they could have had it together. But, it's 
clear when you look at the last three so-called crises we've had, 
which were just temporary shortages, but they all had a dramatic 
effect on the economy. 

Energy is frequently not understood in terms of its role in the 
economy. But, I think it's very important. 

So, the question, then, based on those comments and that discus- 
sion is. When are we likely to reach the peaks of the Hubbard 
curves? Or, if you have some other model other than the Hubbard 
model, that's fine. 

When does it become a real problem? When do the prices really 
start to escalate rapidly? 

And, what are the likely replacement scenarios? And, I think 
that's the real function of DOE, to try and look out long term 
where the industry may not have the resources, may not be able 
to dedicate a lot of resources because it's not profitable. 

I would like to know where each of you are personally in this. 
And, I also would appreciate your comments on what is likely to 
happen to energy prices when we start peaking out on the Hubbard 
curves. 

And, we will just go down the line. 

Chairman Rohrabacher. If I could ask each of you to be concise, 
because Mr. Ehlers has used his five minutes a few minutes ago. 

Dr. Hakes. I would like to be able to answer that question, but 
our analysis that we do at the Energy Information Administration 
is confined to the year 2015. And, we've not gone beyond that area. 

So, I don't really feel very equipped to answer that question. 



158 

Mr. Ehlers. That's unfortunate, because that's where the real 
problems are. I would rather have you spend your time on that 
than forecasting prices between now and then, because we have 
people like Mr. Schleede, who can do the forecasting and get paid 
for it by other people. 

Mr. Schleede. 

Mr. Schleede. I'm not getting paid for this part of it, I will tell 
you. 

[Laughter.] 

Mr. Ehlers. That's okay. I'm sure you make enough elsewhere. 

[Laughter.] 

Mr. Ehlers. We appreciate your presence. 

Mr. Schleede. As far as King Hubbard's bell curve, if you look 
back, we've been getting predictions that we are at the top of that 
curve now, dating back into the 20s. And, where it is, where that 
top of the curve really is, I don't know. And, I'm not sure anyone 
does know. 

It was only a few years back that government policy assumed 
that we were running out of natural gas. And, we now know that 
we've got more natural gas than we know what to do with and 
world proved reserves of gas are up threefold from what they were 
15 or 20 years ago. 

But, I think the thing that we have to keep in mind is that tech- 
nology keeps developing that change the world a great deal. And, 
not all that technology is developed by the government. 

But, technology does keep changing our outlook and making new 
things available that none of us in the forecasting business or other 
business have been able to see. And, that's the case with energy 
right now. 

Energy efficiency has improved tremendously over the last few 
years. And, not all of it has been price induced. 

A lot of the energy efficiency improvements that are occurring 
are byproducts from other technology developments — electronics, 
communications, electronic controls, better materials, all of which 
have energy efficiency as a bj^jroduct and which are helping us. 
But, to try to predict out 50 years or 40 years, I think, is very dif- 
ficult and perhaps impossible to do. 

I certainly don't have any confidence in any predictions out 
there. What I do worry about is when people do make these pre- 
dictions is that they are based not on the best information avail- 
able but on the desire to show a particular bias conclusion that 
benefits them. 

And, that's what I think this Committee ought to worry about. 

Mr. Ehlers. If I may, I agree totally. And, it always bothers me 
that people let ideology creep into these things on both sides. 

Mr. Romm, quickly. 

Mr. ROMM. I'm not a forecaster. I'm a physicist, like yourself. 
And, I just go by reading the literature as much as possible, be- 
cause the government is not in the job of betting on one future or 
another. 

I would say that apparently the Congressional Research Service 
has £in expert on earth sciences who is very knowledgeable in this 
matter. I have an August 18th report that he did. 



159 

He has a line in here, "Discounting the reserves that may be ex- 
aggerated and utilizing only that portion of the resources that may 
be produced in actual practice could reduce the ultimately recover- 
able oil remaining in the world to a level where the midpoint of 
world oil depletion would occur at the turn of the century followed 
by a production decline of nearly 3 percent per year." And, he 
makes clear that that's a worst case scenario. 

But, another view — and this is something I am more familiar 
with — is Royal Dutch Shell. And, I had one chart up there. 

Last year, the Chairman and CEO of Royal Dutch Shell UK, a 
man named Chris Fay, gave a speech in which he outlined what 
Shell thought. And, Shell is the most profitable oil company. It's 
the most profitable, according to "Fortune" magazine the most prof- 
itable corporation in the world. 

He said, "There is clearly a limit to fossil fuel. I showed how 
Shell's analysis suggests that resources and supplies are likely to 
peak around 2030 before declining slowly." 

"And, about the growing gap between demand and fossil fuel sup- 
plies, some will obviously be filled by hydroelectric and nuclear 
power. Far more important will be the contribution of alternative 
renewable energy supplies." 

And, that's why Shell has bought two photovoltaic companies and 
they invest in biomass in Brazil. And, clearly, if Shell predicts re- 
newable energy may be the dominant source of power by the mid- 
dle of the next century then, indeed, this is an area where the Fed- 
eral Government is crucially needed, because this is long term, 
high risk R&D. 

We have been very successful in bringing the cost of 
photovoltaics and wind energy down, which is one of the things 
that has convinced Shell that renewables are going to make deep 
market penetration. And, I would just comment that the Japanese 
outspend us just on photovoltaics by over two to one. 

So, the other countries of the world have caught on to what Shell 
understands, which is that renewables may, indeed, a plausible 
scenario, be very dominant in the next century. And, if the United 
States is going to participate in what may be one of the world's 
largest international markets, we had better have high levels of 
R&D in that area. 

Mr. Ehlers. Mr. Lynch, very quickly. 

Mr. Lynch. Yes, thank you. Actually, I have a paper on this sub- 
ject of supply modeling, including the Hubbard approach, coming 
out next week. 

I would mention Shell also has a large synthetic fuels plant in 
Malaysia, which would be profitable if the price of oil was where 
they had forecasted. But, they are losing money on it now. 

The short answer to the Hubbard question is. Hubbard got lucky. 
If you read his earlier statements, you will see he really didn't have 
a very clear methodology, but he happened by chance to come close 
to predicting the U.S. oil production peak. 

The main error is that he's using a curve. The area under the 
curve is supposed to be total resources. That amount, in theory, is 
fixed because it's the total resource. But, the estimates of that have 
increased over time since his original work and even recently. 



160 

So, you really can't see a peak, because the peak keeps moving 
out further and further into the future. And, people who do this 
kind of work are always sort of explaining that the previous peak 
was wrong but now they have a new peak and it's the real peak. 

So, I wouldn't give too much credence to that. I can forward to 
your staff my paper, if you would like. 

Mr. Ehlers. I would like to see it. And, let me just comment 

Chairman Rohrabacher. Thank you, Mr. Ehlers. You know, you 
have had about three times as long as anyone else. 

Mr. Ehlers. Thank you. I appreciate your tolerance. I will be 
very, very quick. 

I just want to point out 

[Laughter.] 

Mr. Ehlers. (continuing) the key point is that there is a peak. 
And, my personal opinion on the oil, it's likely to be about 2020 or 
2025. 

The last item 

Chairman Rohrabacher. Thank you, Mr. Ehlers. 

Mr. Ehlers. (continuing) energy is the only non-recyclable re- 
source. Everyone should remember that. 

Chairman Rohrabacher. What's the only non-recyclable re- 
source? 

Mr. Ehlers. Energy. It's the only resource that cannot be recy- 
cled. It's a non-material resource. 

Chairman ROHRABACHER. I think there is a university lecture be- 
hind that last statement. 

[Laughter.] 

Mr, Ehlers. But — no, I would be happy to extend that. 

[Laughter.] 

Mr. Ehlers. Thank you, Mr. Chairman. 

Chairman Rohrabacher. That's the second round. Mr. Doyle. 

Mr. Doyle. Thank you, Mr. Chairman. Following Mr. Ehlers' 
lead, I will try to be brief. 

[Laughter.] 

Mr. Doyle. Let me start by saying, you know, in the political 
forecasting business, there is a saying that the only thing that is 
certain is that nothing is certain. But, I would note for Mr. Roe- 
mer's benefit that one thing that is certain about the NCAA tour- 
nament is that Penn State is in it and Notre Dame isn't. 

[Laughter.] 

Mr. ROEMER. Would the gentleman yield? 

Mr. Doyle. Yes. Yes, I will yield to the gentleman. 

Mr. ROEMER. Now, we are really talking about some serious is- 
sues here. 

[Laughter.] 

Mr. RoEMER. I would note to the gentleman that both Indiana 
and Perdue are in the tournament and that we still have the most 
successful high school basketball tournament in the country. 

Thank you. 

[Laughter.] 

Mr. Doyle. And, I wish them all the luck in the world. 

[Laughter.] 

Mr. Doyle. I guess, looking at these models and talking about, 
you know, the uncertainty of things, clearly looking at models that 



161 

predict energy prices into the future are clearly uncertain, at best. 
But, I think one thing that maybe we can all agree upon is that 
energy research £ind development has contributed to keeping en- 
ergy prices low. 

And, it's also my understanding that in these models, we take 
into account constant technology gains so that if we were to drop 
off the research and development efforts that clearly would have an 
effect on these models also. And, I guess it just gets down to a 
question of since we can't, you know, decide what the pace of our 
nation's energy research and development should be by looking at 
the facts, because it seems that the facts are clearly uncertain at 
best, it comes down, in my mind, on which side do we make a mis- 
take. 

Do we err on the side of not keeping pace with other countries? 
Japan, for instance, spends many, many times more money on re- 
search and development than this country does. 

Do we put our country in the position that if we guess wrong and 
we don't continue to maJce these investments in research and devel- 
opment, I think we find ourselves in a much more serious situation 
than if we continue these efforts. And, I think it's also important 
to note that the amount of monies we are talking about have fallen 
dramatically since 1980. 

I mean, we are now spending roughly 20 — or there has been 
roughly a 20-percent cut from what we spent in 1980 in applied re- 
search investment. So, we are not sitting here talking about an 
ever increasing dollar amount going into research and development 
in energy here in this country; we are looking at decreases. 

And, I just think that it doesn't make much sense to this mem- 
ber, who certainly is in no position to guess what the future holds 
in the year 2015 or beyond, that if we are going to make a mis- 
take — and, clearly we seem to make lots of mistakes when it comes 
to predicting these things — I would hope that we err on the side 
of keeping this country competitive and continuing to make invest- 
ments as other countries and competitors are doing in research and 
development. 

And, with that, Mr. Chairman, I will yield back the balance of 
my time. 

Chairman RoHRABACHER. Well, I think we should have the panel 
comment on that. Go right ahead. Dr. Hakes. 

Dr. Hakes. Well, I think that relates to a policy question. And, 
so I would defer to the other members of the panel. 

Chairman RoHRABACHER. Mr. Schleede. 

Mr. SCHLEEDE. I don't think there is anyone that questions that 
R&D has produced benefits. The question is. Which R&D has pro- 
duced benefits? 

Is it the DOE-funded R&D programs or is it R&D that is pri- 
marily coming from the private sector? And, I submit that question 
is not always clear. 

And, even when you take DOE's claims of the things it has been 
involved in, this document, for example, is noticeably weak in iden- 
tifying what the DOE role really was in these developments. It's 
impossible to tell by reading it whether DOE had a significant in- 
fluence or whether it provided a few dollars and then took credit 
for the results. 



162 

But, the question, undoubtedly, gets back to how much insurance 
can we afford. How much should we spend? 

And, we could throw money at lots of things and say it's insur- 
ance and that we ought to err on the side of safety. But, we can't 
afford it. 

Chairman Rohrabacher. Do you have a comment? 

Mr. ROMM. I think it's clear. I think there's a great concurrence 
that energy R&D is of great value to the nation. 

I think the document on energy success stories that Mr. Schleede 
refers to is something that we have a lot of supporting material for, 
including very detailed discussions of what the role of the Depart- 
ment is. And, I think it's important not to overstate what the De- 
partment does. 

I think it's important, however, to understand that the country 
has, in some sense, got a looming, you know, R&D problem, which 
is that the private sector R&D has been flat in the last five years. 
A lot of this is due to corporate downsizing, international competi- 
tion. 

Energy R&D, because of low prices, since 1985 in the private sec- 
tor is down 35 percent. So, we have this situation where everyone 
says energy R&D is important, the private sector has begun to pull 
out because of competitiveness and low energy prices, and, the one 
body that is charged with looking long term is also seeing cuts in 
energy R&D. 

So, I would just say that this is a time when we should be think- 
ing of how do we increase federal R&D spending, how should we 
particularly increase energy R&D spending. And, I don't think the 
notion that we should be cutting the budget in half makes much 
sense, given the tremendous consensus on the value of energy 
R&D. 

Mr. Doyle. And, Mr. Chairman, I would like to correct a state- 
ment I made, too. When I said that since 1980 there was a 20-per- 
cent reduction, I actually had it wrong. 

Since 1980, we now spend 20 percent of what we spent in 1980. 
We have actually reduced Department of Energy R&D funding 80 
percent. We now spend 20 percent. 

In our total budget — I mean, here's a graph that shows what our 
total U.S. energy's expenditures are. And, this little pencil line you 
see down here is what the federal energy R&D efforts are. 

Chairman Rohrabacher. That's right. That's right. Mr. Doyle, 
I 

Mr. Doyle. So, I just want to reiterate that. 

Chairman Rohrabacher. I remember those corporate boon- 
doggles that we cut out. 

Mr. Lynch. 

Mr. Lynch. Thank you, Mr. Chairman. I just want to say that 
I'm a little concerned at the suggestion that maybe there's some 
magic number of correct research spending. 

I think one thing you do want to consider is why are you spend- 
ing the money on particular projects and just think that, you know, 
you don't want to build a Clinch River breeder reactor just because 
it's located where, I believe, the Senate Minority Leader was from. 
You don't want boondoggles, whether they are DOE boondoggles or 
congressional boondoggles, with all due respect. 



163 

Chairman ROHRABACHER. Point well taken, Mr. Lynch. 

[Laughter.] 

Chairman Rohrabacher. We now have Mr. Davis from Virginia, 

Mr. Davis. Thank you, Mr. Chairman. Let me ask the Depart- 
ment of Energy representative, do you have any information that 
leads you to really fear the instability situation in the Gulf at this 
point in terms of an energy crisis? 

Mr. RoMM. Well, I think if you read the newspapers, every major 
Gulf exporter has had some turmoil, terrorist event or war within 
the last one year or two years alone. I think the people — the secu- 
rity analysts who look at this — are very concerned about it. 

And, I think obviously we've had classified briefings. And, we 
would be delighted that any member who really wants to get at 
this issue, how stable are the Persian Gulf suppliers today and 
what is the likely prospect in the future, we would be delighted to 
set up some security briefings. 

But, as I say, it is 

Mr. Davis. I guess my question was maybe that would be a good 
thought for this Committee, is if you are relying on some confiden- 
tial information or classified information, maybe we ought to know 
that. 

I would just ask, Mr. Schleede, you don't seem as concerned obvi- 
ously as the DOE people in terms of a future energy crisis. Now, 
if one comes upon us, you are not going to be held accountable, un- 
derstand. 

But, I just wonder if you could kind of speak to that? 

Mr. Schleede. Well, I think there are many reasons to be less 
concerned about another energy shock, crisis, or whatever, than 
there have been previously. And, in my detailed statement, I list 
a dozen or so of those reasons. 

But, I would come back to a point that what I would hope the 
DOE would start doing is paying attention to arguments and points 
on both sides and not do what Mr. Romm has done this morning, 
and that's just emphasize all the reasons why we might have to be 
concerned. I mean, as taxpayers, we ought to be able to look to peo- 
ple in the government to present objective information. And, I sub- 
mit that what we are getting out of the DOE R&D folks is nothing 
but scare arguments to justify their programs and not getting £in 
objective, balanced look at what the future energy situation is like. 

I can tick off some of the reasons why I think we should be less 
concerned, if you would like. But, they are detailed in my state- 
ment. 

Mr. Davis. Okay. Thank you. 

Mr. Romm. If I could just interject here, I keep hearing that it's 
the Department that is not being objective. I've tried to be very ob- 
jective here. 

I think if you compare my testimony to Mr. Schleede's, you will 
find that his testimony presents only the reasons why we should 
worry less today about a crisis. And, there are, indeed, such rea- 
sons, including the strategic petroleum reserve, including the fact 
that the world oil markets are much more — there's a futures mar- 
ket. 



164 

There are a number of factors which would mitigate against the 
kind of crisis that we had in the 1970's. I Ust them in my testi- 
mony. 

However, to only list the ones that would mitigate against a cri- 
sis, as Mr. Schleede does, I would argue that's not objective. I try 
to argue in my testimony some of the reasons why we should still 
be concerned about an oil crisis in the future. 

And, I would just mention two of those, one of which is that in 
the 1970's we were — the competition for oil was between us and 
our NATO allies. That's who was competing for oil. 

If there were a crisis early in the next century, what you would 
find is that the competition for oil would have an additional ele- 
ment. And, that is the tremendous growth in east Asian supply — 
in east Asian demand. 

So, you would have a completely different geopolitical picture, 
whereas nations that have not been our traditional allies would be 
competing for us with oil as opposed to what happened in the 
1970's. 

Does that completely weigh against the other factors? I think 
that's for the members to decide. 

I think a second factor, which is worth mentioning, is that tke 
sectors of the U.S. economy that could easily reduce their depend- 
ence on oil have done so. The utility sector has dramatically re- 
duced its dependence on oil. The industrial sector has worked to re- 
duce its dependence on oil. 

The transportation sector, however, remains 96 percent depend- 
ent on oil. In order for the transportation sector to have other op- 
tions, we need new technologies and new infrastructure. And, 
that's something that the Department works on. 

I am not saying that the factors that make a crisis more likely 
outweigh the ones that make it less likely. I £mi not predicting a 
crisis. I want to make that very clear. 

I'm saying it's a plausible scenario. I'm saying that people like 
Don Hodel of The American Enterprise Institute and Bob Dole 
have raised similar scenarios. 

It's the government's job to worry about plausible, worst case sce- 
narios and find appropriate funding. 

Mr. Doyle. Okay. Thank you. I yield back my time. 

Mr. Ehlers. Dr. Hakes, a final comment? 

Dr. Hakes. I would also like to say that I question Mr. Schleede's 
throwing around the term "non-objective," because when we work 
on these forecasts every year, we invite experts of every persua- 
sion. And, I would ask. Don't we even invite you every year to come 
talk? And, don't we invite Professor Lynch to come talk? 

And, we have participation from almost all elements of the en- 
ergy industry, energy experts. And, those are calculated before 
these projections are made. 

If there was some attempt here to push things in one direction, 
why would we invite you to our meeting? 

Mr. Davis. Let me just ask Mr. Schleede, if he could, to have the 
last word on my time, since he's a constituent of mine. Do you want 
to respond to that, Mr. Schleede? 

[Laughter.] 



165 

Mr. SCHLEEDE. Thank you. I should have repeated a comment I 
made earlier. 

I am making a distinction between EIA and the rest of DOE. I 
do consider EIA much more objective than I do the part of the De- 
partment that is out constantly seeking more t£ix dollars for its 
programs. 

Mr. Ehlers. Thank you very much. I would just comment that 
since I've arrived in Washington, I've noticed a great paucity of ob- 
jectivity in this particular part of the world, something we all share 
in. 

Next, Mr. Olver from Massachusetts. 

Mr. Olver. Thank you, Mr. Chairman. I was going to ask — in 
fact, maybe now with you in the Chair is an appropriate time to 
ask for equal time with your comments earlier. 

But, actually I have to leave here very shortly. So, I think I am 
going to make an attempt to stay somewhere close to the allotted 
time. 

I wanted just to explore a little bit a couple of things that two 
of the former — two of my colleagues had spoken about with the 
panel. And, first, from the gentleman from Michigan, who is 
chairing now the hearing, you had made a comment that you were 
very strong — it was kind of — it started out in a different way, but 
then came down that you were strongly in favor of making certain 
that we had the information so consumers could make the correct 
decisions. 

And, I think that that's something that we can all agree on, that 
people should have that information. But, unfortunately, once you 
get finished creating the information, then the problem is that the 
consumers are not — do not have an equal right in this society, as 
we are, to actually — to make the correct decisions because of the 
economics of the situation. It's not a free decision for them to do. 

So, life-cycle costs, which ought to make them reach one decision, 
may not be open. Whatever may give them the lowest life-cycle 
costs may not be open as a thing for them to take because of their 
circumstances. 

And, so it seems to me that if you are developing an energy effi- 
ciency over a continuum and you've got products which on a contin- 
uum use less or a greater amount of energy and people — you get 
that information out there, that it is one — and since the decision 
is not exactly free because of the economics to families that it is 
then an appropriate goal, an appropriate purpose, for government 
to try to move this continuum toward energy conservation, toward 
something which is less abusive, usive [sic] and abusive, of what 
you, Mr. Chairman, had pointed out, is the only non-recyclable 
input. 

And, you would ask for just a brief comment. Am I on base or 
off base on that, in your view? 

Is it appropriate for government to use its R&D and its policy to 
set goals for what ought to be the standards of energy efficiency 
and move that continuum toward an energy efficient position? 
Briefly, because I have another one that I want to talk about from 
another member. 

Mr. Ehlers. Are you asking Mr. Schleede? 



166 

Mr. Olver. No. I'm asking anybody. Is the analysis that I gave 
basically correct? 

Or, is it — do you generally agree or generally disagree? 

Mr. Ehlers. Mr. Schleede. 

Mr. Schleede. If you are talking about balancing benefits and 
costs and doing it honestly, I think clearly that makes a lot of 
sense. However, in the appliance efficiency standards, which deals 
directl)'' with the point you are talking about, we have a situation 
where appliance efficiency standards have been evaluated, the eco- 
nomics have been evaluated, on the basis of price forecasts that are 
much higher than current forecasts. 

And, as a result, the economics justifying those forecasts need re- 
evaluation. Now, whether DOE is 

Mr. Olver. But, for the people that do not have a free decision 
in this, it's not, in the process of what you are saying, whether the 
forecast is off by 20 percent or not, their position is still going to 
be exactly the same. They don't have a free decision in the econom- 
ics. 

Mr. ROMM. If I could interject 

Mr. Schleede. As far as the customer is concerned, that's cor- 
rect. But, whether DOE, in setting these appliance efficiency stand- 
ards which are then — the costs of which are then imposed on con- 
sumers, whether they are using the best information available and 
using up-to-date price forecasts in their economic evaluation is a 
separate question. 

And, it needs attention. 

Mr. ROMM. If I could just interject, Mr. Schleede is just factually 
incorrect that the appliance efficiency standards are based on fore- 
casts that are way off. The fact of the matter is that most of the 
appliance efficiency standards deal with saving electricity. 

Electricity price forecasts, they just haven't gone up and down 
very much. That's A. 

B, the standards — typically you issue a standard. The product 
has to be manufactured in a few years. We shoot for paybacks of 
three to four years. So, we are only talking about what is going to 
happen in the next several years that matter. 

To give a couple of examples, just so we can stop being abstract 
about this and get very factual, we issue detailed analysis of what 
the cost of conserved electricity from our standards is. Typically, 
the cost of conserved electricity is two cents a kilowatt hour, three 
cents a kilowatt hour. 

The proposed — one of the refrigerator standards that we are con- 
sidering would have a cost of conserved electricity of 2.9 cents a kil- 
owatt hour and a payback to the consumer of 3.7 years. Most con- 
sumers are paying eight and a half cents per kilowatt hour. 

So, it really doesn't matter whether the price of electricity is fore- 
cast to go up 10 percent, to go down 10 percent. These standards 
are remarkably cost effective. 

Mr. Olver. You gentlemen are extremely good, at least the two 
already, at answering some other question. But, I really am not 
quite sure what the question is that you are answering. 

Anyway, I want to go on to a different thing. At 

Mr. Ehlers. Just a moment, Mr. Olver. I just want to mention 
that we have a vote on the Floor. 



167 

We have — Ms. Rivers, do you have a question to ask? 

Ms. Rivers. Yes. 

Mr. Ehlers. And, Mrs. Cubin wishes to ask a second question. 
We would Hke to wrap this up before we take the vote, if at all pos- 
sible. 

Mr. Olver. Well, let me ask just 

Mr. Ehlers. You have just a few seconds left on our clock. But, 
go ahead and ask your question. 

Mr. Ehlers. The gentleman from Tennessee made a comment, 
which was that he felt it was — this is — perhaps, to paraphrase, it 
was tragic that we had withdrawn from nuclear energy as a source 
of energy because of fear, grossly exaggerated fear, of waste. Now, 
could I get quickly from this group, do you generally agree with 
that position that he has put forward or do you generally disagree? 

Quickly. Just disagree or agree generally. 

Dr. Haxes. The factor is the cost, the investors* unwillingness to 
put forward the capital costs. 

Mr. Olver. Can I get you to say generally disagree or generally 
agree? 

Dr. Hakes. That is one factor. 

Mr. Olver. Pardon? 

Dr. Hakes. The factor is one waste — waste is one factor. But, 
there are other factors as well. 

Mr. Olver. All right. I see it's not going to be possible for me 
even to get that out so that I can then ask the other question, 
which was the — the meat of that question was going to be what did 
each of you think were the key things that would get us — if you 
generally agreed with the position — back to nuclear energy being 
properly a part of the mix that we ought to be considering for the 
future. 

And, that, I thought, might get us something interesting as to 
how we ought to function here. But, I don't have time. 

Mr. Ehlers. Thank you, Mr. Olver. Ms. Rivers. And, Mrs. Cubin 
has volunteered to submit her question in writing. 

So, Ms. Rivers will be the last. 

Ms. Rivers. Thank you, Mr. Chairman. I address this question, 
first, to Dr. Schleede but then others I would like to hear from. 

We agree, in that Congress has the responsibility to review the 
effectiveness of these programs. But, what I am hearing from you — 
or, actually what I read from you, because I was not here earlier 
and I apologize for that, is that you feel like the Yergin Task Force 
and the Energy Advisory Board are really hopelessly compromised 
in terms of being able to provide objective advice. 

So, it sounds like what we are talking about is that the decisions 
on these issues are going to have to be made in the political arena. 
If I accept that, do you think two hours of hearings are enough to 
make that kind of decision? 

Mr. Schleede. I really don't want to make the 

Ms. Rivers. Well, it's an easy question. 

Mr. Schleede. (continuing) Committee's judgment on that. But, 
just to clarify, I have more confidence in the Yergin report than I 
do in the information coming directly out of DOE which seems to 
me to be terribly biased in favor of conclusions that they need more 
money. 



168 

Ms. Rivers. Okay. To follow up on that, then, in saying that we 
are concerned about the information that we are getting from our 
agencies and we are going to have to make the decisions politically, 
I would ask you. Given the level of attendance and the depth of un- 
derstanding on this issue, how long do you think it should take this 
Committee to understand these issues to the point that they could 
make major decisions on forecasting and funding? 

Mr, SCHLEEDE. Given the collective intellectual capacity of this 
Committee, I shouldn't think it would take very long at all. 

Ms. Rivers. Oh, okay. 

[Laughter.] 

Ms. Rivers. Do others have a comment on that? 

Mr. Lynch. I thought the Yergin report was fairly well. But, yes, 
I think you need a lot more time and effort. 

The Office of Technology Assessment perhaps had a role in that 
in the past. We have a lot of additional information that we would 
be glad to provide. 

Ms. Rivers. Okay. And, how long do you think it would take us 
to take all that in, to understand it and do some good policy- 
making? 

Mr. Lynch. I think that's up to — ^you know, we have a lot of ma- 
terial. That's up to you all to decide. 

Ms. Rivers. Okay. 

Mr. RoMM. If I could just 

Mr. ROEMER. Would the gentlelady yield? 

Ms. Rivers. I would just like to hear from Mr. Romm. 

Mr. RoEMER. Okay. 

Ms. Rivers. And, then, yes. 

Mr. Romm. If I could just say, I'm glad there has been a uniform 
endorsement of the Yergin report, which was headed by one of the 
world's foremost authorities on oil. The Yergin report clearly 
spelled out great concern about the world oil situation, the world 
energy situation, called on more of the — the government to do more 
in energy R&D. 

I would like to read the last paragraph. "But unlike the allied 
coalition in the Gulf crisis, innovation and technological creativity 
cannot be summoned into service on short notice. Energy R&D is 
the long term investment, a modest investment by comparison to 
the cost of disruption, that is made to assure a more secure and 
productive future." 

Chairman RoHRABACHER. Thank you very much, Ms. Rivers. I 
am going to give Mr. Roemer the last word, but I would like to 
close this hearing. We are going to be adjourning after that. 

Let me just say that I thank you very much for coming here with 
your testimony. I am sorry I had to go back and forth. 

We are on the edge of a major military engagement in the Tai- 
wan Straits. I'm on the International Relations Committee, 

Let me just say that we have not cut — apart from anjrthing you 
have heard from the community, we have not cut research and de- 
velopment in energy. What we have cut — at least in this last year, 
what we cut were things that were labeled research and develop- 
ment. 

As Mr. Schleede has pointed out, catalogs, promotions, commer- 
cialization, utilization, now that may be a useful function for the 



169 

government but it's not basic research and development. And, that 
was one of the priorities we had. 

Every member of this Committee had a chance to substitute the 
cuts that we had for other priorities. That was something that we 
did in this Committee, is that any suggestion you have that you 
want to make, if you want to cut something else, we will cut some- 
thing else if you make that or put an alternative there for us in 
terms of the spending reductions. 

So, with that said, I believe some of the reductions in the early 
1980's, as pointed out by Mr. Doyle, I was around. I was a reporter 
during those time periods. 

And, I know that during the Carter years, yeah, we spent a lot 
of money on research and development. And, a lot of them were 
hyper-boondoggles that benefited huge corporations and they made 
money on these "research" projects. 

And, they weren't worth it in the long run. And, they were all 
based on the projections of high energy costs. 

And, so, in the end, if we don't have the right projections as to 
what energy is going to cost, we will make decisions that cost this 
country hundreds of billions of dollars. And, I can agree with Mr. 
Romm that we need some long term investment in research and 
development, but it has got to be based on good figures. 

So, with that, I am going to leave the last word to Mr. Roemer, 
who can refute everything I just said 

Mr. Roemer. Mr. Chairman, let me just say in 30 seconds 
that 

Chairman ROHRABACHER. All right. 

Mr. Roemer. I think much of what we are talking about here in 
terms of R&D is investment in the safety and the national security 
of this country. It's investment in jobs — good, high paying jobs — for 
the people of this country. 

And, we are talking about two-tenths of 1 percent of the budget. 
Now, if we can stay out of a war like the Persian Gulf for two- 
tenths of 1 percent of the budget when we cannot rely on Iraq and 
Iran and Sjrria and a host of other countries in the Middle East for 
50 percent, let alone 78 percent of our oil, I think that this is some- 
thing that we should have more hearings on, that we should under- 
stand in a very, very intelligent and expertise way. 

And, I think that, with all due respect, Mr. Chairman, I think 
that this is worth the taxpayers' money. 

Chairman Rohrabacher. All right. Mr. Roemer, thank you. 

This hearing is adjourned. 

[Whereupon, the hearing was adjourned at 11:53 a.m., 

[The following material was received for the record:] 



170 

APPENDIX: 

FOLLOW-UP QUESTIONS AND ADDITIONAL MATERIAL FOR 

THE RECORD 



171 



Dr. Jay E. Hakes 

Administrator 

Energy Information Administration 

U.S. Department of Energy 

Answers to Followup Questions 



172 



QUESTION FROM THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, HOUSE 

COMMITTEE ON SCIENCE 

Ql. EIA'slatest forecast (Annual Energy Outlook 1996) includes five cases: (1) Reference; 
(2) Low Economic Growth, High Economic Growth, Low World Oil Price, and High 
World Oil Price. In all five cases, EIA projects that world oil prices in 2005, 2010 and 
2015 will be higher in real dollar terms than they were in 1994. 

• For its Low Worid Oil Price case, EIA projects that real worid oil prices will be 
only a few cents higher than they were in 1994. 

• For its Reference case, EIA projects that real prices will increase by nearly 64% 
from 1994 to 2015. 

• For its High Worid Oil Price case, EIA projects that the 1994 price will more than 
double by 2005 and then continue upward. 

a. Is there zero probability that real worid oil prices will be lower in 2005, 2010, or 
2015 than they were in 1994? 

b. If the probability is not zero, what probability would you estimate? If at or near 
zero, are you, in effect, telling all decision makers that there is virtually no 
possibility that real worid oil prices will be lower after 2000? 

Al. a. The first Administrator of the Energy Information Administration was fond of 

reminding us that "there are no facts about the future." This caution is particularly 

applicable to world oil prices. It is possible that real worid oil prices in any year through 

2015 could fall outside the indicated range, including a drop below the 1994 price. Based 

on current information, trends, and policies, however, we think it is unlikely that prices 

will fall substantially below the 1994 price (or above the high price scenario) and remain 

there for a sustained period of time. There are many reasons for this assessment, including 

anticipated growth in worid demand for oil at rates far surpassing those seen in recent 

decades. 

Worid oil prices are particulariy difficult to project as the worid oil market is not a 



173 



competitive market and prices are determined in part by decisions made by nuyor oil 
producing countries rather than strictly by maricet forces. Specifically, some of the larger 
producing nations in the Organization of Petroleum Exporting Countries (OPEC) produce 
less oil than they are capable of producing in order to keep prices at a higher level than 
they might otherwise be. Some oil market analysts have expressed the opinion that if the 
worid oil market was fully competitive, prices could be under $10 per barrel, closer to the 
marginal costs of extraction and transportation from the Persian Gulf. Consequently, the 
announced or discerned intentions of OPEC nations must be factored into any forecast of 
oil prices. Since these intentions could change, or political events could change the 
circumstances in which decisions are made, any price forecast is based on the best current 
assessments, and should not be considered a certainty. 

It is also possible that changes in policy could affect the world price of oil. For instance, 
some actions (such as carbon mitigation policies that tax oil consumption or mandate 
world-wide e£5ciency standards) to lower world demand for oil would likely lead to lower 
world crude oil prices than those projected in the AEO. It should be noted that, 
depending upon the years selected, the Low Oil Price case does show fiat prices. The 
2000 price in the Low Oil Price case is lower than the 1994 price (S14.66 per barrel in 
2000 vs. $15.52 per barrel in 1994, in 1994 dollars). In &ct, the entire Low Worid Oil 
Price path is lower than the actual 1995 price of $16.78 per barrel. 



174 



The cases in the AEO are not meant to bound the possibilities of future oil prices, but 
rather to provide a range based on world oil market conditions and reasonable 
assumptions about future demand and supply, as they are now understood. Thus, to assert 
that there is zero probability for any particular level of future prices would go far beyond 
EIA's ability or claim to foresee future energy market behavior. 

b. We have no basis for assigning probabilities to the price paths in the different AEO 
cases. Some of the important determinants of prices, as discussed above, are not market 
driven and are not amenable to analysis of probability. The low price case has prices near 
constant 1994 prices in real terms. We believe that this case is a real possibility, although 
we cannot state a probability that it will occur. Likewise, we cannot say that there is 
virtually no possibility that real worid oil prices will be lower than the 1994 price after 
2000. 



175 



QUESTION FROM THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, HOUSE 

COMMITTEE ON SCIENCE 

Q2. The EIA Annual Energy Outlook 1 996 assumes that 37 gigawatts of nuclear capacity, 
accounting for abotit 40 percent of the Nation's cunent nuclear generation capacity, will 
be retired by 2015. What are the reasons for this pessimistic assessment of nuclear 
power? 

A2. ' The operating assumption in.the Annual Energy Outlook 1996 (AE096) is that each 

nuclear power unit retires \^en its operating license expires. A nuclear powerplant is 

licensed to operate for 40 years, a limit imposed by the Atomic Energy Act of 1954. An 

amendment to the act allows for a renewal of the license for an additional 20 years, 

contingent upon approval by the Nuclear Regulatory Commission. Although a rule is in 

place for license renewal, it has not yet been tested and no utility has applied to renew 

the license of a nuclear reactor. For the six nuclear units that have beer, 'etired over the 

last ten years, the average number of years of operation at retirement was 20 years, with . 

the oldest operating for 28 years. As of 1994, 50 percent of all operating nuclear power 

plants have total operating costs of over 3 cents per kwh and 25 percent of them have 

costs of over 4 cents per kwh. (Included in these costs are fuel, operating and 

maintenance, post operational capital expenditures, and the relevant overhead costs.) 

Additionally, as the older plants age, many of them will need aging-related 

repairs/replacements of components. The total levelized cost of new steam coal plants 

and advanced combined cycle plants are estimated to range between 3.6 and 5.1 cents 

(1994 dollars) per ]cwh, depending on the technology and year of operation. Given these 

data and the statistics, an assumption that ail existing units operate for 40 years is not 

pessimistic Furthermore, as new advanced combined cycle plants become available after 

2010 at a cost of 3.6 cents per kwh. many of these nuclear units will be uneconomic. It 



176 



should be noted that this assumption has been adopted because of the difBculty of 
determining precisely which nuclear generating units will renew their licenses, and which 
will be retired early. Because of the likelihood that there will be some of each, we have 
made the assumption that, on average, all units will simply retire after 40 years. 

No new nuclear orders are expected to be iiutiated over the forecast horizon, due to 
nuclear waste and economic concerns. The total levelized cost of a conventional nuclear 
plant beginning operation in 2000 is projected to be about 6.3 cents per kwh (1994 
dollars), compared to 5.1 cents per kwh for a coal-steam plant and 3.9 cents per kwh for 
an advanced combined cycle plant. For plants beginning operation in 2015, the 
corresponding costs are expected to be 6.3 cents per kwh for conventional nuclear, 4.4 
cents per kwh for coal steam, and 3.6 cents per kwh for advanced combined cycle. The 
levelized costs for an advanced nuclear technology, which is expected to be available for 
commercial operation during the forecast horizon, is projected to be about 5.8 cents per 
kwh in 2015. Thus, the nuclear technology has higher average levelized costs than 
competing fossil fuel technologies. Note that these costs refer to utility-operated plants 
only. 

The Office of Civilian and Radioactive Waste Management projects that 80 reactors will 
run out of space for spent fuel by 2010 if no permanent waste storage facility is available. 
The Department of Energy does not expect to have a high level waste storage facility 
completed before 2010. Existing nuclear plants will have to purchase onsite storage 
containers, thereby increasing the cost of operating nuclear power. EIA believes that it is 






177 



highly unlikely that new nuclear power units would be built without guaranteed storage 
availability for the waste. Also, new nuclear orders will be of a new design, adding risk 
and uncertainty to the cost and performance of fiiture nuclear power units. Potential 
investors are likely to wait until the technology is proven and the costs are well defined, 
pediaps through the experience of building units overseas. Also, as the electric power 
industry moves towards deregulation, nuclear may be perceived as a riskier investment 
than other technologies with shorter lead times for construction. With competition, cost 
recovery will be determined by the maricetplace rather than by cost-of-service regulation. 
Therefore, cost recovery for long-leadtime, coital-intensive technologies such as nuclear 
will be characterized by greater uncertainty. 



178 



QUESTION FROM THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, HOUSE 

COMMITTEE ON SCIENCE 

Q3. To what extent does the latest EIA forecast address the likely restructuring of the 

electricity industry, which should lead to increased competition and, in the view of many 
analysts, to lower electricity prices in the future? 

A3. Because the AE096 assiunes current laws and regulations, the full impacts of electricity 

restructuring are not incorporated in the reference case. As stated in the AEO, many 

questions remain about the evolving market structure, and it is likely that the answers will 

involve both legislative changes and the development of new market institutions. 

However, some of the assumptions used in the AE096 were modified because of the 
likely market impacts arising from the anticipation of further competition in the 
electricity industry. Improvements in the costs and performance of new fossil and 
renewable generating technologies over time have been incorporated in the AE096, 
partially as a result of market deregulation. For example, the cost and performance 
characteristics for new gas-burning advanced combined-cycle plants have improved 
dramatically in recent years and they are expected to continue for some time. It is true 
that this trend toward lower costs and higher efficiency may have occurred without 
market deregulation; however, the move to\«ards competition has certainly accelerated it. 
In fact, the two trends, the movement towards a competitive market and the improvement 
in generating technology cost and performance are reinforcing one another. As the cost 
of generating power from new technologies continues to fall, the pressure on policy 
makers to deregulate grows. And, in turn, as the market becomes more competitive, the 
pressure on generating technology vendors to lower costs and improve performance also 



179 



grows. 



In addition, the AEO includes a two page box discussing the potential impact of 
electricity market restructuring. Figures showing the sensitivities of electricity prices and 
capacity expansion plans are included and discussed (pages 30 and 3 1 ). In addition, EIA 
is currently analyzing the factors that will drive the competitive price of electricity and 
the impact of historical market regulation on the efficiency of operation of fossil steam 
plants. The results of these efforts will be published in separate analysis reports. 



180 



QUESTION FROM THE SUBCOMMTTTEE ON ENERGY AND ENVIRONMENT, HOUSE 

COMMITTEE ON SCIENCE 

Q4. On page 1 of your prepared testimony you state that EIA has "made significant efforts to 
assure that users of our material are made fully aware of their limitations and the 
unavoidable uncertainties that underlie energy forecasting, as well as alternatives to our 
projections (such as those made by private forecasters, or committed long-term contracts 
that assume price risks." 

What are the "significant efforts" that EIA made? . 

A4. The significant efforts that ELA has undertaken to make users aware of the limitations and 

uncertainties that underlie energy forecasting include: 

• The verbal statements in virtually all major presentations made by the 
Administrator and his chief forecasting representatives that considerable 
uncertainties underlie every energy forecast, including EIA's; 

• the inclusion of such a statement prominently in the Preface of the AE096 and 
previous AEOs; 

• a discussion of uncertainties in the AEO forecast in the Administrator's message 
in the AEO; 

> • inclusionofspecialhighlightedkey areas ofuncertainties as in, for example, the 

discussion of electricity restructuring (pages 50-51 in AE096) and a section in 
each major area that discusses the challenges for the future; 

• a siunmary of the most recently available alternative forecasts with an illustration 
of how these compare with EIA's in selected key variables, and 

• publication of alternative integratedx^ses wliich explore uncertainties that relate 
to macroeconomic growth and world oil prices as well as special sectoral analysis 
which explore the impacts of alternative technological penetration assumptions.. 



In addition, we have cooperated with the U.S. Department of Energy Policy Office and 
the Federal Energy Management Program (FEMP) of the OfBce of Energy Efficiency and 
Renewables to develop more timely updates and dissemination of our forecasts for use in 
federal energy purchasing programs. At the same time, we have advocated that our 



181 



forecasts be only one of several options identified for the Federal manager in making 
energy-related decisions, including the futures market, specific contract offerings and 
other forecasts. As a result of our cooperative effort, users of the FEMP software that 
provides life-cycle energy costs are allowed several options in addition to the A£0 
reference case in choosing projections for life-cycle costs. 

In addition, our documentation includes a section on uncertainties and sensitivity analysis 
on the key varitibles we believe to be the most important. To stress the fact that we 
recognize uncertainties in any energy forecasting, we hold regular working group 
meetings with Department of Energy and other Government users of our forecasts to 
solicit advice and information from knowledgeable experts, and we hold an annual 
conference following publication of each year's A£0 where uncertainties are a key topic 
of discussion. We also hold numerous meetings throughout the year with stakeholders 
both within and outside of the Department. Recent examples include meetings to address 
cost and performance issues for residential, commercial, and electricity technologies in 
April 1995; a meeting held in May 1995 to solicit the views of outside experts on model 
scenarios that should be pursued; and an all-day workshop held in August 1995 to 
address natural gas resource issues. Almost all of our models have been reviewed by 
outside experts through the ongoing Independent Expert Review Program, wiiich 
provides for outside academic and industry experts to critique the models and their 
results. Finally, we continuously publicize the caveats and limitations of our forecasts 
through full documentation of our assumptions in the AEO Siqjplement (available on the 
Internet and the EIA OROM); and our complete set of National Energy Modeling 



182 



System (NEMS) model documentation reports (available through EI A's National Energy 
Infonnation Center, as well as on the Internet and the EIA CD-ROM). 



183 



QUESTION FROM THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, HOUSE 

COMMITTEE ON SCIENCE 

Q5. How can decisionmakers protect themselves from making umeconomic decisions because 
energy price forecasts may turn out to be inaccurate? 

A5. - The risks inherent in making uneconomic investment decisions in energy are not very 

different fix>m the risks in making any large investment in other areas, and the same 

means of protection are available to energy decisionmakers as they are elsewhere. The 

actions that can minimize the risk in making uneconomic decisions include the ability of 

the decisionmaker to develop an appropriate small set of scenarios that include the 

plausible set of circumstances that can occur on the upside and on the downside of 

investment decisions. These scenarios plus a "baseline scenario" should be used to 

evaluate possible investment actions being considered. Investment tools have been 

developed and are available to the investment community and financial markets and these 

■ should be considered. In the final analysis, however, model forecasts are an adjunct to, 

rather than a substitute for, good business judgment 

As stated before, ELA forecasts are only one of a number of sources available to users. 
Others include the futures market, committed long*term contracts, and alternative 
forecasts from the private sector. Judicious analysis of all of these sources, including 
- EIA's, is necessary for users to minimize the risk associated with reliance upon a single 
forecast However, it is unlikely that risk can be completely removed fix>m investment 
decisions, and it would be imprudent for ELA to suggest that there is a way to do so. 



184 



QUESTION FROM THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, HOUSE 

COMMITTEE ON SCIENCE 

Q6. Mr. Schleede has suggested that even though EIA is an independent agency within the 
DOE, its continued [location] within the Department raises questions about EIA's real 
independence. He has further suggested that consideration be given to removing EIA 
from DOE and making it part of an independent statistical agency. 

Would you please comment? 

A6. EIA has steadfastly honored its impartial role within the DOE mandated by the Congress 

in its authorizing legislation. The preservation of that independence is ingrained in EIA's 

culture. We employ internal peer review processes to assure that EIA's forecasts and 

analysis are supported by factual information and that assumptions that may be subject to 

differing views are documented and transparent to users. While EIA does perform 

alternative policy analysis, we do not take policy positions and thus maintain our position 

of objectivity. EIA has long recognized that our independence is a principal factor that 

gives our work credibility and value and distinguishes EIA from other forecasting 

organizations. 

EIA's independent role has worked well at the Department of Energy for close to two 
decades. The Professional Audit Review Team, which has evaluated EIA annually since 
its beginning, has constantly found no reason to question EIA's independence from DOE's 
energy policy function. So there is no reason to make a change. We believe this view is 
shared by the vast majority of customers in the Administrations, Congress and the public 
that have used EIA's work throughout its existence. 



185 



QUESTION FROM THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, HOUSE 

COMMITTEE ON SCIENCE 

Q7. To wbaX extent does EIA use external peer review prior to issuing its forecasts? 

A7. In EIA, we exercise an open and proactive process for developing current information 
about industry, technology, and international developments and trends relevant to our 
outlook. The principal forums for receiving such information with respect to the mid- 
term forecasts iqipearing in the AEO include: 

• technical working groups for government experts within and outside of the 
Department which meet monthly, 

• an annual NEMS/AEO conference following publication of the AEO, 

• special all-day meetings >^ch bring in outside industry, academic and 
government experts to exchange technical information as we did, for example, in 
April 1995 to address cost and performance issues for residential, commercial, 
and electricity technologies; in May 1995 to solicit the views of outside experts on 
model scenarios that should be pursued; and in August 1995 to address natural gas 
resource issues, 

• an annual press briefing on the day of the AEO's release, 

• special briefingsfor industry analysts, both on the day of the AEO's release and 
throughout the year (such as special briefings provided earlier this year to the 
American Gas Association, the Natural Gas Supply Association, the Gas Research 
Institute, and the Interstate Natural Gas Association of America), to gather 
industry's reactions, comments and feedback \^ch would be considered for the 
next forecast, ^ 

• regular participation in meetings of energy organizations such as the Edison 
Electric Institute, the National Mining Association, the Gas Research Institute, 
and the Energy Modeling Forum, as well as ongoing consultation with the Electric 
Power Research Institute concerning its information on cost and performance of 
electricity technologies, and 

• an ongoing Independent Expert Review Program, which provides for outside 
academic and industry experts to critique the models and tiieir results, and v^ose 
recommendations are incorporated where time and resources permit 



186 



Because it is important to maintain not only the reality of technical independence but also the 
perception, we require a significant level of research to ensure that a particular suggestion is 
well-grounded both theoretically and empirically before we will adopt changes to the model 
suggested by others. It is our belief that NEMS and the AEO forecasts have benefited from the 
external peer review that the model and analyses have undergone. 



187 



QUESTION FROM THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, HOUSE 

COMMITTEE ON SCIENCE 

Q8. To what extent are EIA's assumptions used in its forecasts consisteiit with the 
assumptions used by other Government agencies, such as 0MB, the Council on 
Economic Advisors or the Department of Treasury? 



A8. Most of the projections and primary assumptions of the other government agencies cited 
in your question focus on macroeconomic issues. As such, their methodology does not 
incorporate a detailed representation of the energy sector and fuel prices. Consequently, 
we can answer the question primarily in terms of economic assumptions. We have 
limited our response to those forecasts of which we are aware that have been released 
during the last year. 

EIA independently develops its assumptions and forecasts for the U.S. energy-economic 
system using its technical judgment and modeling systems. Consequently, EIA 
assiunptions and outlooks have been significantly different in the past compared with the 
economic assimiptions and outlooks developed by other Government agencies such as 
0MB, CEA, and the Department of the Treasury. However, the 1 996 EIA forecasts of 
economic growth are very comparable to the forecasts of other Federal government 
agencies that have been released over the last 12 months. To compjire them one must 
take into account the difiFerent time periods covered. For the period 1994 through 2000, 
EIA forecasts real Gross Domestic Product (GDP) growth at 2.45 percent annually. For 
the same time period, the official Council of Economic Advisers (CEA) forecast 
contained in the Febriiary 1995 Economic Report of the President was 2.5 percent. CEA 
does not release a longer term forecast. The Bureau of Labor Statistics released a set of 



188 



forecasts in November of 1995 containing a projection of real GDP growth between 1994 
and 2005 of 2.27 percent annually. The EIA growth rate covering this same period is 
2.35 percent. In its Fiscal Year 1997 Budget, released in January of 1996, the OfiBce of 
Management and Budget (0MB) assumed that GDP growth from 1994 through 2002 
would be 2.28 percent annually, compared to EIA's assumption over the same period of 
2.41 percent. The GDP forecast used by the Congressional Budget Office in its 
December 1995 forecast is essentially identical to that used by 0MB. Underlying the 
GDP forecasts are population growth projections for which EIA uses the Censtis Bureau 
middle-growth forecast. It should be noted that many of the differences among the 
economic assimiptions used by government agencies are small, and are related as much to 
the timing of the release as anything else. The 0MB forecast, for example, included data 
for the fourth quarter of 1995, which had lower GDP growth due to abnormal weather 
and the effects of government furloughs. EIA's projections were made piior to the fourth 
quarter, and thus did not include its impacts. Other than that, the GDP forecasts made 
over the past year were essentially identical. 

OMB and the CEA do not publish energy price projections. In developing the economic 
forecast that is used in the budget formulation process, a set of energy price projections is 
developed by OMB, Treasury, and the CEA. No formal model is used. Instead, recent . 
energy prices, the futures market, and general inflation projections are used to develop a 
judgmental energy price forecast. 

The Environmental Protection Agency often uses energy price projections fiY>m EIA for 



189 



reference case purposes. Rather than relying exclusively on one forecast, they may use 
projections fiom private forecasters such as DRI and WEFA, consulting finns such as 
ICF, Inc. and energy industry-supported groins such as GRI to provide a range of energy 
. price estimates for scenario purposes. Appendix F of the Aimual Energy Outlook 1 996 
contains a series of tables that compare the EIA projections with those of other 
forecasting groups. For example. Table F2 indicates that although the world oil price for 
2010 ($23.70 per barrel) in the AE096 reference case is somewhat higher than the other 
forecasts, the Low World Oil Case ($ 1 6.02 per barrel) fall? below the lowest forecast. 
The AE096 wellhead gas price for 2010 ($2.15 per mcf) is lower than all the other 
forecasts. Delivered coal prices to utilities ($25.88 per ton) in 2010 are in the mid-range 
when compared to other forecasts. 



26-794 97-7 



190 



QUESTION FROM THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT, HOUSE 

■ COMMITTEE ON SCIENCE 

Q9. Mr. Schieede has criticized the EIA Reference case forecast that the average price of 

natural gas delivered to electric generators will climb sharply afler 2005 compared to the 
price of coal delivered to electric generators, so that by 201 5 the average delivered price 
of natural gas will be 230% the price of coal as compared to the 1994 actual relationship 
of 161%. 

How would you respond to that criticism? 

A9. Changes in the relative prices of fuels for a particular end-use sector can occur for a 

variety of reasons related to both demand and supply. There is no a priori reason to 

believe that price ratios should be constant. Indeed, in a competitive market, prices are 

constantly changing in response to such factors as regulatory policy, demographic 

changes, technological progress, and even the weather. Just over the last five years, for 

example, the relationship between the average delivered prices of natural gas and coal to 

electric utilities has varied significantly. The price of natural gas delivered to electric 

■ utilities was 149 percent that of coal in 1991 and 185 percent of coal in 1993 (see 

Figure 1). While this variation largely reflects the recent volatility of natural gas prices, it 

is also in part related to the coal market, which has undergone significant changes due to 

the Clean Air Act Amendments of 1 990 (CAAA90), a miners' strike in 1 993, and a 

decline in overseas demand for U.S. coal. Price data from 1973 to 1994 show significant 

changes in relative prices of fuels delivered to electric utilities. Relative to coal, natural 

gas was most competitive in 1974 when its price was about 68 percent that of coal, while 

by 1984 its price had reached 216 percent of the price of coal delivered to electric 

utilities. The price ratio in AE096 is stable at current levels (ranging from about 1 .5 to 

about 1 .8) before starting to increase around 2008. After 201 0, natural gas is expected to 



191 



see fmther price pressiire due to increased demand from the electric generating sector as 
the nation's nuclear capacity begins to retire while the demand for electricity continues to 
increase (see Question 3 for a discussion of the assimiptions concerning the retirement of 
nuclear generating opacity). 

Natural gas is an attractive fuel for the electric generating sector because technologies 
fueled by natural gas have lower capital and non-fuel operating costs and higher thermal 
efficiency than other fiiels, wliich offset the higher fuel costs of natural gas technologies. 
The choice of a technology is largely driven by the levelized (that is, over the life of the 
unit) delivered cost per kilowatt-hour at the plant, including capital, operating, and fuel 
costs, as well as the costs of environmental and other regulatory constraints. The AE096 
projects that in 2000, for a typical baseload-serving fricility, the levelized cost of 
electricity from a new natural gas combined-cycle plant will be 22 percent lower than the 
cost of electricity from a pulverized coal unit Although the gap narrows by 201 5, the 
cost of the natural gas plant will still be 1 8 percent lower than that of the coal plant. Over 
the forecast period, technological progress reduces capital costs and improves thermal 
conversion efficiency for both coal and natural gas generation technologies. 
Improvements in thermal conversion efBciency for natural gas-fired technologies are 
projected to exceed that of coal (17 percent improvement for coal between 2000 and 20 1 5 
vs. 22 percent improvement for natural gas). Because of this improvement, increases in 
the price of natural gas can exceed those of coal without significantly reducing the cost 
advantage of natural gas-fired technology (see Figure 2). 



192 

Another factor affecting the increase in natural gas prices is the change in the regional 
mix of demand, resulting in higher average transportation costs. In 2015, for example, 
the reference case projects that the regional market shares of the West South Central (the 
"gas patch," close to most domestic production of natural gas) and Pacific regions will be 
almost halved from their 1994 shares, to 25 percent and 13 percent, respectively, of total 
U.S. natural gas consumption in the electric generation sector. In comparison, gas used 
for electric power generation in the South Atlantic, Middle Atlantic, and East North 
Central regions is projected to increase significantly, from 18 percent in 1994 to 49 
percent by 2015. Because these plants are further from the source of natural gas supply, 
the average cost of gas transportation to electric generators is expected to increase. From 
2005 to 2015, ^proximately 20 percent of the increase in the delivered price of natural 
gas is directly attributable to the increase in the transportation costs caused by the change 
in regional consumption patterns. 

Natural gas resources in the United States are abundant; however, some of the resources 

are in geologic formations that are less accessible and more costly than others to explore 

> 
and develop. As more of the economic areas are exploited, the returns (in terms of new 

discoveries) per drilling efiTort are likely to decline due to the reduced availability of 

larger fields for e}q)loration and development at the same depths. This is especially true 

for the more mature areas of the onshore lower 48 states, the source of most U.S. natural 

gas production. Technological progress tends to reduce drilling and finding costs and 

enlarge the resources tfiat are economically recoverable. The resultant increases in costs 

per discovery may be partially or fiilly offset by technological progress, depending on the 



193 



type of the specific resource. For frontier areas such as the deep offshore, technological 
progress could fully of^t the early depletion affects vtiiile for mature onshore fields, the 
cost offsets by technological progress may only be partial. The net result, however, is 
likely to be an increasing cost fiinction for investment in new reserves, wliich would 
translate into an upward sloping supply curve for natural gas. 

Finally, the price of coal to electric utilities is projected to remain virtually flat from 1994 
through 201 5. Factors influencing this projection are assimied flat miners' wages, 
productivity improvements of about four percent annually, unit transportation rates from 
the mine to electricity producers that are essentially unchanged on a national basis (but 
somewhat lower for Western coal), and a gradual shift to lower-cost Western coal 
production due in part to the requirements of the CAAA90. Between 2000 and 201 5, 
delivered coal prices are projected to increase by less than 2 percent, as the price 
pressures that are associated with increasing demand for low-sulfiir coal begin to offset 
moderating gains in labor productivity. 



194 



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196 



Mr. Glenn R. Schleede 

President 

Energy Market and Policy Analysis, Inc. 

Reston, Virginia 

Answers to Followup Questions and Additional Material 



197 



Glenn R. Schleede response to Follow up Questions 
March 14, 1996 hearing on U.S. Energy Outlook and Implications for Energy R&D 



Question: Now that EIA and other forecasters have lowered their outyear price 
projections, is the faulty forecast problem something that we don't have to worry about 
anymore? 

Answer to Question 1: 

The answer to this question is clearly **No." EIA's latest forecast (Annual Energy Outlook 
1996) is a step forward in catching up with major changes that have occurred in energy markets, 
but more improvements are needed and the &ulty forecast problem deserves continuing attention 
by your committee and others in the Congress. For example; 

a. More changes are needed in EIA forecasts to reflect changes that are occurring in energy 
markets. Among the remaining problems with EIA's forecasts are the following; 

1) EIA's forecasts are based, essentially, on one basic "scenario" or set of assumptions 
about U.S. and worid energy markets. The assumptions that EIA has made lead, 
inevitably, to the conclusion that the worid will be increasingly dependent on oil from 
Persian Gulf nations. Other equally plausible assumptions would result in much less 
future dependence on Persian Gulf oil than is suggested by EIA 's assumptions. 

These other plausible assumptions and scenarios deserve equal attention. The Congress 
should consider requiring EIA to present several plausible scenarios ~ rather than just 
one scenario ~ in its annual energy forecasts. This would help assure greater 
objectivity, more thorough analysis, and better public. Congressional and media 
understanding of potential future energy markets. EIA should develop forecasts based 
on each scenario. At least one of the several scenarios should, for example, reflect the 
very real possibility that; 

• Oil and gas production (and proved oil and gas reserves) and exports from former 
Soviet Union, Eastern European nations, and other Non-OPEC nations will 
increase more rapidly than assumed by EIA. 

• OPEC nations, including those in the Persian Gulf region, will find it in their 
interests to increase productive capacity when world oil demand grows. 

• Other energy demand and supply factors will turn out to be more favorable than 
EIA has assumed ~ in terms of continuing improvements in technology, slower 
growth in demand, lower prices, and faster growth in supply even at lower prices. 

To EIA's credit, the agency's leaders held a public conference on March 25, 1996 in 
Arlington, Virginia and invited several energy experts who presented information that 
heretofore has not been adequately taken into account in EIA forecasts, including 



198 



-2- 

information about the outlook for world oil markets. Hopefully, this information will 
be reflected in future EIA forecasts. 

2) EIA's Annual Energy Outlook 1996 price forecasts assume, in ail five cases, that real 
oil prices will be higher in 2015 than they were in 1994. In effect, EIA is telling all 
those who use the Annual Energy Outlook that there is no chance that real prices will 
be lower in 2015 than in 1994. This is an unwise signal that could lead to additional 
faulty decisions in the future In fact, future real oil prices could be lower than 1994 
and decision makers should take this possibility into account. 

3) EIA's Annual Energy Outlook 1996 forecasts of electricity prices reflect level or, in 
some cases, slight downward adjustments. The changes now underway in the electric 
industry are virtually certain to result in significant downward adjustments in 
electricity prices during the next 10 years. Those who rely on EIA's latest forecasts 
for electricity prices are likely to make unwise decisions. Furthermore, the downward 
adjustment in electricity prices is likely to force additional downward adjustments in 
natural gas prices for end users. 

4) EIA's Annual Energy Outlook 1996 forecasts that natural gas prices will increase 
significantly after 2005 and that the gap will grow significantly between the delivered 
price of coal and natural gas to electric generating companies. Interfliel competition 
in energy markets is unlikely to permit the growth in price diflferentials that EIA 
forecasts. 

Decisions based on past forecasts need to be reconsidered. Thousands of government 
and private sector decisions have been made during the past few years on the basis of high 
energy price forecasts (by EIA and other forecasters) that have proven to be faulty. These 
fiuilty forecasts have already resulted in huge costs for consumers, taxpayers and investors. 
In some cases, it may be possible to reduce the future cost burden if decisions are 
reconsidered. Therefore, all possible decisions based on high price forecasts should be 
reconsidered in light of the new, lower forecasts that have been issued by EIA and other 
organizations. Within the government, these decisions include: 

• Justification for spending on energy supply and conservation technology projects. 

• Estimates of savings from energy efficiency and conservation projects. 

• Estimates of savings fi^om existing and proposed appliance efficiency standards. 

• Estimates of the value of oil and gas leases, including ANWR and the Naval Petroleum 
Reserves. 

• Estimates of revenue that will be received from lease bonuses and royalties. 

In addition, your committee should look very closely at the economic justification for any 
proposed spending on energy conservation and renewable energy programs, and the fusion 
energy program that has been justified by past energy price forecasts. 



199 



-3- 

Question: In your statement, you indicate strong appreciation for science and technology 
but still seem to favor cutting back on energy development, demonstration and 
deployment projects. Mean^'hile, the American Association for the Advancement of 
Science (AAAS) has recently warned that the U.S. u running serious risks because R&D 
spending is being cut How would you answer the AAAS concern? 

Answer to Question 2: 

I have great appreciation for the contributions of science and technology. However, I believe 
the Congress must stop assuming that everything that is labeled "R&D" or "science and 
technology" is inherently worth support from tax dollars and that all proposals are of equal merit. 
As the competition for tax dollars grows, clearly the Congress will need to sharpen its ability 
to distinguish among those R&D efforts that deserve funding and those that do not. DOE 
energy technology programs are a good place to start. 

I haven't reviewed the AAAS document, but I believe that emphasis by any organization on a 
reduction in the total dollars spent for R&D is Macious. If this is what the AAAS has done, it's 
unfortunate. Any fair appraisal of taxpayer-financed R&D spending should consider: 

1 . What the dollars are actually being spent for? 

2. Whether the results being achieved are worth the dollars spent? 

3. Whether priorities being given to competing R&D needs are in the nation's best interests? 

On the first question (What is money actually being spent for?), I submit that too much of the 
money being spent by DOE under the label of "R&D" does little or nothing to advance scientific 
knowledge or produce new technologies. Much of the money seems to be spent for questionable 
studies, promotional documents, Washington offices for DOE contractors, lobbying eflForts 
(including efforts paid for under DOE contracts and grants), and other overhead. 

On the second question (What results are being achieved?), the DOE's best efforts to date to 
explain what has been achieved by the $100 billion that has been spent on energy R&D do not 
provide a convincing story. In addition, it is very clear that much of the money that has been 
spent on energy R&D ("synfuels" is one example) has been wasted. 

On the third question (Are priorities correct?), I suspect that we probably are not wasting a lot 
of money on basic research. However, the chances of waste grow rapidly as federal agencies 
provide funds for efforts that include development, demonstration or deployment of 
technologies. Further, as spending is used for projects other than basic research, the likelihood 
grows that private sector fiinds are being displaced. The private sector is far better than 
government agencies in understanding and assessing markets and in producing needed 
technologies when they are needed — without help or interference from the government. 



200 



IfAAAS has not already done so, perhaps the organization should focus its attention on the 
outputs from our investments in R&D — not on the inputs (i.e., the number of dollars spent). 

I have reviewed papers issued in the past by various special interest groups that decry "cuts in 
R&D." These papers all too often use statistical gimmicks, misleading comparisons, and 
incomplete analyses. For example: 

a. They often start from some high point in R&D spending and assume that the high point was 
the correct level of spending. 

b. They ignore the fact that much past spending that they characterize as "R&D" has been 
wasted on demonstration and commercialization projects that were fianded only because of 
faulty market forecasts, powerfiil political constituencies, or blatant porkbarreling, 

c. They do not distinguish adequately between basic research, applied research, development, 
demonstration and commercialization activities. The rhetoric then incorrectly asserts that 
private industry has little or no incentive to engage in any of these activities. 

d. They make highly selective and misleading comparisons in their attempts to show that R&D 
efforts are not getting enough tax money. (For years, it was the "Soviets are spending more 
than the U.S. Now it's "The Japanese are spending more") 

e. They ignore the fact that government spending on R&D sometimes displaces work that 
would be undertaken by private industry on a timely basis. 

f They ignore the fact that government spending ties up resources (dollars and people) that 
might make more important additions to our knowledge base if those resources were used 
elsewhere. They ignore the fact that government contractors and grantees, often operating 
under cost-type contracts and grants, have bid up salaries of scientists and engineers to the 
point where universities, colleges and high schools have been unable to compete and are, 
therefore, less able to educate the next generations of scientists and engineers. 

As "entitlement programs" and interest on the national debt command a growing share of 
available tax dollars, competition for remaining ftinds will become more rigorous. To help 
taxpayers get the highest value for the tax dollars that are available for R&D, ideally AAAS and 
other scientific and engineering organizations would: 

• Participate constructively in identifying and eliminating low priority and/or wastefiil R&D, 
rather than merely complaining about "cuts" and crying out for "more R&D spending." 

• Help in weeding out those activities paid for from R&D accounts that contribute little or 
nothing to the advancement of scientific knowledge (e.g., useless studies, directories, public 
relations materials and events, unnecessary travel, "Washington Offices," lobbying, 
payments by contractors and grantees to associations, coalitions and other dues to lobbying 
organizations). 

Scientists who are justifiably proud of the careful analysis, objectivity and other tenets of 
scientific method that they follow in their daily pursuits should insist that their associations and 
spokespersons in Washington adhere to the same standards and methods when evaluating federal 
spending for R&D. Focusing only on "inputs" is hardly a scientific or objective approach. 



201 



5- 



3. Question: In your statement, you expressed concern about a potential "conflict of 
interest" between DOE's responsibility to spend tax dollars wisely and its efforts to 
maintain or expand DOE's role in energy and get funding for its programs. Is this really 
a serious concern? 

Answer to Question 3: 

I believe it is a very serious problem. While EIA seeks to be objective, this claim does not apply 
to DOE's policy and program offices. As explained in more detail in response to question 4, Mr. 
Romm's testimony reflects little interest in defending the interests of taxpayers. Instead, it was 
devoted almost exclusively to attempts to justify spending for DOE R&D programs. Mr. 
Romm's testimony was not an isolated instance. Other evidence also suggests that DOE officials 
are much more interested in promoting spending for DOE programs than they are in protecting 
the interests of taxpayers. For example: 

1 . DOE spends thousands and perhaps millions of dollars on promotional materials, including 
glossy documents that attempt to defend its programs. 

2. Additional millions seem to flow through DOE to contractors, grantees and others that find 
their way into organizations that use tax dollars to pay for Washington offices, lobbying, 
contributions to associations and coalitions that seem to spend most of their effiarts in 
keeping tax dollars flowing through DOE. As illustrated in my detailed statement, DOE 
officials openly encourage contractors and grantees to lobby for more money for DOE 
programs. 

3. As explained in response to question 1, EIA relies almost exclusively on only one basic 
scenario for fiiture U.S. and world energy market conditions while ignoring other plausible 
scenarios. DOE policy and program officials carry this "one scenario" approach to extremes 
~ emphasizing only possible future developments that would create the perception of a 
looming "energy crisis" or "threat to national security." The perceptions that DOE policy 
and program officials seek to create are designed to support a larger role for DOE and more 
spending of tax dollars for DOE's energy supply and conservation programs. 

4. There is a clear conflict between DOE's responsibilities to taxpayers (for objectivity in 
analysis and careful stewardship over tax dollars) and its effisrts to obtain more tax dollars 
for its programs. Too often, it seems that DOE's policy and program officials are more 
responsive to contractors and grantees who spend tax dollars for energy R&D than they are 
to taxpayers who provide those funds. 



202 



-6- 

Question: Mr. Romm has given a vigorous derense of DOE's energy R&D investments. 
Would you please comment as to the validity or his arguments. 

Answer to Question 4: 

Taxpayers have every right to expect greater objectivity and balance from the Department of 
Energy than was reflected in Mr. Romm's testimony. Perhaps most disturbing was the fact that 
some members of the Committee apparently did not recognize the weaknesses in his arguments 
and were prepared to accept the views he was presenting. More specifically: 

1. Mr. Romm's testimony lacked objectivity and balance. Instead of presenting a balanced 
picture of U.S. and world energy market conditions and outlook, he chose to cite possible 
future conditions that would help create the perception of some looming "energy crisis." 
This, of course, is a common practice of those in government or in special interest groups 
who wish to build or maintain a large government role and obtain tax dollars for their 
favorite programs. 

2. Mr. Romm's assertion that low energy prices are due to DOE's energy R&D spending is 
simply not true. In fact, a reduction in federal regulation, greater competition in energy 
markets, and improved technologies produced in the private sector are the reasons why we 
have plentiful energy supplies and lower energy prices. 

3. As explained in response to question 1, there are many plausible and credible scenarios for 
the future of U.S. and world energy market conditions. Mr. Romm chose to describe only 
one of those plausible scenarios — one that would lend support for a large role for DOE and 
for continued spending on DOE energy technology development, demonstration and 
commercialization programs. The scenario that he outlined: 

• Assumed inevitable growth in dependence on oil fi^om Persian Gulf nations, 

• Assumed that nations in the Persian Gulf region would not increase productive capacity 
above current levels as world oil demand grows ~ even though they can increase 
productive capacity at costs far below current market prices for oil and even though 
they will continue to need hard currency, and 

• Assumed that oil from those nations is inherently subject to interruption or increases 
in price. 

This "crisis" scenario has long worked well for the DOE/Contractor Complex in scaring the 
Congress, the media and the public into providing large amounts of tax dollars for DOE 
programs. 

But, it is now time for DOE and the Congress to recognize that they owe it to the American 
people and, in particular, to taxpayers to recognize other equally plausible scenarios that 
lend less support for continuing a large role for DOE and its spending programs. 



203 



-7- 

Most of the arguments Mr. Romm used have worked for DOE in the past but, hopefully, 
the Science Committee and others in Congress will recognize the weakness of these 
arguments. For example: 

a. The "insurance" argument. This argument is a common one from those who want 
to spend our tax dollars. However, it does not provide any useful criteria for 
evaluating spending levels. The amount of money that anyone spends for insurance 
should be determined rationally ~ based on an objective assessment of the risk and 
the amount of insurance that can be afforded. DOE, however, works to create the 
perception of a huge risk rather than presenting objective analysis that would 
contribute to informed debate. DOE does not provide useful answers to such key 
questions as: How much DOE-type 'insurance' is enough? Is the "insurance" 
allegedly provided by DOE's energy technology spending more important than 
spending for national defense. Medicare, or basic research? Is the cost of the 
"insurance" more important than letting hard-working people keep more of their 
earnings? 

b. "R&D has been Cut." This is a well-worn tactic by those seeking more tax dollars 
for their programs; i.e., find some past high point in spending and then show how 
spending has been "cut" from that level. This argumoit, of course, ignores such 
questions as: 

• Should spending ever have reached the previous high level? 

• Was money wasted when spending was at the high level? 

• Have conditions changed so that heavy spending is no longer justified? 

• Are there higher priorities for spending the money that is available? 

These questions are particularly important in the case of DOE programs because 
much of the past spending for energy R&D was 'justified" by forecasts of high 
energy prices, rapid growth in demand, and/or slow growth in supply that have 
proven to be fnulty. 

c. The nation is "under-investing in R&D." TTiose who use this argument typically 
focus on the "input" dollars as if tiiey were a valid measure of the value received for 
those dollars. They seldom provide convincing evidence to support their claim. 
Instead, they find some anecdote, isolated fact, or partisan contention that lends 
support for their position; e.g., the Japanese are spending more. They also ignore 
other competitors for the available tax dollars. 

d. 'DOE R&D helped produce a useful product." It would be amazing if the 
DOE/Contractor Complex could not find a few success stories among the energy 
R&D projects on which more than $100 billion has been spent. Furthermore, the 
anecdotes are seldom clear or convincing with reelect to the role played by the DOE 
spending or whether the development would have occurred without DOE 



204 



involvement. Perhaps even more would have been accomplished if the government 
had not been involved and the resources (people and dollars) tied up by government 
spending had been allowed to work in a truly entrepreneurial atmosphere. 

e. "Energy R&D commands only 2/lOths of a percent of the amount the U.S. spends 
on energy." This simply is not a meaningful calculation. 

5. Your hearing on March 14, 1996 demonstrated that your Committee needs to insist that 
DOE be more objective and balanced in its assessment of energy markets and our energy 
outlook and that the Committee needs to insist on better answers to the critical questions 
about DOE'S role and its spending for R&D. Specifically, the Committee should not feel 
obligated to spend tax dollars on DOE programs unless very convincing answers and hard 
evidence is supplied to answer the following questions (described in more detail on pages 
11 - 16 of my detailed statement for your March 14, 1996 hearing): 

a. Does proposed energy RDD&D program spending distinguish appropriately among 
support for basic research, applied research, development, demonstration, and 
deployment (or commercialization) activities? 

b. Has spending on energy development, demonstration, and deployment projects 
displaced funding for promising basic and applied research? 

c. Are all the projects proposed by DOE really worth funding? 

d. Can DOE justify the billions in tax dollars that have already been spent on energy 
RDD&D, let alone continued spending? 

e. Do federal agencies really have the capability to carry out a cost-effective "industrial 
policy" such as that contemplated in DOE's spending for energy supply and 
conservation technology? 

f Does DOE adequately address fundamental questions concerning the appropriate role 
of the government in supporting energy technology projects? Specifically: 

1) Would the technology development occur without a federal subsidy? 

2) Do federal subsidies inevitably flow to "second best" projects? 

3) Do federal subsidies for energy technology projects displace potential private 
investments? 

4) Do federal energy technology subsidies delay, rather than speed up, the 
development and commercialization of technologies? 

g. Will DOE's capability to select worthwhile R&D projects be improved by its proposed 
"Portfolio" approach? 



205 



h. Who in the Executive Branch is responsible for assuring that tax dollars for energy 
technologies are spent wisely? 

i. If DOE has the responsibility for guarding public and taxpayer interests, does it have 
the capability and will to do so? 



206 



Energy Market & Policy Analysis, Inc. 

P.O. Box 3875 
Reston, Virginia 22090-3875 

(703) 709-2213; Fax 709-2214 

GUmm k. SehUak Overnighl MaU: 

PmkUm 1414 HenOitgway Court 

Reslon, VA 22094 

March 17, 1996 



The Honorable Dana Rohrabacher, Chairman 
Subcommittee on Energy and Environment 
Committee on Science 
U.S. House of Representatives 
Washington, DC 20515 

Dear Chairman Rohrabacher: 

When ^)pearing before your Subcommittee on March 14, 1996, I did not give you an adequate 
answer to one of your important questions. This letter is to provide a further response to that 
question and to add comments on several arguments presented during the hearing. 

Response to your question. You asked for information on the costs that have been borne by 
consumers, taxpayers, and others because forecasts made by EIA and other organizations have 
grossly overstated energy prices. I'm not aware of any complete accounting of such costs but, 
the enclosed paper. Illustrations of Costs Resulting from High Energy Price Forecasts, provides 
enough examples to suggest that total costs are clearly in excess of $100 billion ~ and probably 
much higher. The paper includes some information on extra costs being borne by electric 
customers in California. 

Comments on certain arguments presented during the hearing. I was disappointed by the lack 
of balance and objectivity on the part of the "policy" witness from DOE, and by scare tactics and 
specious arguments used to justify spending hundreds of millions of our tax dollars for DOE's 
energy supply and conservation technology programs. For example: 

1. The "insurance" argument. This argument is a common one from those who want to spend 
our tax dollars. The argument is specious because the amount anyone spends for insurance 
should be determined rationally ~ based on an objective assessment of the risk and the 
amount insurance that can be afforded'. Attempting to justify DOE energy technology as 
"insurance" contributes little to an informed debate. Is the "insurance" provided by DOE's 

Chicken Little's friends would have been insurance-bankrupt if they had attempted to insure against the frantic fowl's 
false warnings that the sky was falling! 



207 



-2- 

energy technology spending more important than spending for national defense, Medicare, 
or education? Is it more important than letting hard-working people keep more of their 
earnings? 

"R&D has been Cut." This is a favorite "inside the beltway" tactic; i.e., find a high point 
in spending and then show how spending has been "cut." Some members of the Committee 
seemed particularly interested in a graph used to depict the "cuts" in energy R&D. Three 
graphs showing federal outlays for energy R&D are attached (Attachments A, B and C) to 
demonstrate the way that clever graphs are sometimes used to mislead unsuspecting observers. 

• Attachment A covers Fiscal Years 1955-1995.^ This shows the tremendous increase in 
spending that occurred after the Arab oil embargo when the Nixon, Ford and Carter 
Administrations seemed to be competing with the Congress to see who could "throw" the 
most money at energy R&D. This was a period of particularly wasteful energy spending. 

• Attachment B covers only Fiscal Years 1985-1995. It is an example of the way that 
selective use of data can be used to demonstrate "cuts" in spending of our tax dollars. 

• Attachment C covers the same data as Attachment B but uses a common trick to further 
mislead people; i.e., it uses $2 billion as the baseline of the graph ~ rather than $0. 

Many of the energy R&D projects (e.g., synfuels) subsidized with tax dollars beginning in 
the mid-70s were "justified" by claims that oil prices would increase to $1(X) per barrel or 
more. Most of the projects were failures - either because of technical infeasibility or because 
there was no chance that the projects would lead to technologies that would be viable in the 
private, competitive economy. Fortunately, most of those uneconomic projects were stopped 
in the early 1980s. Unfortunaiely , outlays continued into the mid-1980s because DOE or the 
Synfuels Corporation had made binding commitments to the projects. 

The point is that periods when great amounts of tax dollars were wasted is hardly a sound 
basis for arguing that we are not now spending enough on energy R&D. Taxpayers deserve 
to have all spending justified every year — not just the change from some prior year. 

The nation is "under-investing in R&D." Apparently, this argument will never go away - 
and those who use it will never be satisfied whatever the amount of tax dollars spent for 
R&D. Those who use the argument focus on the "input" dollars as //they were a valid 
measure of the value received for those dollars. All too often they seem unwilling to 
recognize competing needs, unwilling to participate in setting priorities among competing 



2 



Data are taken firom Budget of the United States Government, Fiscal Year 1996, Table 9.8. Data for FY 1996 are not 
shown on the chart since the numbers shown in the budget document apparently are estimates that were not approved by 
the Congress. ^ 



208 



needs, and unwilling to help weed out low priority efforts and ineffective projects or to take 
a stand against wasteful energy R&D spending. Furthermore, far too much of the money 
appropriated for R&D has been used for activities (including lobbying for more R&D 
spending) that add nothing to our scientific knowledge and that contributes no new 
technologies that will be successfully in the private, competitive economy. 

4. "The XYZ Lab helped produce a useful widget.' Anecdotes are often beguiling but are 
generally specious. It would be truly amazing if the DOE/Contractor Complex could not find 
a few success stories among the energy R&D projects on which more than $100 billion has 
been spent. But a few successes do not justify spending billions more of our tax dollars on 
energy R&D. Furthermore, would even more have been accomplished if the government 
had not been involved and the resources (people and dollars) tied up by government spending 
had been allowed to work in a truly entrepreneurial atmosphere? 

5. "Energy R&D commands only 2/lOths of a percent of the amount the U.S. spends on 
energy." Such a calculation is so meaningless that it really doesn't deserve comment. 

6. DOE needs to help Shell Oil develop renewable energy. If I recall the statements 
correctly, DOE's policy witness described the Shell Oil Company as the most profitable 
corporation in the world. Further, he praised what he contended was Shell's conclusion that 
the price of renewable energy would drop dramatically from current uneconomic levels and 
become competitive with fossil fiiels. But, he failed to explain why Shell -- with its "large 
profits" and great confidence in the future of renewable forms of energy would need DOE 
subsidies to pursue renewable technologies. If his interpretation of Shell's conclusion about 
the economics of renewables is correct. Shell and other private sector companies will certainly 
be investing in renewable energy technologies — without DOE's help or interference. 

7. Impending "energy crisis." All too many government officials have made their careers by 
emphasizing the threat of an "energy crisis" due to "excessive" dependence on Mideastem oil. 
I urge the Committee not to overlook the countervailing points made on pages 7-9 of my 
detailed statement for your March 14, 1996 hearing. 

Attempts to create the perception of an impending "energy crisis," demonstrate that Thomas 
Sowell is 100% correct when he explains in his book. Vision of the Anointed, that government 
officials all too often follow a typical pattern. First, they work to create the perception of a 
"crisis"; then they seek a large ration of tax dollars and authority to "rescue" America with 
their "solutions." Such actions go a long way in explaining why a growing number of 
Americans have become disenchanted with the federal government and bristle at "inside the 
beltway" attitudes. 

As a former career employee of the federal government, I was embarrassed by the lack of balance 
and objectivity demonstrated by DOE's policy witness. We deserve better from all government 



J 



20<) 



-4- 

employees, including political appointees, and from the Department of Energy. We should not 
have to put up with any government employee — career or appointed — that is so willing to put 
his interest in securing more tax dollars for his favorite programs ahead of his responsibility for 
balanced and objective analysis and careful stewardship of taxpayers' money. My sympathy goes 
out to the many dedicated career employees in DOE who must be embarrassed by the cavalier 
attitudes toward taxpayers that is displayed by some DOE officials. 



Attachments: Graphs showing Federal 
Outlays for Energy R&D 

Enclosure: Illustrations of Costs Resulting 

From High Energy Price Forecasts 



cc: The Honorable Tim J. Roemer 
Senior Minority Member 
Subcommittee on Energy & Environment 



Sincerely, 




210 



Attachment A 






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211 



Attachment B 



Misleading Use of Data on Federal Outlays for Energy R&D - FY 1985-1995 

Starling with a high point in spending to suggest that energy R&D has t»een "cut" 



I 

2 




I Outlays in million $ 



JDala Source: Budget of the United States Government, Fscal Year 1996. Historical Tables. Table 9.6. | 



212 



Attacbmcnt C 



Misleading Use of Data on Federal Outlays for Energy R&D - FY 1985-1995 

Starting wtth a high poini in spencfng to suggest that energy R&O has been "cuT and using a truncated scale 



4300 
4200 
4100 
4000 
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1985 


1986 


1987 


1988 


1989 


1990 


1991 


1992 


1993 


1994 


1995 


1 Outlays In million i 


4249 


2622 


2321 


2287 


2454 


2342 


2501 


2593 


2517 


2654 


2959 



iDala Source: Budgal of Die United SliilBS Govemmenl. Fecal Year 1996. Hsloncal Tables. Table 9 8 | 



213 



Energy Market & Policy Analysis, Inc. 

P.O. Box 3875 
Reston, Virginia 22090-3875 

(703) 709-2213; Fax 709-2214 

GUnn R. SeUeede Overnight Moll: 

PnsldeiU 1414 Hemingway Court 

Reslon. VA 22094 

April 4, 1996 



The Honorable Dana Rohrabacher, Chairman 
Subcommittee on Energy and Environment 
Committee on Science 
U.S. House of Representatives 
Washington, DC 20515 

Dear Mr. Chairman: 

This letter is to follow up on an important question raised during your March 14, 1996 hearing 
on U.S. Energy Outlook and Implications for Energy R&D. The question is: Are the tax dollars 
that the Department of Energy (DOE) proposes to spend for R&D properly allocated among basic 
and applied research, development, demonstration, and "commercialization" activities? 

The President's Fiscal Year 1997 Budget request for two of DOE's large R&D programs 
demonstrates the need for close scrutiny of DOE's plans. As shown by the table below, DOE's 
spending plans for the FY 1996 through FY 2002 contemplate: 

• Sharp reductions in DOE general science programs, which support basic research in nuclear 
and high energy physics (25% reduction in FY 2(XX) compared to FY 1997); and 

• Sharp increases for DOE "Energy Conservation" programs that are focused heavily on the 
development, demonstration, and "commercializaiion" of products that DOE hopes would be 
used by industry, commercial establishments, and consumers. 

Budget Authority in millions of dollars' 



FY 1996 FY 1997 FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 
DOE General Science Programs $981 $1,009 $928 $845 $760 $867 $988 

DOE Energy Conservation $613 $715 $736 $756 $778 $799 $822 

A Strong case can be made for a significant federal role in supporting the basic research that is 
funded by DOE's general science program. (Also, I believe that two of the last three Nobel 
Laureates in physics were supported by that program.) However, it is much more difficult to 

Budget of the United States Government Fiscal Year 1997, Analytical Perspectives, Table 25-1, Functions 251 and 272, 
pp. 344-345. 



214 



-2- 

justify a major federal role in developing, demonstrating, or "commercializing" consumer and 
industrial products.' Private sector organizations and individuals have a much stronger incentive 
to pay for such efforts and they are much more capable than DOE to determine when it makes 
sense to pursue product development, demonstration and commercialization activities. 

Furthermore, DOE and its predecessor agencies have demonstrated repeatedly that they do not 
have the expertise to "pick winners." Instead, DOE funded development, demonstration, and 
commercialization projects have seldom produced products that can compete successfully in the 
private, competitive economy. 

It will be necessary to pay more attention to the priorities within the total dollars spent for R&D 
as competition increases for the tax dollars that are available after paying for entitlements and 
interest on the national debt. 

I urge you to consider carefully the issue of appropriate federal role as you consider DOE's 
proposals to cut basic research while increasing spending for energy conservation programs. 

Sincerely, 

cc: The Honorable Tim J. Roemer )9/,...i'Jr J-^-^-t^^^^^ 

Senior Minority Member 
Subcommittee on Energy & Environment 




2 
The type ofenergy conservation" projects that DOE proposes to pursue with our tax dollars are described on pp. 446- 

447 of the Appendix, Budget of the United States Govemmeiu, Fiscal Year 1997; on pp. 143-146 of DOE's FY 1997 

Congressional Budget Request. Budget HighUghts (DOE/CR-0039), March 1996; and pp. 243-573 of DOE's FY 1997 

Congressional Budget Request, Volume 4 (DOE/CR-0037), March 1996. 



215 



Energy Market & Policy Analysis^ Inc. 

P.O. Box 3875 
Reston, Virginia 22090-3875 

(703) 709-2213; Fax 709-2214 

GUmm R. SchUtJ* (htrmghl Mail- 

Praidtmt 1414 Hemmgwf Court 

Return. VA 22094 



February 14, 1996 

Dr. Jay Hakes 

Administrator 

Energy Information Administration (EIA) 

U.S. Department of Energy 

Washington D.C. 20585 

Dear Dr. Hakes: 

This letter is in response to your criticisms of my January 30, 1996 letter to the Directors of the 
Office of Management & Budget and Congressional Budget Office. For ease of reference, 
Attachments #1 and #2 are copies of the Electricity Daily, and Oil Daily articles containing your 
comments, and Attachment #3 is a copy of the January 30 letter. 

I appreciate your willingness to participate in and expand the public debate. The issues are 
important and involve billions of dollars in costs to consumers, taxpayers and investors. 

The Electricity Daily article covering my January 30, 1996 letter and your response deal with only 
a few of the issues raised in my letter. Accordingly, I suggest pursuing the debate with a clear 
listing of real issues and the "non-issues." Such a list follows. Comments on each follow the list. 

Issues and non-issues (or "straw men") 

1. Does EIA provide valuable data on past energy supply, demand and prices? (A non-issue.) 

2. Have past energy price forecasts substantially overestimated energy prices? 

3. Is EIA the only organization that substantially overestimated energy prices? (A non-issue.) 

4. Have energy price forecasts that turned out to be faulty led to decisions by business 
executives, regulators and other government officials that have proven to be uneconomic? 

5. Have these decisions cost consumers, taxpayers and investors billions of dollars? 

6. Have EIA and other forecasters substantially lowered their forecasts of future energy prices? 

7. Now that EIA and other forecasters have substantially lowered their forecasts of future energy 
prices, should decisions, estimates and analyses based on past forecasts be reconsidered? 

8. Do federal and state government officials now have a special responsibility to reconsider past 
decisions, estimates and analyses? 

9. What are the responsibilities of those who issue energy price forecasts to those who use their 
energy price forecasts in terms of: 

• Showing clearly the accuracy of previous forecasts? 



216 



• Providing clear and prominent warnings concerning the limitations of the forecasts and 
the risks of relying on the forecast? 

• Providing guidance to potential uscts of forecasts that might help keep them from relying 
too greatly on energy price forecasts? 

10. What are the responsibilities of users of energy price forecasts in terms of: 

• Understanding the role played by energy price forecasts in the economic analyses that 
they rely on? 

• Understanding the inherent limitations of any energy price forecast? 

• Understanding the assumptions that drive the output of the models that underlie the 
energy price forecasts that they use? 

• Using a range of potential future energy prices when evaluating alternative courses of 
action when the success depends on future energy prices? 

1 1 . Should EIA continue developing and issuing energy price forecasts? 

12. If so, should EIA: 

• Change its methods of forecasting? 

• Include in its forecast a case or scenario that contemplates continuing reductions in the 
real cost of oil, natural gas and electricity? 

13. Is there a systematic upward bias in energy price forecasts? 

14. Is there a 'conflict of interest" within DOE between EIA's responsibility for issuing objective 
forecasts and the Department's attempts to develop support for its energy programs? 

15. Are there grounds for questioning EIA's reference case forecast that the average price of 
natural gas delivered to dectric genoators will climb sharply after 2005 compared to the price 
of coal delivered to electric generators? 

Excq>t for numbers 1 and 3 (whidi I consider "non-issues"), all of the above questions are raised 
directly or implicitly in my November 30, 1995 and previous letters. As suggested in my 
numerous letters to DOE and others, I believe the real issues deserve attention and action. I 
recognize that neither EIA nor DOE has authority or responsibility to deal witli all of them ~ 
which is the reason I have written to the Directors of 0MB and CBO. 

Speciflc Conunents 

The remainder of this letter comments on all 15 questions. 

1. Does EIA provide valuable data on past energy supply, demand and prices? (A non- 
issue.) This issue is listed only because you raised it. I consider it a "non-issue." Contrary 
to your comments, I have not questioned the quality of EIA data on past energy market 
conditions in my communications. I am an avid user of EIA data on past market conditions. 
I believe EIA is unequaled in this area of activity. No other organization has the statutory 
authority nor the resources (tax dollars) to support such an intensive energy data collection 
and analysis effort. (I understand EIA's budget in fiscal year 1995 was approximately $75 
million.) I have questioned whether as much energy data should be collected and presented 
in the future. This is a quite logical question in view of: 



217 



-3- 

• Increasing competition for those tax dollars available for "discretionary" programs. 

• Dramatic changes in energy markets since EI A was created, reduced federal regulation, 
increasing competition, and dwindling justification for federal market intervention. 

• Widespread recognition that the federal role in all areas needs to be reconsidered now 
that the "era of big government is over." 

2. Have past energy price forecasts substantially overestimated energy prices? The answer 
is clearly and demonstrably "yes." See Attachments #4 and #5. The "1995" column on these 
tables show in 1994$ the crude oil and natural gas (wellhead) prices forecast by EIA in its 
Annual Energy Outlook issued from 1985 through 1993. The tables also show EIA's estimate 
of actual 1995 prices for crude oil and natural gas. As the two attachments show: 

• The "actual" crude oil price of $16.81 per barrel in 1995 compares with EIA's forecasts 
which had ranged from $55.40 to $21.34 per barrel. 

• The "actual" price of $1.60 per Mcf for natural gas in 1995 compares with EIA's 
forecasts which had ranged from $6.99 to $2.19. 

Specifically, the actual price you show for crude oil in 1995 ($16.81) is 70% below the 
forecast EIA made in January 1985. The actual price you show for natural gas in 1995 
($1.60) is 77% below the forecast EIA made in January 1985. 

As attachment #4 and ^ show, EIA had reduced its forecasts for 1995 prices in most years 
after 1985, but never reduced them enough. Similar data could be provided for other energy 
products and for forecasts made by others. 

3. Is EIA the only organization that substantially overestimated energy prices? (A non- 
issue.) No one that I know has ever made this assertion. As you know, EIA's Annual 
Energy Outlook documents normally show some information on forecasts made by other 
organizations such as DRI, WEFA, and GRI. These data show clearly that other forecasters 
have also substantially overestimated energy prices. I have used EIA forecasts to illustrate 
the problems caused by energy market forecasts because EIA data are so readily available. 
The complaint that "By just mentioning EIA, he's giving the impression that we're the only 
ones who forecast high prices" is not credible. 

However, I believe a good case can be made that EIA 's overestimation of energy prices in its 
forecasts have played an e^iecially significant role in decisions that have been costly because: 

• EIA forecasts are so readily available at little or no cost, and 

• Issuance of forecasts by a federal government energy agency may have led users to 
presume that they would be more accurate and objective than forecasts from other 
sources. 

For these reasons, EIA forecasts probably have been more widely used than their more 
expensive "brethren" by individuals and organizations (such as state public utility 
commissions) that are not as knowledgeable about energy markets and forecasts as, for 
example, major oil companies. 



218 



-4- 

4. Have energy price forecasts that turned out to be faulty led to decisions by business 
executives, regulators and other government officials that have proven to be 
uneconomic? Again, the answer to this question is demonstrably "yes. " Examples include: 

a. Decisions by business executives: 

• Large uneconomic investments in oil exploration, particularly during the period from 
1980 - 1984. 

• Loans by savings and loan (S&L) and commercial banks to organizations exploring 
for oil (contributing to the "S&L crisis' and costly taxpayer bailout). 

• Investments in research, development and demonstration efforts to produce oil from 
oil shale and "synthetic fuels" from coal. 

• Investments in nuclear power plants on the assumptions that oil and other fossil fuel 
prices would increase substantially. 

• Power purchase agreements signed by electric utilities that were based on forecasts 
that oil and gas prices would increase sharply. 

b. Decisions by state public utility commissions (PUCs): 

• Requirements that electric utilities sign contracts to purchase power from non-utility 
generators based on "avoided cost" calculations that assumed high oil prices (e.g., 
in California, New York and Maine). 

• Strong encouragement by PUCs that electric utilities provide demand-side subsidies 
and/or purchase power from loiewable energy sources, again based on presumptions 
of high oil and gas prices. 

c. Decisions by other government officials: 

• Federal subsidies and price guarantees given by AEC, ERDA, DOE and/or The 
U.S. Synthetic Fuels Corporation for oil shale and other "synthetic fuel" 
development and demonstration projects (e.g.. Solvent Refined Coal projects. Great 
Plains Gasification Project, and numerous other projects to produce liquids or gas 
from coal.) 

• Bonneville Power Administration 1994 contract with Tenaska to purchase power 
from a gas-fired power plant. According to a DOE Inspector General report, the 
decision was predicated on forecasts of rapidly rising natural gas prices. (Press 
reports indicate that BPA's attempt to withdraw from this apparently uneconomic 
contract is being challenged in a $1 -t- billion lawsuit. 

• Use of high price forecasts by Minerals Management Service (MMS) when 
estimating the value of oil and gas leases, including ANWR. 

• Mineral Management Service use of high price forecasts resulted in rejection of lease 
bids only to be followed by acceptance of a lower bid and, therefore, less revenue. 

5. Have these decisions cost consumers, taxpayers and investors billions of dollars? Again, 
the answer is clearly and demonstrably "yes." Each of the above decisions, and thousands 
of others that were based on high energy price forecasts have resulted in costs to consumers. 



219 



taxpayers, and shareholders. Unfortunately, these extra costs will cx>ntinue far into the future 
because of the investments and contracts that have been made in the past. In the case of 
electric utilities, many of the investments will be part of the "stranded investments" that will 
have to be paid by customers, shareholders or creditors and which, in some cases, will be 
borne by taxpayers. 

Have EIA and other forecasters substantially lowered their forecasts of future energy 
prices? Again, the answer is clearly and demonstrably 'yes." Attachments #4 and #5 show 
how much lower ELA's latest forecasts are compared to prior years. The forecast price for 
natural gas at the wellhead in 2010 is down 38% from one year earlier. EIA's January 1995 
forecast price for crude oil in 2010 was lowered by 16% from January 1994. A comparison 
of data in EIA's Annual Energy Outlook for 1994, 1995 and 1996 demonstrates that other 
forecasters have also substantially lowered their price expectations. 

Now that EIA and other forecasters have substantially lowered their forecasts of future 
energy prices, should decisions, estimates and analyses based on past forecasts be 
reconsidered? Failure by business executives and federal and state government officials to 
reevaluate and reconsider decisions, estimates, and analyses based on past high price forecasts 
would seem to be foolhardy. Even if past actions cannot be reversed, decision makers and 
those affected by the decision should be informed when decisions based on past forecasts are 
no longer viable or will result in costs that can't be justified on the basis of current 
knowledge. 

Do federal and state government officials now have a special responsibility to reconsider 
past decisions, estimates and analyses? Again, the answer would seem to be an unequivocal 
"yes," particularly when you recognize that: 

• Economic analyses based on past energy price forecasts will undoubtedly be changed when 
the new forecasts are substituted; and 

• The ^-reaching impact of the many federal and state govenunent decisions and estimates 
on consumers, taxpayers, and investors. 

Examples of the decisions, estimates and analyses that need to be reconsidered have been 
identified in previous letters and earlier in this letter. Matters needing reconsideration, in 
addition to those identified above, include: 

• Proposed and existing energy efficiency standards issued by DOE and other agencies. 

• Price forecasts that agencies must use in evaluating Federal Energy Management Program 
(FEMP) actions. 

• Justification for energy RD&D projects (including energy supply and energy efficiency or 
conservation programs and projects) proposed by DOE and other agencies. 

• Estimates of revenue from oil and gas lease bonuses and royalties. 

• Value of the Naval Petroleum Reserves which are to be sold in accordance with the recently 
enacted Defense Authorization Act. 



220 



-6- 

Energy cost savings that can be expected from various programs including "Green Lights" 

and "Energy Star." 

Energy cost savings claimed by various government officials in speeches, testimony, and 

reports. 

Estimates of savings associated with energy efficiency and conservation criteria in federal 

government backed mortgages. 

Estimates of savings and justification for DOE's energy conservation assistance programs. 

Estimates of savings associated with energy projects funded under various foreign aid 

programs. 

In addition, it seems appropriate that DOE should be sure that the President, the Congress, and 
governors are aware that the original justification for the Low Income Home Energy Assistance 
Program (LIHEAP) has disappeared since U.S. average home heating oil prices (in 1994$) were 
down by approximately 56% in 1995 from prices that prevailed when LIHEAP was started. 
Residential natural gas prices were down by 31% from highs reached in 1983, and residential 
electricity prices were down by 20% from highs reached during the period from 1982-1985. 
(See Attachment #6.) 

What are the responsibilities of those who issue energy price forecasts to those who use 
their energy price forecasts in terms of: 

• Showing clearly the accuracy of previous forecasts? 

• Providing clear and prominent warnings concerning the limitations of the forecasts 
and the risks of relying on the forecast? 

• Providing guidance to potential users of forecasts that might help keep them from 
relying too greatly on energy price forecasts? 

Several of the previously identified issues are beyond the scope of EIA responsibility, but this 
issue is not. It seems quite clear that many who have access to EIA and other forecasts are not 
in a position to evaluate them or use them without exposing themselves and their customers and 
shareholders to significant risk. I appreciate the fact that you have finally begun including a 
limited "warning" or "qualification" on your forecasts in Annual Energy Outlook 1996 (pp. ii and 
12). This is a step in the right direction but it is not enough. I believe you have an obligation 
to take at least two additional steps: 

• Firs?, you should show tables similar to Attachments #4 and #5 of this letter so that potential 
users can see EIA's past track record in forecasting energy prices. 

• Second, you should provide guidance to potential users of forecasts that might help prevent 
over reliance on them. 

As you know, I have also suggested that 0MB issue guidance on use of forecasts. 0MB 
guidance would be preferable because of the far reaching, adverse impact that price forecasts 
have had throughout the economy, in the development of budget estimates, and in economic 
analyses of proposed federal programs. However, 0MB guidance would not preclude EIA from 



221 



including such guidance in its forecast documents where it might more likely be seen by 
otherwise unwary users of the forecasts. 

Ideally, conrunercial forecasting organizations would also provide similar guidance. Perhaps your 
leadership on this matter would set a useful example. 

10. What are the responsibilities of users of energy price forecasts in terms of: 

• Understanding the role played by energy price forecasts in the economic analyses 
that they rely upon? 

• Understanding the inherent limitations of any energy price forecast? 

• Understanding the assumptions that drive the output of the models that underlie the 
energy price forecasts that they use? 

• Using a range of potential future energy prices when evaluating alternative courses 
of action when the success depends on future energy prices? 

Clearly, business, regulator and other government users of energy price forecasts bear a large 
' share of the responsibility for the costly decisions that result from using forecasts that turn out 
to be faulty. EIA cannot be held responsible for all the unwise and uninformed acceptance of 
forecasts or the selective use of forecasts to support preconceived conclusions. However, 
including additional warnings and guidance in EIA forecasts, as suggested in 9, above, could be 
helpful in reducing the number of unwise decisions and the costs that are borne by consumers, 
taxpayers, and investors. 

11. Should EIA continue developing and issuing energy price forecasts? I recognize that this 
is a sensitive issue that understandably evokes a strong EIA response since forecasting (as 
opposed to collection and analysis of information on the past) is a significant EIA activity. 
Nevertheless, the question is quite legitimate recognizing: 

• The availability of energy price forecasts from other sources; 

• The track record of past forecasting activities; 

• The dramatic changes in U.S. and world energy markets since EIA began its forecasting 
activity, including increased competition in energy markets — which has demonstrated that 
competition is more effective than government intervention in protecting interests of 
consumers; 

• The increasing competition within government for the use of tax dollars and 

• Many commodity markets behave quite well without the benefit of federal government price 
forecasts. 

12. If EIA continues making forecasts, should EIA: 

• Change its methods of forecasting? 

• Include in its forecast a case or scenario that contemplates continuing reductions in 
the real cost of oil, natural gas and electricity? 



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-8- 

These issues are too complex to treat in detail in this letter. However, I believe they deserve 
serious attention. I believe that an objective review by people who do not have a financial or 
emotional interest in EIA's forecasting methodology would reveal that: 

• The NEMS models are exceedingly complex; 

• The models produce specious outputs; 

• The complexity cannot reasonably be expected to improve forecasting accuracy; 

• The models rely extensively on historical data even though energy market conditions (and 
relationships among variables) have changed dramatically; and 

• Policy developers and other users of forecasts could develop equally good analyses of 
alternative courses of action by using arbitrary assumptions about future energy prices. 

With respect to the second part of question 12, ELA. has taken a step forward, compared to prior 
forecasts, by including a case that contemplates roughly level real oil prices (i.e., growing by only 
.2% per year fi-om 1994-2015 in EIA's "Low Oil Price" case). However, EIA's failure to admit 
that oil prices could continue to decline in real terms is unfortunate. All policy developers and 
decision makers should be forced to recognize that energy prices can continue downward 
' movement in real dollar terms. The chances of this occurring is not zero. I believe that EIA 
leadership should pay greater attention to the work of prominent economists (e.g., Bamett, 
Nordhouse) that shows that commodity prices tend to follow a downward long-term trend. EIA 
should not dismiss the real world developments that could result in further softening of oil 
markets during the 20-year period covered by EIA's forecasts. 

13. Is there a systematic upward bias in energy price forecasts? As you know, I have 
suggested that many publicly available energy price forecasts are affected by 'a systematic 
upward bias." My papers on the subject are readily available to you.' Those papers include: 

• A detailed listing of reasons why energy price forecasts may have an upward bias; and 

• An invitation for interested parties to identify countervailing biases if they exist. 
I believe the issue is sufficiently important to warrant EIA's serious consideration. 

14. Is there a 'conflict of interest* within DOE between EIA's responsibility for issuing 
objective forecasts and the Department's attempts to develop support for its energy 
programs? I recognize that this is a sensitive issue within DOE. Your reassuring response 
concerning your final "sign ofT authority for EIA's annual forecasts provides some comfort 
with respect to EIA forecasts. This reassurance is not dispositive for several reasons 
including: 

• The fact that DOE policy and program officials do not always use EIA forecasts as the 
basis for DOE policies and proposals. See, for example, DOE's 1991 energy policy 
proposals that were based on energy demand estimates in 2010 of 1 18. 1 quadrillion Btus^ 

Attachment 3 to Energy Price Forecasts are Leading Business Executives, Regulators, and Other Government Officials 
to Make Uneconomic Decisions, February 20, 1 995 and the 1 996 edition advance copy dated February 1 , 1 996. 

^ U.S Department of Energy, National Energy Strategy, Technical Appendix 2, February 1 991 , Table B-5. p. 100. 



223 



-9- 

while EIA only a short time later issued its reference case forecast showing demand of 
106.90 Btus,^ nearly 10% below the forecast used to develop and support numerous, 
expensive DOE policy and program proposals. 

• Officials of DOE and other government agencies often give speeches and testimony and 
issue reports that include claims about potential economic benefits of policies and 
programs that do not identify the energy price forecasts on which claims are based.^ 

• DOE and its predecessor agencies (AEC, ERDA, FEA) have a long history of 
overestimating energy demand and prices and underestimating energy supplies that would 
be available at prices below their forecasts. Examples include AEC estimates of raw and 
enriched uranium required for nuclear power plants, the "Project Independence" reports, 
and the 1991 National Energy Strategy. Detailed analysis, particularly of justifications used 
in supporting DOE spending programs, undoubtedly would reveal many more examples. 

• Attempts to create or maintain the perception of a "crisis" are a well known technique used 
' by federal government officials when they are attempting to gather public and congressional 

support for programs that require spending tax dollars, or increasing the role of the federal 
government. 

If these practices have come to an end, the change is not widely known. 

15. Are there grounds for questioning EIA's reference case forecast that the average price 
of natural gas delivered to electric generators will climb sharply after 2005 compared 
to the price of coal delivered to electric generators? This is one of the very specific 
questions I raised concerning EIA's latest forecasts. You responded in your comments to The 
Electricity Daily that I "had failed to understand the EIA analysis, which was looking at new 
capacity." Assuming you are refering to the analysis reported on page 32 of AE096, I have 
reviewed and do understand it. I would point out, however, that: 

• This analysis, while quite usefiiL, appears to deal only with the comparative cost of new coal 
vs. gas capacity and is based heavily on EIA's conversion efficiency ("heat rate") 
assumptions; 

• The same conclusions do not apply to existing generating capacity; and 

• The arudysis does not explain the EIA reference case forecast that markets will permit the 
average delivered price of natural gas to climb by 2015 to 230% of the price of coal fi-om 
the 1994 actual relationship of 161%. 

Furthermore, it appears that one would have to assume that the average U.S. gas vs. coal price 
relationship would be controlled largely by new generating capacity efficiencies and would not 

U.S. Energy Infonnation Administration, Annual Energy Outlook 1991, Table Al , p. 43. 

* For example, Sustainable Energy Strategy, July 1 995 National Energy Plan submitted by the Administration pursuant to 
Section 801 of the Department of Energy Organization AcL 



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-lo- 
be constrained by other intra- and inter-fuel competition factors (e.g., gas-on-gas competition). 
In short, I believe the question is still valid. 

I hope you will find this listing and explanation of issues useful as EI A pursues its efforts to provide 
accurate and objective energy information, even though not all of the issues can be addressed by EI A 



Attachments: 



1. 
2. 
3 

4, 



6. 



Copy of Electricity Daily article 

Copy of Oil Daily article 

November 30, 1995 letter to 0MB and CBO 

Table comparing EIA forecast and actual 

crude oil prices 

Table comparing EIA forecast and actual 

natural gas prices 

Table showing various real energy prices 

(In 1994$) for the penod from 1973 to 1995 



Sincerely, 

yUfiiv I-)- 



JK. ! 






tL/-^L 



cc: Secretary of Energy 

Directors of OMB and CBO 



225 



Attachment #1 

Article appearing in The Electricity Daily, Monday, February 5, 1996: 

ETA Rebuts Schlecde Screed 

The Energy Information Administration is coming out swinging in the face of criticisms of its energy 
price forecasts from energy consultant Oenn Schleede (ED, Jan. 31). In a written statement to Electricity 
Daily, EIA Administrator Jay Hakes accuses Schleede of spreading "misinformation" in a recent letter to 
the Oflice of Management and Budget and the Congressional Budget Onice. 

Hakes said, "EIA's overestimation of energy prices over the years has been approximated by virtually all 
groups that do forecasting. In the 1970s and early 1980s forecasters, including EIA, greatly overestimated 
energy prices. The price collapses ofthe mid- 1980s came largely unanticipated. Even the price estimations 
of a few years ago are high compared to current projections." Hakes added, "This situation has been 
recognized for many years and is hardly news. It is likely, however, that current forecasts have a much 
stronger grasp ofthe geologic and market forces that afifect price than ever before." 

Schleede's suggestion that energy prices may continue to fall in real dollars, as they have in the past, "is 
opfen to debate," said hakes. "EIA projects moderate increases in energy prices and some periods of 
declines in real dollars. However, those who convert the trends of the last few years into long-term 
projections could be repeating the mistakes of 1 5 years ago." 

Schleede criticized EIA for predicting a divergence between prices of coal and gas for electric generation 
after 2005. Hakes responded that Schleede had failed to understand the EIA analysis, which was looking 
at new capacity. He said in the 1996 EIA forecast, "the coal-versus-gas generation investment decision 
incorporates anticipated capital cost reductions and improvements in heat rates for both pulverized coal 
units and combiried cycle units. Based on engineering estimates, the 1996 Annual Energy Outlook assumes 
that the eflRciency of pulverized coal will increase to 42 percent while gas combined cycle is assumed to 
increase to almost 60 percent. 

"Consequently, the cost of producing electricity from pulverized coal in 2015 is projected to be about 44 
mills per kWh while the cost to generate electricity from gas combined cycle units is projected to be about 
36 mills per kWh. Gas-fired combined cycle generation is competitive in 2015 despite the projected 
widening gap between delivered coal and gas prices." 

Hakes also defended EIA's "national energy modeling system" or NEMS. "With its ability to create 
'what if scenarios," said Hakes, "this model can evaluate the potential consequences of proposed policies. 
For instance, NEMS is often used to assess the impacts of proposed energy policies on the environment and 
the impacts of new tax policy on energy use. Modeling of energy (or anything else, for that matter) is an 
inexact science, but decisionmaking is a better process with nonpartisan models than without them." 

Hakes also took issue with Schleede's complaint that EIA can be manipulated by its Department of 
Energy parent and its political masters. "As the final sign-off on EIA's work, including the Annual Energy 
Outlooks," Hakes said, "I can report that no one has tried to 'slant' our results. And if they did, they would 
not be successful. Open and nonproprietary systems, regular review by academic, government, industry 
experts, and— most of all— the integrity of EIA analysts would not allow it to happen." 



226 



Although EIA projections may not differ significantly from those made by private organization, great 
weight is given to independent, government forecasts," the complaint said. 

Hakes said he's pleased the government figures carry more weight. 

"The critics are right. There has been an increasing use of our projections over the years. That puts some 
pressure on us," he said. 

Private companies, for example, have used the numbers to lure more customers. 

Last year, before made its latest revisions to gas price forecasts, Virginia Power ran newspaper ads 
comparing the steep gas price increase predicted by EIA with stable electricity prices. 

Citing the lost business, American Gas Association (AGA) president and Chief Executive Michael Baly 
in December threatened to "take an active role in eliminating EIA's forecasting responsibilities" if figures 
were not lowered this year. 

But with last month's 38% reduction in the projected gas price for 2010, gas producers for now are 
lontent with EIA. 

The revisions represent a"quantum leap" in government forecasting, according to Paul Wilkinson, AGA 
^ce president of policy analysis. 

Observers say modest price estimates are still hard to come by amid the lingering fears of an energy crisis 
such as the one that created the price run-ups of the 1970s and early '80s. 

"Back 20 years ago, there was the expectation that oil prices would increase continuously for the 
foreseeable future. In 1981, people were talking about $100 bbl of oil," said Edward Murphy, director of 
financing for the American Petroleum Institute. 

"It's taken a lot for that mindset to be killed." 

In its 1984 AEO, for example, EIA said 1995 oil prices (in constant 1994 dollars) would average 
S55.40/bbl and gas would run about $6.99/Mcf 

The high forecasts over the years have led to some questions about EIA's role within DOE. 

Though billed as "policy-neutral," EIA's high forecasts suggest an upward bias aimed at validating DOE 
:laims of an imminent energy crisis, Schleede argues. 

He has called on the government to redesignate EIA as a wholly independent statistical agency. 

By law. Hakes noted, DOE has no direct authority over any of EIA's functions, including forecasting. 

I'm the final sign-ofF," he said. "I think everybody knows that." 



227 

Attachment #2 

Article appearing in The Oil Daily, Thursday, February 8, 1996: 

Critics Maintain Fire AT EIA Despite Cut In Price Forecasts, by Katherine Culbertson, Oil Daily Staff 
Writer 

WASHINGTON — The Energy Information Administration (EIA) may have lowered its expectations for 
energy prices over the past few years, but it hasn't been able to silence all its critics. 

Chief among the detractors is Glenn Schleede, who as president of Energy Market & Policy Analysis Inc. 
since 1992 has admonished EIA for issuing misleading forecasts. 

In the latest Annual Energy Outlook (AEO), released Jan. 1 1, EIA—a semi-independent agency of the 
Department of Energy (DOE)~lowered long-term forecasts for both oil and natural gas. 

In 1994 dollars, EIA now says oil in 2010 will cost $23.70/bbl and domestic natural gas $2. 15/Mcf, down 
from last years estimates of $24.62/bbl and $3.46/Mcf 

Schleede welcomed the revisions as "belated" recognition of change in energy markets. 

But given the EIA's predictions of increasing prices, he said the agency still is missing the downward 
trend evident since the 1980s. 

"Real energy prices have been trending downward and forecasts have been lowered, yet most forecasts 
continue to show price increases," he said. 

Though Schleede says he doesn't "mean to pick on EIA," EIA Administrator Jay Hakes disagrees. 

"By just mentioning EIA, he's giving the impression that we're the only ones who forecast high prices," 
Hakes told The Oil Daily. 

"All organization have been high with their projections," he said. 

EIA's latest forecasts for gas prices in 2010 are some 16^-52^ lower than other predictions put out by 
leading forecasters. 

Schleede has countered that EIA should be held to a higher standard because its figures are so widely 
used. 

"Anyone can go to the government printing office and buy a copy of the Annual Energy Outlook for 
[$18]," he said. 

Also, firee copies of the AEO are mailed out to federal, state and local government agencies, public 
libraries and the media. 

Last September, the Interstate Natural Gas Association of America filed a similar complaint with the 
Federal Energy Regulatory Commission. 



228 



Attachment U3 



Energy Market & Policy Analysis, Inc. 

P.O. Box 3875 
Reston, Virginia 22090-3875 



(703) 709-2213; Fax 709-2214 



aenn R. Schlttdt 
PresideiU 



Ortrnlght MaU: 
1414 Hemingwof Court 
RtUoH, VA 22094 



January 30, 1996 



The Honorable Alice M. Rivlin 
Office of Management & Budget 
Washington, DC 20503 

Dear Directors Rivlin and O'Neill: 



The Honorable June E. O'Neill, Director 
Congressional Budget Office 
Washington, DC 20515 



Summary: This letter updates and adds to my letters of November 1 and 30, 1995 that describe 
0MB and CBO actions needed to minimize the cosily impact of energy price forecasts on 
consumers, taxpayers, and shareholders. The need for your actions has grown because: 

► Past energy price forecasts have substantially overestimated energy prices and have already 
cost consumers, taxpayers and shareholders billions of dollars. 

• New price forecasts issued on January 11, 1996 by the Energy Information Administration 
(El A) in its Annual Energy Outlook 1996 are significantly lower than past forecasts. For 
example, the forecast for wellhead natural gas prices in 2010 is down 38% from EIA's 
January 1995 forecast. EIA's latest forecast for crude oil prices in 2010 is down 19% from 
it's January 1994 forecast and 36% from it January 1992 forecast. (Details in Attachment #1). 

• Proposals, decisions, actions, and claims based on earlier forecasts are now out of date and 
need to be reconsidered, lest they result in even more unnecessary costs for consumers, 
taxpayers and shareholders. 

► Serious questions remain concerning the validity of EIA's latest forecasts. Real energy prices 
have trended downward since the early 1980s (See Attachment #2) and increasing competition 
in energy markets portends further reductions, yet EIA continues to forecast that most energy 
prices will increase. 

As explained in previous letters, energy price forecasts, including those prepared by the U.S. 
Department of Energy (DOE), have widespread impact. For example: 

• Energy price forecasts affect thousands of economic analyses and decisions made by private 
sector organizations, public utility commissions, and other government officials. 



229 



-2- 

• In the federal government energy price forecasts affect: 

• Budget estimates, for both revenues and expenditures; 

• Economic analyses used to justify energy efficiency standards, subsidy programs 
(including DOE's energy research, development and demonstration programs), and the 
Federal Energy Management Program (FEMP); and 

• The validity of claims of 'energy savings" made by government officials. 

Specific Problems and Reconunended Actions. Previous letters have listed a number of actions 
needed to reduce the adverse effects of faulty energy price forecasts. This letter updates the list. 

1 . DOE/DOC November 1995 Energy Price Forecast for FEMP. Two months ago -- in 
November 1995 - DOE and the Department of Commerce (DOC) distributed new forecasts' 
that must be used by federal agencies and certain private sector organizations until November 
1996 for FEMP life-cycle cost analyses. This DOE/DOC document is based on outdated, 
higher energy EIA forecasts, particularly for natural gas. DOE and DOC should be directed 
to withdraw this document and provide updated forecasts. 

2. Energy Efficiency Standards. Energy efficiency standards for appliances and other products 
issued by DOE are based on economic analyses that incorporate EIA price forecasts. Use of 
high energy price forecasts overstate potential savings in energy costs and result in more 
stringent standards than are justified. Accordingly, DOE should be directed to: 

• Begin immediately using EIA's new energy price forecasts when evaluating the 
economics of any energy efficiency standards now being considered. 

• Prepare additional economic evaluations using even lower future energy prices than those 
recently issued by EIA. This action is appropriate in light of the DOE/EIA history of 
overestimating future energy prices. To assure an adequate range of possibilities, these 
additional evaluations should include at least: 

• One case that assumes that rral energy prices, including world oil prices will remain 
level indefinitely, and 

• One case that assumes that real energy prices, including world oil prices, will 
continue on a downward trend. 

• Reevaluate all energy efficiency standards that have already been issued to see whether 
they would still be justified using EIA's latest energy price forecasts. 

• Make public the results of these evaluations and reevaluations so that consumers are not 
misled by out-of-date government analyses and regulatory decisions. 

3. Oil and Gas Leases. Price forecasts affect Mineral Management Service estimates of: 

• The value of potential leases of federal lands for oil and gas exploi-ation and 
development, and 



1 



Energy Price Indices and Discoutt Factors for Life-Cycle Cost Analysis 1996, NISTIR 85-3273-10 (1095) prepared 



by the U.S. Department of Commerce for U.S. DOE, Federal Energy Management Program. 



230 



-3- 

• Revenue (federal and state) that will be received from bonus and royalty payments from 
oil and gas leases on federal lands are based on energy price forecasts. 

Whether EIA forecasts are used for these purposes is unclear. In any case, valuation 
procedures and budget estimates for oil and gas leases, including the Alaskan National 
Wildlife Refuge (Al^fWR), should be reconsidered in light of new market fundamentals and 
lowered oil and gas price forecasts. In addition, states that receive revenue from federal 
leases should be advised that such revenue may be lower than previously estimated. 

4. Value of Naval Petroleum Reserves. DOE has, in the past, made estimates of the value of the 
Naval Petroleum Reserves using highly questionable energy price forecasts and analytical 
procedures. For example, in an April 1994 report, DOE's gas price assumption for 1995 is 
some 30% above the actual U.S. aveiage. Also, one set of price assumptions was used when 
analyzing two of three alternatives for the future handling of the NPRs. DOE used a set of 
higher price assumptions when evaluating a third alternative, thus producing a biased result. 
Apparently, the third alternative — creation of a government corporation to take over the 
NPRs - was the alternative prcqxKed by those prqjaring the report. The value of the NPRs 
should be recalculated using realistic oil and gas price forecasts, including scenarios that 
recognize that the very real possibility that oil and gas prices will remain level or continue 
to decline in real dollar terms. 

5. Economic justification for proposed energy RD&D Subsidies. DOE and other agencies use 
energy price forecasts whenever they attempt to use economic analysis to justify proposed 
energy research, development and demonstration (RD&D) subsidies. Whether DOE program 
offices use EIA forecasts or others is unclear. In any case, DOE and other agencies should 
prepare economic analyses to sui^rt such subsidy programs and they should use realistic 
energy price forecasts when doing so. In addition to EIA's Reference Case forecast, agencies 
should prepare analyses using forecasts that recognize the possibility that oil and gas prices 
will remain level or continue to decline in real dollar terms. Such a requirement should be 
imposed on all proposed energy RD&D eiqKnditiues, including, fossil, nuclear or renewable 
energy and energy conservation. 

6. Costly private seaor decisions due to high price forecasts. High energy price forecasts issued 
by EIA and commercial forecasting organizations have contributed to uneconomic capital 
investment and long-term contract decisicms in the private sector. For example: 

• High price forecasts lead to overestimates of future revenue from investments in energy 
production ventures. 

• High price forecasts for one energy source and low estimates for another influence 
choices among energy sources when making capital investment in facilities that use 
energy (e.g., electric generating plants) or making long-term contracts (e.g., for power 
purchases or fuel purchases). 

• Individual and institutional investors have been misled. 



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-4- 

EIA has included a "warning" concerning use of its forecasts in Annual Energy Outlook 1996. 
This is a useful step, but EIA should also warn anyone who has used past forecasts that 
analyses, decisions, or actions based on them should be reconsidered. 

7. Utilities' 'Avoided Costs' and 'Stranded Investmeras. " Price forecasts have played a major 
role in overestimates of "avoided costs'^ by electric and gas utilities and by state utility 
commissions. These overestimates made high cost purchase power contracts and demand-side 
subsidies appear attractive. However, these contracts and subsidies have led to billions of 
dollars in unnecessarily high electric and gas bills for consumers. They have also contributed 
to uneconomic ("stranded') investments that will be costly for consumers, shareholders, or 
both as the electric industry becomes more competitive. There are many cases around the 
country where this has occurred. For example: 

• A Maine PUC member has indicated that much of the high cost of power in Maine is 
attributable to decisions based on high energy price forecasts.' 

• DOE's Inspector General has concluded that Bonneville Power Administration (BPA) 
erred in using high gas price forecasts when deciding to sign a contract to purchase 
power from a privately owned gas-fired generating plant.* This contract has far reaching 
implications for Bonneville's customers and, potentially, for U.S. taxpayers. BPA's 
attempt to withdraw from the arrangement apparently is being challenged in a $l-t- 
billion lawsuit. 

State public utility commissions, governors, and legislators, in particular, should be 
specifically informed of the significant changes in EIA's forecasts of future prices and urged 
to reconsider any decisions, actions, or requirements based on previous forecasts. 

8. Claims by government officials. Reports, testimony, and speeches made by officials from 
DOE, EPA, other agencies, and government contractors often include claims of alleged 
"energy savings." For example, the July 1995 National Energy Policy Plan submittied by the 
Administration, Sustainable Energy Strategy, makes numerous claims about "savings" that 
will be achieved by 2000 or 2010 (e.g., pages 23, 25, 26, 27, 30, 45). Any such claim must 
be based on some assumption or forecast of future energy prices. All such claims should be 
reevaluated in light of lower energy price forecasts. All future reports, testimony, and 
speeches should be screened to avoid false or misleading claims. 

9. Government role in Energy Forecasting. It is time to reconsider whether forecasting of 
energy prices is an appropriate federal government role. Energy price forecasts are available 

~ In (he case of electricity , the phrase, "avoided cost," is generally used to describe Ihe cost that an electric utility would 
incur if it added capacity needed to provide additional electricity demand. Such "avoided cost" calculations have been 
used to evaluate bids and proposals from other organizations that wish to provide the electricity, or to evaluate the cost 
of load oianagemeot or conservation measures that could be taken to avoid the increase in electricity demand. 

' See Enclosure #2, p. 3 and NARUC Bulletin No. 49-1993, December 6, 1993, p. 2. 

Office of Inspector Geoeial, U.S. Depattmeot of Energy, Audit of Bonneville Power Administration 's Energy Resource 
Programs. DOE/IG.0379, September 1995. 



232 



from a variety of commercial forecasting organizations. EIA is, in effect, competing with 
such organizations. Further, dozens of other commodity markets operate efficiently without 
federal market forecasts. 

10. Other Actions if EIA is to Continue Issuing Forecasts. If EIA is to continue issuing energy 
demand, supply, and price forecasts, several additional steps are needed: 

a. EIA reconsideration of forecasts in Annual Energy Outlook 1996 (AE096). While EIA 
made progress in AE096 in reflecting recent market conditions and lowering price 
forecasts, several aspects of the EIA model, the input assumptions, and the resulting 
forecasts deserve reconsideration. These include: 

• The EIA presumption that worid oil prices will inevitably increase. 

• The absence of a realistic "low" case in EIA's forecasts; i.e. , one that recognizes the 
possibility that energy prices will continue to decline in real terms indefinitely. 

• The inconsistencies between EIA's forecasts of delivered fuel prices for electric 
generating companies, particulariy between coal and natural gas. EIA has forecast 
substantial divergence between deiivoed coal and natural gas prices after 2005, with 
natural gas prices growing rapidly and coal prices declining slightly. It is not clear 
that market forces, including intofuel competition, will allow such divergence. 

• The strong possibility that EIA has not taken adequately into account the downward 
pressure on fiiel prices (particulariy coal and natural gas) that will result firom 
growing competition and downward cost pressure in the electric industry. About 
40% of all the Btus consumed in the U.S. are used to generate electricity. Electric 
generators will be working hard to reduce fuel costs as competition increases and the 
"automatic" pass-through of fuel costs (the "fuel clause") disappears. 

• The failure to reflect in EIA's forecasts of end user prices for electricity and natural 
gas the virtual cotainty that growing competition within and between the electric and 
gas industries will result in significantly lower real prices. Organizations, including 
distribution companies, in both industries are taking steps to reduce costs and prices 
and such steps are likely to continue and intensify. 

b. Scenario-based forecasts. EIA bases its forecasts largely on a single scenario that 
assumes growing dependence on oil from OPEC and an inevitable, significant increase 
in world oil prices from current levels. In EIA's forecasting model, this "inevitable" oil 
price increase assumption, in turn, "forces' EIA's natural gas price upward. EIA has 
slavishly adhered to its oil market assumptions despite downward trends in oil prices and 
strong evidence that commodities typically experience long-term price depreciation, not 
appreciation. If EIA is to continue making energy market forecasts, it should add at least 
two scenarios to the one currently being used. One should reflect the possibility that oil 



233 



and other energy prices will be level over the long-term.' Another should reflect the 
possibility that oil and other energy prices will continue to decline in real terms. 

c. Reevaluate NEMS. The National Energy Modeling System (NEMS) used to produce 
energy demand, supply, and price forecasts is a relatively new and expensive 
undertaking. However, experience thus far should be sufficient to provide the basis for 
a thorough reevaluation of the need for such a complex and expensive modeling 
program. As market forces continue to bring energy demand and supply into balance and 
push energy prices lower, it may be time to reduce DOE/EIA energy data collection, 
analysis and modeling activities. 

d. Consistency of ElA Forecasts with other Government Reports. EIA's independence 
should be maintained and EIA should be shielded from any attempt by policy officials, 
subsidy program managers, or special interest groups to use EIA's energy forecasts to 
serve their particular interests. However, steps are also needed to either assure 
consistency -- or clearly explain differences - among assumptions used by EIA in 
preparing forecasts and those used by other government officials when: 

• Making revenue and spending estimates for the President's budget. 

• Preparing important economic reports. 

• Preparing economic evaluations of existing and proposed policies and programs. 

• Justifying proposals to the public and to Congress. 

To achieve these results, it may be necessary to establish an OMB-led peer review 
committee, with participation from the Council of Economic Advisers and the Treasury 
Department to either: 

• Review the EIA forecasts before they are released to the public to accomplish the 
above objective, or 

• Prepare and issue a report immediately after EIA's forecasts are released that 
explains differences between EIA assumptions and forecasts and those being used 
elsewhere in the federal government. 

11. Organizational Location of EIA. Current law provides that EIA is an independent agency 
within DOE but ELA's close relationship with other DOE energy functions may weaken that 
independence. The organizational location of EIA deserves reconsideration. DOE and its 
predecessor agencies have a long and unfortunate history of overestimating future energy 
demand and prices. Recent history suggests that those in charge of DOE's energy policy and 
program functions seem to find it necessary to try to create a public perception of an "energy 
crisis" to build Administration and Congressional support for continued spending of billions 
of tax dollars on DOE's energy programs. Such an atmosphere seems incompatible with 
EIA's responsibility for producing unbiased information on energy. 

Short-term volatility in oil and natund gas prices should be expected for a variety of reasons, including weather, facility 
problems, and other temponuy coodiboas. 



234 



-7- 

Thus, the continued presence of EIA within DOE raises questions about EIA's real 
independence and whether its location leads to forecasts that are designed in part to 
justify DOE energy programs. Removal of EIA from DOE should reduce the potential 
for a "conflict of interest" between EIA's responsibility for independent forecasts and 
DOE official's desire to build support for DOE's spending programs. Perhaps EIA 
should be removed from DOE and made a part of an independent statistical agency. 

12. Guidance on the use of energy price forecasts. As explained above, energy price forecasts 
--whether prepared by EIA or others — play an important role in many government and 
private sector decisions and actions. As indicated, forecasts that have proven to be faulty and 
improper use of forecasts has cost consumers, taxpayers, and shareholders billions of dollars. 
In view of this, 0MB should issue a Circular or other directive that provides clear instructions 
to federal agencies on the use of energy price forecasts in government proposals, decisions, 
and actions. Such a directive should: 

• Recognize that no one can assure that their energy price forecast will be accurate, and 
> • Accordingly, require that agencies use at least three alternative future energy price paths 
when evaluating proposed policies, programs, regulatory requirements, or other actions. 
At least one alternative should assume moderate (perhaps 1 % per year) increases in real 
prices; one should assume level real prices, and one should assume that real prices will 
continue to decline. When decisions are dependent upon future energy prices, the 
alternative relied upon by an agency should be clearly identified and the choice among 
alternatives definitively justified. 

I hope this letter explains adequately the important role contribution that energy price forecasts 
have made in decisions that have proven to be unwise and that have cost - and continue to cost ~ 
billions of dollars. I urge you to consider the proposals carefully. The action needed should not 
be left to DOE because of that Department's "conflict of interest" and because the actions and 
implications described extend well beyond DOE's authorities and responsibilities. Also, based 
on past attempts to address die problems, it seems unlikely that corrective actions will be taken 
unless 0MB, CBO and/or the appropriate Congressional committees address the issue that have 
been identified. 

Attachment: Sincerely, 

1. Comparison of past EIA forecasts 

2. Past energy prices in constant 1994$ 

cc: Secretary of Energy 
Secretary of Commerce 
Secretary of die Interior 





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238 



Energy Market & Policy Analysis, Inc. 

P.O. Box 3875 
Reston, Virginia 22090-3875 

POS) 709-2213; Fax 7*9-2214 

Clmn R. ScUaa^ (huniit^ UalL 

ftttidmt UI4Hmimrmar Court 

Kmimm, VA 22»94 



April 25, 1996 



Mr. Jay Hakes, Administrator 
Energy Information Administration 
U.S. Depanment of Energy 
Washington. DC 20585 

Dear Dr. Hakes: 

As you are well aware, EIA's Annual Energy Outlook 1996 (AE096) forecasts that U.S. average 
electricity prices will change very little between 1995 and 2015 (i.e., no more than .5% per year). 
Graphs based on AE096 forecasts are enclosed (residential, commercial, industrial and all users). 

Early revision of EIA's AE096 electricity price forecasts seems essential now that the Federal Energy 
Regulatory Commission (FERC) has issued Orders 888 and 889, and in view of the widespread 
expectation than actions already underway will result in suhstanlially lower prices. 

I recognize that it is difficult at this time to forecast the extent that electricity prices will decline as 
a result of FERC's action, the ongoing electric industry restructuring, and increasing competition that 
is already underway. I also understand that you have a study of the matter underway. However, 
early action by EIA is necessary because reliance on AE096 forecasts by private sector, regulatory 
agency and other government officials could result in decisions that are uneconomic and costly for 
consumers, taxpayers, and investors. Specifically, I urge you to: 

• Inform all users of the Annual Energy Outlook as soon as possible that electric prices are almost 
certain to be lower than those forecast in AE096. 

• Expedite the completion and publication of your study of the impact of electric industry 
restructuring, and issue revised price forecasts at the earliest possible time. 

• Inform users of the Annual Energy Outlook that competition from lower electric prices for end 
users, together with increasing competition underway in the gas industry, are also likely to result 
in lower natural gas prices for end users than those reflected in AE096. 

• Inform others in DOE and other government agencies that rely on EIA price forecasts of the high 
probability that electric and gas prices for end users will be lower than those forecast in AE096. 

• Urge others in DOE and officials in other government agencies to : 

• Take mto account the expectations of lower electric and gas prices for end users, and 

• Revise budget estimat es, justifications for tmt^ R&D spending programs, and claim s of 
energy cost savings that have already been submitted to the Congress. 



H- 



239 



-2 



The expectation that dectric prices will be lower is especially clear now that the FERC has issued its 
Orders 888 and 889. Consider, for example, the following quotes from the April 25, 1996 issue of 
the Electricily Daily. 

"The order should have major economic impacts, however In the final environmental 
impact statement on the proposal, FERC calculated that the order will produce direct co<;i 
savings of $3.8 billion to $5.4 billion, just on the basis of plant efficicnce, lower reserve 
margins and the like. The FERC staff said indirect savings from introducing competition 
into wholesale markets will dwarf those, but can't be calculated at this point 

"Chair Betsy Moler said, "Today's actions by the commission will benefit the industry and 
consumers to the tune of billions of dollars every year. They wnll give us an electric industry 
ready to enter the 21st ccntuiy. These rules will accelerate competition and bring lower 
prices and more choices to energy consumers." 

Electric industry officials (eg., Dr. Richard BaJzhiser, President and CEO of the Electric Power 
Research Institute) have estimated that electric prices will decrease by "25% or more " 

Early action by EIA, as suggested above, could go a long way toward heading off unwise and costly 
decisions based on AE096 and similar forecasts by others. Such actions could be especially 
important in the case of state public utility commissions (PUCs) since they often make decisions based 
on long-term energy price forecasts Furthermore, PUCs may not have the resources to assess, 
independently, the validity of EIA forecasts or those available from commercial forecasting 
organizations. 

Thank you for your consideration of the above recommendations 

Sincerely, 



Enclosures 






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244 



Illustrations of Costs Resulting from 
High Energy Price Forecasts 

That Are Borne by Consumers, Taxpayers, 
and Shareholders 



By 



Glenn R. Schleede* 



March 17, 1996 



♦Energy Market & Policy Analysis, Inc., P.O. Box 3875, Reston. Virginia. Phone: 703, 709-2213 



245 



Illustrations of Costs Resulting from High Energy Price Forecasts 
that are Bome by Consumers, Taxpayers, and Shareholders 

- Contents - 

Page 
Introduction 1 

A. Electric industry 1 

1 . The role of faulty energy price forecasts 2 

2. High estimates of avoided costs led to high cost power purchases, costly commit- 
ments to "renewables," and heavy subsidization of "demand-side" measures 2 

3. Over-investment in generating &cilities 2 

4. Long-term fuel contracts with prices above market levels 3 

5. Magnitude of the extra costs now faced by electric industry customers, 
shareholders, and creditors and, in some cases, taxpayers 3 

6. Who will pay? 4 

B. Natural gas industry 4 

1 . High cost gas purchase contracts signed by gas pipdines 4 

2. Existing and potential excess pipeline capidty 4 

C Investments in oil and gas exploration 5 

D Bank failures resulting from non-performing loans to energy companies 5 

E Government spending for energy research, development, demonstration, and 

commercialization projects 5 

F. Overbuilding of nuclear generating plants by TVA and in the Pacific Northwest 5 

G. Bonneville Power Administration's contract to purchase power from an IPP 6 

H. Overestimating the value of leases and lease revenues 6 

I. Biased analyses based on high energy price forecasts 7 

1 . DOE's biased analysis of the costs and benefits of alternatives for the 

future of the Naval Petroleum Reserves 7 

2. Federal agency estimates of savings from potential Federal Energy 

Management Program (FEMP) projects 7 

3. Questionable claim of "energy cost savings" by a lobbying organization 7 



246 



March 17, 1996 
Illustrations of Costs Resulting From High Energy Price Forecasts 



Undoubtedly, there is no complete accounting of the huge costs that have been incurred by 
consumers, taxpayers, shareholders, and investors as a result of decisions that were based on high 
energy price forecasts that have proven to be faulty. 

However, it is possible to identify key categories of extra costs and, in some cases, estimates of the 
dollar magnitude of the costs that have been and still are being incurred because the Energy 
Information Administration (EIA) and other forecasters drastically overestimated energy prices and/or 
energy demand. This paper provides illustrations involving: 

The electric industry 

The natural gas industry 

Investments in oil and gas exploration in the late 1970s and early 1980s 

Bank failures resulting from non-performing loans to some energy companies 

Tax dollars wasted on impractical energy R&D projects 

Overbuilding of nuclear capacity by TVA and in the Pacific Northwest 

Bonneville Power Administration's contract to purchase power from a NUG 

Minerals Management Service (MMS) over estimating the value of oil and gas leases 

Biased analyses by DOE and lobbying organizations ~ based on high price forecasts 

A. Electric industry 

A large share of the extra costs resulting from high energy price forecasts will be borne by 
electric industry consumers, shareholders, and other investors ~ and potentially by taxpayers ~ . 
because of 
• Faulty estimates by utilities and PUCs of "avoided costs"' because of high forecasts of 

energy prices and/or demand. 

Heavy investments in long-lived capital intensive assets such as electric generating plants. 

Federal government and/or state PUC requirements that utilities sign long-term contracts 

to buy power from non-utility generating firms (NUGs). 

Independent power producers' (IPPs) decisions to build electric generating plants and 

electric utilities' decisions to sign power purchase contracts with IPPs. 

PUC requirements or encouragement that utilities invest in or buy power from generating 

units that use "renewable" energy. 

PUC requirements or encouragement that electric utilities subsidize actions by customers 

to reduce electricity use or shift uses to low demand periods ("demand-side" measures). 

Long-term fuel supply contracts with prices that proved to be above market. 



"Avoided costs" are estimates of the cost that an electric utility would incur if it produced electricity with its own facilities 
rather than buyuig from others or rather than subsidizing conservation. 



247 



1. The role or faulty energy price forecasts. Faulty, high energy price forecasts contributed 
in a major way to the extra costs because utilities have been using large amounts of oil, coal, 
and natural gas to fiiel electric generating units and EIA and other forecasters drastically 
overestimated the prices for these fiiels. The high fuel prices led to high PUC and utility 
estimates of "avoided costs." For example; 

• California Public Utility Commission (CPUC) President Daniel Fessler recently 
reported^ that the CPUC assumed that oil prices would be SI 18 per barrel when they 
calculated avoided costs. 

• A Commissioner from the Maine PUC has reported that Central Maine Power 
Company's avoided cost calculations assumed oil would cost $100 per barrel.' 

2. High avoided costs led to high cost of power purchases, commitments to 
"renewables," and heavy subsidization of "demand-side" measures. The high estimates 
of avoided costs were then used by PUCs and/or electric utilities as the basis for: 

• Prices in contracts that electricity that utilities: 

• Wctc required to sign with owners of "qualifying facilities" (QFs) pursuant to the 
Public Utility Regulatory Policy Art (PURPA), and 

• Agreed to sign with IPPs and other non-utility generators (NUGs). 

• CommitmoTts that some utilities were required to make to invest in or buy power from 
generating facilities fuel by "renewable" energy. 

• Economic analyses that helped determine the level of subsidies that utilities would 
provide to encourage customers to avoid use of elertricity or other forms of energy or 
to shift uses to periods of low demand. 

3. Over-investment in generating facilities. Faulty forecasts of high energy prices and rapid 
growth in electricity demand also contributed to over-investment in generating facilities. 
For example: 

• Investments in nuclear generating plants that were justified in part by forecasts of high 
oil prices. No nuclear plants were ordered after 1973 and some ordered before 1973 
were canceled. However, construrtion continued on some nuclear plants because 
owners assumed the plants would be an economical way of avoiding the use of oil that 
was forecast to cost $100 per barrd or more. Lower oil price forecasts probably would 
have led to cancellation of more nuclear plants — with the result that utilities would be 
facing less "stranded costs" than they now &ce. 

• Investments in IPP-owned generating units and utilities' decisions to sign contracts with 
IPPs were often predicated on forecasts of rapid growth in elertricity demand. The 
prices for power from IPPs were often based on high energy price estimates and 
decisions by IPPs to build, and financial institutions to finance projects were also based 
on expectations of high electridty demand and high fuel prices. In most cases, electric 



Senunar on February 27, 1 996 - Johns Hopldus University's Strategic and International Studies (SAIS) 
' NARUC Bulletin No. 49- 1 993. December 6, 1 993. p2. 



248 



utilities and their customers bear the high costs. However, in some cases (eg, in 
California) the price that is paid for electricity will drop to market levels after the 
contracts have been in effect for 10 years. At that point the IPP owners and/or their 
creditors will bear the cost risk. 

As electricity demand growth slowed and it became obvious that many proposed QF 
and IPP generating units would not be needed, some electric utilities have "bought their 
way out" of contracts — resulting in rather high costs for customers in the short term 
but savings in the longer term. 

Long-term fuel contracts with prices above market levels. Some electric utilities and 
non-utility generators have entered into long-term contracts for fuel (usually natural gas, 
coal, or oil) for their generating facilities. (Non-utility generators were often required to 
sign long-term fiiel supply contracts in order to get financing for their facilities.) The price 
for fiiel in these contracts was often based on high fuel price forecasts. These contracts also 
add extra, potentially stranded, costs. 

Magnitude of tbe extra costs now faced by electric industry customers, shareholders, 
and creditors, and, in some cases, by taxpayers. Many estimates have been made of the 
magnitude of the high costs that are now being faced — some of which may become 
"stranded costs." The exact amounts of these costs can only be estimated since they 
depend, in many cases, on the future market price for electricity. If the market price for 
electricity drops as most observers expect, "stranded" costs will increase. Examples of 
estimates of the extra costs and "stranded" costs now being faced include the following; 

• An official of Southern California Edison (SCE) reported in 1994* that SCE's 
customers had already incurred above market costs of S2 billion during the period from 
1985 through 1993 and face an additional $5.9 billion in the years ahead (with annual 
costs peaking at $900 million in 1996). These extra costs were attributed to CPUC 
requirements that SCE enter into power purchase contracts with PURPA "qualifying 
facilities" and generators using renewable energy. 

• Cambridge Energy Associates estimated in March 1 995 that California utilities face 
stranded costs in the range of $13 billion to $26 billion — depending upon the market 
price of electricity in the years ahead.' 



4 



Presentation by L. D. Hamlin, Southern California Edison to a Conference on State Trends in Energy and the Environment, 



Santa Fe, New Mexico, June 14, 1994. 

Cambridge Energy / 
March 1995, pp. 2-3. 



Cambridge Energy Associates, Decision Brief, Shedding Light on Stranded Costs by Gary Simon and Aldyn Hoekstra, 



249 



-4- 

• Moody's Investor Service estimated in August 1995 that total stranded costs for U.S. 
investor owned utility companies at "$50 to $300 billion, depending upon on market 
price assumptions."* 

6. Who will pay? As indicated by the above sources, the actions by state PUCs and electric 
utilities, often based on faulty energy price forecasts, have resulted in huge costs ~ some 
of which may beconoe "stranded costs" as the electric industry becomes more competitive. 
These extra costs will eventually: 

• Be paid by electric customers through their monthly bills; 

• Be borne by investors in dectric utilities or IPPs in the form of write-downs if the costs 
can be recovered from customers; or 

• Be borne by creditors if the utilities and/or IPPs become bankrupt. 

In some cases, some of the costs may be shifted to taxpayers. This will occur if 

• Electric utilities are permitted to accelerate the depreciation of their assets, thus 
reducing their tax payments to federal, state and local governments; 

• Lower profits, losses, or bankruptcies resuk in reduced corporate income tax payments 
to federal or state governments; or 

• Tax-paying utilities' assets are sold off to entities that can finance the purchases with 
tax-exempt bonds. This approach is comemplated in the proposed sale of certain assets 
of the Long Island Lighting Company to the Long Island Power Authority (LIP A) 

B. Natural Gas Industry 

Decisions based on high estimates of energy prices and demand have also added extra costs for 
natural gas industry customers, shareholders, and creditors, and for taxpayers. The causes and 
the eflFects are somewhat less complex in the gas industry than in the electric industry Examples 
of extra costs in the gas industry include: 

1. High cost gas purchase contracts signed by gas pipelines. Many gas pipeline companies 
signed "take or pay" contracts for natural gas supplies during the late 1970s and eariy 1980s 
based on forecasts that gas supplies were running out and the prices would increase rapidly. 
However, market prices for natural gas at the wellhead decreased in the early 1980s 
(particularly afto" the iD-efiFects of the Natural Gas Policy Act of 1978 had passed). This left 
pipelines with large conunitments for gas at prices well above market-clearing levels. 

2. Existing and potential excess pipeline capacity. Changes in regulation, including open 
access to interstate pipelines (FERC Order 436) and unbundling of pipeline services (FERC 
Order 636), has resulted in major changes in the natural gas industry. Slower than 
forecasted increases in natural gas demand in California has resulted in excess pipeline 
capacity in the West Further, as local gas distributing companies (LDCs) across the nation 

' Moody's Investors Service, Stranded Costs wilt ThreaUn Credit Quality of U.S. Elscthcs, by Paul Fremont and Robijn 
Homstra, August 1995, p. I. 



250 



-5- 

give up finn capacity commitments that they no longer need under the new market structure 
(when contracts expire), interstate pipelines in other regions may be faced with excess 
capacity. Such developments may lead to further financial strains in the industry and to 
costs that will have to be borne by consumers, shareholders, creditors, or taxpayers. 

C. Investments in Oil and Gas Exploration 

During the late 1970s and early 1980s, hundreds of millions of dollars were invested in oil and 
gas exploration based on forecasts that oil and gas prices would increase rapidly. Many of these 
investments have had to be written off at tremendous cost to investors. 

D. Bank Failures Resulting from Non-performing Loans to Energy Companies 

During the 1980s, many commercial banks and savings and loan (S&Ls) institutions experienced 
non-performing loans to oil and gas exploration companies and other energy firms that had made 
investments based on forecasts of high oil and gas prices. In some cases, the costs of non- 
performing loans were borne by owners and shareholders of the banks and S&Ls. In other cases, 
the costs have been borne by taxpayers who have paid the costs of the S&L bailouts 

£. Government Spending for Energy Research, Development, Demonstration and 
Commercialization Projects 

Federal agencies (Atomic Energy Commission, Energy Research and Development 
Administration, Federal Energy Administration, U.S. Synthetic Fuels Corporation, and 
Department of Energy) have spent some $100 billion tax dollars on energy supply and 
conservation technologies since 1955 — with the vast majority spent since 1975. Many of the 
projects that were subsidized were "justified" on the basis of high energy price and energy 
demand forecasts that have proven to be faulty. A large share of this money has been wasted 
because the projects proved to be technically infeasible or impractical, or to have no realistic 
chance of producing or conserving energy competitively in the marketplace. In short, much of 
the money was wasted. The projects on which the large dollars were wasted included the 
proposed Liquid Metal Fast Breeder Reactor (LMFBR), oil shale projects, synthetic fijeis form 
coal projects (including SRC-1 and SRC-2, the "solvent refined coal" projects; and the Great 
Plains Gasification Project). 

F. Overbuilding of Nuclear Generating Plants by TVA and in the Pacific Northwest 

High forecasts of electricity demand contributed to the overbuilding of nuclear generating 
capacity by the Tennessee Valley Authority (TVA) and in the Pacific Northwest: 



251 



• According to the GAO, "TVA is $26 billion in debt and has invested $14 billion in 
nonproducing nuclear assets..."^ 

• Commitments to build nuclear generating plants in the Pacific Northwest that were not 
needed led to the largest municipal bond default in U.S. history. 

Apparently only the interest expense for TVA's $14 billion in nonproducing nuclear assets is 
being passed through to TVA's customers. Eventually, of course, someone will have to stand 
the cost of the $14 billion principal. 

GAO has concluded that TVA's financial condition puts it at a competitive disadvantage for the 
fijture when the electric industry will be more competitive. 

G. Bonneville Power Administration's Contract to Purchase Power from an IPP 

DOE's Inspector General has concluded that Bonneville Power Administration erred in using 
high gas price forecasts when deciding to sign a contract to purchase power fi^om a privately 
owned gas-fired electric generating plant.' This contract has far reaching implications for 
Bonneville's customers and, potentially, for U.S. taxpayers. BPA's attempt to withdraw fi-om 
the arrangement apparently is being challenged by the plant developer in a $1+ billion lawsuit. 

H. Overestimating the value of Leases and Lease Revenues 

The Department of the Interior's Minerals Management Service (MMS) estimates the value of 
blocks of public lands that are offered for lease. Also, for federal budget purposes, MMS must 
develop estimates of the revenue that will be received fi-om lease bonus payments and royalties 
received by the Federal Government. All these estimates depend to some extent on fijture energy 
price expectations, but information on the price forecasts used by MMS is not readily available. 

During the balanced budget discussions of 1995, it became clear that MMS estimates of the 
potential value of leasing of ANWR was based on outdated fijel price forecasts. Whether MMS 
has developed new estimates is unknown. 

MMS' over-estimate of the value of one lease block in the Western Gulf of Mexico (Brazos A- 
52) led to a loss of approximately $11 million during the 1980s. The instance involved a bid of 
approximately $26 million by an oil and gas exploration company for the lease MMS turned 
down the bid as inadequate. The following year, the same company submitted a lower bid and 
it was again turned down. In the third year, the same company bid approximately $ 1 5 million 
for the same lease block. The bid was then accepted. Apparently, MMS had overvalued the 

General Accounting OflHce, Tennessee Valley Authority - Financial Problems Raise Questions About Long-Term 
Viability. August 1995, p. 3. 

' Office of Inspector General, U.S. Department of Energy, Audit of Bonneville Power Administration's Energy Resource 
Programs, DOE/IG-0379, Sq)tember 1995. 



252 



lease initially largely because it was using a high forecast of natural gas prices As natural gas 
prices continued their downward trend, MMS apparently realized that it had overestimated the 
value of the lease. Meanwhile, the U.S. Treasury received some $1 1 million less in lease bonus 
revenue than it would have received had a more realistic natural gas price forecast been used and 
the initial bid been accepted. 

I. Biased Analyses Based on High Price Forecasts 

In addition to the above cases where high price forecasts have resulted in demonstrable costs to 
consumers, taxpayers, and investors, there are other instances where the use of energy price 
forecasts raises important public policy issues Instances such as the following should not be 
overlooked as the Congress considers problems caused by faulty forecasts. 

1. DOE's biased analysis of the costs and benefits of alternatives for the future of the 
Naval Petroleum Reserves (NPRs). In April 1994, DOE prepared an unusually biased 
analysis of the value of the NPRs using questionable price forecast data and even more 
suspect analytical procedures.' DOE's gas price assumption for 1995 was some 30% above 
the actual U.S. average and even further above prices in California where most of the NPR's 
gas reserves are located. The highly suspect analytical technique involved the use of one 
set of price forecasts to analyze two of three alternatives for the future handling of the 
NPRs. DOE then used higher price assumptions when evaluating a third alternative. 
Apparently the third alternative — creation of a government corporation to take over the 
NPRs — was the alternative favored by those preparing the report. It is quite amazing that 
the DOE leadership would allow such an biased analysis to be issued. 

2. Federal agency estimates of savings from potential Federal Energy Management 
Program (FEMP) projects. DOE issued a price forecast in November 1995 '" that Federal 
agencies and certain private sector organizations apparently are required to use during the 
next year to evaluate FEMP projects. The forecast was rendered obsolete by EIA's energy 
price forecast issued in January ~ two months after the DOE/Commerce forecast. 

3. Questionable claim of "energy cost savings" by a lobbying organization. A November 
1995 report by American Council for an Energy Efficient Economy includes a claim that 
"appliance standards already adopted will save consumers $132 billion (i e., energy cost 
savings minus the increased first cost) over the lifetime of products purchased by 2030."" 

Any estimate of "energy savings" during such a long period of time (some 40 to 55 years, 
including the life of the appliances) is unlikely to be valid. Information in the report suggest 

US Department of Energy, Organizational Alternatives for the Naval Petroleum and Oil Shale Reserves, Apnl 1 994. 

'" Energy Price Indices and Discount Factors for Life-Cycle Cost Analysis 1996. NISTIR 85-3273-10 (1095), prepared 
by the U.S. Department of Commerce for U.S. DOE, Federal Energy Management Program. 

' ' American Council for an Energy EfBcient Economy, National Appliance Efficiency Standards: Cost-Effeclive Federal 
Regulations, November 1995, p. 6. 



253 



-8- 

that the estimate was based on energy price expectations that are at least three years old. 
The $132 billion energy cost savings estimate undoubtedly would be much lower if it were 
based on EIA's latest, sharply reduced energy price forecast. The estimate would be even 
lower if EI A had reflected in its forecast that reductions in electric rates that are almost 
certain to occur as the electric industry becomes more competitive. 

These three examples illustrate the need for the Congress to be very wary of analyses, claims and 
justifications presented by the DOE/Contractor Complex. 



OC -/CiA 0-7 



254 



Energy Price Forecasts are Leading Business Executives, 
Regulators, and Other Government Officials 

to Mai<e Uneconomic Decisions 

- 1996 Edition - 



During the past 16 years, most energy price forecasts have substantially overestimated future 
energy prices. Decisions based on these high price forecasts have often turned out to be 
uneconomic, and have cost consumers, taxpayers, and shareholders billions of dollars. 

Many business leaders, regulators and other state and federal government officials are 
continuing to use energy price forecasts as a basis for their decisions without questioning the 
forecasts and without taking precautions to protea against forecasts that may be faulty. Some 
may not understand the role that price forecasts are playing in their decisions. 

Important and costly decisions that have been and still are being based on forecasts of future 
energy prices include investments by the private sector in facilities to produce, transport and 
use energy; estimates by utility executives and regulators of utilities' "avoided costs" and long- 
term marginal costs, and calculations of the value of potential "stranded investments"; 
calculations of savings expected from investments in energy efficiency and conservation; 
calculations of the economic costs of alternative energy sources for new facilities; and federal 
government officials' decisions to spend tax dollars for energy research and development, and 
their estimates of the value of and revenue from mineral leases on federal lands. 

The history of faulty price forecasts and recent significant (30+%) downward adjustments in 
forecasts for some energy prices indicate that decisions made on the basis of older price 
forecasts need to be reconsidered, and precautions should be taken to minimize the potential 
that even the newer, lower forecasts will turn out to be invalid 



An Information Paper for Clients and Colleagues 

by 

Glenn R. Schleede 

February I, 1996 
Energy Market & Policy Analysis. Lie. P.O. Box 3875, Reston. VA 22090-3875. Phone: 703. 709-2213, Fax 709-2214 



255 



Energy Price Forecasts are Leading Business Executives, Regulators, and 

Other Government Oiliciab to Make Uneconomic Decisions 

- 1996 Edition - 



Preface to 1996 Edition 



The first edition of the paper with the above title was published on February 20, 1995. It 
proved to be very popular. Hundreds of copies have circulated in the United States and 
Canada and I have also responded to several requests fi'om Western Europe. 

In January 1996, EIA substantially reduced its forecasts for wellhead natural gas prices (e.g., 
year 2010 prices by 38% from its January 1995 forecast). During the past year, other 
commercial suppliers of energy forecasts have also reduced forecasts for natural gas prices 
and for other energy sources. These downward adjustments led to two questions: 

1 . Now that forecasters have made progress in recognizing substantial changes in U. S. and 
world energy markets, should one be comfortable with the newer forecasts? A review 
of some of the forecasts suggests the answer to this question is clearly "No." There are 
many reasons to continue to be concerned about the validity of energy price forecasts. 

2. Do those decision makers who have relied on past forecasts need to do anything now 
that forecasts have been revised downward? The answer to this question is clearly 
"Yes." In &ct, dedsions made on the basis of past forecasts are likely to turn out much 
differently than expected. Failure to reconsider such decisions could easily lead to even 
more unnecessary costs for consumers, taxpayers, and investors. 

These two considerations led to me to conclude that the February 20, 1995 paper should 
be updated and published as the "1996 Edition." 

As always, comments on the paper are welcome. 

GRS 



256 



Energy Price Forecasts are Leading Business Executives, Regulators, and 

Other Government OfTiciak to Make Uneconomic Decisions 

- 1996 Edition - 

- Contents - 

£age 

Preface to 1996 Edition i 

Executive Summary 1 

Purpose and content of this paper 2 

A. Energy price forecasts play a pervasive but often hidden role in business, 

regulatory, and public policy decisions 3 

B. Uneconomic decisions costing consumers, taxpayers, and shareholders billions 

of dollars have been based on past energy price forecasts 4 

C. Real energy prices have come down and newer forecasts have been lowered 

substantially, but forecasters continue to project significant price increases 4 

1 . Downward trend in real energy prices 5 

' ' 2. Latest energy price forecasts are substantially lower than prior years 5 

a. EL\'s Annual Energy Outlook 1996, January 1996 5 

b. Forecasts by other organizations 6 

3. Despite real price trends and substantial lowering of its new forecasts, 

EL^V is still projecting that prices will increase substantially in the future 7 

D. Downward adjustments in forecasts make it necessary to reconsider investment, 

contract, and public policy decisions 8 

E. Recent evidence indicates some executives, regulators and other government 

officials are basing decisions on questionable forecasts 9 

1 . Bonneville Power Administration 9 

2. Recent U.S. DOE/Department of Commerce energy price forecast 9 

3. Analysis done for the U.S. Department of Energy 10 

F. Several facts and concerns about energy price forecasts deserve attention 10 

1. What organizations are now making energy market forecasts? 10 

2. Have all past energy market forecasts turned out to be wrong? 11 

3. Is it possible to develop an accurate energy price forecast? II 

4. The danger of "consensus" forecasts 12 

5. Is there systematic upward bias in energy price forecasts? 12 

G. How can decision makers protect themselves from making uneconomic 

decisions because energy price forecasts may turn out to be inaccurate? 13 

Attachments: 

1. Average annual energy prices in constant 1994$: 1973 to 1995 

2. DOE/EL\ Annual Energy Outlook Reference Case Energy Price Forecasts: 1 984- 1 996 

3. The potential for systematic upward bias in energy market forecasts 

-ii - 



257 



Energy Price Forecasts are Leading Business Executives, 
Regulators, and Other Government Officials to Mskke Uneconomic Decisions 

- Fcbnury 1996 Edition - 

Executive Summary 

During the past 16 years, most energy piice forecasters have substantially overestimated future energy 
prices. Decisions based on these high price forecasts have often turned out to be uneconomic. These 
uneconomic decisions have cost consumers, taxpayers, and shareholders billions of dollars. 

Despite this history, many business leaders, ^^^lato^s and other state and federal government officials 
are continuing to use energy price forecasts as a basis for their decisions without questioning the 
forecasts and without taking precautions to protect against forecasts that may be faulty. Some may 
not understand the role that price forecasts are playing in their decisions. 

Among the important and costly decisions that have been and still are being based on forecasts of 
future energy prices are the following: 

' * Investments by the private sector in &cilities to produce, transport and use energy; 

• Estimates by utility executives and regulators of utilities' 'avoided costs" and long-term marginal 
costs, and calculations of the value of potential 'stranded investments"; 

• Calculations of savings expected from investments in energy efficiency and conservation; 

• Federal energy efficiency standards for appliances and other products; 

• Calculations of the economic costs of alternative energy sources for new facilities; and 

• Federal govenimem officials' decisions to spend tax dollars for energy research and development, 
and their estimates of the value of and revenue from mineral leases on federal lands. 

During the past 1 8 months, many energy forecasters have lowered significantly their estimates of 
future energy prices. For example, in Jamiary 1966, the U.S. Energy Information Administration 
(ELA) lowered its estimate of year 2010 wellhead natural gas prices by 38% from one year earlier and 
62% from 5 years ago. EIA's latest forecast for crude oil prices for 2010 are down by 4% from one 
year ago and 38% from 5 years ago. 

EIA's downward revisions are a welcome, if belated, recognition of changes that have occurred in 
U.S. and worid energy markets. However, there are strong reasons to question whether the recent 
lower price forecasts are low enough. EIA and many otha forecasters are still projecting significant 
price increases, particularly after the year 2000 — even though real prices have been trending 
downward since the eariy 1980s and strong intra and inter-fud competition prevails. 

The history of &ulty price forecasts and recent significant downward adjustments in price forecasts 
provide two strong messages to decision makers: 

• Analyses and decisions based on okkr price forecasts are out of date and should be reconsidered. 

• Precautions should be taken to minimize the potential that even the newer, lower forecasts 
underiying their decisions will turn out to be invalid. 



258 



Purpose and Content of this Paper 

Since the energy shocks of the 1970s, energy price forecasts that have proven to be invalid have been 
a major factor in decisions that turned out to be uneconomic. These decisions have been very costly 
for consumers, taxpayers, and shareholders. Some have caused severe financial strain and 
bankruptcies. 

Recent evidence suggests that some decision makers are continuing to rely on forecasts, perhaps 
unwittingly, in ways that could lead to more uneconomic and costly investment decisions, and to 
unwise public policies. 

This paper has been prepared as a warning to unwary business executives, regulators, and other 
government officials: 

• To be very careful about their use of energy price forecasts, and to suggest steps that should be 
taken by decision makers. Somebody's energy price expectations underlie most econo.iiic 

" analyses of long-term energy investments, contracts, and other commitments. Decision makers 
should know whose forecast is being used and how the forecast was developed. They should 
understand the impact of the forecast on the economic analyses they are using as the basis for 
decisions. They should also be prepared to accept the consequences if the forecast turns out to 
be invalid. 

• To be aware that government and commercially available forecasts of energy prices have been 
revised downward substantially in recent months, making it necessary to reconsider decisions 
based on previous forecasts. 

The remainder of this paper deals with the following topics: 

The pervasive but often hidden role of energy price forecasts in business, regulatory, and public 

policy decisions. 

The uneconomic decisions, based on past energy forecasts, that have cost consumers, taxpayers, 

and shareholders billions of dollars. 

The significant decline in prices in recent forecasts compared to one, two, or five years ago. 

The contrast between a decade long decline in real energy prices and the continuing tendency of 

some forecasters to predict that prices will increase. 

The significant but unrecognized implications for investment, contract and public policy decisions 

of the downward trend in real prices and forecasts and the need to reevaluate past decisions. 

The indications that some business executives, regulators, and other government officials are 

basing decisions on questionable energy price forecasts. 

The steps that can be taken to reduce exposure to questionable forecasts. 



259 



-3- 

A. Energy price forecasts piay a pervasive but often hidden role in business, regulatory, and 
public policy decisions. 

Many business executives, regulators and other government officials seem to be aware only 
generally that past forecasts of high energy demand and prices turned out to be wildly inaccurate, 
and that forecasts of energy supply that would be available at moderate prices turned out to be 
too low. Some are aware that these forecasts led to some very costly decisions for consumers, 
taxpayers and shareholders. 

The realization that past forecasts proved to be incorrect has led to some, but apparently not 
enough, healthy skepticism about energy forecasts. Many people are continuing to use 
questionable forecasts, perhaps without even knowing they are doing it. 

It is not unusual to hear a high level executive, regulator, or government official to say, "I don't 
believe any of those damn energy forecasts." The same person may then sit down and look at 
an economic analysis that shows a net present value (NPV) or internal rate of return (IRR) for 
' an important energy decision without realizing that somebody's forecast of future energy prices 
underlies the estimates he or she is relying upon. 



B. Uneconomic decisions costing consumers, taxpayers, and shareholders billions of dollars 
have been based on past energy price forecasts. 

Almost everyone that is heavily involved in energy matters now recognizes that thousands of 
energy decisions made during the past 16 years turned out to be uneconomic because they were 
based on assumptions and forecasts that energy prices — particularly oil prices — would 
increase rapidly. For example. Commissioner Welch of the Maine Public Utility Commission 
is reported to have told the 1993 Annual Convention of the National Association of Public Utility 
Commissioners (NARUC)that; 

"Much of the high cost of power in Maine is attributable to the price impact of QF 
contracts signed in the mid-1980's committing Maine utilities to large purchases 
based upon avoided cost calculations assuming, in hindsight, an incredibly bad 
forecast price for oil of $100/ barrel by the end of 1990's."' 

Utility executives and regulatory commissioners in Maine were not the only people who relied 
upon energy market forecasts that proved to be faulty. For example: 

• Oil and gas producers invested large amounts of money in exploration and development 
based on high price forecasts. 



' MAJiUC Bulletin No. 49-1993, December 6. 1993, p. 2. 



260 



-4- 

• Gas pipeline companies signed contracts for the purchase of natural gas at high prices based 
on high gas and oil price forecasts. 

• Electric utilities invested in large base-load nuclear and coal-fired power plants and signed 
long-term coal contracts (some with built-in price escalators) based on high forecasts for 
electricity demand and for oil prices. 

• Federal officials proposed and Congress passed laws that prohibited building of new gas- 
fired powerplants and industrial facilities and restricted the use of natural gas in existing 
facilities, based on assumptions that the U.S. was running out of natural gas. The U.S. 
Synthetic Fuels Corporation provided funding for research and development (R&D) 
projects, and provided price guarantees for oil shale and coal gasification projects, based on 
assumptions or forecasts that energy demand and prices would increase significantly. 

• Banks, retirement fund managers, insurance companies, and other financial institutions 
provided loans for investments in energy production, transportation, and utilization facilities 
that proved to be uneconomic. Some contributed to costly savings and loan bank failures. 

• The U.S. Department of Energy spends large amounts of tax dollars and the U.S. 
government has provided large tax subsidies on technologies that are not economic. 

The costs of uneconomic decisions such as these are still being borne by those who ultimately 
pay the bills: customers, taxpayers, and shareholders. Other costs lie ahead. For example: 

• Investments in oil and gas exploration that proved to be uneconomic are reflected either in 
higher costs for products, lower return for investors, or both. 

• Overestimates of electric utilities' avoided costs (due to high oil price forecasts) led to above 
market costs for electricity purchased fi^om non-utility generators (NUGs). These costs are 
being paid by electric customers, or they are a part of the investments that utilities believe 
may be "stranded" as the electric industry becomes increasingly competitive. 

• Costs of government contracts, grants, loans, loan guarantees, and price guarantees for 
energy research, development and demonstration projects based on high energy price 
forecasts are being borne by taxpayers. 



C. Real energy prices have come down and newer forecasts have been lowered substantially, 
but forecasters continue to project price increases. 

During the past 16 years, energy markets have behaved quite differently from the way forecasters 
predicted. Newer forecasts have begun to reflect the changes and lowered their estimates of 



261 



. -5- 

fiiture energy prices, but there are strong reasons to question whether even the new, lower 
forecasts are low enough. 

1. Downward trend in real energy prices. Most real energy prices (i.e., prices adjusted for 
inflation) in the U.S. have trended downward. Attachment #1 shows prices in constant 
1994$ for various energy products based on data from ElA's Monthly Energy Review, which 
provides information back to 1973 for some products and to 1978 for others. Examples of 
downward trends include the following (all data in 19945): 

a. Crude «1 prices averaged SIS. 5 1 per barrel in 1994, compared to a high (in 1994$) of 
$59.59 in 1980. The trend is moving closer to the 1973 $12.46 price that had not 
reflected the fiill impact of the increases that occurred in 1973-74 and 1979-80. 

b. Natural gas wellhead prices were $1.88 pa- thousand cubic feet (Mcf) in 1994 (a year 
of relatively high prices in recait years), down from a high of $3,75 in 1983. (Prices 
were lower in the 1970*5 but these comparisons to earlier years are not meaningful since 
prices were held to artificially low levels by federal wellhead price regulation.) 

c. Retail gasoline prices, including taxes were $1.17 per gallon in 1994, compared to a 
high of$2.16 in 1981. 

d. Refinery wholesale prices for gasoline for resale, excluding taxes, were $.60 per gallon 
in 1994, compared to a high of $1.70 in 1981. Gasoline prices in 1994, excluding 
taxes, appears to be an all-time low. 

e. Residential heating oil prices averaged $.88 per gallon in 1994, down from a high of 
$1.91 in 1981. 

f Residential natural gas prices were $6.41 per million Btus (MMBtu) in 1994, down 
from a high of $8.77 in 1983. 

g. Residential electricity prices averaged $.084 per Idlowatthour in 1994, down from a 
high of$.104 in 1982-1985. 

Based on 10 mmiths of 1995 data now available, av^age oil prices are likely to be slightly 
higher than 1994 and natural gas and dectricity prices lower in 1995 than in 1994. 

2. Latest energy price forecasts are substantially lower than prior years. 

a. EIA's Annual Energy Outlook 1996. The new Annual Energy Outlook issued in 
January 1996 finally brings EIA's price forecasts down substantially from prior years. 



262 



-6- 

particulaiiy for natural gas. While late, this is a promising step toward recognizing the 
changes that have occurred in U.S. and world energy markets during the past decade. 

Attachment #2 is a table showing in 1994$ the prices EIA has forecast for crude oil and 
natural gas wellhead prices over the past 10 years for the years 1995, 2000, 2005, and 
2010. As the table shows: 

• EIA's latest forecast of $23.70 per barrel for crude oil in 2010 is: 

• 3.7% below its $24.62 forecast issued one year ago (January 1995). 

• 24.5% below its $3 1 .41 forecast issued three years ago (January 1993). 

• 44.7% below its $42.87 forecast issued six years ago (January 1990). 

• EIA's latest forecast of $2. 15 per thousand cubic feet of natural gas at the wellhead 
in 2010 is: 

• 37.9% below its forecast of $3.3.46 issued one year ago (January 1995). 

• 45.6% below its forecast of $3.95 issued three years ago (January 1993). 

• 67. 1% below its forecast of $6.54 issued six years ago (January 1990). 

Tables similar to those in Attachment #2 could be constructed for other energy projects 
— with similar results. 

b. Forecasts by other organizations. 

The Gas Research Institute (GRI) released preliminary information in August 1995 on 
its 1996 baseline forecast. The prices shown in this forecast compare as follows with 
those in GRTs 1994 baseline forecast released in August 1994 (all numbers in 1994$): 



• 



• 



2 



2000 2010 
Crude oil price assumption - per barrel 

• 1995 baseline forecast $18.52 $20.46 

• 1996 baseline forecast $16.17 $16.17 

Natural gas acquisition (lower-48) - per million Btus 

• 1995 baseline forecast $2.44 $2.60 

• 1996 baseline forecast $2.37 $2.28^ 

GRI latest forecast indicates that it expects oil prices to remain flat in real dollars. 

EIA' sAnntud Energy Outlook (AEO) provides comparisons with certain conrunercially 
available energy price forecasts, typically those issued by Data Resources Incorporated 



This would be $2.27 per Mcf, compared to $2. 15 per Mcf forecast in EIA's Annual Energy Outlook 1996. 



263 



-7- 



(DRI) and the WEFA Group. AE095' and AE096* show the following DRI and 
WEFA forecasts for worid cnide oil prices (all shown in 1994$): 

2000 2010 



DRI - Spring Summer 1994 


$25.17 


$28.64 


DRI -October 1995 


$16.54 


$21.99 


WEFA - 3rd Quarter 1994 


$20.78 


$21.80 


WEFA -3rd Quarter 1995 


$19.55 


$20.88 



In its 1995 fixecast shown above, DRI has reduced substantially its forecasts for 2000 
and 2010. WEFAhadalready lowered its forecasts by the 3rd Quarter of 1994. In 
their forecasts released in 1995, DRI, WEFA and GRI are forecasting oil prices for 
2000 and 2010 lower than EIA's forecast released in January 1996. 

3. Despite real price trends and substantial lowering of its new forecasts, EIA is still 
projecting that prices wiD increase significantly in the future. 

While real energy pnces have declined cmd many forecasters have lowered forecasts, some 
forecasts continue to predict substantial price increases These expected increases deserve 
careful consideration by anyone using the forecasts.' 

EIA's AE095 Reference Case* forecasts show the following annua/ ra/es of increase in real 
energy prices during the period from 1994 to 2015:^ 

Worid oil prices 2.4% 

Natural gas wellhead prices 1.5% 

Coal mine mouth prices -0.5% 

Residual oil delivered to electric generators 2. 1% 

Natural gas delivered to electric generators 1 .4% 

Coal delivered to electric generators -0.3% 



^ EIA Annuat Energy Outlook 1995, Table 3, p.7 andp. 66. 

* EIA. Annual Energy Outlook 1996, Table 3. p.8 and p. 63. 

' Thcfc are a vaiiety (^potential cxplanatioas for projected increases. One thtf deserves attention ~ the possibility that 
publiciy available energy pnce fofecasts have a systematic upward bias - is addressed later in this paper. 

* EIA. Annual Energy Outlook 1995, Tables A 1 and A3, p 73 and p. 76. 
The rates vary widely fitm year to year during the period. 



264 



-8- 

These rates of increase may seem small, particulariy when compared with past increases. 
Nevertheless, they are significant, particulariy when compounded over a 16 or 21 year 
period. Also, the significant differences in projected rates of increase in prices of fijels 
delivered to electric utilities raise questions about the internal inconsistency of forecasts and 
whether market forces (intra-fuel and interfile! competition) will permit such price 
differentials. Forecasted increases such as these need to be evaluated carefiilly by decision 
makers. 



Downward adjustments in forecasts make it necessary to reconsider investment, contract, 
and public policy decisions. 

The large downward adjustments in energy price expectations shown in forecasts during the past 
year, including EIA's 38% downward adjustment in 2010 natural gas wellhead prices, have 
significant economic implications for decisions on energy related investments, contracts, 
regulatory decisions, government spending programs, and public policies. It is less than clear 
that decision makers have recognized that forecasts have been changed or that they are being 
taken into account by business executives, regulators, or other government officials. For 
example lower fiiture price expectations will mean that: 

• Energy production investments will provide less revenue than expected. 

• Input energy costs for fiicilities that use energy (e.g., electric generating plants) will be lower 
than expected. 

• Savings expected Srom energy conservation and energy efficiency projects and government 
energy efficiency standards will be less than expected. 

• Newer technologies dependent on energy sources other than fossil fiiels (e.g., renewables) 
have tougher economic standards to meet. 

Among the more specific decisions that are likely to be affected by lower energy price forecasts 
are the following: 

1. Decisions made by individuals and organizations in the private sector concerning 
investments and long-term contracts involving energy production, transportation and use. 

2. State public utility commissions (PUCs) and other regulators' decisions that are affected 
by energy price expectations, such as estimates of gas and electric utilities' future 
marginal costs and avoided costs, costs and benefits of energy efficiency and 
conservation programs, costs of renewable energy sources, the prudence of capital 
investments and fuel procurement activities, and estimates of "stranded investments." 

3. Decisions and estimates made by federal government officials relating to revenue 
expectations and justification for proposed spending programs, including: 



265 



a. Estimates of savings associated with proposed energy efficiency standards (e.g., 
s^jpliances, equipment, motor vehicles). 

b. Estimates of the costs and benefits of proposed energy efficiency and conservation 
projects covered by the Federal Energy Management Program (FEMP). 

c. Estimates of the value of oil, gas, and coal leases on federal lands, and the revenue 
that may be received from lease sales and royalties. 

d. Estimates of the benefits and costs associated widi various proposed energy research, 
develc^moit, and demonstration activities. 

e. Estimates of the benefits and costs associated with various environmental 
requirements affecting energy production, transportation and use. 

f. Estimates of the potential revenue fiom energy taxes, and the effects on the economy 
of proposed energy taxes and energy tax incentives. 



E. Recent evidence indicates executives, regulators and otber government ofFicials are basing 
decbions on questionable forecasts. 

Two recent pieces of evidence suggest that some decision makers may not yet be aware of the 
recent downward trends in real energy prices and energy price expectations, or that they have 
other reasons for using energy price forecasts that are questionable at best. 

1. Bonneville Power Administration. DOE's Inspector General (IG) has concluded that 
DOE's Bonneville Power Administration (BPA) erred when, in 1 994, it assumed rapid 
increases in natural gas prices when signing a J2.2 billion contract to purchase electricity 
fi'om a privately owned gas-fired generating plant.' This contract has far reaching 
implications for Bonneville's customers and, potentially, for U.S. taxpayers. The IG 
concluded that BPA would be paying more for the electricity than it could recover fi-om its 
sale. BPA's attempt to withdraw fi-om the contract apparendy is being challenged in a $1 
+ billion lawsuit. 

2. Recent VS. DOE/Department of Commerce energy price forecast. In November 199S, 
DOE issued a document entitied, "Energy Price Indices and Discount Factors for Life-Cycle 
Cost Analysis 1996," that was prepared for DOE by the Department of Commerce. 
Apparendy, federal government agencies and some private sector entities are required to 

OfSoe of Inspector General, U.S. Department crf'Energy, Audit of Bonneville Power Administration 's Energy Resource 
Programs. DOE/IG-0379, September 1995. 



266 



-lo- 
use the numbers in this document during the next year in economic analyses of potential 
energy efficiency and conservation projects under the Federal Energy Management Program 
(FEMP). Unfortunately, the numbers in the document are based on old EIA data which 
have been rendered obsolete by EIA's January 1996 forecasts, particularly for natural gas. 

As indicated earlier, the use of high energy price forecasts overstates savings that can be 
achieved from energy efficiency and conservation measures. 

3. Analysis done for the U.S. Department of Energy. An August 1994 analysis for DOE 
of int^ated resource plans (IRPs) prepared by 27 U.S. electric utilities during the period 
from 1991 through 1993 revealed that a very wide range of price expectations were used 
in preparing integrated resource plans, particularly in the case of natural gas prices.' The 
report indicated that: "The range went from a low of 2% [per year increase] in real terms 
(or perhaps 5% in nominal terms assuming 3% inflation) to a high of 12% in nominal terms 
(or perhaps 9% in real terms). The potential impact of these projections is profound. If gas 
, prices are projected to increase at 2%, gas is more likely to be chosen as the fuel for new 

capacity or repowering...On the other hand, gas is unlikely to be selected for any purpose 
if prices are projected to rise at 12% annually." 

Apart from the choice of fuel for power generation, such price expectations could be having 
a very significant impact on electric utilities calculations of savings that could be expected 
from energy efficiency and conservation measures. The study did not attempt to determine 
the rationale or the motivation of the utilities for using such high and widely varying price 
expectations, or whether forecasts were questioned by PUCs or intervenors. 

F. Several facts and concerns about energy price forecasts deserve attention. 

There are a variety of facts and concerns about energy price forecasts that should be noted by' 
people who use such forecasts as a basis for their economic analyses and decisions. Several are 
discussed below. 

1. What organizations are now making energy mariwt forecasts? Energy demand, supply, 
and price forecasts are made by a variety of goverrunent and private organizations. Several 
have already been identified in the preceding pages. To summarize: 

a. EIA annually publishes a long-term forecast of U.S. energy demand, supply and prices. 
EIA also publishes quarterly a short-term forecast. 

b. The National Institute of Science and Technology (NIST), a part of the U.S. 
Department of Commerce, prepares (for DOE) price forecasts (allegedly based on 



9 



The EOP Foundation, A Report to the U.S. Department of Energy on the Role of Integrated Resource Plans (IRPs) in 



a Rapidly Changing Electric Industry. August 23, 1994, Grant Number DEFG4493R4 10608, pp. 37-38,42.0-17. 



267 



-11- 

information from EIA) that Federal agencies are required to use in analyzing the costs 
and benefits of projects to conserve enwgy or use it more efficiently. 

c. Many organizations in energy industries (oil and gas companies, electric and gas 
utilities, etc.) develop their own forecasts for use in their analysis of their investment, 
production, and marketing decisions. Except for regulated companies, these forecasts 
generally are confidential and are seldom made public. 

d. Commercial forecasting and consulting organizations, such as Data Resources 
Incorporated (DRI), WEFA, Petroleum Industry Research Associates (PIRA), and 
National Economic Research Associates (NERA) are in the business of providing 
energy market forecasts for their clients. 

e. Research and trade associations, such as the Gas Research Institute (GRI), and the 
American Gas Association (AGA) devdop energy market forecasts primarily for their 
members. Their forecasts are often made available to others upon request. 

f A variety of other economic analysis and consulting organizations develop forecasts for 
their clients. 

g. Other organizations within EKDE and other federal government organizations (or 
contractors on their behalf) make forecasts that are different fi-om those developed by 
EIA. 

2. Have aO past energy market forecasts turned out to be wrong? 

During the past 16 years, very few publicly available energy price forecasts have been 
accurate. Most have overestimated energy demand and prices, and underestimated 
supplies."* Confidential forecasts developed by organizations in the energy industries for 
their own use may have been more accurate than forecasts issued by government and 
commercial forecasting organizations. 

As indicated earlier, most govemmem and widely used commercial forecasts have predicted 
and continue to predict increasing energy prices while real energy prices have trended 
downward. As demonstrated in Attachment 1, most energy prices have declined in real 
terms (i.e., when adjusted for inflation) during the past 20 years. 

3. Is it possible to devdop an accurate energy price forecast? No one knows for sure what 
future energy markets will bring. For example, no one predicted accurately the sharp 
increases in oil prices that occurred in 1973-74 and 1979-1980, or the sharp drops that 

' Some energy analysts and consultants have argued that energy prices axe likely to remain generally flat or decline from 
early 1 990 levels over the long term. 



268 



- 12- 

occurred in 1986. Despite the inadequacy of foresight, projections of energy prices must 
be made and used in analyses of the economics of any long-term investments, commitments, 
government spending programs, or other public energy policies. 

Forecasts are exceedingly di£5cult to make during periods of price volatility. Also, historical 
periods that included controls on prices (such as oil and natural gas) add confusion. More 
reliable forecasts may be somewhat easier to develop now that prices have become more 
stable than in the 1970s and eariy 1980s, and since prices for primary energy sources are no 
longer regulated by the federal government. However, none are likely to predict short-term 
volatility accurately. 

It does appear to be the case that forecasting organizations that have close and direct 
contact with people participating in energy markets and that focus heavily on market 
fundamentals are the most successful with their forecasting activities. 

In addition, there may be other factors at work which affect energy price forecasts. These 
are discussed below in connection with the question of whether there are systematic upward 
biases in energy price forecasts. 

The Danger of "Consensus" Forecasts. Some energy market forecasters and users of 
forecasts place considerable weight on the fact that two or more of the government and 
publicly available commercial forecasts tend to show similar forecasts. As illustrated earlier, 
ELA typically includes in its Annual Energy Outlook a comparison of its forecasts with those 
made by certain other organizations. Actually, it is unwise to derive comfort fi'om fact that 
several forecasts are roughly similar because: 

• Many forecasters use very similar assumptions (including underlying economic 
assumptions), computer models, and procedures, with the result that outputs are 
unlikely to differ, and 

• Many of the so-called "consensus" forecasts, like EIA, have consistently overestimated 
energy prices. 

Is there a systematic upward bias in energy price forecasts? The poor track record of 
most energy forecasters and the high cost to the nation of uneconomic decisions based on 
those forecasts quite naturally raises the question of whether there is a systematic upward 
bias that has affected energy price forecasts during the past 16 years. Attachment 3 explores 
this issue in some detail and concludes that: 

• There are many reasons to suspect that there is a systematic upward bias that is directly 
related to the interests of the forecasting organizations, and 



269 



-13- 

• That there does not appear to be compensating downward pressure that would offset 
the upward bias. 

How can decision makers protect themselves from making more uneconomic decisions 
because energy price forecasts may turn out to be inaccurate? 

Clearly, there are no sure ways to prevent uneconomic decisions. Decision makers will have to 
accept the &ct that foresight is limited. However, there are steps that can be taken that will give 
the dedsion maker a more firm basis for making decisions. In brief, they are: 

1 . Recognize that any analysis of the economics of a long-term investment decision, contract 
conunitment, regulatory decision, or public policy that will be affected by future energy 
prices includes somebody's forecast of future energy prices. 

2. Evaluate the forecasting organization and the way its forecasts are developed, including: 

a. Who made the forecast. Keep in mind that wide usage of forecasts from a particular 
organization may not be an important consideration. 

b. The track record of the forecasting organization during the past 10 years. Require the 
forecaster to present tables like those in Attachment #2 so that you can evaluate the 
forecaster's track record. The tables should include a comparison of forecast prices and 
actual prices like those in Attachment #2. 

c. What the assumptions are that drive the forecast (including, but not limited to 
assumptions about economic growth, disposable income, U.S. industrial mix, energy 
demand, energy supply, energy efficiency improvements). 

d. What internal relationships (e.g., relationships between crude oil prices and o^'ier 
energy prices) have been fixed ("hard-wired") in the model. 

3. Recognize that the outputs from forecasting models are largely dictated by the input 
assumptions and "hard-wired" relationships in the model. 

4. Learn as much as possible about \ht fundamentals of the energy markets that are important 
to the decision. 

5. Resist temptations to base decisions on "forecasts" of future energy markets showing up in 
newspapers and magazines. Such "forecasts" often are superficial, based on the views of 
a very few people who may or may not be knowledgeable about energy markets, and often 
have a purpose other than supplying the best available estimates to someone making an 
important decision. For example, such forecasts may be the work of someone trying to get 



270 



-14- 

attention for a particular proposal or, even, to get someone to make an investment or other 
decision that is beneficial to the "forecaster' or the forecaster's organization. 

6. Insist that you be presented analysis fiom more than one organization and that the forecasts 
reflect different views of potential oiergy markets. Using several forecasts that reflect the 
current "consensus" view adds nothing significant that one forecast fi'om the group doesn't 
provide. 

7. Insist that you be presented economic analyses based on: 

a. At least three fixture energy price paths (in effect a "high," "mid," and "low") Thembc 
should include a forecast that hokJs energy prices level in real terms and a forecast that 
shows energy prices continuing to decline in reail terms. 

b. Different price trcgectmies for different energy sources. For example, if a decision is 
being made among alternative energy sources (e.g., coal, oil, and natural gas), the 
differences between energy price paths will often be more important than the price 
trajectories themselves. 

8. Be sure that alternative decisions are tested against various price paths and different 
trajectories. An alternative that comes out well against all price paths and price trajectories 
will be rare. Proposed decisions that dont come out well against some of the paths and 
trajectories should be considered very carefully before going ahead. 

9. Watch out for the bias, conscious or unconscious, of the organizations or person(s) 
proposing the decisions, doing the economic analysis, or preparing the forecast on which 
the economic analysis is based. It is often easy to bias the results of a price forecast or an 
economic analysis to support a preferred conclusion. 

10. Recognize that, in the final analysis, virtually all long-term commitments involve risk. The 
decision-maker cannot know in advance that the "right" forecast has been used or that the 
right decision has been made if that decision depends on a long term energy price forecast. 

1 1 . Consider whether there are ways of hedging against risks and whether the costs of hedging 
are reasonable. 



271 



AtUchmcnt 1 



Average Annual Energy Prices In Constant 1994$ 


1973 to 1995 


Residential 
Electricity 
Cts oer kWh 


CO h* o oi 
h*- 00 O) oc 


Ico o 00 m 
o) o> 00 o 


CJ> rr •* -<»■ 
C3> o o o 


Tf CO CO T- 

O <3) C7> 0> 


CO h- CD CO 
00 CO 00 cc 


in TT CO 
CO 00 OO 


c 

8^ 

■&o 

^<= 

a> CI 
= c 

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Attachment 3 
The Potential for Systematic Upward Bias in Energy Market Forecasts 



During the past 16 years, energy price forecasts that grossly overestimated prices have played a major 
role in decisions that have turned out to be uneconomic ~ at great cost to consumers, taxpayers, and 
shareholders. The decisions include investments in facilities to produce, transport, convert, use, and 
conserve energy; long-term contracts; and spending for energy R&D projects. 

This history leads to three important questions: 

• First, are current forecasts still overestimating future energy demand and prices? 

• Second, is there systematic upward bias in widely used energy price forecasts? 

• Third, if there is, directly or indirectly, a systematic upward bias in energy price forecasts, what 
should be done by decision-makers to correct for the bias? 

This paper deals with the second issue. 

Experience with energy markets and energy forecasts reveals several clearly identifiable reasons why 
energy demand and price forecasts tend to have an upward bias. There do not appear to be offsetting 
downward biases. Potential sources and reasons for upwardly biased forecasts include the following: 

1. Forecasts used in attempts to influence public policy. Policy makers in Washington and the 
media are often targets of energy market forecasts that have an upward price bias. Sources include: 

a. Interest groups seeking preferential treatment Forecasts of high energy demand or high 
energy prices tend to support the objectives of various interest groups that focus their attention 
on Washington, D.C. Such interests may want special treatment in the form of contracts, cash 
subsidies, loans or loan guarantees, favorable tax treatment, access to mineral resources on 
public lands, protection against regulations that increase cost, creation or continuation of 
groups within the government that defend their interests, and/or statements of support for 
interest group objectives from high level government officials. 

Forecasts that suggest high potential for energy shortages, sharp increases in energy demand 
and prices, or high emissions from energy facilities have often proven to be effective in creating 
a "crisis'* expectation. Examples from the past few years include: 

1) Emphasis on high oil import dependence and U.S. dollar outflow from organizations 
favoring energy taxes or seeking favorable tax treatment, import duties on oil, access to 
public lands for resource development, subsidies for R&D, changes in licensing or permit 



3-1 



274 



2) Forecasts of inadequate supplies of natural gas to meet potential demand and sharply rising 
prices by organizations representing competing energy sources, and from gas producers 
seeking tax breaks for exploration and production. 

3) Forecasts of high usage of coal and other fossil energy sources leading to increased 
emissions, with the forecasts from organizations &voring tighter regulatory controls or 
taxes to discourage emissions of regulated pollutants and "greenhouse gases," and from 
organizations representing non-fossil energy sources. 

b. Government agencies pushing particular policies and programs. Government agencies can 
also introduce upward bias in energy donand and price forecasts. They, too, recognize the 
need for a crisis or perceived crisis to move Washington to accept their proposals. Examples 
during the past few years include agencies seddng funds for energy R&D programs, tighter 
energy efficiency standards, opening of federal lands for energy development, higher taxes on 
energy, and taxes or tighter standards on emissions. 

c Analysts or consultants pushing a particular policy position or seeking attention. 

Washington is a &vored place for energy and natural resource policy analysts and consultants 
u to push their favorite solution to an actual or perceived public policy problem. The resulting 

publicity provides personal satis&ction, additional business and, perhaps, invitations for more 
speeches. Members of this broad group are unlikely to attract attention unless they predict 
some sort of crisis or unusually high benefit if their proposal is adopted. 

2. Forecasts developed by private individuals and organizations are used to promote particular 
projects. Outside the Washington arena there are fertile grounds for the use of forecasts that 
predict high prices, particularly for oil and natural gas. For example, companies in energy industries 
must consider investments in exploration and production, new energy fecilities or programs, energy 
efficiency and conservation projects, or energy R&D projects. 

Those seeking internal company approval or outside financing for projects find it easier to produce 
favorable economic analyses to support their proposals //'they use forecasts of high prices for oil, 
natural gas or whatever the competing energy source happens to be. Further, once an energy 
investment is committed beyond recall, there is a continuing incentive to predict high prices for 
competing energy sources to head off questions about the wisdom of the investment. 

3. Forecasts produced by professional forecasting oi^ganizations may become entangled in client 
interests. Market and price forecasts produced by professional energy forecasting organizations 
vary widely in quality and in their expectations. Some are quite good. Others have a reputation for 
providing high price forecasts. The reasons a professional forecasting organization might produce 
high price forecasts appear to include the following: 

• Some individuals or organizations responsible for procuring forecasts from outside firms want 
high forecasts to help justify preconceived positions, projects or spending levels favored by the 
individual or his employing organization. 



-3-2 



275 



• High price forecasts, particularly when supplied by outside "experts," are useful when 
attempting to justify continuation of an incomplete projea after energy market conditions have 
changed. 

• Once a client organization has decided on a course of action based on an outside forecast, the 
forecaster is reluctant to show lower prices, even when market conditions change. 

4. Forecasts produced to encourage investments. Investment firms may also be a source of high 
energy demand and price forecasts. Such forecasts might be used to encourage investments in 
particular projects or companies that would benefit //energy prices rise. 

5. Forecasts produced by people who have a greater fear of being wrong on the low side than 
the high side. The unexpectedly high oil prices and, to a lesser extent, coal prices during the period 
from 1 973 to early 1 98 1 were a shock for many individuals and organizations. That experience 
seems to have contributed to a situation, particularly in government agencies, where individuals are 
very reluctant to be faced with a situation where energy supplies are less plentiful or energy prices 
higher than they have forecast. There appears to be a perception that penalties would be greater 
for being under prepared than over-prepared for a potential energy "emergency," or for 

. underestimating rather than over-estimating energy prices. Unfortunately, these people usually do 
not suffer the consequences of their overestimation of demand and prices. 

6. Underlying causes of biases in energy market forecasts. The potential existence of systematic 

upward bias in energy demand and price forecasts deserves attention by anyone that makes decisions 
that are affected by energy price forecasts. Biased forecasts may be intended in the case of some 
examples listed above, but there are other potential sources of error in energy market forecasts. 
Lack of foresight undoubtedly tops the list. But, for purposes of this discussion, three other 
potential reasons deserve comment: 

a. Complex models and questionable assumptions. Complex models driven by hundreds of 
assumptions and "hard-wired" relationships are always a source of concern. Unfortunately, 
assumptions and prescribed relationships within models are all too often not recognized, 
understood, or evaluated by users of forecasts. Often, forecasters may not understand the uses 
of their forecasts or have an opportunity to explain limitations. 

b. Outdated baseline information. Some forecasts are plagued by lack of current baseline 
information because of rapid changes in energy markets (e.g., natural gas, electricity), difficulty 
in obtaining accurate data, and/or limited direa contact with energy markets that could provide 
current information for use in baselines. 

c. Static vs. dynamic analysis. Some forecasters overlook the dynamic nature of energy 
markets. Millions of individuals and organizations make decisions daily that affect energy 
supply, demand and prices. A small change in some market factor (supply, demand, price, 
regulatory requirement, purchase of a more or less energy efficient product, etc.) can have a 
major impact on energy markets ~ particularly in times of strong interfuel competition. 
Forecasters who are not directly involved in working energy markets are often unaware of the 

-3-3- 



276 



alternatives that are available to individuals and organizations making decisions affecting those 
markets, particularly alternatives that result in lower prices. 

d. Overestiinating lead times. Some forecasters overestimate the lead time needed for markets 
to adjust to new signals, either by reducing demand or bringing on new supplies. The 
unexpected length of the in&mous "gas bubble" was due in part to the failure of forecasters to 
recognize that: (a) many gas producers had explored for and found reserves but had not begun 
production because the gas was not needed, (b) lead times needed to bring proved, non- 
producing reserves into production are often quite short, and (c) investing in new exploration 
did not make sense if the producer had an ample supply of proven reserves that were not yet 
in production. Forecasters need to recognize that statements made by energy producers about 
long lead time requirements may be a symptom of frustration with government requirements 
or business conditions and are not necessarily an accurate prediction of the time that will be 
required to complete a particular action, such as bringing a new production well on line. 

e. Failing to recognize marginal resources. Even a small, lasting increase in oil prices means 
that some economic alternative will be available tomorrow that wasn't available yesterday. A 
slightly higher price may make it economic to invest in a piece of equipment or process change 

„ to increase energy supplies or reduce energy use. For example, higher energy prices may mean 

that it is now more economic for an electric utility to subsidize an action to reduce electricity 
demand. A small change in price may change the economics. 

f. Clinging to "depletion" theories. Some forecasters choose to predict rising energy prices 
on the theory that resources such as oil are finite and eventually will run out. This approach 
contrasts with those who believe that the prices for oil, natural gas, other energy sources will 
behave like other commodities and are more likely to remain level or decline in the long term. 

g. Failure to recognize technology improvements. Some forecasters fail to take into account 
the potential for technology to continue to work to reduce costs of finding and producing 
energy resources, including natural gas and oil. 

Some forecasters seem not to recognize adequately the effect of alternatives that are "at the 
margin" of today's price. For example, millions of barrels of heavy oil or oil from tar sands 
cannot be produced economically today but may be economic if oil prices rise significantly. 

Promoters of new energy technologies seem to ignore supply and demand alternatives available 
"at the margin." They may assume that their &vorite energy technology will automatically 
become economic if prices rise. Such assumptions tend to ignore: (a) other energy sources or 
demand side alternatives at the margin that may become economic first, and (b) the possibility 
that progress is being made in other technologies that may make them even more competitive. 

Those who use energy market forecasts as the basis for their decisions, or use them in analyses done for 
decision-makers, should be alert to the possibility of bias. As a minimum, they should test proposed 
courses of action under a variety of energy supply, demand and price scenarios, including scenarios with 
lower energy demand and prices, and more plentiful supplies than are shown in "consensus" forecasts. 

-3-4- 



277 



PRESENTATION BY L D. HAMLIN 

SOUTHERN CALIFORNIA EDISON 

STATE TRENDS IN ENERGY AND THE 

ENVIRONMENT CONFERENCE 

JUNE 14, 1994 

SANTA FE, NEW MEXICO 



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Southern California Edison genuinely is an 
environmental utility. We are sincere about it. 
We work at it. 

Let me add a few more facts about us -- as 
important background for a discussion of life 
along the fault line. 

Like the average United States utility, we rely 
on nuclear energy for about one-fourth of our 
energy. 

Unlike the average utility, we purchase more 
than one-third of our energy from other parties 
- six times the norm. 



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And very much unlike the average utility, we 
are committed to contractual arrangements that 
force us to acquire a major component of our 
energy from qualifying facilities - equaling 17% 
of our capacity, and 32% of our energy. 



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The amount of our generation supplied by 
renewables and cogeneration climbed steadily 
from 1986 to 1992. The picture you see here 
was painted by California regulators, who saw 
the PURPA law as a golden opportunity to 
introduce competition ... and presumably lower 
power generation costs ... in the California mix. 



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The cost of such power has the same profile 
as the supply. We now spend well over two 
billion dollars a year purchasing this kind of 
power -- and it is mandated. Both renewables 
and cogeneration come onto our system as 
base load. They are not dispatchable. 



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This proved to be a miscalculation. 
The result and degree of that miscalculation 
can be seen in a comparison of California 
electric rates with those of other states. We 
are in the highest priced category. Each of 
Southern California Edison's kilowatt-hours 
costs our customers an average of ten cents. 



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For those who are not yet moved to tears by 
these graphs, let me break these costs down a 
bit. In 1993, our customers paid for cogen 
power at an average total cost of 6.1 cents per 
kilowatt-hour. Solar walks off with all the prizes 
at 1 5.5 cents. 

All renewables average higher than our 
average system costs. 



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And the costs mount up over the years. As 
Everett Dirkson used to say -- a million here 
and a million there, pretty soon you're talking 
real money. The annual payments above 
market costs that our customers make to QPs 
have been climbing steadily since 1986 - 
already totalling over two billion dollars. This 
year, we project more than $800 million in such 
overpayments. 

The peak will come in 1996, when our 
customers will pay close to $900 million more 
than market costs to QF's that were created by 
regulators to be competitive sources of power. 



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After 1996, these payments begin to diminish, 
as the regulatory mandated subsidies expire. 
In about 15 years, the wonderful impact of this 
regulatory experiment in utility micro- 
management will have run its course. 

By then, our California customers will have 
parted with a totally unnecessary and 
unproductive $7.9 billion. This single chart is a 
picture of what happens when market forces 
are over-run by good intentions. 

Think about this when you think about a 
government-operated health care system. 



Slide #10 



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Here is another comparison that speaks 
volumes. It depicts vividly the fault line that 
runs through our company today as we struggle 
to be an environmental utility. 

On the left are the cogeneration and renewable 
costs that you saw earlier. 

On the right are Edison's resource costs, 
ranging from 2.2 cents for hydro to 6.7 cents for 
nuclear. 

The net result of this sharp disparity is that 
Southern California Edison customers pay one 
cent more for their average kilowatt-hour than 
they should be paying. These cogen and 
renewable overpayments alone add just over 
10% to our market cost structure. 



Slide #11 



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To round out the regulatory influences, we also 
have a function within the CPUC called the 
Biennial Resource Plan Update. One of its 
tasks Is to tell utilities when and how much new 
capacity it needs, and how much of that 
capacity will come from renewable resources. 
This process is referred to as the BRPU. 

This regulatory cluster ... the CPUC staff ... 
DBA ... and BRPU ... has forced micro- 
management of utility operations -- a regulatory 
command and control approach. They specify 
demand ... the need for generation ... what type 
of generation ... when it must come on line ... 
and how much each kilowatt-hour will cost. 



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We think there is a better way -- better for the 
California economy, better for the environment 
... and better for Southern California Edison as 
a business enterprise. 

Step one ... acknowledge that regulatory 
command and control ... micro-management ... 
doesn't work. The numbers prove it. Social 
engineers may have worthy goals, but they 
should have the humility it takes to attain them. 

Second ... social engineering mandates should 
be eliminated as mandates . They may well be 
worthwhile as goals. It is the methods that 
we're concerned about - not the good 
intentions. 



Slide #13 



301 



Third ... both we and our regulators, working 
together, should adopt a business-driven focus. 
That focus, properly managed, can attain all 
sensible environmental goals, and do it at 
market prices. 

We believe that this is as true for you as It is 
for us. What happens in California may 
sometimes happen in large print, like that 
famous Hollywood sign, but we know that the 
fault line between environmental and regulatory 
goals and competitive costs runs through every 
other utility In America. 



Slide #13 - continued 



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We recognize that the pattern that fits the 
future for one utility will differ from that of others. 
But for what it may be worth to you ... and 
perhaps as background for the panel discussion 
that we are going to hold shortly ... let me 
describe what we see as an ideal way to build 
a future Southern California Edison - as an 
environmental utility, and simultaneously as a 
competitive utility. 

We would begin by bringing a new visibility to 
the relationship between environmental 
benefits and their costs. California customers 
should be able to make a decision on the 
issue. It is, after all, their quality of life and their 
personal finances that are at stake. 



Slide #14 



304 



The first step toward that goal would be to 
separate Edison's power generating capability 
and take it out of the core utility. That power 
portfolio, balancing all generation assets in the 
same mix, could compete at somewhere 
betw een 5jind 6 cents per kilowatt-h our. One 
ointTgreiTadvantages would be freedom from 
much of the administrative overhead that is part 
of utility operation. A power generation entity 
needs few lawyers or auditors or customer 
service personnel ... no more than an 
independent power producer needs them. 



Slide #14 - continued 



305 



A power generation entity offering kilowatt- 
hours at that price would establish a clear 
market level. Other sources of energy -- 
whether cogen or renewable - would have a 
clear target to shoot at -- and a tough 
competitor to beat. Because we would sell our 
power at a price based on our capacity mix, we 
would not have to consider write-downs of our 
facilities. We are convinced that they are 
competitive in meeting the needs of our electric 
system. 

Probably the most satisfying fact about such an 
arrangement would be our ability to show one 
and all that we can compete with any alternate 
source - including cogen plants. 



Slide #14 - continued 



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Mr. Joseph J. Romin 

Acting Principal Deputy Assistant Secretary 

Office of Energy Efficiency and Renewable Energy 

U.S. Department of Energy 

Answers to Followup Questions 



308 



HEARING OF THE SUBCOMMITTEE ON ENERGY AND ENVIRONMENT 

COMMITTEE ON SCIENCE 
U.S. HOUSE OF REPRESENTATIVES 

on 

U.S. Energy Outlook and Implications for Energy R&D 

Thursday, March 14, 1996 
2318 Raybum House Office Building 

Followup Questions Submitted to 

Mr. Joseph J. Ronun 
Acting Principal Deputy Assistant Secretary for Energy Efficiency and Renewable Energy, 

U.S. Department of Energy 

Prepared and Oral Testimony 

Ql. On page 5 of your prepared testimony, you state: "One analysis by DOE's Oa 
Ridge National Laboratory in Tennessee put the cost to the U.S. economy over th 
past 25 years of over reliance on OPEC oil, including the cost of price shocks, at $ 
trillion. Oak Ridge has estimated that a price shock in 2005 could cost the U.S 
economy hundreds of billions of dollars." 

Please provide copies of this analysis and estimate, including the supportin 
documentation. 

Al. The cost to the U.S. economy of over reliance on OPEC oil is estimated in a report by th 
Oak Ridge National Laboratory: The Outlook for U.S. Oil Dependence," by David I 
Greene, Donald W. Jones and Paul N. Leiby, May 11, 1995, report number ORNL-6873 
[Note: A copy is attached.] 



309 




ORNL-6873 



OAK RIDGE 
NATIONAL 

LABORATORY 

The Outlook for U.S. Oil 

Dependence 



^ 



David L. Greene 

Donald W. Jones 

PaulN.Leiby 



MUUGCDir 

LOCKHEED MARIM ENBtOTrrSTEUS, MC. 

FORTHEtWITBXTATIt 

OEPAKTMENTOFDKIISY 



310 



THE OUTLOOK FOR U. S. OIL DEPENDENCE 



• David L. Greene 
Center for Transportation Analysis 



Donald W. Jones 

Paul N. Ldby 

Energy and Global Change Analysis 



Oak Ridge National Laboratory 



> 



prepared for 



Office of Transportation Technology 
U. S. Department of Energy 



ORNL^73 



May 11, 1995 



311 
TABLE OF CONTENTS • 

UST OF nOURES .' iv 

UST OF TABLES iv 

ABSTOACT '. :.:...: v 

ACKNOWLEDGEMENT. vu 

1. THE "OEL PROBLEM" 1 

1.1 INTRODUCTION 1 

\2 IS THE WORLD "RUNNING OUT OF OIL"? 5 

1.3 THE DISTRIBUTION OF WORLD OIL RESOURCES 7 

1.4 .THE INELASTICITY OF WORLD OIL SUPPLY AND DEMAND ..... 10 
IJ THE MONOPOLY POWER OF OPEC 11 

1 .6 IMPACTS OF MONOPOLY BEHAVIOR ON THE U. S. ECONOMY . . 21 

1 .7 THE FUNDAMENTALS HAVE CHANGED LITTLE SINCE 1973 .... 26 

2. THE PRESENT AND FUTURE OIL PROBLEM .....'. '. 33 

2.1 A SIMPLE SIMULATION MODEL . , :.33 

2.2 1993-2010 BASELINE FORECAST 35 

2.3 ALTERNATIVE SCENARIOS , 36 

2.4 SIMULATION RESULTS 40 

2.4. 1 A Two-year Price Shock in 2005 40 

2.4.2 Impact of Releases from Strategic Reserves 41 

2.4.3 Economic Impacts on the United States 44 

2.4.4 Increasing Price Elasticities 48 

3. CONCLUSIONS ..." 53 

4. REFERENCES 57 

APPENDDC A .63 

APPENDIX B '. : : : . 69 



••• 

lU 



312 
USTOFnCURES 



Figure 1. Crude Oil Prices, 1968- 1993, Refiner Acquisition Costs of Imported 

Crude OU ...2 

Figure 2. World Oil Resources Estimates, 1993, Proved Reserves v. 

Ultimate Resoivces ... 9 

TigaitS. Crude Oil Production by OPEC Core, Annual Ou^ut Relative 

101973 14 

Figure 4. Oil Prices and Core OPEC Market Share, Historical and Projected 19 

Figure 5. OPEC Share of World Oil Market, Historical to 1 993 and Projected 

to 2010 : ...27 

Figure 6. Energy and Oil Costs as Shares of U. S. GDP 28 

Figure 7. U. S. Net Oil Imports 29 

Figure 8. Use of Petroleum by Sector, 1973-1992 30 

Figure 9. ' Price v. OPEC Market Share, Scenario: Supply Shock in 2005 ...... 42 

Figure 10. OPEC Gross Revenues fix)m 2005 to 2010, Alternative Scenarios .... 43 

Figure 11. World OO Prices in Base Case and Price Shock Scenarios 45 

Figure 12. Costs of Oil Dependence to U.S. Economy: Price Shock Scenario 46 

Figure 13. Costs of Oil Dependence to U.S. Economy: Ppce Shock & 

Doubled Elasticities 50 

Figure 14. OPEC Market Share, 1995-2010, Alternative Scenarios 51 



LIST OF TABLES 



Table 1. Simulation Model Short-Run Elasticities , 34 

Table 2. Oil Prices, EIA Simulation of8MMBD, 9-Month Oil Supply Disnqjtion 

intheYear2000 v... 38 

Table 3. OPEC Revenues and U.S. Economic Impacts Under Alternative Scenarios 

(Billion 1993 $ Present Value, 1993-2010 39 

Table A.1 Recent Estimated Short- and Long-Rim Price Elasticities of Oil Demand . . 65 

Table A.2 Price Elasticities of World Oil Supply 67 

Table B.l Estimates of the Impact of Oil Price Shocks on GNP 72 



nr 



313 



ABSTRACT 



Maricet share OPEC lost in defending higher prices from 1979-1985 is being steadily 
regained and is projected to exceed 50% by 2000. World oil markets are likely to be as 
vulnerable to monopoly influence as they were 20 year^ ago, as OPEC regains lost market 
share. Hie U.S. economy appears to be as exposed as it was in &e early 1970s to losses from 
monopoly oil pricing. A simulated 2-year supply reduction in 2005^ boosts OPEC revenues 
by rbughly half a trillion dollars and costs the U.S. economy an tqjproximalely equal amount 
The Strategic Petroleum Reserve i^pears to be of little benefit against such a determined, 
multi-year supply curtailment either in reducing OPEC revenues or protecting the U.S. 
economy. Increasing the price elasticity of oil demand and supply in the U.S. and the rest, 
of the world, however, would be an effective strategy. 



314 



ACKNOWLEDGEMENT 



The andiois iKish to tiiaiik Phil Pattason and Bany McNutt for tiidr interest 

colleagues Jeny Hadder and Randy Curiee for dieir comments on earlier drafts. Any 

lanaining enms are tiie author's responsibility. This repoit is dedicated to Nfichael Greene. 



vu 



315 
1. THE **OIL PROBLEM^ 



i.l INTRODUCTION 

n October 1973, tiie Arab members of the Organization of Petroleum E3q>oiting Coumries 
OPEC) annoimced an oil boycott against countries that aided Israel during the "October 
Var.** From Sqrtember 1973 to December 1973, tiiey reduced their crude oil production t^ 
\2 MMBD. World oil prices doubled between October 1973 and January 1974 (Figure 1). 
Lgain in 1979-80 a 5.4 MMBD loss of production from Iran and Iraq, about 9% of world 
irpduction, resulted in another doubling of the price of oil. In both instances, OPEC 
oembers restrained production in succeeding years, electing to keq> prices at die new higher 
evels. From May to December of 1990, total oil output firom Kuwait and Iraq fell by 
.8 MMBD, about 7.6% of worid oil production. From the second to &e fourth quarter of 
990, oil prices again nearly doubled, from $17.50 to S33 per barrel (1993 $).' This latest 
rice shock was short-lived in comparison to the others, as Saudi Arabia put its enormous 
lack capacity to use, expanding production by 3 MMBD to make vp most of tiie lost supply 
ratom,1993,p.l38). 

lie cost to the United States of oil price shocks and si^ly manipulation by tiie OPEC cartel 
as been enormous. Recent estimates put the cumulative costs from 1972 to 1991 at over 
4 trillion 1993 $ (Greene and Leiby, 1993). Monopoly pricing of oil hurt die U. S. . 
conomy in three different wa^. First, by making oil scarcer, higher oil prices reduced tiie 
uqnit the economy was amiable of producing with the same resources. Second, sudden, 
Mastic price changes further reduced domestic product because wages and prices caimot . 



•Prices in ifais piper vc 1993 dollars, except where indicated otherwise. 

1 



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adjust quickly enough to mamtain full eiiq>loyinent of ^ fictors of production. Thus, in the 
«hort-tenn, tiie economy co|uld not even attain ihc lower long-run potential gross domestic 
product (GDP). Finally, monopoly pricing transfers the wealth of U. S. citizens to the 
owners of foreign oil in the form of monopoly rents. Each one of these was a major 
component of the' S4 trillion loss the economy suffered over the past two decades. 

But will this ever hqjpen again? Today oil si^^lies are abimdant Oil prices are relatively 
low and OPEC qjpears to be in disarray. Is the oil problem over? That is the question ^s 
paper addresses. It begins by considering the nature of the oil market and the &ctors that 
allow OPEC to wield monopoly power. Oil resources, according to our best estimates, are 
as concentrated as ever in the Persian Gulf and in the OPEC nations. Wiih iix rest of the 
world (ROW) drawing down its reserves at nearly twice the rate at wliich OPEC is using its 
reserves, OPEC's share of world oil supply must rise, and that is exactly vibaX is bappaang. 
WiHx an increase in market share comes a greater ability to raise prices. Fundamental 
economics ordains that the potential market power of the OPEC cartel depends on its market 
share, the ability of consumers to reduce oil use in response to higher prices, and the ability 
of ROW producers to expand oil supply in response to a reduction by the cartel. Not only 
is OPEC's market share rising toward its historic high point, but recent studies (cited below) 
provide no evidence of increases in the price elasticities of world oil s\^)ply and demand. 
Greater maricet share and continuing world dependence on OPEC oil will give the cartel the 
opportunity to raise oil prices. The chance to gain enormous wealth will give them the 
motive. In a public speech in March of 1 993, Francisco R. Parra, former Secretary General 
of OPEC and senior executive of Petroleosde Venezuela made it clear that he understood 
both. 



To most observers, it seems Obvious that the individual and collective 
interests of OPEC member countries would be well served by a speedy and 
substantial increase in the price of crude oil .- say, to $25 - to be followed 
over a period of time by a series of smaller ones to at least keep pace with 
inflation.*' 



OC TCiJI 



318 



*^t also seems obvious that OPEC has the collective power to achieve such 
. an increase in prices. Why not do soT* 

The prize is $5 billion per month." (Parra, 1 994, pp. 1 8-19, p. 23.) 

Next, &.t factors that detemine the impact of oil price increases on the U. S. economy are 
examined. Unfortunately, it eppeais that future oil price shocks would be just as harmful to 
fbs U. S. economy as those of the past Recent studies reafBrm that oil price increases cause 
gross national product (GNP) to M and prices to rise (e.g., Moosa, 1993) and suggest no 
significant differences between the impacts on the U. S. economy of the 1990 price shock 
and those of 1973-74 and 1979-80 (Tatom, 1993; Mork, Olsen and Mysen, 1994). Tlie 
reason is that little of fundamental importance has changed. The cost of oil as a percent of 
U. S. GNP, a key determinant of the macroeconomic impact of a price shock, was 1 .5% in 
1973. It was 1.5% in 1992, as well. Oil imports, the other key determinant of the loss of 
U. S. wealth during a price shock, supplied 35% of U. S. oil use in 1973 and peaked at 46% 
in 1977. U. S. petroleum imports were 44% in 1993 and averaged 46% through the first 10 
months of 1994 (U. S. DOE/EIA, 1995a, table 1.8). Of course, the U. S. now has the 
strategic petroleum reserve, 592 million barrels of oil to be drawn on in a sixpply emergency. 
The real issue for world oil prices is total worid stocks, however. In 1973 petroletmi stocks 
held by Organization for Economic Cooperation and Development (OECD) countries 
amoimted to 2.-6 bUlion barrels, about 44 days of total world consumption. At the end of 
September 1994, OECD stocks totaled 3.7. billion barrels, equal to to 57 days of worid oil 
use. Government-owned reserves accounted for nearly all of the increase, totaling 
919 million barrels or 14 days additional siqjply (U. S. DOE^EIA, 1995c, tables 1.1c, 13 and 
1.6). If used properly the additional reserves will help, but are unlikely to prevent a 
determined supply reduction by OPEC nor protect the U. S. economy from rts effects. 

Finally, &e potential future costs of monopolistic <>il supply and siQipIy curtailments are 
explored using a simple simulation model. Beginning with a U. S. Dep art me nt of Energy 
forecast as a Base Case, a two-year siqjply reduction comparable m size to those of the past. 



319 



is simulated Such a si^jply cutback, beginmng in 2005, is likely to cost the U. S. economy 
half a trillion dollars. The Strategic Petroleum Reserve, indeed, the strategic stocks of all 
OECD countries combined, appeal to be an ineffective defense against such a sapply 
reduction. Increasing the short- and 16ng-nm elasticities of oil dqnand and si^ly by 50% 
to 100% on the other hand would be an effective strategy, this, however, would require 
major advances in the technology of transportation energy use and liquid fuels sv^ly. 



1 J IS THE WORLD "RUNNING OUT OF OIL"? 

The answer to this question seems patently obvious: Yes, 4e world's oil resources are 
ultimately finite and subject, eventually, to being exhausted. But we are interested in a 
different question: is the economic theory of exhaustible resources the appropriate 
Aeoretical context for analyzing the world oil maricet today? Interestingly, the answer to this 
question turns out to be no.,Leading oil maricet economists have concluded that the brilliant 
theory of depletable resources developed by Hotelling (1931) is not particularly useful to 
describe the world oil market, primarily because it pertains to a strictly limited, known 
quantity of oil. As Adclman (1 990, p. 9) has pointed out over and over again, 

"Oil reserves are not a one-time stock to be used ij?), but an inventory, always 
being consumed and replenished by investment, in new and especially in old 
fields." 

■ ,«> • ■. . 

The basic resuJt of the Hotelling analysis is that in the long nm the net price of oil (pnce 
minus xv» ^nst\ extraction costs]) will rise steadily at the rate of interest 

Despite several noteworthy efforts to modify the Hotelling model to captare the reality of the 
worid ofl market (e.g., Stiglitzi 1976; Gilbert, 1978; Alsmiller, et al., 1985; Marshalla and 
Nesbitt, 1986), it remains an unrealistic representation of the nature of oil resources 



320 



(Wctldos, 1992; Banks, 1986). Mabio (1992, p. 3X has fingered peilu^s the most critical 
issue. 

*niie geophysicd limits may bite one day, but this day of reckoning is so. fitf 
ahead as to have, on any conceivable assumption about discount rates, no 
impact on price.** 

This view has been echoed most recently by Gordon (1994, p. 4) who points out tiiat in most 
cases resource iexhaustion is not a pressing problem either because the exhaustion costs are 
too low to matter or because the constraint on resources is nonbinding. 

History is very instructive with respect to Msc fears about resource depletioiL Yergin (1991, 
pp. S 1-52) described the situation facing the Standard Oil Trust in the early 1 880s. 

* . . ' » • 

"There was always the fear that the oil would run oul l.And who kntew 
when? Could the industry survive even another decade?...Various experts 
cautioned that the Oil Regions would soon be depleted. In 1885, the State 
Geologist of Pennsylvania warned that 'the amazing exhibition of oil' was 
only 'a temporary and vanishing phenomenon-one A^ch young men will 
live to see come to its natural end." . 

Adelman (1989, p. 19) made the following acerbic observation about U.S. reserves in the 
second half of the twentieth century. 



"No area in the world is as drilled-up today as this country was (excliiding 
Alaska) in 1945; 'Remaining recovmtble reserves' were 20 billion barrels. 
In ^ next 42 years; the 'lower 48' produced not 20 but 100 billion, and had 
20 billion left Equally important, there was no mcrease in real cost before 
1973;" . • ' .' 

"Was this 100-billion barrels-plus, and stable costs, a miracle, like Moses 
striking tite desert rock to get water? Hardly. The lesson is that oil reserves 
are not a fixed stock to be allocated over time, biit an inventory, constantly 
consumed and replenished by investment" . 



321 



CoDsideriiig the reserves of the OPEC countries, one finds that piitative "exhaustion dates" 
lie so &r in the future that it Is hard to conceive how they could be relevant to OPEC pricing 
policy. At 1992 production rates, the proved reserves of Saudi Arabia would last 85 years, - 
those of Kuwait 250 years, the UA^E's 115 years, Iraq 135, Iran 75, and Lybia 40 years, 
according to Oil and Gas Journal estimates. Discounted at any reasonable market rate of 
interest, dollars 1 00 years from now are not worth much in comparison with dollars today. 

Furthermore, Middle East OPEC countries can expand their reserves with little effort 
Finding costs which, in non-OPEC areas are usually a significant component of production 
costs (Adelman, 1986b), in the Middle East are trivially low, as the Deputy Secretary 
General of OPEC has noted (Al-Chalabi, 1988c, p. 231). 

*■ ■ "Thirdly, the cost of finding a new barrel of oil in the Middle East is so low 

as to be an economically irrelevant &ctor, compared with the cost of finding 
one barrel outside OPEC. It is estimated that the cost of finding one barrel 
in the non-OPEC area is generally between $5 and $8, A^iiereas in the Middle 
East is always less than SI and could be as low as 10-20 cents." (1988 
• dollars, one assumes) 

Jf oil is not an "exha\istible resource" then a much simpler model of world simply and 
demand can be xised to imderstand the world oil market Furthermore, there is no imperative 
Aat oil prices rise over time in a competitive maricet This point is crucial because if it is not 
the inexorable economics of exhausting the world's oil resources that causes world oil prices 
to rise then it miist be something else, and that something else turns out to be the exercise of 
monopoly power. 



13 THE DISTRIBUTION OF WORLD OIL RESOURCES 

By accident of geological history, the majority of the world's oil reserved are concentrated 
within die borders of a relatively few nations. The member states of OPEC hold the lion's 



322 



dure of world ofl itsoutces by any measure. Hie Otf am/ C^Joumo/ estimates that OPEC 
countries contained 77% of the world's 996 billion bairels of proved reserves of crude oil 
World Oilt yAdch puts reserves in the former USSR 130 billion barrels higher has OPEC's 
share at 66% of 1.092 billion barrels (U. S. DOE/EIA. 1994c, table 36). Although there is 
no. standard international definition of proved reserves, these estimates generally reflect 
crude oil resources ibst have been discovered and are economically and technically feasible 
to produce at prices similar to those prevailing in recent history. Certainly there are more 
petroletmi resources in the world than reflected in the proved reserves estimates.^ 

Best estimates of tiie world's ultimately recoverable petroleum resources, discovered and yet 
to be discovered, however, also show OPEC dominance. The U. S. Geological Survey's 
world petroleum assessment puts "World Ultimate Resources" of oil at 23 trillion barrels, 
of which about 0.7 trillion barrels have already been produced. This leaves 1 .6 trillion to be 
recovered, 60% more than reflected in proven reserves (Masters, Attanasi, and Root, 1994). 
Of the estimated remaining ultimate resources, OPEC countries hold just over 55% and the 
U.S. just under 6%.' At present, OPEC nations are producing at a rate of about 1% of their 
ultimate resources per year. The rest of &e world, however, is drawing down their resources 
at an average rate of 1 .9% per year. The trend is clear: an increasing OPEC share of world 
ofl resources and of world oil productiotL 



'Ahhou^ teknowledgiog some unceitainy in dieir esdoutes, petroleum geologists teem confident . 
in their general level. *^e believe that, worldwide, recoverable conventioital oil and gas exist in ultimate 
quantities ap p r o xim ating 2300 billion banels (370 Gm' ) of oil and 12000 trillion cubic feet (340 Tin' ) of gas. 
These vahies are Hmited by our concepts of woild petroleum geology and our understanding of specific basins; 
Boneifaeleu, continued expansion of exploration activity, around the worid, has resulted in only minimal 
adjustments to our quantiutive understanding of ultimate resources." (Masters, Attanasi, and Root,- 1 994) 

- 'The most recent U.S. Geological Survey (199'S) assessment of technically recoverable resources 
puts the total slightly higher, at 1 12.6 billion barrels up from 91.7 billion banels. AMtough a significant 
change for the U.S., this is only about I */• of the total worid estimates. 



323 



Figure 2. 

\A/orld Oil Resources Estimates, 1993 

Proved Reserves v. Ultimate Resources . 





OPEC 



□ U.S. 



ROW 



Sonree: U. S. DOE/EIA. 1994 c. Table 36; Masters, Attanasi, and Root, 1994, Table 1 



Although world petroleum resources are ultimately finite, the world is not imminently 
"running out of oil" (Gordon, 1994). At 1992 consumption rates, the 1.6 trillion barrels of 
ultimate resources would last 65 years. There are, in addition, vast unconventional oil 
resotirces in the foim of extra heavy oils, tar sands, and oil shale. Esctra heavy oil deposits 
in &e Orinoco province of Venezuela and tar sands in Western Canada together are judged 
to be equivalent to 0.6 trillion barrels of crude oil, roughly the proved reserves of the entire 
Middle East. These two deposits alone would add another 25 years at cunent consumption 
rates. DifBculty of recovery and processing, and adverse environmental impacts will 
increase the cost of these resoivces, however. The problem is not <Mie of "running out of 
oO," it is rather a problem of the costs and environmental impacts of oil use. 



324 

1^ THE INELASnCiTY OF WORLD OIL SUPPLY AND DEMAND 

After the concentration of resources within the boundaries of a few countries, the most 
important fact about &e world oil market is the inability of supply and demand to respond 
quickly to diock& Put another way, the short-run elasticities of oil demand and supply are 
veiy small relative to their long-tun elasticity. The evidence is veiy consistent on ftis point: 
long-run oil market elasticities are about ten times greater than shoit-run elasticities (Table 1 , 
below, Huntington, 1991, table 4; 1994, ^)pendix; Greene, 1991, table 1). It is difBcuh to 
overemphasize the in^jortance of this for tmderstanding the operations of the oil market and 
tiie role of the OPEC cartel in it. It explains why prices can double or triple as a result of 
very small changes in supply. It explains why monopoly pricing of oil can yield enormous 
profits for several years, but only at the expense of market share and the erosion of moiM>poly 
influence (Adebnan, 1986c, p. 325). It explains why the most profitable strategy for the 
OPEC oil cartel is a series of price shocks sandwiched between years of lower prices 
(Suranovic, 1994). There is a relatively high degree of consensus on tiiis point in the 
literature and recent studies show the same magnitudes for price elasticities as older studies. 

The most comprehensive assessments of oil maricet simply and demand elasticities have been 
conducted by the Energy Modeling Forum (Huntington, 1991; 1993). These provide a 
consensus that the short-run elasticity of oil demand is less (in absolute value) than -0.1, and 
tiiat the long-r\m elasticity is less than -1.0.* At an oil price of qiproxiinately $30/bbl., shoit- 
run price elasticities of demand in Huntington's 1993 studyof nine major world oil models, 
range from -0.027 to -0.1 15, with a mean and median of -0.075. Long-run price elasticities 
of demand ranged from -0.157 to -2.544, with a mean of -0.562 and median of -0.437. 
Gately and Rappopoit (1988) estimated a U.S. oil price elasticity of demand of -0.07 for one 
year and -038 over a ten-year period. In a recent simulation study, Huntington (1994) used 
short- and long-run elasticities of -0.06 and -0^6, respectively to represent both OECD and 



Throu^out this paper, chort-nin applies to a period of one year. 

10 



325 



nos-OECD countries. Stiranovic (1994) i^rts short-nm price elasticiti^ of -O.0*^for die 
U.S., -0.06 for Japan and Europe, and -0.02 for the rest of the worid outside of Orcc. A 
-more recent study by Gately (1992) produced a shoit-run U.S. price elasticity of -0.066, 
v/biie the short-run elasticity in developing economies was -0.01 . 

Oil supply is also veiy inelastic in the shoit-iun. In Huntington's (1994) recent simulation 
analysis be chose si^Iy elasticities of 0.04 and 0.4 for short- and long-run re^>onses to 
represent both OECD and non-OECD su^jply. Suranovic (1994) reports values of 0.05 for 
U.S. short-run si^ly elasticity, 0.01 for Canada and Europe, and 0.05 for the rest of the 
world outside of OPEC. A previous assessment by Huntington (1991) of supply elasticities 
in eleven world oil models found average sboit-run elasticities of 0.05 for the U.S., 0.05 for 
the OECD, 0.03 for total non-OPEC world oil supply. The corresponding long-run 
elasticities were 0.39, 0.43, and 0.40. Again, these were calculated at oil prices in the 
vicinity of $30 per barrel. Al-Sahlawi (1989) reports an estimated supply elasticity for major 
ttott-OPEC producers of 0.03 for the short nm and 0.60 for the long run. 

These patterns of oil price responsiveness give the OPEC cartel enormous scope to influence 
oU prices in the short-run, but &r more limited monopoly power over the longer term. This 
fact is crucial to understanding the past and possible future of the world oil market 



13 THE MONOPOLY POWER OF OPEC 

' The £act that OPEC, or at least a core groiq> within OPEC, has acted as a monopolistic cartel 
in the past is widely accepted by oil market economists. The process by vAndi from OPEC's 
incqjtion in 1960 ibt member countries wrested control and ownership of their oil resources 
from foreign concession holders has been chronicled by Yergin (1991, Chs. 22-29). This 
together with the tightening of the world oil market in the early 1970s set the stage for the 
dramatic exercise of OPEC market power in the first oil price shock of 1973-74, when an 

11 



326 



Anb OPEC cutback bf 5 million barrels per day produced a net supply shortfall of 4.4 
million barrels per day (Yergin, 1991, p. 614) and a tripling of &e real price of piL 

Although OPEC does not control the entire world oil supply, it still has considerable 
monopoly power. In reality, absolute monopolies are rare. Even fee Standard Oil monopoly 
it its peak in I S80 controlled 90%, not 100%, of U.S. refinery capacity (Yergin, 199i,p. 95). 
An additional complication is that OPEC is not a' single entity but a cartel of sovereign 
states.^ Technically, OPEC is an imperfect monopolistic cartel of the von Stackelberg type 
(Mabro, 1 992). A von Stackelberg monopoly holds a large enoxigh market share to influence 
prices, but its monopoly influence is limited by a nontrivial amoimt of competitive supply. 
Dr. Fadihl J. Al-Chalabi, Deputy Secretary General of OPEC described OPEC's role in just 
ftis way (Al-Chalabi, 1988b, p. 115). 



"As the only structured group of sellers in the world energy trade, OPEC can 
take pricing and production decisions which have a far-reaching impact on 
the world energy market. Other energy sellers are scattered in separate 
entities, with no common, coordinated policy action other than the objective 
of securing and maintaining a market share at a price high enough to allow 
them to continue investing in the industry." 

This is as precise a definition of a von Stackelberg cartel as one cotild ask for. 



OPEC looks like a cartel and talks like a cartel, but does it act like a cartel? Empirical 
studies by Dahl and Yticel (1991), Jones (1990), and GrifSn (1985) have rejected the 
hypothesis that OPEC's behavior is consistent with that of competitive producers. GrifBn 
clearly and concisely summarized the results of his empirical analysis (1985, p. 962). 



*Webster's Nmtfa New Collegiate Dictionary defines a cartel as, " 2 : a combination of independent 
commercial or industrial enterprises designed to limit competition or fix prices." Substitute states for 
cial or industrial enten>rises. 



commercial or industrial enterprises. 

12 



327 



*Teifaq;>s die most strildng aspect of the oiqnrical tests is the clear<ut oatuie 
of the results. First, among OPEC countries, tiie partial market-sharing cartel 
model could not be rejected for all 1 1 coimtries, whereas frequent rejections 
■re observed for the other theories. Second, in terms of the ability of the • 
yarious models to explain production, die partial market-sharing cartel model 
dominates the competitive model Third, in comparisons with 1 1 non-OPEC 
coimtries we observe the opix>site tendency— &e conq>etitive model could not 
be rejected for 10 of the 1 1 non-OPEC producers." 

The basis for the conclusions of these formal statistical tests is obvious from an inspection 
of the oil production data of OPEC core members. When real prices tripled from 1973-1975, 
Kuwait, Lybia, Iran, and Saudi Arabia all decreased TaHaa than increased ou^ut Again in 
the 1979-1982 period, while oil prices skyrocketed as a result of lost sxqjply from Iran and 
Iraq during their bitter war, all core members consistently cut back production (Figure 3; 
U. S. DOE/EIA, 1994a, Table 11.5). Competitive producers would have increased, not 
decreased production in response to higher prices. OPEC producers cut production in order 
to maintain the high pricc. B\it by cutting production, OPEC members eventually weakened 
their own market power, leading to a reduction of revenues. . 

The gradual erosion of revenues and loss of market power finally led to a collapse of the 
cooperation among OPEC members necessary to restrict ou^ut, and the price "collapse** (to 
long-nm monopoly price levels) in 1986. The head of OPEC's Energy Studies Department 
described the process as follows. 



"Against such a background, OPEC found it increasingly di£5cult to stabilize 
the oil market, maintain strong prices and prevent a large-scale decline in its 
revenues, from ahigh of $287 bn in 1980 to S131 bn in 1985. The decrease 
in revenues occurred in spite of strenuous efibrts to maintain prices, by 
continually scaling down OPEC production and the institution and 
maintenance of production quotas for Member Countries since April 1982." 
(Al-Fathi, 1990, pp. 2-3; current $, one assumes.) 



13 



328 



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Dr. Subroto, tiien Sectctazy Genetal of OPEC offered &e same view of the colli^se of oil 
prices following OPEC's defense of high prices after the 1979-80 shock (Subroto, I989» 

P-T)- ' \ ..... 

"Since then,- we have resorted to a range of agreements aimed at achieving 
equitable, sustainable levels of price and production in a stable operating 
environment This has almost always involved our Member Countries 
sacrificing market share for the good of all prodiicers and consumers. As 
mentioned earlier, this ultimately became too much of a burden, most notably 
in 1986 v^en the international oil price structure collapsed." 

Not only has OPEC acted as a cartel, but it has earned enormous profits by so doing. 
Dr. Al-Chalabi, Deputy Secretary of OPEC recounted the windfalls produced by the 1979-80 
and 1973-74 oil price increases (1988a, p. 5). 

•"OPEC's income from oil rose from about $136 billion a year to the 
staggering figure of about $287 billion during the same period. This must 
have aggravated the economic impact of the 'first oil shock,' when OPEC's 
oil revenues rose from about $24 billion in 1972 to about $120 billion in 
1974.'' (Again, one assumes current $.) 

Finally, if OPEC producers were competitive, their marginal production costs should at least 
^^proximately satisfy the competitive market conditions that marginal costs of production 
equal the market price. Detailed and carefiil analyses by Adelman (1986; Adelman and 
Ward, 1980), have shown that this condition is not close to being satisfied. For example, 
in 1978 the investment needed to deveic^ an incremental barrel of oil in &e U.S. was 
69 times wiiat it was in Saudi Arabia (Adelman, 1986, p. 389 and table 1). Updating 
Adehnan and Shahi's (1989) estimates of OPEC's finding and lifting costs for oil, Dahl and 
YQcel (1 99 1 ) concluded that in all OPEC countries except Nigeria and Venezuela, costs wi^ 
$2.20 per barrel or Jess (1993 $). Venezuela and Nigeria's costs were estimated to be less 
than $4 and Saudi Arabia's certainly less than $1 per barrel. With prices fiu- above marginal 
costs, competitive producers would expand ou^uL But OPEC members did jhA, and are not 



IS 



330 



^ut there was obviously massive restraint in Saudi Arabia. The sum of .; 
maiginal cq)ital and operating cost..was about IVo of the priceof $12.70." 
■ (Adehnan,1986,p.391) 

SevenI estimates have been made of v«4iat oil prices would be if &e world oil maricet were 
comp e titiv e. The most recent estimate by GrifBn and Vielhaber (1 994) put the competitive 
market price at %125 per barrel ($6.60 per barrel in 1990 $). Other estimates mclude 
Adehnan*s (1989) $6.25 per barrel, Morison's (1987) range of $625 to $7.70 and Brown's 
(1987) range of $8.50 to $1 1.10 per barrel (all converted to 1993 $). All are obviously well 
below maricet prices since 1973. 

To summarize, OPEC talks like a monopoly, acts like a monopoly and takes its monopoly 
profits to the barik. That OPEC has exercised and can exercise monopoly power in world 
oil maricets means there is, ^so facto, a massive market Dulure in the world oil maricet. 
Furthermore, to conrect the market failure probably requires collective actiori on the part of 
coisDming nations, since the actions of individual consumers by themselves are not likely 
to have sufficient impact This is important, because it implies that neither private 
conservation in response to higher monopoly prices nor private hedging in anticipation of 
fuUire price shocks (such as should occur in futures markets) will correct the maricet failure. 

But what of OPEC dissension and disarray? Has not the Persian Gulf War permanently 
poisoned relations among OPEC members? Perimps. However, if there are hundreds of 
billions of dollars to be made, it would be prudent to remember .Morris Adehnan's 
admonitiorL 



The rewards of monopolizing the world oil industry have been so huge that 
the OPEC nations will make strenuous violent efforts to maintain it The 
Iran-Iraq war was a great help in a difficult d e cade, oo is the Iraqi 
aggression, which has shut down two major producers; If Ae cartel 
collapses, it will reappear, periiaps with H partly different memberslup. 
Whoever they settle their differences they can cut production, and raise the 
price." (Adelman, 1990, p. 12) 

• 16 



331 



llial Ae OPEC caitel has exercised and can exercise monopoly power in world oil markets 
by cooperating to curtail production is widely accepted (see, e.g. Griffen and Vielhaber, 
1994; Jones, 1990; Adelman, 1990b; Giiffen, 1992; 1995; MacFadyen, 1993). Instances of 
cheating are literally exceptions that prove the rule. As owner of two-thirds of the world's 
proven reserves and si^jplier of half of the world market, OPEC's potential to use market 
power is rarely disputed. Those vviio argue that OPEC has not been effective in using its 
potential monopoly powo- in the past (e.g., Bohi and Toman, 1993) have been confused by 
tiie dynamics of monopoly power in slowly adjusting markets. Recent studies (Suranovic, 
1994; Greene, 1991; Wirl, 1985) have shown that extreme price shocks are inevitably 
followed by the waning of monopoly influence with the loss of market share, and that loss 
of market share leads to lower prices. But at lower prices lost market share is tecaptarcd in 
time, and monopoly influence restored. 

Basic economic theory applied to the history of world oil prices proves to be veiy 
enlightening. Economic theory demonstrates that in a static market a monopolist maximizes 
profits by charging a price, P, that exceeds the cost of production, C, (including the normal 
return to capital). 



F 



c L . I \ a) 



{':wi 



In reality, it is very rare for a monopoly to centrol 100% of a maricet For a monopoly 
coxitrolling a large share, < s < 1, of a market, things are a bit more complicated. The profit 
maximizing price depends on the price elasticity of demand, bm it also depends on the 
monopolist's market share, as well as on the ability of competitors to respond to a reduction 
m siqjply by the monopolist ((Sreene, 1991). In equation (2) i^ch defines the profit 
auDdmizing price for such a partial monopolist, \i is defined as the change in quantity 
supplied by competitors for a one imit increase in supply by the monopolist Here, it is the 

17 



332 



negative of the number of bairels siqjplied by the ROW for a one banel-per-day reduction 
in supply by OPEC. 



This equation has several hnportant features. Like equation (1 ), the larger P is, tiie smaller 
the ratio P/C. Also, the smaller the monopolistic share, s, the smaller P/C. This is veiy 
important for understanding the recent histoiy of world oil prices. As OPEC loses maricet 
diare m defending higher prices, its profit mavimiTing price must fall. Put another way, its 
monopoly power, defined as the ability to raise prices without loss of profit, declines. 
Finally, fte more responsive the ROW oil sapply, ^, the smaller P/C. If the ROW can meet 
OPEC's supply reductions barrel for barrel, at the same price, the cartel has no monopoly 
influence over prices. Supply responsiveness is a direct function of the price elasticity of 
si^Iy, as one woxild expect (Greene, 1991). 

The large difference between short-run and long-run oil market price elasticities implies that 
the cartel can force prices much higher in the short-run than can be maintained in the long- 
run (Greene, 1991; MacFadyen, 1993). In the short-run, P/C ratios may exceed 5. In the 
long-run they are probably less than 2. Thus, small sipply shortfalls on &e order of 10% or 
less can create enormous price shocks in &e shoit-rxin, but such price levels cannot be 
maintained in the long-run. To maintain high prices, the cartel must sacrifice maricet share. 
But as it gives xxp market share it gives up the ability to maintain high prices. Ultimately 
prices must fall to long-run monopoly levels (or somewhat higher in a growing maiket). 

There is no way out Maintaining prices at short-run profit-maximizing levels requires loss 
of market share viMdh eventually requdres lowering prices. Retaining maiket share requires 
lowering prices. This pattern is clearly evident in ^ histoiy of oil prices and OPEC market 
share of the 1970s and 1980s. In Figttre 4 oil price is plotted against Ae market share of tiie 

18 



333 



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OPEC core oadoDs: Saudi Arabia, Kuwait, Itaq, ban, the United Arab FTnirates, and Lybia. 
Years ate identified by Aeir last two digits. Curves iepiesenting the long-run and short-run 
P/C ratios as functions of the core OPEC nations* share of the world market have also been 
plotted. The curves have been drawn using consensus elasticity estimates based on the 
energy economics literature * The 1972 world oil price is assumed to be the competitive 
price (c) for all years. 

The 1972 and 1973 oil prices zpptai to fail below even the long-run monopoly price curve, 
given OPEC's market share. The price shock of the last quarter of 1973 and 1974 raised 
prices above the long-run ciirve but well below OPEC's short-run profit-maximizing price. 
In a growing world market, prices just above the long-run curve can be maintained 
indefinitely at a constant maricet share. This ^pears to be ^proximately v/bax was 
hi^jpening fiom'1974 to 1978. In 1979 and 1980, spurred by the oil supply disruptions due 
to Ae Iran-Iraq War, prices rocketed towards short-run profit-maximizing levels. Sustaining 
ftese price levels in 1981, 1982, and 1983 cost OPEC dearly in market share. "With profits 
and maricet share continuing to dwindle in 1984-85, the OPEC resolve cracked. Prices were 
lowoed to s^jproximately the long-run monopoly price level A\iiere readjusting economies 
and economic growth are now building OPEC market share back towards its previous level. 
Dqartment of Energy forecasts of OPEC market share in 2000, 2005, and 201 are included 
to iUustrate the expected trends (U.S. DOE/EIA, 1 995b). 

Stu(fies by Wul (1 990) and Stiranovic (1 994) have shown that a pricing policy of brief price 
diodes of two years or so in duration, separated by periods of lower prices may well be a 
profit maximizing strategy for OPEC. This is bad news for consuming nations since price 
shocks reduce GNP, tend to increase unemployment and transfer national wealth to oil 
producing countries. 



'Because shoit-nm elasticities are so small, curves cannot be drawn based on the assumption of 
constant elasticities. Elasticities mtist be an increasing (m absolute value) function of oil price. We assume 
Gnes supply and demand equations, which satisfy this requiranent, and the same parameters as Table 1 below. 

" . 20 



335 

lj6 IMPACTS OF MONOPOLY BEHAVIOR ON THE U.S.ECONO>IY 

A fudden inciease m the price of oil creates tUree principal types of econon^ic losses toibt 
U. S. economy: 

1. Loss of the potential to produce, . 

2. Macro-economic adjustment losses, and 

3. Transfer of wealth from U. S. oil consumers to foreign oil esqpoiters. 

These three effects are separate and additive. 

« 

When ofl prices rise, they signal the economy that a basic resource has become more scarce. 
As a result, the economy is able to produce less ou^ut with the same resources of cental, 
labor, n*»*'^»^^^ and land. The impact of this loss of potential ontpat or GNP, will be 
greater in the short-run than in the long-run because greater substitution for oil is possible 
in the long-run. The implications for ibc economy's long-nm potential to produce have been 
described by Tatom (1993) and many others (e,g, Pindyck, 1980; Burgess, 1984; Pakravan, 
.1984; etc.). 

- ''Oil and energy price changes affect the economy because energy resources 
are used to produce most goods and services. As a resuh, a rise in their price 
will (1) raise ihe total cost of an efficient producer's output, (2) aher die most 
efficiem means for producing output, (3) lower the profit-maximizing level 
of output, (4) raise the long-run equilibrium price of output, and (5) reduce 
the capacity oxitput of each firm's existing stock of capital." 

In the short-iun, the technology embodied in energy using capital cannot be adjusted 
immediately to the new price regime. It is obviotis from the shott-run inelasticity of oil 
demand that &e economy's ability to quickly substitute away from oil remains veiy Mmi*^ 
Even in tiie long-run, oil demand appcan to be inelastic. ' In tibe short-nih, losses are 
miignifii^ by tiie &ct that it takes time to optimize the economy b energy-using technology 

21 



336 



totiienewscarciQrofoiL How long does h take? Consider &e typical life of transportation 
equipment: 10-15 years for an automobile, much more for a jet aircraft, locomotive, or ship. 
Additional time is needed to develqp designs incorporating more efficient technology and 
faring these designs to market Indeed, if prices &11 again within a few years, the economy 
will never fiilly adjust This short-run versus long-nm potential GNP effect is distinct from 
macroeconomic adjustment losses. 

When prices rise rapidly, additional transitory costs result because wages and prices are not 
able to adjust sufBciently rq>idly to the new oil price regime to permit the economy to 
operate at full employment Macroeconomic adjustment losses are in addition to the loss 
of productive capacity that would occur even were the economy at full employment 
Because of stickiness in wages and prices, the economy is unable to immediately adjust to 
a sudden increase in the price of as important a commodity as oil. These cyclical losses are 
truly transitory, perhaps lasting only about one year (Tatom, 1993, p. 132). Their effect is 
to temporarily amplify the loss of output capacity. . 

Third, viiben prices are increased by monopoly behavior, there is also a transfer of wealth 
from U. S. oil consumers to the owners of foreign oil. This "loss" is a transfer payment It 
is hot a loss of economic output, v^liich distinguishes it from the two economic losses 
described above. The wealth still exists, ownership is simply transferred from U. S. citizens 
to foreign oil producers. A similar transfer of wealth also takes place within the U. S. from 
oil consumers to owners of U. S. oil resources. Since this is internal to the U. S. we do not 
count it as a loss to the U. S. economy.' The transfer of wealth is exactly equal to the 
quantity of oil the U. S. imports times the difference between the monopoly price and the 
competitive market price of oil. 



Nonetheless, it is likely to be pemived as a social problem, as the Windfall Profits Tax on oil 
imposed during tibe 1970s m^sts. 

22 • 



337 



All Aree efibcts have been recognized by economists for some time. Pindyck (1 980, p. 19) 
estimated a 0^% loss of U.S. potential GNP for a 10% increase in fte price of oil, based 
on 'iMck-of-fte-envelope*' calculations, and also asserted that ^ indirect, or macroeconomic 
adjustment effects would be of roughly equal magnitude. He also noted that the cost of an 
energy price shock depends on the energy cost share of GNP and that, in the short-run at 
least, it would be reasonable to assume no substitution possibUities as an qyproximation. 
Hub he asstnned tiiat the short-run elasticity of GNP with respect to an energy price shock 
would equal the n^ative of the energy cost share of GNP. Tatmn (1994, p. 134) also noted 
die relationship between the impact of oil prices on output and &e oil cost share of GNP as 
well as the fact tiiat the oil cost share today is about ^^^ it was in the 1970s. 

"While energy use per unit of ou^ut is lower than earlier, economic theory 
indicates that the responsiveness of prices or output to a change in a 
resource's price are proportional to the share of the resotirce's cost in total 
cost, not to the share of its q\iantity in output** 

Empirical estimation of the impact of oil price shocks on U.S. GNP was carried out by Moik 
and Hall (1980a, 1980b). In response to the 70% increase in energy prices in 1974 and 
additional 30% increase in 1975, tiiey estimated that U.S. (iNP fell 2J% in 1974, about 5% 
in 1 975 and 4.5% in 1 976. They concluded that, 

"...the energy price shock ^>pears to e}q>Iain about diree quarters .of the 
recession, in terms of declihe in real output in 1974 and 1975, and most of its 
shortM thereafter." (Moric and Hall, 1980a, p. 45). 

Findings by Motk and Hall (1980b) for fte 1979-80 price shock were similar a 1% decrease 
in GNP in 1979 and a 4% decrease m 1980. 

Hickman (1987) tised fourteen major macroeconomic models to estimate the impact, of a 
50% oil price shock, occtnriitg in 1984, onU.S. GNP. He found Aon-rm responses ranging 
fiom -0.010 to -0.047, wiA an avenge of -0.028. This would imply an average elasticiQr of 

23 



338 



twice Aat amount, or •0.056, veiy much in line vn&x both theory and statistical e^adence. 
The ml cost share of U.S. GNP in 1984 was 0.044, vAncb would imply an elasticity for lost 
cnxtpat in 1984 of -0.044, leaving -0.012 as the macroeconomic adjustment cost component 
for ftat year. Using a small model of the world oil maricet, Helkie (1991) simulated &e 
impacts of past price disruptions and concluded that an estimate of the elasticity of GNP with 
respect to oil price of about -0.03 replicated past events well. 

Bohi (1989, Ch. 3) claimed to show that a theoretical t:^per bound on the impact of an 
energy price shock on potential GNP was so small that the empirical and model-based 
^^msitK cited above could not possibly be correct He obtained a mayimum impact of 0.7% 
in 1974 and 0J6% in 1979-80. Greene and Leiby (1993), however, showe4 and Bohi has 
acknowledged, that &ese results were due to an error in his calculations, and that the correct 
answers were 5% for 1974 and 2.5% for 1980. These estimates, of coiirse, are very 
consistent with all the published estimates from Pindyck (1 980) on. ' 

Hamilton (1983; 1985) investigated the historical relationship between oil price shocks and 
rejected the hypothesis that oil price shocks were statistically vtncorrelated with economic 
recessions. He also rejected the hypothesis that other factors, including monetary policy, 
could have caused oil prices to rise before recessionary periods. Examining the historical 
events believed to be responsible for oil price shocks, he concluded that, "...we must give 
causal interpretatioi^ to the correlation between oil prices and ou^iit" (Hamilton, 1985, 
p. 1 1 5). More recentiy, Moosa (1 993) concluded that tiiere was a significant relationship in 
^K^choU price caused output to decline but n6t the reverse. He observed, 

"The results are in general hardly surprising: they are in agreement with the 
basic theory and confirm the conclusion derived fit>m the informal 
examination of the data." (Moosa, 1993, p. 1151) 

Recently, Mork, Olsen and Mysen (1994), estiinated macroeconomic responses to oil price 
increases in seven OECD countries from 1967 to 1992. They found an elasticity of U.S. 

- 24 



339 



•C^ widi respect to the price of oil of about -0.05 to -0.07, essentially the same as studies 
using only data fixmi earlier oil price shocks. CMy Norway did not show a negative impact 
of oil price increases on GNP. The authors concluded, 

*t)veiall, our results seem to leave no doubt that oil-price fluctuations must 
be reckoned with as a significant force in the shaping of business cycles of 
tiie leading market economies. This force must be expected to persist as long 
as oil remains an important energy source." (Mork, Olsen, and Mysen, 1994, 
p.34) 

Oil prices doubled from July to October 1990, but declined relativelj' quickly as Saudi 
Arabia and the U A.E. boosted production to eliminate the supply shortfall caused by loss 
of ou^ut from Kuwait and Iraq. Taking into account the shorter lerigth of this price shock, 
Tatom examined the question of whether its impact on the U.S. economy was 
disproportionately smaller than previous shocks. He found that it was not. 

•Thus, another lesson from the 1 990-91 price changes is that the economy . 
^jpears to remain exposed to oil price shocks to a nearly equivalent extern as 
earlier;" (Tatom, 1994, p. 148) 

The transfer of wealth from oil consumers to owners of foreign oil that occurs wdien 
monopoly power is exercised in world oil ma^ets is sometimes neglected because it is not 
a loss of economic ou^ut, but only a transfer of ownership. The ou^ut is still produced, it 
is just a question of who owns ^^iiat Oil consumers get poorer, oil producers get richer. If 
. one's co n ce rn is with the wel&re of the entire world, transfer of wealth is entirely a question 
of equity, not economic loss. But if one's concern is with the U.S. economy, wealth transfer 
is a genuine k>ss. Wealth leaves, and if it comes back, it comes back only in exchange for 
more U^. oulput or piopeity. 



"An iotemational oil shock also reduces the purchasing pow«r of U. S. 
national income. 



2S 



340 



.... Tven if total U. S. ovXpvH remains unaltered by ihc oil shock, the U. S. 
economy woxild still be worse off due to the reduction in the purchasing 
power of its domestic income." (Huntington and Eschbach, 1 987, p. 202) 

Fiecisely Ae same phenomenon has been described by Hogan and Broadman (1988, p. 65). 
Mork, Olsoi, and Mysen (1994, p. 20) also mention the transfer of wealth as a cost of oil 
price iJK)cks. 

That the transfer of wealth is not included in the loss of ou^ut (CJNP) has been explained by 
Greene and Leiby (1993) and Huntington and Eschbach (1 987, pp. 1 99-200). 

*ln particular, the oil wealth loss that is central to the microeconomic analysis 
is excluded from real GNP as measured in macrocconomic models. This 
situation requires a combination of losses estimated from each approach if 
one wants to measure the frill effects of oil price shocks on oil-importing 
countries." 

Finally, &e transfer of wealth as a cost of oil dependence derives from the fact that it results 
from flie exercise of monopoly power by oil producers. If there were no monopoly behavior 
in world oO markets, there woiild still be some transfer of wealth, in the form of rents, to 
k>w-cost oil producers. In a competitive market, this would not be counted as a cost of oil 
dependence to the U.S. Thus, in estimating the transfer of wealth cost in the monopolized 
on market, only the cost over and above a competitive market price is counted. 



1.7 THE FUNDAMENTALS HAVE CHANGED LITTLE SINCE 1973 

Since 1973, the basic determinants of U.S. vulnerability to monopoly behavior in world oil 
markets have changed less than one might think: 1) OPEC's market share has fallen but is 
on the rise; 2) oil demand, now more concentrated than ever in the transport sector, Temains 
price inelastic; 3) the oil cost-share of GNP is about what it was before the first oil price 



26 



341 



ihock; and 4) Ac level of U^. inqxnts, key detenniiumt of the transfer of U.S. wealth, is as 
high as ever. OPEC's monopoly power depends on Us share of low-cost world oil resources 
and its oonespondtngly large share of the world oil noaiket, as well as firom the inelasticity 
of sboit« and long-run world oil supply and AtmnnA Market share OPEC lost defending 
high prices from 1980-35 is being n9>idly regained. It appears that reports of OPEC's 
demise have, tn the wends ofMaric Twain, be«si greatly exaggerated. Lost maricet share can 
and is being regained, and with it comes market power. The Energy Information 
Administradon (\J. S. DOE/EIA, 1995b) projects that by 2005, OPEC's market share is 
likely to exceed the levels of the 1970s (Figure 5). 

Figures. 

. OPEC 8har« of World Oil Market 

Hittorieal to 1903 and Prejsetod to 2010 




I i I I I I I I I I I I I I I I I I I I . 
1960 1970 1M0 



I I i I I I I I 
1090 



TTTTTTTTTTTTTTTT 
2000 2010 



Source: U. S. DOE/EIA, 1995b. Table C.20, 1994a, Table 1 IJ 



The sensitivity of &e economy to oil and energy price shocks depends on the cost shares of 
oil and energy in GNP. Intiiitively, tiie more one spends on oil, the more a proportional 
increase in its price v^ reduce ou^ut Though the economy's dependence on energy and 
oil since 1981 has been significantly reduced, it is now about the same as it was at the time 
of ^ first oO price shocL In 1973 tiie net cost of oil to dae U. S. amounted to 1.5% of GDP. 
In 1992 oO's cost Aait was 1J%, and decreased to 1.3% in 1993 (Figure 6). Energy costs 

27 



342 

Figure 6. 

Energy and Oil Costs 
As Shares of U.S. GDP 




" I I I >" I 1 i 

1070 ^ers 



I I Energy 



on 



Somce: VS. DOE/EIA. 1994, tables 32, 3 J. 3.6. 

amounted to 8.3% of GDP in 1973, and in 1992 energy costs comprised 8.2%. To be sure, 
energy and oil costs rose dining the late 1970s and early 1980s with the price of oil. They 
will rise again with future oil price hikes. The important point is that oil's importance to our 
eamoray is about the same as it was twenty years ago, before the Arab OPEC oil embargo 
of 1973-74. The uses of oil have changed somewhat, increasing the importance of 
transportation oil use as other sectors moved away from oil. 

The transfer of wealth from U. S. consumers to foreign owners of oil depends directly on 4e 
level of U. S. imports. Current levels of U. S. oil imports are higher than those preceding Ae 
first oil price shock in 1973-74 and alrhost equal to the highest level on record: 46.5% in 
1977. U. S. oil imports have been rising since 1982 and are expected to continue to rise in 
Ae future (Figure 7). The EIA predicts that U. S. imports vnW increase from their current 
fcvel of 45% of U. S, consumption into the range of 58% to 67% by 2000, and from 58% to 
77% by 2010. Greene and Leiby put the transfer of U. S. wealth due to monopolistic oil 
pricing from 1972-1991 at over SI trillion. A given OPEC price hike in the future will 



28 



343 
Figure?. 

U.S. Net Oil Imports 




■ Total bnpeiti Q OPEC 
Source : U.S. DOE/EIA. 1994a. table 5.7; 1995a. table l.S. 

almost surely cause a greater loss of U.S. wealth than in the past because the U. S. will be 
importing more oil. 

Oil use is now highly concentrated in the transport sector where fuel demand is known to be 
price-inelastic. Transportation is at the center of the United States* petroleum problem for 
three reasons. First, the transportation sector is far and away the dominant consumer of 
petroleum products, accounting for two-thirds of U. S. oil use in 1993. In terms of the light 
products tiiat drive the petroleum market, transportation's share is more than three four&s. 
Second, whereas other secton over the past twenty years have shown some ability to 
substitute other energy sources for oil, transportation has not (Figure 8). Third, ibe 
transportation sector is all but totally dependent on oil for energy. Pipelines using natural 
gas or electricity are the only significant nohpetroleum energy users. 



Finally, some argue tfiat oil futures markets significantly reduce or even elisiinate the costs 
of monopoly ofl pricing and price shocks to thi U.S. Tlie purpose of futures jsarkets is to 
allow oil consumers to hedge, in effect buy insurance, against the possibility of future price 

.29 



344 
Figure 8. 

Use of Petroleum by Sector, 197S-1994 




Source: U^. DOE/EIA. 1994a, table 2.1 ; 1995a. table 2.6. 

increases (or decreases). Futures markets did not create the possibility of hedging: that 
always existed in the form ofstockpiling, private insurance markets, etc. Futures maricets 
make it easier to hedge, i.e., reduce the transaction costs. Thus, futures markets make it 
easier for oil cbnsximers to insure themselves against the expected private costs of future 
price shocks. The key word is private. 

Futures maricets cannot internalize the public costs of oil use. Given that OPEC wields 
monopoly power in the world oil noarket, buying an additional barrel of oil miakes a tiny 
bcrease in demand, resulting in a tiny increase in the price of oil and a tiny increase in the 
probability and size of a future oil price shock. All oil consumers expaience tiiis 
infinitesnnal increase in cost The fiactionofthe total cost that is born as private cost by die 
marginal consumer is a truly tiny fraction (one over the total number of barrels consumed). 
The private ofl consumer will take no account of the benefits that would accriie to the nation 
if he reduced his oil consumption or if the price elasticities of oil supply and donand could 
be increased. Thus, the portion of the marginal social cost of oil that could be internalized 



30 



345 



by, fytaxs maricets is negligible in comparison to tttt totaL Futures mailcets cannot solve 
problems of public goods and bads. In fiict, futures maricets do not even try. Nearly all oil 
fiitures contracts are very short-term, a few mon&s or less. Clearly this can have nothing to 
do witfi oil price shocks that might occut in 2005^ 



31 



346 



2. THE PRESENT AND FUTURE OIL PROBLEM 



2.1 A SIMPLE SIMULATION MODEL 

In tiiis section, the likely impact of a future oil price shock on the U. S. economy is 
^tniii»fi»H A simple model of world oil supply and demand was constructed in the fomi of 
a spreadsheet (see Appendix A for details). World oil demand is represented for two regions: 
fte U. S. and the ROW including OPEC). World oil supply is represented for tiuee regions: 
OPEC'Ae U. S., and the ROW (excluding OPEC). OPEC siqiply is to be specified 
(exogenous), while the model solves simultaneously for U. S. and ROW sv^ly and demand. 
A dynamic adjustment specification is used to represent short- and long-run adjustment.to 
price changes. The EIA's Annual Energy Outlook 1995, (AEO) Reference Case provides a 
*3ase Case" forecast Price shock scenarios are produced by changing OPEC supply and 
using the model to compute a new market solution for U. S. and ROW oil si;^ly and 
AfmanA The cost of monopoly oil pricing to the U. S. economy is then estimated based on 
techniques developed by Greene and Leiby (1993) to estimate the costs of monopolistic oil 
pricing from 1972-1991 . These are described in detail in Appendix B. 

Siqjply aiul demand equations are assumed to be ^ear, which implies that elasticities will 
be an increasing fimction of oil price (since both supply and demand are inelastic). 
Elasticities for the Base Case Simulation Model are shown in Table 1 as a fimction of world 
oil price. 

Whefter and i^t^ien a fiiture oil price shock will occur will depend on the diesire^nd ability 
of OPEC nations to cooperate to restrict production. In addition, temporary price shocks can 
occur even without monopoly behavior if supplies '.are significantiy disrupted by an act of 

33 



347 



Table I. Simulation Model Short-Run Elasticities 



" 


Demand 


Si^jply . 


World Oil Price 
(1993 $/BBL) 


•U.S.andROW 


U.S. ■ 


ROW 


$20 


-0.037 


0.028 


0.023 


$35 


-0.068 


0.048 


0.032 ' 


$50 ■ 


-0.099 


0.067 


0.056 



war or nature. Because of this, &e precise timing and size of a future price shock cannot be 
predicted. It is conceivable that OPEC nations may be imable to cooperate to restrain 
production- To say that there is mistrust among OPEC nations today is an understatement 
Price shocks, however, are likely to be very profitable for OPEC countries (Suranovic, 1994) 
and as OPEC's share of the world oil market grows, the economic rewards to restraining 
production will also grow. If the pay-o€f is sufRcientiy large, it is reasonable to expect 
OPEC countries to search for ways to cooperate and to find a suitable apology for cttating 
yet another oil price shock. Unless meaningful alternatives to petroleum use in 
transportation are develope4 the 2000-2010 period will provide OPEC with both the 
opportunity and motive to create another oil price shock. The value to OPEC of a brief, two- 
year supply reduction of 10% the first year and 17% the second is likely to exceed half a 
trillion dollars.* 

The consequences for the U. S. economy of anotiier sustained price increase, such as that of 
1979-1985, would be grave. The two-year price shock simulated below costs the U. S. 
economy over half a trillion 1993 dollars, discounted to present value (PV). This single 
shock nearly doubles tiie cost of monopoly oil pricing to the U. S. economy through 2010. 



*nie 10*/««nd 1 7% reductions are relative to the ytar before die ^ock. Tfcey co rre sp o u d to 13%and 
21% reductions over what OPEC would otherwise have produced under the Base Case projection. 
Funfaermore, OPEC cannot immediately return to previous production levels but must increase slowly from 
tfiese restricted levels. 

34 



348 

2^ 1993-2010 BASELINE FORECAST 

The U. S. Dq>aitnient of Energy (DOE), EIA*s 1995 Annual Energy Outlook^ Reference 
Case Projections are used as the Base Case for analyzing the impacts of future oil stq>ply 
reductions by OPEC* The Base Case oil price projections call for oil prices to increase from 
S16.12/bbl m 1993 to $19.13 m 2000. $21.50 in 2005 and $24.12 in 2010. World oU 
demand grx>ws at the modest rate of 1 .7%/^ear, from 66. 1 8 MMBD in 1 993 to 88.32 MMDB 
by 2010. U. S. den^and grows at a inuch slower pace, 0.7%/year through 2010, U. S. oil 
supply declines from 9.53 MMBD in 1993 to a low of 8.22 in 2005, but then begins 
increasing to 8.58 MMBD in 2010 as oil prices increase. The ROW oil supply mcreases 
gradually from 29.63 MMBD in 1993 to 33.07 MMBD in 2010, an average annual rate of 
0.6%. The 1995 AEO does not present its assumptions aboxit total oil production by China 
and former Soviet countries, but only shows the net exports from these countries. The 
Energy Information Administration's 1994 International Energy Outlook (U.S. DOE/EIA, 
1994d, Table 3), however, does show production projections for China, the Former Soviet 
Union and Eastem Exirope through 2010 that are geiierally consistent with the 1995 AEO 
Reference Case Projections. These project oil output in China growing from 2.84 MMBD 
in 1992 to 3.4 in 2010, an average growth rate of 1%, and former Soviet plus Eastem 
European countries increasing from 9.16 MMBD in 1992 to 1 1.4 MMBD, according to the 
1994 lEO projections, an average rate of 1 2%. We use tiiese growth rates in our simulation 
analysis. Sensitivity analysis indicates that the results of the simulations are not greatly 

in ' * 

dependent on this assumption.'" 



*'Oir producdan bat includes crude oO, natural gas plant liquids, other hydrogen and hy dr o cai bo u s 
fat refinery feedstoda, alcohols, liquids from coal and other sources, and refinery gains. £IA projections do 
not mchide production tor intanal consumption in Euraiia but only Eurasian exports. An estimate of all 
Eurasian production binchided in the simuladoD below. As a result, OPEC maiket share exceeds SQ% in 2004 
and readies only S3Vo by 2010. If former Soviet countries and China become.full participants m mtetiutiraa] 
trade, this would be more correct 

'*For example, Griflen and Vielhaber (1 994) propose an "aggresstive non-OPEC supply scenario" 
the "Key assumption" of which is that production by former Soviet Republics and China would mcrease to 
19.2 MBD by 2010. This implies a 3J%/yr. Rate ofproduction growth for these countries. 

35 



349 



Wi&i oO prices near Ac long-run monopoly price level and growing world demand, OPEC's 
share of die world oO market increases Continuously &roughout the Base Case forecast 
Including Eurasian prodiiction for domestic consumption in our ROW Base Case reduces 
OPEC's maricet share in conq>arison with that reported in the 1 995 AEO forecast, shown in 
Figure 8 . OPEC's Base Case maricet share grows fiom 41% in 1993 to 46% by 2000, 51% 
in 2005, and reaches 53% by 201 0, With growing volume and rising prices OPEC revenues 
more &an double between 1993 and 2010. From SI 60 billion in 1993, OPEC gross revenues' 
increase to S410 billion by 2010. OPEC grosses a total of $5.0 trillion (1 993 $) over the 
forecast period with a PV of $3 .5 trillion discounted at 4%/yr. 



23 ALTERNATIVE SCENARIOS 

Past ofl price shocks occurred vHien wars or the deliberate action of OPJEC nations restricted 
the siqjply of OPEC oil to worid markets. Following the 1973-74 and 1979-80 price shocks, 
OPEC nations continued to restrict their supply of oil to world markets in a deliberate effort 
to TTiflmtain high oil priccs. As we have seen above, prices following the 1 979-80 oil price 
shock were sufBciently high to result in a continuing erosion of OPEC's market share as oil 
siq^ply and i^frnmA dynamically adjusted to the higher price regime. In 1 99 1 , Saudi Arabia 
and otha producers intentionally increased oil production, resulting in a much briefer 
episode of higher prices. A plausible future oil price shock can be simulated by a similar 
reduction in OPEC oil si^ly in the context of an imdisrupted, "Base Case" projection. 
Ahhou^ it is not clear exactly how a future oil price shock will occur, analysis by Suranovic 
(1993; 1994) indicates that repeated shocks, each of qiproximately two years' duration 
would yield die maximum revenues for OPEC. For our pvoposes it is sufScient to 
demonstrate die impacts of a single plausible shock on world oil prices and the U. S. 

tCODOTOy. 



36 



26-794 97 - 1 2 



350 



The price shock scenario assumes tfiat all OPEC nations reduce their sapply in the year 2005 
-by 10% over the previous year, or 13% over what fbey would have produced in 2005 
according to the AEO projections. It the following year, &ey further reduce sv;>ply by 17% 
versus 2004, or 2 1 % versus ^NbaX they would have sillied under the Base Case scenario. 
OPEC is then assumed to begin gradually increasing si^plies until in 2010 the supply 
lediiction is 20.4% versm the Base Case. This pattern was chosen because it produces 
almost exactly the same revenues for OPEC in the years 2007-2010 as OPEC would have 
received in the Base Case. This diminishes the need to consider revenue gains or losses in 
years beyond the 1995 AEO forecast horizon of 2010. 

The Energy Information Administration (U.S. DOE/EIA, 1994d, p. 22) recently published 
the results of the simulation of a shorter supply disruption, assumed to occur earlier, in the 
year 2000, at a Base Case oil price of $20.70. Three different levels of supply disruption 
were assxmied: 4, 6, and 8.MMBD, corresponding to 11%, 17%, and 23% of OPEC's 
projected rate of production in 2000. The 4 MMBD disr\j^on was assumed to last for only 
6 months, the 8 MMBD for 9 months, and the 6 MMBD disruption was simulated for both 
6 and 9 month durations. Because these disruptions last less than a year, their impact on 
annual prices will be proportionately smaller than our assumed si^^Iy cutbaclcs. In addition, 
the EIA assumes that 2 MMBD of surge capacity will be available, inside and outside of 
OPEC, to offset the supply disruption. That is, no monopoly behavior on the part of OPEC 
is assumed. The EIA simulation also assumes that the U. S. will draw down the SPR at rates 
of 3.5 MMBD in the first quarter. 1 . 1 MMDB in the second and 0.5 MMBD in the third (an 
annual average rate of 1 .3 MMBD). Given all of the above, impacts were evaltiated for four 
scenarios defined by use of the SPR, and assumptions about stock inventory responses and 
price elasticities (Table 2). 

Because of the earlier occurrence, shorter duration, and absence of monopoly behavior, the 
EIA's sv^ly disr\q}tion simulations differ from those presented below. On an annual basis, 
the 8 MMBD supply curtailment with 1 MMBD inventory build-up corresponds to a 

37 



351 



Table 2. OU Prices, EIA Simulation of 8 MMBD, 
9-Month Oil Si^ly Disnq}tion in the Year 2000 



Scenario 


SPR Not Used 


SPR Used 


1 .0 MMBD inventoiy build-up +10% 
lower elasticity 


$54J0 


$45.00 


1.0 MMBD inventoiy draw-down + 10% 
higher elasticity 


$37.60 


$31.60 



5.25 MMBD anniial supply shortfall. On this basis, the market response to supply 
curtailments is conqurable to those we present below. Prices rise to $54.50/bbl in EIA's 
simulation. 

Nine additional scenarios are considered (Table 3). Two explore the effect of use of the 
Strategic Petroleum Reserve (SPR) on this sustained supply curtailment Three others 
assess the intact of doubling world price elasticities of supply and demand assuming: 1) 
Base Case OPEC production, 2) Price shock OPEC production, and 3) OPEC aggressively 
cuts back on production so as to match OPEC's price shock revenues for as long as 
possible. These three scenarios are then repeated, assuming that bnly U.S. oil price 
elasticities double. Finally, for purpose of comparison, it is assumed that OPEC restricts 
production to the same levels as in the aggressive scenario with doubled U.S. elasticities, 
but the lower Base Case elasticities are assumed. 



38 



352 



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2.4 SIMULATION RESULTS 

2.4.1 A Tnro-ycar Price Shock in 2005 

The ha&Bl supply disruption is about ibe same size as ibase that occurred in 1973-74 and 
1979-80. In 1980, OPEC crude oil production was 4 MMBD (13%) lower than in 1979. 
In 1981 OPEC cm ou^ut by another 4 MMBD for a 26% reduction over 1979's ou^ut 
level (OS. DOE/EIA, 1 994a). The quantity of oil assumed to be lost in 2005 is somewhat 
greater, 5.5 MMBD, but the percent reduction is also 13%. As a result of the OPEC 
cutback, oil prices more than double, from S21/bbl in 2004 to $54/bbl in 2005. To keep 
prices elevated, OPEC is assumed to cut 2006 ou^ by a total of 21% over what it would 
otherwise have been. Still, the price of oil declines to S46/bbl as world si^ly and demand 
adjust and OPEC's market share Ms. After 2006, OPEC is assumed to gradually ease i^, 
allowing prices to drop to $28-30^bl through 2010. Though past oil price increases lasted 
longer, diis two-year shock is consistent wi& the types of price shocks Suranovic's (1994) 
simulation analysis foxmd to be a profit-maximizing strategy for OPEC. 

If OPEC were to return to the original Base Case production levels in 2007, prices would 
fall below the competitive long-run price of SlO/bbl and OPEC revenues would plummet 
Instead, h is assumed tbst OP£C expands production just enough to q^proximate the gross 
revenues it would have received in the Base Case in tiie years 2007-2010. The percent 
cutback is eased to 20.4% in 201 over ibe Base Case. Holding revenues in the final years 
at qjproximately the same levels as the Base Case tninimiT^ the problem caused by not 
having forecasts for years beyond 2010. 

Responding to the higher prices, world oil si^ly increases in 2005 by 1 .5 MMBD and 
world demand is 4 MMBD lower Aan the Base Case scenario. U. S. sii^Iy is 0.4 MMBD 
higher in 2005 and 0.7 MMBD higher in 2006. In comparison with the Base Case, U. S. 
demand is 1 MMBD lower m 2005 and 1.7 MMBD lower in 2006. Tnough prices drop 

40 



354 



to about $3 above the level of the Base Case, supply increases and demand reductions 
persist after tiie price shock due to the dynamic adjustment stnicture of the simulation 
model World supply remains 2 MMBD abovie the Base Case, demand continues to be 
•hnost 6 MMBD below it OPEC's maricet share Ms from 50% in 2004 to 44% in 2006. 
From there it begins to recover as the cutback is trimmed (Figure 9). 

The effect on OPEC revenues is substantial. In simple 1993 dollars discounted to present 
value (PV) in 2005 at 4%, the si^ly shock and subsequent strategy nets OPEC an 
additiraal $600 billion in gross revenues. This is a 25% increase over the Base Case 
revenues for the 2005 to 201 time period (Figure 10). The general picture is little affected 
by alternative assumptions about oil su^ly costs and discount rates. Whether $600 billion 
over five years is sufBcient incentive to OPEC members to cooperate on a supply strategy 
is an interesting questiorL Of course, profits might be fimher increased by an additional 
price shock, but such issues are beyond the scope of this report (Table 3). 

2.4 J Impact of Releases from Strategic Reserves 

Use of the SPR is simulated by assuming a rpayirnnm drawdo'wn in the first year of the 
shocL The SPR presently contains 600 million barrels of oil. If all were used over the 
period of a year, the average production rate would be 1.64 MMBD. Use of SPR is 
simulated by adding this to world supply for 2005 before recomputing tiie market 
equilibrium price. It is assumed that OPEC will not change its planned pattern of cutbacks 
in response to the SPR release. Perhaps surprisingly, this turns out to be a reasonable 
assumption. 

The SPR release causes oil prices in 2005 to fall by almost $10/bbl versus the'scenario 
wiAout SPR. Thus, SPR mitigates the price shock of 2005. However, in 2006 there is no 
more SPR and, by assumption, OPEC goes ahead with its original planned cutback of 21%. 
Because prices were lower and supplies more plentifiil in 2005 with the SPR release than 

41 



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357 



w^outh world economies adjust ksstiun in Ac Price Shock scenario. As a result, the 
IWt supply reduction in 2006 causes a larger price shock than it would had SPR not been 
used. Instead of$46/bbI, 2006 prices after the SPR release jump to $5S/bbI. After 2006, 
titey are identical to the no-SPR scenario (Figure 1 !)• In efifect, the sequence of prices is 
changed but not die level. As a result, OPEC lievenues and profits are little changed by the 
use of SPR in this wqr. Estimated gross revenues for Ae 2005-2010 period are only 1% 
lower. Used in Has way, SPR would have little efifect on a determined OPEC strategy to 
restrain productioiL On &e ofter hand, during the first year it might have a discouraging 
effect on a cartel struggling to Trmintain consensus and discipline. 

One could argue that SPR is not &e only strategic reserve in the world and that other 
consuming nations might also release strategic reserves at the same time, magnifying the 
effect of SPR. Petroleim stocks held by OECD cotmtries increased from 2,588 million 
barrels in 1973 to 3,665 million barrels in 1993, a net gain of just over 1 billion barrels. 
Nearly all of the change is accounted for by increased reserves held by the U. S. in the SPR 
and by lespaa in strategic reserves (U. S. DOE/EIA, 1994a, table 1 1.1 1). If all of this 
additional reserve were released in the first year of the 5hock it would raise supply by an 
average of 2.95 MMBD. We explore &e impact of a larger reserve by assuming that the 
U.S. has a second 600 million barrel reserve available ibr use in 2006. The effect of a 
doubled SPR used over two years is equally disa^^inting. The price of oil stays at 
$44/bbl. In 2005, drops to $45/bbI. In 2006. but tlun jumps to $37/bbl. In 2007 fipin 
$29/bbL, without the additional reserve. , . . 

2.4 J Economic Impacts on the Unhcd States 

Regardless of the assumed use of SPR, Ae two year simply curtailment costs the U. S. 
economy in excess of half a trillion dollars PV over the Base Case (Figure 12). Total 
losses to the U. S. economy in ^ price shock scenario amount to $1 .5 trillion (1 993 S) PV 
ClableS). . 



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360 



Assuming a bypothetica] competitive market price of SlO/bbl, &e U. S. lost $18 billion in 
wealth transfer in 1993. By 2010, the U. S. economy would lose S33 billion PV in the 
fonn of wealth transfer in the Base Case. Discounted at 4%/yr. the PV of the estimated 
transfer of wealth in the Base Case through 2010 amounts to $470 billion. Hie single price 
shock in 2005-2006 increases this to $610 biUion PV. In 2005 alone, $170 billion ($105 
billion PV) is lost via wealth transfer. Half of that goes to OPEC, half to other worid 
exporters. 

Id the Base Case prices increase'gradually, but the method used here will always calculate 
some potential output losses as long as oil prices remain above the assumed competitive 
market level of $10/bbl. Slow, steady price increases might be accurately anticipated by 
&e market, essentially eliminating all macroeconomic adjustment losses. In the Base Case 
estimated potential GNP losses amount to $ 1 40 billion PV and macroeconomic adjustment 
losses total $50 biUion PV. In the price shock scenario, estimated potential GNP losses hit 
$160 billion PV in 2005 and $1 10 billion PV in 2006. Macroeconomic adjustment losses 
in those two years are $90 billion and $30 billion PV, respectively. 

Ihe effect of ftdl use of the SPR in 2005 is estimated to be $10 billion, not cotmting profit, 
if any, on the sale of the oil. Estimated wealth transfer declines by $14 billion, potential 
GNP loss decreases by $2 billion, but macroeconomic adjustment losses increase by 
S6 billion. The explanation for the SPR's apparently small impact lies primarily in the &ct 
that what is gained in the first year is lost in the second, '^thout the SPR release, wealth 
transfer losses are $105 and $75 billion PV In 2005 and 2006 respectively, for a two-year 
total of $180 billion PV. "^ith the SPR release, estimated transfer losses are $70 and $95 
billion PV in the two years for a tbtal of $165 billion PV. If the price shock had lasted only 
OK year, a savings of $35 billion PV would have been realized. As it continued into the 
second year, an additional $20 billion PV was lost in 2006 due to thie use of the SPR in the. 
previous year. The situation is similar for GNP losses. Estimated losses without the SPR 
total S160 billion PV in 2005 and $1 15 biUion PV in 2006. With the release the estimates 

47 



361 



are $120 billion FV in 2005 and $150 billion FV in 2006. The sums of the two years differ 
by only S5 billion PV (numbers rounded to nearest S5 billion). 

Doubling &e SPR and releasing over two years produces a small additional benefit to the 
U. S. ecoDomy. The implication is that use of strategic reserves in this way against a 
determined multi-year st^ply reduction is neither an effective deterrent nor an effective 
protection for the economy." These discouraging results corroborate the conclusions of 
an earlier analysis by Suranovic (1 994), who found that reserves on the order of 30 billion^ 
barrels would be necessary to defeat a strategy of determined supply curtailment 

2.4.4 Increasing Price Elasticities 

Given Ae dependence of OPEC market power on st^ly and demand elasticities, a logical 
strategy would be to enhance the abihty of oil sapply and demand to respond to higher oil 
prices. Increasing the short- and long-run price elasticities of supply and demand would 
reduce the impact of the price shock caused by a given siqiply shortfall, thereby cutting 
OPEC revenues and reducing the impact on the U. S. economy. Improving price 
responsiveness should therefore act simultaneously to deter OPEC from initiating a supply 
oitback and protect the U. S. economy in the event one occurs. 

The impact of increasing the oil market's price responsiveness is illustrated by doubling 
the price elasticities of supply and demand and resimulating the effect of the two-year price 
shock and its impacts on the U. S. economy. Doubling price elasticites implies that the 
elasticity of demand at $28/bbl would increase from -0.053 to -0.106. The elasticities of 



"Of course, in a simulation such is this ifae moders equations detennine the results. We note, for 
example, that the value of an SPR would probably be greater if constant elasticity supply and demand 
equations were used instead of linear equations in which elastidties increase widi increasing price. 

48 



362 



si^Iy at die same piice for Ae U. S. would increase from 0.038 to 0.076." Two scenarios 
are considered, one in ^^ch only U. S. |sice elasticities are increased and another in ^Kdiicfa 

ROW si^ly and demand elasticities are doubled, as well. The increase in elasticities is 
rf T'W''***^ to begin in 1996 and increase linearly over a decade until a doubling is achieved 
in 2005. As a result prices and oil quantities clumge for all years after 1 995, not only those 
in which siq>ply shortages occur. . 

Unlike the effect of strategic reserves, the effect of substantially increasing the price- 
lespoQsiveness of the market is dramatic. Doubling the elasticities of supply and demand 
for tt>e entire world cuts post 2005 OPEC revenues in half assuming the Base Case OPEC 
production levels (Figure 10). U. S. economic losses drop to $335 billion PV wiien world 
dastidties double, for an estimated benefit to the U. S. economy of S640 billion PV. If the 
strategy of supply curtailment is tried, OPEC still gets a $300 billion windfall versus no 
price shock, half the size of the price shock windfall at Base Case elasticities. Total 
economic losses for the price shock scenario are $1.5 trillion PV at base elasticities and 
$0.6 trillion PV if elasticities are doubled for a savings of nearly $1 trillion (Figure 13). 

But what if OPEC aggressively tries to maintain its Base Case revenues in the face of 
increasing world elasticity of si^ly and demand? The answer is that it runs head on into 
Ac discipline of the marketplace. With world oil price elasticities at twice their present 
values, OPEC can mwintain its Base Case revenues by cutting back on prodviction only 
through 2002. By 2003 its market share has dwindled to 23% and it is not capable of 
nising prices, by cutting production, to a level sufficient to maintain its Base Case 
levames (Figxire 14). We assume that OPEC ceases cutbacks at this point, and maintainc 
prices at $21/bbl tiirough 2010. This strategy produces only $785 billion PV in revenues. 



°0f coune, fliis exercise also mikes h clear fliat accurate shon-nm price elasticity eninwTes are the 
Bost oitica] element of this analysis. While die estimates used here are consistent with those used by otiiers 
■u) produce a pattern of market behavior consistent widi past e}q>erienc e, there remains uncertainty both wiA 
icspect to their values at particular prices and the rate at which diey diange as price increases. 

49 



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$340 billicm PV less than &e scenario in M^ch Base Case production levels art maintained 
(Table 3). Costs to Ac U^. are significantly higher, but this type of "retaliatory" behavior 
doesn't pay. The single price shock still works better, raising almost twice as much 
. revemie. Harm to the U.S. economy is also much smaller. 

If only U.S. oU price elasticities double, benefits are reduced but are still substantial. At 
Base Case OPEC production levels, the costs of U.S. oil dependence are reduced 35% or 
$350 billion PV (Table 3). Assuming the OPEC output levels of the Price Shock scenario 
raises U.S. costs from $0.6 trillion to $0.9 trillion, but this is still much lower than the 
$1 .5 trillion in Price Shock scenario costs at Base Case Elasticities. If OPEC aggressively 
cot production, trying to achieve the same revenues as in the Price Shock case at Base Case 
dasticities, costs to the U.S. economy would increase to $ 1 . 1 trillion, slightly higher than 
the original Base Case with no production cut-backs. However, OPEC revenues are lower 
tiian in the Base Case and also lower than in the Price Shock case with doubled U.S. 
elasticities. If the same aggressive production cuts are made at the lower Base Case 
elasticities, estimated costs to the U.S. economy double to $22 trillion. 

Increasing the oil market's price responsiveness is effective against the sustained supply 
disruption strategy because it simultaneously reduces the incentive for OPEC to crealt a 
siqjply disruption, diminishes the impact of that disruption on world oil prices, and 
increases the U.S. economy's ability to reduce oil use and oil imports. Increasing the U. S. 
elasticity of demand is almost equivalent to increasing the price elasticity of transportation 
oOuse. Doubling this elasticity is obviously more easily said than done. Use of alternative 
fuels, substitute fuels, technology for r^idly increasing energy efBciency, and techniques 
£3r quickly improving the operating efBciency of transportation systems would probably 
■n be required. 



52 



366 
3. CONCLUSIONS 



Hie Uxited Stales* oil depeDdence problem is not one of nmning out of oil. It is a problem 
of die Qse of monopoly power in worid oil madcets by a few nations that bold the majority 
of the woiid*s oil resources. In ±c past, the OPEC cartel has created or cqntalized on 
disnqptions in die world oU market, resting hundreds of billions of dollars in monopoly 
rents from oil consuming countries. During die past decade, however, the cartel has been 
less effective. This has led some to conclude that conditions in the world oil market have 
materially changed and that oil dqiendence no longer posfes die dneat it once did (Bohi and. 
Toman, 1993). Unfortunately, die majority of die evidence points to the opposite 
conclusion. It ^jpears diat die only in^xntant objective fiictor that has changed 
significantly is the market share of the OPEC cartel, a key determinant of OPEC's power 
in-world ofl markets. The geognqihical concentration of world oil reserves, together with 
trends in world production and consumption, indicate diat lost market share will soon be 
regained. This is corroborated by recent trends and consistent with the best efforts to 
project the iiiture. The potential for monopoly power in the world oil market remains 
because oil resources are still concentrated under the control of a few sovereign states. 

Monopoly power m world oU markets is limited by die abilities of consumers and other oil 
a^Iiers to respond to higher prices and by the OPEC dilates* own ability to cooperate with 
one another. Consumers and suppliers have a much greater ability to respond to prices 
given suf5cient time. As a result, a cartel's monopoly power is &r greater in the short-nm 
than in the long-run, a fifict ixUch has led to considerable confusion about the effects of 
monopoly behavior in world oil noaricets. It is veiy difBcuh within a single year to 
discover, develop, and produce new oil supplies or change die fuel economy of an entire 
fleet of cars. Given a decade or two, however, an entire motor vehicle fleet can be 

53 ... 



367 



replaced, new technology can be developed, and new energy supplies brought to market 
Very high short-run monopoly prices can therefore only be maintained by sacrificing 
maiicet share and thereby market power. 

h is osefiil to consider ^^^lat has changed since the oil price shocks of the 1970s and 1 980s 
since some claim that we are not likely to repeat the experience. The key &ctors are: 
1) OPEC share of world oil production, 2) world short- and long-nm price elasticities of 
demand and supply, 3) in^rtance of oil and energy in the U. S. economy, 4) the level of 
U. S. oil imports, and 5) OPEC's ability and desire to cooperate. OPEC's share of the 
world oQ market is lower today than it was in the 1 970s. It is growing steadily, however, 
and is expected to reach 1 970 levels sometime between 2000 and 2005. The current values 
of elastiticities of supply and demand, because they are usually inferred from historical 
data, are more difficult to determine. However, the most recent studies do not indicate that 
elasticities have increased over historical levels (e.g., Dargay and Gately, 1994). In the 
U. S., the concentration of oil use in the transportation sector as other, more "switchable*^ 
sectors have substituted other forms of energy for oil, suggests that demand elasticity has 
not increased. Finally, oil's cost-share of U. S. GNP, the key determinant of the impact 
an oil price shock will have on the U. S. economy, is about the same as it was before the 
first oil price shock in 1 973. Recent estimates of the impact on the U. S. of the brief 1990- 
91 ofl price shock indicate that the economy is as vulnerable as ever. As Tatom (1993, p. 
148) conchided, "Thus, another lesson fiom the 1 990-91 price changes is that the economy 
appears to remain exposed to oil price shocks to a nearly equivalent extent as earlier." 
Today, U. S. oil imports are within 1 percentage point of their highest level ever, and 
climbing. OPEC's resolve is more difficult to evaluate, especially for a period ten years 
in the future. The simulations presented here, however, suggest that there will be at least 
opportunity and motive for collusion. 

The SPR does not appear to provide an effective defense against a sustained supply 
curtailment For a multi-year episode, the effect of the SPR is to postpone the fiill impact 

54 



368 



of a sustained cutback in piroduction, to reduce itslxnefit to OPEC by about 5% and to 
mitigate its induct on Ae U.S. economy possibly by even less. If OPEC is detenni^ to 
cut production, it can a ppar e n t l y wait out die SPR releases and then reap the benefits of 
higher oil prices. Although SPR may be veiy efifective against a temporary supply 
interruption, against a multi-year si;^ly restriction it appears to ofiier neither a major 
disincentive to OPEC nor agnificant protection to tiie U. S. economy. 

Both the benefit to OPEC and Ibe cost to &e U. S. of a sustained oil price increase, 
however, are quite sensitive to fbc short- and long-nm price elasticities of petroleum 
demand and si^ly. If worid price elasticities of supply and demand could be doubled, fte 
estimated value of a two-year oil price shock to OPEC would be significantly reduced, 
the estimated cost to tiie U. S. economy of an OPEC si^ly curtailment would be cut by 
almost half. Doubling only iht United States* ability to substitute away from petroleum 
in the event of a price increase, cuts die estimated impaci of a price shock on the U. S. 
economy by one third. Moreover, v/bax price elasticities are increased, benefits accrue 
continuously. Wtth doubled price elasticities and Base Case production levels, OPEC 
revenues after 2005 are cut in half^ and U. S. economic costs by two-thirds. Attempts by 
OPEC to maintain revenues in tiie &ce of growing price elasticity are likely to be 
counterproductive for their gross revenues. 

Transportation accounts for two-tiiirds of petroleum use and 80% of high-valued light 
product use in the U. S., since tran^Kntation is 97% (^pendent on oil. Accordingly, 
increasing the elasticity of oil demand and si^ly amounts to increasing the transportation 
sector's price elasticity of oil demand, and increasing ibt price elasticity of supply of 
alternative transportation fuels and dcnnestic petrolexmL Increasmg transportation's ability 
to substitute non-petroleum fbek, as well as improve vehicular and system operating 
efficiencies in the ^Knt-run, should be a vety effective strategy against tiie economic costs 
of oil dependence. How to accoiiq>lish tins end is beyond the scope of this p2^>er. 



55 



360 



If present trends continae, future price shocks appear likely. Price shocks can be veiy 
profitable to oil producers and consuming nations appear to have developed no adequate 
defense against thqn. It does not iqjpear^bat strategic oil reserves could be maintained at 
levels sufficient to defeat a detennined supply curtailment ^nvjMA the ability of the 
economy, especially the transportation sector, to respond to higher prices must be 
increased. The ability to substitute nonpetroleum fuels for oil, and the ability to increase 
vehicle and systems efficiency in the short- and long-run must be enhanced. Even if the 
U. S. pursues tiiese goals on its own, the benefits are likely to be substantial. If the 
technology can be diffused to the rest of the world, the benefits will be multiplied. 

The challenge for consuming nations is to find an effective strategy for countering 
monopoly behavior by OPEC, one that can be sustained during periods of low as well as 
high oil prices. This is not an easy task. When prices are low, there spears to be no oil 
problem. When price shocks occur, there appears to be a crisis. In fact, the same oil 
problem in different phases was there all along. There may now be time, while OPEC's 
market share is growing and while OPEC members are feuding, to prepare for the next oil 
price shocL If the U. S. can successfully prepare, the benefits may be counted in the 
hundreds of billions, if not trillions of dollars. 



56 



370 



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62 



376 



APPENDIX A 



The method for simulating oil supply bnpacts begins with an assuned state of the world 
oil maricet diat is perturbed by a reduction of the supply of oil by OPEC countries. This 
means &e model must be able to repi e seut the world oil supply and demand response to 
an arbitraiy reduction in OPEC sapply. The worid is divided into two demand regions, the 
U. S. and the ROW, and three supply regions, the U. S., OPEC, and ROW. To create a 
price shock, OPEC si^ly is reduced. At this point, demand exceeds supply at the.Base 
Case market price. To achieve a market balance, price must be increased to depress 
demand and increase U. S. and ROW supply. Critical to this process is specifying the 
response of siq)ply and demand to a change in oil price. 



A.1 PRICE ELASTICmES OF OIL SUPPLY AND DEMAND 

Both ofl rfwTuwiH and siq>ply are known to be highly inelastic over a period as short as one 
year, but much more responsive over a longer period of time. A very commonly used 
mathematical formulation for rqnesenting an increasing response over time is the simple 
lagged or dynamic adjustment model This model assumes that &e change in demand, ^Q 
(or sapply ,Q), from period t-1 to period t is a fraction (A) of the difference between the 
desired, or bng-run, demand, ^i (siq>ply), tbat would prevail at the cunent price, P, , and 
last year's demand (si^iply). Because the equations for sapply and demand are structurally 
identical, the stilly and demand subscripts are omitted, below. 

g ' A * b P ^ ' 



63 



377 



The constant A, i ndica t es &ctors other than price that determine demand (or supply) in 
year t, and b is the price slope of the supply or demand equation. Equation (A.1) can be 
leadify solved for cunent demand (or supply) Q, , as a function of inice by siibstituing for 

Q, « X^, + «/*, +(1-X)5,., . (AJ) 

From equation (A^) it is clear &at for each of four equations (supply and demand for both 
the U.S. and the ROW) two parameters arc required: b and < A, < 1. The constants. A, 
, can be directly computed from the Base Case quantities and prices, given b and X." 

The literature is quite consistent on the point that the adjustment rate for oil demand and 
supply is very slow. Values of A. on the order of 0.1 are most common. There is also 
agreement that die short-run price elasticities of supply and demand are quite small, on the 
onicr'of +0.03 and -0.06, respectively. Values found in the recent literature are shown in 
Table A. I. Most values given in the literature are specified in terms of price elasticities 
rather than price slopes, and constant elasticity formulations are common. In the linear 
dynamic adjustment model (A.2), the short-run and long-run price elasticities (P) depend 
on price and quantity consumed, as follows. 



P« = *^^ ; P«.- *^ (A3) 

The implication of equation (A.3) is that if price doubles, short-run price responsiveness 
■win approximately double. It is virtually certain that the price elasticity of oil demand, if 
not oil supply, increases with increasing price in the short-nm. Suranovic (1994, p. 126) 



'Hliis procedure does not explicitly r e p re s ent the effect of o3 prices on demmd via the odier wiables 
that detennine the cwistmt tenns. As long as the price responses are reasonably accurate, this should not be 
an nnpatant concoB. 

64.. 



378 



Table A. 1 Recent Estimated Shoit- and Long-Run Price Elasticities of Oil Demand 



Model/Source 


SJL Price 


LJL Price 


JL 


Midpoint . 

Price 
(1993$) 


BP America - OECD 


-0.048 


-0J48 


0.09 


$30.30 


IPE -OECD 


-0.027 


-0.772 


0.03 


$30.30 


CERI - OECD 


-0.099 


-0.425 


0.23 


$30.30 


OMS - OECD 


-0.062 


-0.448 


0.14 


$30.30 


Gately - OECD 


^.067 


-0.157 


0.42 


$3030 


WOMS - OECD 


-0.029 


-2.544 


0.01 


$3030 


Penn-BU-OECD 


-0.056 


-0.247 


0.23 


$30.30 


FRB-OECD 


-0.115 


-0.538 


0.21 


$30.30 


HOMS - OECD 


-0.083 


-0319 


0.26 


$3228 


HOMSl - OECD 


^.116 


-0.769 


0.15 


$30.30 


OMS92-U.S./Suranovic 
(1994) 


-0.090 


-0.700 


0.13 


--• . ■ 


OMS92 - Europe 


-0.060 


-0.380 


0.16 


-- ■ 


WOM-World/Huntington 
(1994) 


-0.060 


-0.60 


0.10 


$3520 



Sources: HuntingtoD (1994X (1993) md (199IX Sumwrnc (1994). 

model in v^ch price elasticity increases but at a slower rate than it would if the oil 
demand equation were linear. In Suranovic's model, for example, an increase in oil price 
from $24 to $48 (1990 dollars), would increase die price elasticity of demand by only 
about 30%. Compared to those studies, tiie linear formulation will predict smaller price 
shocks for a given reduction in OPEC demand, and tfnis a greater loss of OPEC market 
share over time for any given monopolistic si^^ly stratiegy. 



65 



379 



uses a fonnula based on Hoc Energy Infomiation Administradoh's Oil Maiicet Simulation 
(1983) Huntington (1991) calculated price elasticities of demand based on a comparison 
of eleven world oil market models for a scenario of worid oil prices increasing from $21 .50 
to $43.00 (1993 $) per barrel from .1989 to 2010. He found that short-run price elasticities 
clustered near -0.1 and long-run elasticities were in the vicinity of -0.4. In a more recent 
study, Huntington (1993) used more rigorous econometric methods to estimate short-and 
long-run price elasticities of demand for nine of the worid oil models. The range of world 
oU prices was similar to his previous study. The average short-run elasticity was -0.075 
and die average long-run elasticity -0.562, implying an adjustment parameter of 0. 1 3. In 
a recent article Huntington chose representative values of -0.6 for the long-tim price 
elasticity of world demand and used an adjustment factor of 0.1, implying a short-rim 
elasticity of -0.06 associated with an oil price level of $35.20 (1 993 $/bbl). 

For su|>ply outside of OPEC, Huntington's (1991) study found that short-run price 
elasticities were well below -K).l, averaging +0.03 for total non-OPEC supply and about 
+0.05 for the U. S. and other OECD countries (Table A.2). In his 1994 analysis, 
Huntington used parameters of +0.4 for the long-run price elasticity of supply and and 
adjustment parameter of 0.1, implying a short-nm elasticity of +0.04. 

Translating the point or constant elasticity estimates foimd in the literature into equivalent 
parameters for linear supply and demand equations requires associating an oil price with 
each estimate because in the linear model elasticity is a function of fuel price. At the 1995 
AEO forecast price for 1993 of $16.12 (1993 $/bbl) and quantities consumed (17.24 
MMBD for fte U. S., 48.94 MMBD for ROW), the short-run price elasticities of demand 
for both the U. S. and ROW are assumed to be -0.03, with an adjustment parameter of 0. 1 . 
At $28/bbl, roughly the average price of oil since 1967, the short- and long-run price 
"elasticities of demand would be -0.053 and -0.53, respectively. At $35/bbl, the short-run 
price elasticity becomes -0.068. Short-run supply elasticities at 1993 prices and quantities 
are assumed to be 0.0225 for the U. S. and 0.01 87 for the ROW. These imply U. S. and 

66 



380 



Table A2 Price Elasticities of World Oil Si^ly 



Model/Source 


SJl Price 


. LJU>rice 1 


Uiited States 


OMS (EIA) 


0.117- 


0.340 


Gately 


0.045 . 


0.577 


IPE 


0.000 




ETA-MACRO 




0.215 


Pezm-BU 


0.000 


0.162 


CERI 


0.137 


0.195 


HOMS 


0.012 


0.522 


FRB Dallas 


0.013 


0.475 


DFI-CEC 




0.500 


HOMS-I 


0.0859 


0.662 


Average 


0.052 


0.394 


Rest of the World 


OMS (EIA) 


0.000 


0.170 


Gately 


. 0.052 


0.553 


IPE 


0.000 


■■ 


Penn-BU 


0.000 


.0.200 


CERI:WOMM 


- 0.000 


0.144 


HOMS 


0.000 


0.510 


FRB Dallas 


0.013 


0.480 


DH-CEC 


• 


0.980 


HOMS-I 


0.076 


0.633 


Average 


0.018 


0.384 



Soaree: Huntington 099IX table AJ ' ■ »* 

ROW su|>ply elasticities of 0.038 and 0.032 at S28/bbl, and 0.048 and 0.04 at $35/bbl. An 
adjustment rate parameter of 0.1 is again afflmied so fliat long-run elasticities are ten times 
as large. 

• " • * 

Although &ere can be no exact cdrrespondence between parameters of constant and 
variable elasticity models, tikse parametos are generally consistent with other models over 



67 



381 



dte xsnge of prices mentioned above. Most importantly, as prices rise during a si^Iy 
curtailment, elasticities in the linear model will increase, mitigating against very large price 
sihocks. Hius, relative to constant elasticity models, the simulation model used here will 
tend to predict smaller price increases for a significant oil si^ly reduction. 

Given the short-run price elasticity estimates at 1993 prices and quantities, slope 
coefBcients (b in equation A3 above) are calculated. These are assumed to remain 
constant tiuroughout the 1995 A£0 forecast, and to ^y at the Base Case prices and 
quantities siq>plied and demanded. Next, for each forecast year and for each si^Iy and 
demand equation, a constant term (A, , in equation A.2 above) is computed. With the year- 
specific constant terms and Ae price slopes, we have demand and supply equations for 
eadiyear. Given a reduction in si^ly fiomthe Base Case, these can be used to solve for 
a new worid price that equates oil supply and demand. '^ 

In some scenarios, we assume that price elasticities increse over Hhe Base Case levels. Ihis 
is simulated by multiplying the initial elasticity estimates by a constant factor (say, 2, to 
double price elasticity) and recomputing new price slopes (using equation A.3) at the same 
initial price and quantities. The Base Case calendar year constant terms (AJ are not 
changed. It is assumed that price slopes begin to increase in 1996 and increase linearly to 
reach the new higher value in the year 2005, remaining constant thereafter. This is 
nitmrii»d to reflegt the fact that pricg elasticities cannnf he changeH immftHiatH y 



"A vay simple algoridim, implemented as a macro in the market simulation spreadsheet, is used to 
equate supply and demand. Given an initial supply $hort&lI,'tfae dumge in |vice tlut would equate demand 
.to tlw lower level of siq>ply is computed. One fourdt of the difference between ifae *%ypotibeticar {vice and 
the initia] price is then added to the initial price to create a new price estimate. World supply and demand are 
recomputed at the new price and a new siq>ply short£dl estimate b calnilatcd The process is repeated until 
the supply shoit&U becomes sufiiciently small to be negligible. The dynamic adjustment specification of 
demand equations causes the previous year's demand to affect the uiii e u t year's, and so on. Still, die process 
osusally ctmverges in less than 20 iterations. 

68 



26-794 97-13 



382 



APPENDIX B 



B.1 METHODS OF ESTIMATING ECONOMIC IMPACTS 

Eirh of the tiiree principal types of economic losses to the U. S. economy is estimated: 

1. Loss of the potential to produce, 

2. MaoKxconomic adjustment losses, and 

3. TransferofwealthfromU.S. oil consumers to foreign oil expbiteis. 

The loss of potential GNP is related to oil's cost share of GNP, as die following 
demonstrates (Bohi, 1989), Let Q be the gross ou^ut of &e economy, including final 
consumption of goods and siervices pins the intermediate consumption of oil used to 
produce them. Net output, or true GNP, is therefore, ■ 

GNP '^ Q - P^X (R.1) 

where P^ and X are the price and quantity of oil consumed by the economy, respectively. 
Q is a function of apital (K), labor (L), other energy (E), and oil X, Q(K^,E,X). If we 
assume Aat marginal products (dQ/dK, etc.) are equal to fiutor prices, as diey would be 
at equilibrium in a full employment economy, then a change in GNP can be related to 
changes in fiictor inputs as follows. 

rfCW « P^ * PjdL * P^E - XdPg (BJ) 

If we divide equation (B.2) through by dPo , then multiply tlmugh by (g /GNP) and, 
leanange terms, we derive die following expression in terms of &e cost shares of GNP of 
each&ctor, 

69 



383 

IcM.^^ " Or nrj.. ♦Ox Iw". ♦ O5 l£,„ ^ Oo (B3) 

# 

^lieie Oi is the cost share of GNP for factor i (pncc of i times quantity of i dividtMi by 
GNP), and r\i is the elasticity of substitution of i ^th respect to the price of oil (percent 
change in the use of i with a percent change in the price of oil). If the elasticities of 
substitution were all zero, then the elasticity of GNP with respect to the price of oil would 
eqiial the negative of oil's cost share of GNP. 

While capital, labor, and other energy sources can certainly be substituted for oil in the 
long-run, the short-run substitution possibilities are more limited. For the period of a year 
or two, it seems quite reasonable to assert that the products of the substitution elasticities 
for coital and labor and their respective cost shares are essentially zero. Also in the short- 
run, nq>erience indicates that the effect of an oil price shock on nonpetroleum energy use 
may even be negative. Thus, the negative value of the oil cost share of GNP should be a 
reasonable, if very approximate, estimate of the short-run elasticity of GNP with respect 
to the price of oil. The long-rxm elasticity of GNP with respect to the price of oil should 
be smaller. It is assumed to be zero in this analysis. 

MacroecoDomic adjustment losses occur due to the inability to maintain full employment 
of tiie &ctors of production throughout the adjustment to the new price regime. 
Fortunately there have been numerous assessments of the impact of oil price changes on 
the U. S. economy, some based on model simulations, others using econometric methods 
to analyze historical data. Unfortimately, these studies generally do not Higtinpiigh 
between the two causes of loss of GNP. 

In temis of the size of the impacts, all the estimates of v^ch we are aware are of the same 
general inagnitude as the oil cost share of GNP. The earliest estimates by Mork and Hall 
(1980) and Pindyck <1980) based on the 1973-74 price shock were -0.03 and -0.02, 

70 



384 



req)ectively. In 1973 &e oil cost shate of GNP was 0.015 and in 1974 it jun^ to 0.032. 
More recently, Mork, Olsen and Mysen (1994) estimated oil price elasticities for U. S. 
GNP of -0.054 and -0.068, depending on model formulation, using data covering &e 
period 1967-1992. In the most extensive simulation oftheinqMctsofoil price shocks, tiie 
. Eneigy Modeling Forum ^ckman, 1 987) tested fourteen macroeconomic models with a 
limnlatfd 50% oil price increase beginning in 1983 (Table B.l). They tracked the inq>act 
on GNP for four consecutive years, ending in 1986. If one takes the simple average of all 
four years and all fourteen models, an estimate of -0.047 is obtained. Elasticities for 
individual models ranged from -0.02 to -0.095. 

**Thus the average finding is that real output is reduced by about 0.5 percent 
and the price level increased by about the same amount for each permanent 
increase in the price of oil, with a range for each response of about 02 to 1 .0." 
(Hickman, 1987, p. 164) 

In Ae years 1982 and 1983, the oil cost share of GNP was .045 and .037, respectively, 
having been as high as 0.056 in 1981 . Helkie (1991) cites an elasticity of GNP with 
respect to oil price of -0.03, based on simulations of the Federal Reserve Board staffs 
MCM model, v^ch he uses in his analysis of the impact of supply shortfalls on oil prices. 
The apparent correlation of GNP impact and the oil cost share of GNP is to be expected 
based on the simple theoretical discussion above, and has been previously pointed out by 
Tatom (1993, p. 131) and earlier by Pindyck (1980, p. 19). 

*'The percentage decline in ci^acity outpm and the rise in the price level 
associated with each one percent rise in the relative price of energy generally 
are equal and proportional to the share of energy in the cost of ou^uL" 
(Tatom, 1993, p. 131) 

We assume that in fbe short-run, the elasticity of potential GNP with respect to oil price 
is equal to the oil cost share of GNP. We Anther assume that in the long-run, substitution 



71 



385 



Table B.l Estimates of the Impact of Oil Price Shocks on GNP 



Elasticities of GNP with Respect to Oil Price 


- 


Potential 


Adjustment 




Source 


GNP Loss 


Costs 


Total Effect 


Pindyck(1980) 


-0.01 


-0.009 


-0.02 


Helkie(1991) 








Federal Reserve MCM 






-0.03 


Federal Reserve MPS 




• 


-0.04 


Mork and HaU (1980)" 






-0.03 


Hickman (1987) EMF 7 Study 


LINK 






-0.05 


Wharton 






-0.059 


MACE 






-0.043 


Hubbard-Fiy 


. 




-0.022 


Chase - 


• 




-0.051 


Claremont 






-0.072 


MPS 






-0.063 


FRBMCM 






-0.02 


BEA 






-0.069 


DRI 






-0.046 


Hickman-Cocn 






-0.044 


Sl Louis 






-0.057 


Mork 






-0.095 


Michigan 






-0.067 


Average 


. 


• 


-0.055 


U. S. DOE Interagency Working Group (1990) 


LOW 


• 


, -0.020 




. MID 




-0.025 




HIGH 




-0.040 




Mork. Olsen and Mysen (1994) 




• 


-0.054 








-0.068 



*Buei en a predicted -2.S% decline in 1980 GNP for • 93% increase in oil prices in 1980 over 1978. 



72 



386 



effects will oSset half of the shoit-run loss of output potential. Since we are measuring 
costs relative to a competitive oil price level, and since that competitive price is much 
lower Aan the forecasted oil prices, we do not use tbc instantaneous oil cost share. Instead 
we use the midpoint between tiie oil cost share at the conq>etitive price and that at tiie 
current price. Thus; if the current oil cost share is 3% and the competitive price oil cost 
share is 1%, the short-run potential GNP elasticiQr would be -0.02 and the long-run 
elasticity would be -0.01 , for tiiat year. The mechanism of adjustment is described below. 

There is little in the literature concerning the relative sizes of the macroeconomic and 
potential GNP effects, however, Pindyck (1 980) suggests a 50/50 split In the calculations 
done here, it is assumed that the macroeconomic adjustment effect is 75% as large as the 
short-run potential GNP effect 

In the case of both the. potential GNP and macroeconomic adjustment losses, one may 
expect the economy to adjust over time to the higher price of oil, reducing its impact on 
GNP. This is represented here by estimating a hypothetical price to which the economy 
has adjusted in any given year, and computing GNP losses as a function of the difference 
between the actual market price and the hypothetical price to ^^ch the economy has 
already adjusted. This method is motivated as follows. Consider the lagged adjustment 
model of oil demand and supply presented in the Appendix in equations (A.1) and (A.2). 
At any paiticiilar time, t, the quantity demanded (supplied) will be the long-run equilibrium 
quantity for some price of oil, P*, . Substituting this price into equation (A.1) and letting 
tiie equilibrium quantity, q, ■* Q , and then setting equation (A.2) equal to the resulting 
expression, we get the following iiituitive formula for the hypothetical price. 

P\ « XP, * (1-X)P,., (B.4) 

For macroeconomic adjustthent costs, the rate used is (A.^.33). This rate iihplies near . 
complete adjustment within three years. This is fester than the adjustment rats for most of 

•73 



387 



fte models studied by Hickman (1987). Macroeconomic losses occur whether prices rise 
orfelL 

The elasticiQ^ of potential ou^ut with respect to oil price is deiSned as 



LGNP 
. . CNP » ^ -^^ , 



Where Oo is the oil cost share of output (GNP) and P„ is the price of oil. As noted above, 
we assume 1^2. The GNP loss is computed relative to the assumed competitive market 
price, ?,. Thus in the ishoit run, 

-<'.— ' -o. -^ (B.6) 

and in the long run, 

-a P - P P - V 



- -o. 



k P. 'P. 



(B.7) 



The price variable p^ is a weighted average of the current and competitive price that 
depends on k. 



'.■(-iK4'. 



(B^) 



Equation (B.8) is defined so that equation (B.7) is always satisfied We now assume that 
the economy gradually adjusts towvds the long-run potential GNP elasticity by 
substituting an adjusted price, p,~, for /7, in equation (B.7). 



74 



388 



In the event that ihe current price of oil is less &an the competitive price, we estimate the 
potential GfNP gain by assuming that the short-run elasticity q)plies. When the current 
price is above the competitive maricet price, the GNP loss is estimated by two different 
fonnulas, dq>ending on v/beiber the adjusted price is conveti^ng on the weighted average 
price from below (p^ </?, ) or from above. If p, </>, , then the elasticity is given by. 



^GHfJ', " -°o 



P,-P, 



^ / 



(B.10) 



When p, >p^ , the adjusted price is converging on the long-run price from above, so the 
long-nm elasticity is used. 

( 



^OHf^, ' ~^c 



p - p 



^ / 



(B.11) 



Because P, is often many times as large as P^ , a bettCT qjproximation for the denominator 
than p, is the midpoint of the competitive and current price of oil. Thus, we substitute P^id 
' (P, - ?yi. in the d'enomenator of (B.IO) and (B.l I) in calculating the oil price elasticities 
of potential GNP. 

When oil prices rise due to the exercise of monopoly power by OPEC, there is also a 
transfer of wealth from U. S. oil consumers to the owners of foreign oil. Not all exporters 
are monopoly producers v^o will receive the transfer of wealth in the form of pure 
monopoly rents. Some will have to spend money on exploration and development to 
produce oil. These costs will be deadweight losses to the worid economy, resulting from 
the monopoly pricing of oil. Thus, they are true economic losses. However, since ihey 
occur outside the U. S., they are not included in the loss of U. S. GNP due to higher oil 

75 * . 



389 



prices. Therefore, it is not double counting to consider the entire amount that the U. S. 
pf^s for imports over and above the competitive market price as a loss of wealth to the 
IMted States, and couiit tiiis as an economic cost in addition to &e deadweight losses that 
make iq>tte loss ofpotentialGNPwi&in die U.S. economy. Whether oil ejqporters waste 
&e additional money wo pay them or put it to productive use does not change th? foct that 
it is lost to us. 

A key problem, of course, is determining vibat the price of oil would be in a competitive 
worid oil market without monopoly influence. In 1972, the year before &e Arab OPEC 
(nl embargo, As average cost of imported oil to U. S. refiners, v^ch had been declining 
for two decades, was $1030/bbl in 1993 dollars. In this analysis, we assume a conq)etitive 
market price of SlO/bbl in 1993 dollars. Costs may be computed either holding this price 
constant throu^ 2010, or increasing it at an assumed real discoxmt rate. The latter is 
crasistent widi the theory that oil is treated by markets as a finite exhaustible resource, a 
view Aat is rejected by several renowned energy economists because of the historicaUy 
demonstrated ability of technology to discover new reserves, increase recovery fit>m 
known reserves, and generally eiqpand the definition of economically ej^loitable resources 
(e.g., Gordon, 1994; Adelman, 1990; Mabro, 1992). 



76 



390 



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395 



Q2. On page 5 of your prepared testimony, you also state that "if current energy forecasts 
prove out, the Persian Gulf nations' oil revenues may triple from $80 billion a year 
today to nearly $250 billion a year in 2010." 

Please docimient this statement. 

A2. The sources of this information are two publications of the Energy Information 
Administration: the Annual Energy Outlook 1995 and the International Energy Outlook 
1995. Since this testimony was prepared, the 1996 versions of these documents have been 
released. The calculations below use the more current data. According to these 
documents, the Persian Gulf oil production for 1996 is 17.110 million barrels per day 
(MMBD)-slightly higher than 1995. The projected 2010 production is 35.8 MMBD. The 
world oil price for 1996 is estimated to be $16.98 per barrel-again, slightly higher than 1995. 
The projected 2010 price is |23.70 per barrel-slightiy lower than the 1995 projection. These 
data translate to 1996 Persian Gulf revenue of $106 billion in 1996 and $310 billion in 2010. 
While both these figures are higher than those from the 1995 data, it still represents a 
tripling of revenue for oil producers in the Persian Gulf-one of the most politically unstable 
regions of the world. 

Q3. On page 6 of your prepared testimony, you state: "The final piece in the geopolitical 
puzzle is that during the first oil crisis in the early 1970s, the countries that were 
competing with us for oil were oui NATO aUies, but during the next oil crisis, a new 
important complication will arise: the competition for oil will increasingly come 
from the rapidly growing coimtries of Asia. Indeed, in the early 1970s, East Asia 
consumed well under half of the oil used by the United States; by the time of the 
next crisis, however, East Asian nations will probably be consuming more oil than 
we do." 

Please document this statement. 

A3. The source for this information is Table A3, "World Total Oil Consumption by Region, 1990- 
20/0, "International Energy Outlook, June 1995, page 81. Even by 2000, the combined use 
of Japan and non-OECD Asia will be 20 million barrels per day (MMBD), compared to the 
U.S. demand of 18.9 MMBD (reference case). 

[No/e; These pages are attached^ 



396 



DOE/EIA-0484(95) 
Distribution Category UC-950 



International 
Energy Outlook 

1995 



May 1995 



Energy Information Administration 

Office of Integrated Analysis and Forecasting 

U.S. Department of Energy 

Washington, DC 20585 



This report was prepared by the Energy Information Administration, the independent statistical and 
analytical agency within the Department of Energy. The information contained herein should not be 
construed as advocating or reflecting any policy position of the Department of Energy or of any other 
organization. 



1 



397 




•-! a ^ i - ^"V ■ • ; „ " i-i»; ^ '- iJy. iyj ; ! "■'.^ffy.^.j^ i fi l WtU'j y P'UC: ' 



398 



Tabto A2. WorM Total Energy Consumption by Region, 1990-2010 

(Quadrillion Btu) 











ProiKtieni 


- 


HMenr 


2000 


am 


»io ■ •• 




1990 


1993 


Rafarane* 
Cm* 


SMWlUvlty 
Rand* . 


Rafaranc* 
Casa 


Sanaltlvlty 
Ranga 


R*f*f*<ie* 
Caaa 


SanalUvtty 
Ranga 



occo ....... 

umtadSiwai* 
Canada 



193Ji 100^ 214^ 20S.T 22M 227^ 314.7 1414) 239J> 223J 



OECOEurapa .. 
United NnQdom 



Gaontny ......... 

«*y 

Nalt>affandB ...... 

Omar Euispa 

OlharOECO 

EE/nU 

Fonnaf Soviat Uoion . 
Eastam Europa 

NoThOECOAaia 

OiBia 

OtfiarAiia 

■MdlaEaal.- 



Africa 

Canlral and South Amarica . 



e4j 

10.7 
■ 4J 
18.2 

eo.9 

9.0 

a.9 

14.4 
6.6 

3.3 
16.6 

4.6 
74J 
56.0 
16.3 
823 
27.9 
24.7 

11J 
tJ 

1X9 



85.8 

11.0 

S.2 

19.0 

64.3 

9.7 

9.7 

14.1 

7.0 

3.5 

20.3 

4.9 

•X2 

51.2 

12.0 

86J 

29.2 

27.5 

122 

10J 

14.4 



94.6 
13.2 

6J 
23.2 
713 
113 
10.8 
15.6 

73 

3.9 
213 

5.6 
6l7 
49.7 
14.1 
79.4 

413 
373 
153 
12.6 
173 



92.0 
1Z2 
SB 

30.T 
67.8 

io.e 

10J 

143 

7j 

47 

21.0 

5.3 

•13 

47.9 

13.1 

71.1 

37.3 

33.8 

14.0 



96.4 
14.4 

6.9 
25.8 
75.6 
13.8 
11.4 
16.7 

8.3 

4.1 
22.6 

5.9 
86J 
51.5 
15.0 

«ai4 

46.7 
4».7 
T6L5 



11M 1X4 
15.9 18J 



99.4 

143 
7.0 
250 
753 
123 
11.4 
163 
83 
4.1 
23.0 
53 
89.4 
S43 
15.1 
82.1 
46.4 
43.7 
163 
133 
19.1 



963 

12.0 

6.1 

21.6 

69.5 

10.9 

10.4 

15.3 

7J 

3.0 

21.6 

S.S 

65.1 

51J 
1X7 

7ILJ 

4t0 
37S 
143 



102.4 
»«» 

7S- . 
28.8 
82.5 
13.7 
13.4 
18.4 

«.0 

4.5 
24.5 

6.4 

74.0 

57.5 

16.7 

107.8 . 

56.6 

51.0. 
19.1 



123 fJ^O 
17Jt 21 J 



1033 
15.1 

73 
26.4 
793 
123 
12.0 
173 

83 

43 
24.4 

63 
74.7 
58.4 
163 
1043 
55.6 
46.6 
183 

143 

203 



99.4 

129 
6.4 
22J 
71.3 
11.1 
10.7 
15.7 
. 7.7 
.3.9 
22.3 
5.6 
66.1 
53.7 
14.3 
84.7 
44.9 
39.8 
1X7 



2S7J 

108 J 
17J . 

83 
31.1 
88.9 
14.7 
1X4 
19.8 

9.0 

43 
26.0 

7.0 

91.7 
: 63.4 

18.4 
126.6 
.001 

509 

21S 



Total We>«d 



345.6 3473 4023 S81J 424.9 4363 



4033 477.0 471.7 



1Z7 1X6 

173 94J 

422.4 536.6 



*lncludas m* 50 Stales and the Distnct o« Columt>ia. U.S. Tarritori*! ara indudad In 'Other OECD.' 

Notes: OECO • Oiganiulion Ic Economic Cooperation and Development. EE/FSU • Eastern Europe/Former Soviet Union. Energy total* 
include consumption of biotuels in the United Slates. All sensitivity ranges ara derived independently and do not necassanly add to totals. 
Other totals may not equal sum of components due to independent rounding. The electricity portion ol the national fuel consumption value* 
consists et generation tor domestic use plus an adjustment lor electricity trade based on a fuaPs share ol total generation in the eiporting 
country. 

Sources: Nl*ta/y: Energy ln«onnation Administration (EIA). InttmsliontI Entrgy Annual 1992. 0OE/EIA-02t9(92) (Washington, DC, January 
1694) Proiectlona: EIA. Annua/ Entrgy OiMjok 1995. DOE/EIA.0383(9S) (Washington, DC. January 1995), Table B1: and Woitd Eaargy 
Pniedian System (1995). . - 



Enafgy biformatlon AdminliirjUorf/ Inlarnallonal Energy Outloek 1995 



399 



Tabte A3. World Total OR Consumption by tUglon, 1990-2010 

(Million Barrais per Day) 



' ■ * *"'» • 






l^ro|9ctfoit9 


• ; . • .' 


Kwenr 


»00 


»0S . 


aoio ■. . 


n00loivCoun«^ ' 


1980 


1W2 


n9t9T9fK0 


Rang* . 


R*(*nnc« 
.Cm* 


-8*n»ltlvllir 
' Rang* 


R*r*r*ne« 
' Caa* 


• Rang*. -_ 



oEco .: 

UnJtadSMMC* 

Canada 

U*xiee.....r 



OECOEurei)* .. 
United KinQdOfn 



Illy........ 

W*ih*rt an d » .. 

OltmBnp* . 

pcharOECO .. 

EE/F8U .^..'... 



Full 1 1*1 S^A*t Union , 

EasMfn Etirsp* . . . . 

NonOECOAala 

Chma 

Oltvr Ati* . 

HMdMEaat 



CMitm and SeuOi Anarlci . 



a»3 


40.0 


.44.7 


4t$ 


4T.1 


474 • 


° 484 


414 


484 


474 


««4 


njo 


174) 


184 


%B.r 


l»4 • 


80.1 


104 


»»J 


204 


40.4 


224 


t.r 


1.6 - 


14 


.14 


£0 • 


14 


14 


£1 


14. 


14 


£4 


1.7 


1J 


2.4 


£4 


24 


£6 


£5 


£0 


£7 


£4 


£4 


8.1 • 


5.5 


•4 


84 


8L5 


«4 


8L0 


V . 


6.6 


84 


74 


12J 


13.6 


144 


14.1 


184 


154 


144 


rA4- 


15.4 


U.S 


nj 


1J 


1.8 


14 


14 


£0 


£0 


. 14 


££ 


24 


£0 


ts 


1A 


14 


24 


£0 


££ 


• £1 


£f 


£4 


£2 


£f 


£4 


2.7 


24 


34 


£« 


£2 


3.1 


3L0 


. »4 


34 • 


XI 


£8 


^s 


14 


ZO 


£0 


£2 


£1 


. £1 


£4 


£2 


■■ t1 


£4 


0.7 


0.8 


04 


04 


00 


04 


0* 


00 


«4 


04 


14 


4.1 


44 


44 


44 


44 


44 


4.0 


54 


44 


4.7 


84 


1.0 


14 


14 


IJ? 


fj 


14 


14 


»4 


14 


f.4 


14 


10.0 


74 


0.1 


8L0 - 


8L2 


74 


74 


74 


84 ' 


818 


84 


S.4 


6.7 


4.7 


4.6 


4.7 


54 


5.0 


84 


74 


7.1 


. £0 


1.6 


1.1 


1.4 


J.4 


14 


14 


14 


f.6 


1.7 


14 


L4 


7.4 


04 


144 


fl4 


144 


184 


%i2. 


'fOLf 


184 


f8L0 


174 


Z.3 


2.6 


3.7 


X6 


3.8 


34 


se 


4.1 


4.0 


*7 


44 


5.3 


6.2 


10J . 


10J 


fd.« 


114 . 


11.4 


124 


12.4 . 


124 


1X2 


U 


4.7 


44 


4L5 


44 


84 


44 


8L0 


14 


8L4 


£8 


2.1 


12 


U . 


ZT 


£8 


3.1 


£4 


£4 


34 


. £2 


£8 


U 


34 . 


44 


4L5 


4.7 


84 


44 


8L2 


84 


8L2 


84 



Total Wofid 



864 66.7 



764 



rXB 78.4 



834 



824 88.0 



8.7 



874 844 



Vtcludts Ot* $0 States and me District o< Cokinibia US Tarritonm are included in "Omer OECO.' 

Notes: OECD • Oreanization for Economic Cooperatior^ and Oeveiopmem. EE/FSU • Eastern Europ*^oan*f'Sovi*t Union. All sensitivity 
nngti are denved independentty and do not necessarily add to totals Other totals may not equal sum o< corr^nentt due to independent 
founding The electricity portion of tr>e national fuel consumptiori values consists of generation lor domestic, ua* plua an adjuslmert tor 
•lectiicity trade based on a fuaTs snare of total generat«n in the exportng country. 

Sources History: Energy Woonalion Administration (EIA). Inlemthonsl Energy /Annual 1992. DOE/EIA.0219(92) (Washington, DC. January 
T994| Proiections: ElA. Annual Energy Outlook 199S. DOE/EIA-03e3(9S) (Washington. DC. January 1995). Table C20; and World Energy 
Protection System (1995). 



Energy Infonnatloh Administration/ International Energy OuHeek 1985 



400 



Q4. On page 10 of your prepared testimony, you state that "[i]f biofuels R&D continues 
to be funded at current levels, ethanol from fast-growing dedicated crops, crop 
waste, and wastepaper could be produced for as litde as sixty to seventy cents a 
gaUon by 2005." 

Please document this statement. 

A4. Process economic analyses are being used to guide the biofuels R&D activities that could 
lead to ethanol production costs for as little as sixty to seventy cents a gallon by 2005. 
These analyses identified three process steps that would lead to major cost reductions. The 
steps are: (1) physical and chemical pretreatment to make the biomass materials more 
amenable to enzymatic attack, (2) production and use of efficient, low-cost enzymes which 
convert the material to fermentable sugars, and (3) fermentation of the sugars to ethanol. 
Performance parameters have been established for each of these process steps and are 
being pursued through research and development projects at the National Renewable 
Energy Laboratory and with universities and industrial parmers. One of our primary 
customers, Swan Biomass Company, believes it can produce ethanol for about seventy cents 
a gallon in niche markets now, using waste feedstock and a process technology package 
funded in part by DOE. Cost reductions in both feedstocks and production systems, i.e., 
fast growing dedicated crops and improved conversion processes, should bring the costs 
within the sixty to seventy cents range. 

Q5. On page 10 of your prepared testimony, you also refer to the Partnership for a New 
Generation of Vehicles (PNGV) goal which is to design and construct a prototype 
clean car by the year 2004 that has three times the fuel efficiency of existing cars and 
very low emissions, but comparable or improved performance, safety, and cost. 

Q5a. Aren't the "Big Three" automakers-GM, Ford and Chrysler-involved in the 
PNGV? 

A5a. Chrysler, General Motors, and Ford are all active in the Partnership for a New 
Generation of Vehicles. 

Q5b. Haven't all of the "Big Three" automakers-GM, Ford and Chrysler-been 
making considerable profits in recent years? 

A5b. While none of the "Big Three" were profitable in 1992, Ford, Chrysler, and General 
Motors have each reported profits in 1993 through 1995. Profit trends are far from 
clear, however. Ford and Chrysler reported 1995 per-share earnings that were 
sharply lower (off 28 and 45 percent respectively) than in 1994. In contrast. General 
Motors per-share profits rose by 17 percent in 1995. 

Q5c. If indeed all of the "Big Three" automakers-GM, Ford and Chrysler-have 
been making considerable profits in recent years, what is the rationale for 
subsidizing them to develop a near-term prototype "clean car"? 

A5c. Absent government support, these companies have little or no incentive in spending 
their scarce research and development funds on high-risk technologies needed to 



401 



achieve radical improvements in fuel economy. This question gets right to the heart 
of the proper role of government in the conduct of research and development. We 
believe government has a critical role to play as a catalyst and a facilitator of 
technology research and development-as distinct from product research and 
development which is and should be funded by industry. 

Current market forces (particularly historically low motor fuel prices) are antithetical 
to industry funding of technologies to reduce fuel use. However, developing and 
commercializing more fuel efficient vehicles has considerable energy security, 
environmental, and economic competitiveness benefits for the nation that are 
external to market pricing. Key to the achievement of the national interest 
objectives is government support of long-term, high-risk research and development 
that is not linked to market pull. These technologies include hybrid propulsion 
systems, hydrogen fiiel cells, lightweight materials and structures, energy storage 
components, supercomputer models, vehicle recycling, and alternative fuels. The 
government contribution includes not only cost-shared funding, but also the unique 
research and development capabilities of the Federal laboratories in enabling 
technologies such as materials engineering, supercomputing, and manufacturing 
technologies. 

The majority (about 75 percent) of the government cost-shared fiinding provided to 
Chrysler, Ford, and General Motors for research and development is not spent by 
them, but passed on to suppliers and universities who perform the work. The 
proportion of Federal funding will be higher for high-risk projects where the 
outcome is uncertain, and that of industry funding will be higher for technologies 
with a clear, more, definite, and nearer term market. Beyond the technology 
development phase of PNGV, the industry has committed to apply, as they become 
commercially viable, those technologies resulting from the research program that 
would be expected to significandy increase fuel efficiency. 

The leveraging of government research and development capabilities by the private 
sector enables U.S. companies to better compete with foreign companies, which 
often obtain significant assistance from their governments (e.g., Japan/Ministry of 
International Trade and Industry and Europe/EUROCAR). As the recent 
(3/18/96) National Research Council Peer Review of the PNGV program pointed 
out, the U.S. IS already behind in the crucial areas of compression ignition engines 
and ultracapacitors. We currently enjoy a leadership position in such technologies 
as energy storage, gas turbines, and hydrogen fuel cells; to reduce our effort at this 
point would result in surrendering these leads to our foreign competitors. 

Q6. At the bottom of page 10 and the top of page 11 of your prepared testimony, you refer 
to advanced battery research, and highlight the nickel metal-hydride battery. 

Is it not true that nickel metal-hydride batteries are already commercially available, 
and if so, what is the rationale for continued taxpayer subsidies of this technology 
rather than concentrating scarce resources on long-term battery R&D? 



402 



A6. Nickel metal hydride batteries are only commercially available today as small cells and 
batteries for consumer electronics applications. In FY 1997,- approximately 75 percent of 
the advanced battery research and development fijnding will be for long-term technologies. 
A portion of the remaining-25 percent will be used for projects which will reduce the cost 
of large nickel metal-hydride batteries to a threshold that will render them viable for electric 
vehicles. 

Q7. On page 11 of your prepared testiinony, you say that the Department is "seeking to 
expand natural gas as a transportation fuel." 

Is it not true that natural gas has been used as a transportation fuel for decades, and 
if so, why should scarce Federal resources be used to fiuther demonstrate what is 
already a reality? 

A7. Although natural gas has been used in vehicles for many years, and is a popular 
transportation fuel woddwide, many technical and market barriers exist to increased use of 
natural gas in the U.S. transportation market. DOE is working to address these barriers, as 
provided for in the Alternative Motor Fuel Act of 1988 and the Energy Policy Act of 1992. 
DOE R&D efforts are focused on key technological advancements that will dramatically 
increase the range of natural gas vehicles, reduce the costs of manufacture, and capture the 
improved emissions performance these vehicles are capable of. Industry investment in light 
duty and heavy duty engine development for natural gas vehicles has grown dramatically 
during the last five years, with DOE support, but still pales in comparison to industry 
investments in gasoline and diesel engine development. Simultaneous with critical R&D, 
DOE works in partnership with industry, and State and local governments, to identify 
infrastructure needs, such as refueling, service, training, and information to fleets and 
consumers on the availability and use of natural gas vehicles. For example, our Office of 
Heavy Vehicle Technologies is workingwith major manufacturers, such as Cummins Engine 
Company and Caterpillar, to improve the efficiency of direct injection engines with liquefied 
natural gas (LNG). Engines have been optimized to operate on gasoline and diesel, and the 
same research and testing must be accomplished to optimize operation using alternative 
fuels. 

Q8. On page 11 of your prepared testimony, you also say that the Department is 
developing gas turbine engines for light duty vehicles. 

What specific development is underway? 

A8. DOE'S PNGV/Hybrid Propulsion System Program, which is being implemented through 
50-50 cost-shared contracts with each of the three major U.S. automakers, includes gas 
turbines as one of the major candidate engine technologies. Gas turbines offer noise, 
vibration, packaging, multi-fuel, and emissions advantages relative to mainy other options. 
The automakers and turbine developers (AlliedSignal, Teledyne Ryan, and Allison) are 
developing advanced turbine engines designed for hybrid propulsion systems that will 
double the fuel efficiency of current 4-door, mid-size sedans (i.e., Concorde, Lumina, and 
Taurus). Additionally, DOE is conducting supporting R&D to address the major technical 
challenges: low-cost, high-temperature structural ceramic components, ceramic waste heat 
recovery devices, ultra-low emission combustion systems, and thermal insulation. 



403 



Q9. On page 11 of your prepared tesdmony, you say "probably the one technology that 
experts would agree has the best chance over the long term of significantly reducing 
petroleum use in the transportation sector is fuel cells." 

If this is the case, and given that Federal resources are and will continue to be 
constrained for the foreseeable future, why doesn't the Department allocate relatively 
more resources to this promising technology rather than continuing to spend money 
on technologies, such as natural-gas vehicles that are already commercially 
available? 

A9. Allocation of limited Federal funds is a matter of balancing the risk of achieving success in a 
specific technology with the need for a high probability of achieving our mission of 
reducing petroleum use in the transportation sector, preferably within a few years. 
Increasing the use of alternative fuel vehicles, such as natural gas vehicles, ensures that near- 
term displacement of petroleum is achieved while the risks associated with longer term 
technologies, such as fuel cells, are being reduced. Since fuel cells are fuel flexible and 
therefore can operate on various alternative fuels, they will benefit by the fuel infrastructure 
which is established by nearer term alternative fuel vehicles. Over the last five years, there 
has been rapid progress in proton exchange membrane fijel cell technology, such as 
dramatic increases in power density and decreases in precious metal catalyst loadings. These 
technology advances have resulted in the Department requesting major increases in the fuel 
cell budget allocation even though the over-all budget has been constrained. For example, 
since the fiiel cell program for transportation was established in FY 1987, the funding has 
steadily increased to about 10 times the initial funding. We regularly reevaluate these 
allocations as the state of the technology continues to change and advance. This 
reevaluation process occurs through internal processes, through external peer review, and 
through close consultation with industry. 

QIO. Finally, on page 11 of your prepared testimony, you state: "Over the past two 
decades the DOE has invested considerable resources to develop several types of 
fuel cells that wiU soon be used to power cars, trucks, utilities, commercial buildings, 
and industries. The Japanese govenunent has been increasing its fuel cell R&D 
budget at 20% per year for the past five years, and Japanese companies are less than 
five years behind U.S. companies in this technology." 

QlOa. Please provide, by fiscal year, the DOE funding for fuel cells over the past 
twenty years. 

AlOa. DOE Office of Fossil Energy (DOE/FE) fuel cell appropriations in million % are 
listed below. The DOE/FE total for the 20 years, 1977 through 1996, is $778.1 
million. 



404 



1977 


1978 


1979 


1980 


1981 


1982 


1983 


1984 


1985 


1986 


21 


j5.2 


40.5 


35.5 


32.0 


34.5 


32.0 


46.6 


42.7 


35.3 






1987 


1988 


1989 


1990 


1991 


1992 


1993 


1994 


1995 


1996 


29.4 


34.2 


26.5 


38.0 


42.9 


50.8 


50.4 


51.1 


47.0 


52.5 



Source: DOE appropriations records. 

DOE Office of Energy Efficiency and Renewable Energy (DOE/EE) funding for 
fuel cells in the transportation sector is presented below: 



FISCAL 
YEAR 


FUNDING 
MILLIONS 


COMMENTS 1 


1987 


1.0 


No funding before 1987. The fuel cell bus program 11 
was initiated dunng this period. 


1988 


2.6 


1989 


3.7 


1990 


5.1 


During this period the fuel cell bus program 
continued at approximately $2.0M/YR until tapering 
off and successful conclusion in FY 1996 (no FY 
1996 funding). Research and development programs 
in fuel processing and PEM fuel cells were initiated 


1991 


7.8 


1992 


9.5 


1993 


12.0 


1994 


19.5 


1995 


23.1 


1996 


22.0 


PEM fuel cell system development and fuel 11 
processing programs. || 


TOTAL 


106.30 





QlOb. Please provide the Japanese govemment funding over the same two decades. 

AlOb. Values for the amount of fuel cell funding by the Japanese government, as reported 
in literature and estimated by visitors to Japan sometimes vary over a fairly wide 
range. In addition to variations in the rates assumed for conversion from Japanese 
yen to U.S. dollars, it appears that sometimes the values attributed to govemment 
spending have included the total costs of some govemment programs which are 1/2 
to 2/3 cost-shared by the private sector. These are separate from the totally private 
sector funded programs. Published reports of the govemment funding over the 
past 20 years for R&D and for demonstrations are listed below in million $ 
(converted from Yen at rates indicated). No funding before 1981 is reported in the 
literature. 



405 



■ 


1978 


1979 


1980 


1981 


1982 


1983 


1984 


1985 


1986 


(ym 








235 


235 


235 


232 


240 


160 


R&D 








1.1 


2.5 


8.5 


15.9 


19.9 


19.9 


Demo 




















Tot. 








1.1 


2.5 


8.5 


15.9 


19.9 


19.9 




1987 


1988 


1989 


1990 


1991 


1992 


1993 


1994 


1995 


1996 


150 


124 


126 


146 


134 1 


126 


110 


100 


94 




22.4 


28.3 


28.6 


19.4 


25.1 


30.8 


43.3 


50.5 


54.6 












4J 


14.7 


11.9 


83 


NA 




22.4 


28.3 


28.6 


19.4 


29.9 


45.5 


55.2 


58.8 


NA 





Sources: N. Asada, MITI Fuel Cells Program, U.S. DOE/Japan AIST Fuel Cell 
Technical Meeting, Tucson, Dec. 3, 1992; M. Nishikawa, Government Budget for 
Fuel Cell Development Information Center, Oct., 1994; U.S. DOE/Japan AIST 
Fuel Cell Development Meeting, San Diego, Dec. 2, 1994. 

QlOc. Please document the statement that "Japanese companies are less than five 
years behind U.S. companies in this technology." 

AlOc. A recent assessment regarding stationary fuel cells appears in the outside witnesses 
testimony on fuel cells for the House Appropriations Subcommittee on Interior and 
Related Agencies, March 7, 1996, Statement of Donald R. Glenn, Energy Research 
Corporation: "ERC believes the U.S. has a tenuous three-four year lead in this field 
with Japan close behind." 

With respect to transportation fuel cells, the Japanese position in fiiel cell 
technology is well documented in the scientific literature. For example, there were 
five Japanese Proton Exchange Membrane (PEM) fuel cell papers presented at the 
fall 1995 meeting of the Electrochemical Society. All were directly relevant to 
transportation technologies, but perhaps the most interesting was that presented by 
scientists from Toyota ("Optimized CO Tolerant Electrocatalysts for Polymer 
Electrolyte Fuel Cells," Masayoshi Iwase and Shigeyuki Kawatsu, Toyota Motor 
Company, Extended Abstracts Volume 95-2 of the Electrochemical Society). In 
this paper they demonstrate their complete grasp of the issues involved in PEM fuel 
cell catalyst loading and poisoning; a major issue in commercialization of this 
technology. In comparing the data presented there with our own studies it is 
eviderit that they are very close to achieving our present state-of-the-art. We should 
note that information presented in scientific journals typically lags the true 
competitive position of the researchers. 

Besides information which is directly available to us in the scientific literature, there 
is anecdotal evidence that a major Japanese automotive company is close to 
unveiling a hybrid electric concept car with an integrated fuel cell power source. 



406 



Also, in an unclassified review of the status of fuel cells: "Fuel Cells: Foreign 
Development Efforts to Catch Up in an Emerging Technology," the efforts of 
Japan, Europe, South Korea, Canada, and Russia are examined. A graphic within 
the document lists the following countries and companies as "less than 5 years 
behind the United States" by type of fuel cell: 

Phosphoric acid cells : 

Japan - Toshiba 

Japan - Fuji Electric 

Japan - Mitsubishi Electric Corporation 

Japan- Sanyo 

Molten Carbonate cells : 

Japan - Ishikawajimi-Harima Heavy Industries 
Japan - Mitsubishi Electric Corporation 
Japan - Hitachi 

Polymer electrolyte cells : 
Japan - Fuji Electric 
Germany - Siemens 
Germany - Daimler-Benz 

Qll. On page 12 of your prepared testimony, you state that "domestic jobs are created 
when money that would have gone overseas to purchase foreign oil goes instead to 
U.S. workers manufacturing technologies for highly-efficient cars and trucks, or for 
growing domestic biofuels." 

Mr. Schleede says in his prepared testimony, however, that a large share of the 
outflow of dollars for our oU imports comes back to the U.S., directly or indirecdy, as 
payments for the merchandise and services that we export and that DOE seems 
uninterested in the relationship of oil import dollars to our export markets. 

How would you respond to Mr. Schleede? 

All. Mr. Schleede's assertion that "DOE seems uninterested in the relationship of oil import 
dollars to our export markets" is incorrect. The Department is very much interested in this 
relationship. We believe that we have a responsibility to the taxpayers to consider the 
national interest, which includes the trade deficit. Mr. Schleede doesn't seem to share our 
concern. 

Q12. On page 13 of your prepared testimony, you state that "[w]e already spend a 
hundred times as much money on military forces in and around the Gulf than we do 
on technologies to minimize dependence on Gulf oil." 

Please document this statement. 

A12. The current fiscal year expenditures on research and development of energy efficiency 
technologies that can reduce dependence on imported oil total about $220 million. 



407 



According to the CATO Institute, annual expenditures for the defense of the Middle East 
equal about 150 billion (Ravenal, Earl C, Designing the New World Order , 1991). This is 
more than 120 times the amount spent on the DOE energy efficiency technology research 
and development activities (not including state grants, such as weatherization assistance), and 
over 70 times the amount spent on RD&D for Energy Efficiency and Renewable Energy. 

Q13. On page 13 of your prepared testimony, you refer to the "independent commission 
headed by Daniel Yergin". 

Please explain why the Secretary of Energy Advisory Board (SEAB) Task Force on 
Energy Research and Development, chaired by Daniel Yergin, was truly an 
"independent commission." 

A13. The Secretary of Energy Advisory Board's Task Force on Strategic Energy Research and 
Development, chaired by Dr. Daniel Yergin, was constituted under the Federal Advisory 
Committee Act and operated entirely independently from Department of Energy's 
management and influence. 

The Task Force was composed of 31 members, none of whom had any direct affiliation 
with the Department. These members represented one of the most impressive collections 
of seasoned energy experts ever to advise the Secretary of Energy on its energy R&D 
programs. Dr. Daniel Yergin, is a renowned expert on energy issues and a Pulitzer Prize 
author of The Prt^e - 

Dr. Yergin made all final decisions about Task Force membership. He sought competence 
in the field and broad representation from industry, academia, and non-Federal public 
sector interests. The Task Force deliberated extensively in fijll public view at nine open 
meetings in order to achieve consensus before issuing its final report. 

In July 1995, at the request of Chairman Rohrabacher, the Department conducted a review 
of all contractual arrangements over the previous five years, from FY 1991 through FY 
1995, which, may have existed between the Department, its laboratories and subcontractors, 
and the organizational entities with whom the Task Force members were employed or 
otherwise affiliated. Our final report was submitted to the Chairman on August 17, 1995. 
The results of our review showed that 15 of 31 entities had no contractual arrangements 
whatsoever with the Department over the entire five-year period. Four other entities had 
minor funding relationships, totaling from $ 10,000 to less than $ 100,000, over the five-year 
period. Hence, 19 of 31 entities, or nearly two-thirds of all entities affiliated with the Task 
Force's membership, had little or no R&D business with the Department. Of the 
remaining 12 entities, six were major research universities, from whom any Federal sponsor 
of R&D would be expected to seek R&D expertise. 

These Task Force members provided a valuable public service to the Department and the 
Nation by sharing the wisdom and advice of their experience virtually free of charge. They 
made a considerable commitment of their personal time and effort. Their sole purpose was 
to render a collective view-based on their professional knowledge and expertise-on how the 
Nation might best address its long-term energy R&D needs. They did this as a public trust, 
independendy, without conflict of personal or organizational interest. 



408 



[Note: Chairman's Rohrabacher's letter to Secretary of Energy Ha^^el R. O'Lear)' dated June 30, 1995, 
Secretary O'Leary's response dated August 2, 1995, and Acting Deputy Assistant Secretary for House 
Liaison, Robert S. Kripomc:^ response dated August 17, 1 995 an attached.] 



409 



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U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON SCIENCE 

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WASHINGTON, DC 20515-6301 
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June 30, 1995 



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Honorable Hazel R. O'Leary 
Secretary of Energy 
U.S. Department of Energy 
1000 Independence Avenue, SV\/ 
Washington, DC 20585 

Dear Secretary O'Leary: 

The House Science Subcommittee on Energy and Environment has received copies of 
the Final Report of the Secretary of Energy Advisory Board (SEAB) Task Force on 
Strategic Energy Research and Development, and an accompanying press release 
dated June 13, 1995, entitled "Independent Task Force Says Energy R&D Essential 
to U.S. Economy Cutbacks in R&D Could Put Nation at Risk". 



According to the attached June 13, 1995, press release, "(t]he report cautioned that 
proposed cuts in federal energy R&D programs 'would not be prudent, given the 
strategic importance of energy to the Nation' and that energy R&D is needed 'to help 
mitigate the severe economic risks of possible disruptions in the Nation's future energy 
supplies.'" 

In addition, the press release states that "[t]he Task Force recommends 'that the 
Federal Government continue to provide leadership, focus, and substantial financial 
support for energy R&D to ensure that the national goals of U.S. energy security, 
economic growth, environmental quality, and national leadership in science and 
technology are effectively achieved. Such support is essential to our Nation's future 
well-being." 

Basically, the Task Force endorses the status quo, but bemoans the fact that even 
more taxpayers' dollars are not being spent on energy R&D. While this result is hardly 
surprising, I find it disturbing the many of the members of this "independent" task 
force are employed by or affiliated with entities that receive funding from the 
Department of Energy. 



410 



June 30, 1995 
Page Two 

Specifically, I request that you provide me details of all direct and indirect Department 
of Energy funding (including type of funding instrument and purpose of funding) for 
each of Fiscal Years 1991 through Fiscal Year 1995 to date for each of the following 
entities: (1) Cambridge Energy Research Associates; (2) AlliedSignal Inc., (3) PG&E 
Enterprises, (4) American Gas Association, (5) State of Iowa Department of Natural 
Resources, (6) Honeywell Incorporated, (7) Clark-Atlanta University, (8) CONSOL 
Incorporated, (9) Gas Research Institute, (10) Natural Resources Defense Council, (11) 
Fusion Power Associates, (12) Massachusetts Institute of Technology, (13) American 
Electric Power, (14) Oregon Public Utilities Commission, (15) Baker, Hughes, 
Incorporated, (16) Pacific International Center for High Technology Research, (17) 
Electric Power Research Institute, (18) Amoco/Enron Solar, (19) ABB Combustion 
Engineering, (20) Strata Production Company, (21) AES Corporation, (22) Stanford 
University, (23) Bechtel Group, Inc., (24) University of Michigan at Ann Arbor, (25) 
The University of Massachusetts, (26) Pennsylvania State University, (27) U.S. Export 
Council for Renewable Energy, (28) Shell Oil Company, (29) Unocal Corporation, (30) 
National Power Company, and (31) The Alliance to Save Energy. 

I further request that this information be provided no later than the close of business 
on Monday, July 10, 1995. 

If you or your staff have further questions regarding this request, please contact Dr. 
Harlan Watson, Staff Director of the Subcommittee on Energy and Environment at 
225-9816. 

Thank you for your cooperation. 



Sincerely, 




Dana Rohrabacher 

Chairman 

Subcommittee on Energy and Environment 



Attachment 



411 



SEAB 

Task Force on Strategic Energy Research and Development 

Daniel Yergin, Chairman 
Maxine Savitz, Vice Chair 
Mason Willrich, Vice Chair 

EMBARGOED FOR RELEASE UNTIL: CONTACT: Maria Rodriguez 

Tuesday, June 13, 1995 Vanguard Communications 

12 Noon, E.T (202) 331-4323 

Independent Task Force Says Energy R&D Essential to U.S. Economy 
Cutbacks in R&D Could Put Nation at Risk 

Federal support for energy R&D is "essential to our Nation's future well-being," contributing to 
economic growth, security, environmental quality, and competitiveness in the international market- 
place, according to an independent Task Force chaired by energy expert and Pulitzer Prize-winning 
author Daniel Yergin. Noting that Department of Energy research and development "has had its 
flaws," the Task Force added that recent investments "are generating billions of dollars worth of 
annual consumer energy savings and new business opportunities, and playing an important role in 
job creation." 

The report cautioned that proposed deep cuts in federal energy R&D programs "would not be 
prudent, given the strategic importance of energy to the Nation" and that energy R&D is needed "to 
help naitigate the severe economic risks of possible disruptions in the Nation's future energy sup- 
plies." 

"DOE's R&D programs can be made more efficient," said Yergin, president of Cambridge Energy 
Research Associates. "But the wholesale demolition of those programs would not only hurt America's 
energy position but also contribute to a "brewing R&D crisis' in the United States — the resuli of 
simultaneous cutbacks in federal R&D programs, and retrenchment and refocusing of private sec- 
tor R&D." 

Energy R&D: Shaping Our Nation 's Future in a Competitive World, is the product of a nine-month 
Mudy by a 30-mcmberTask Force of leading energy experts from industry, academia, and research, 
under the chairmanship of Yergin, the author of The Prize: The Epic Quest for Oil, Money, and 
Power and co-author of Russia 2010. The Task Force was appointed by Secretary of Energy Hazel 
R. O'Leary in October 1994, and today presented its report to the Secretary of Energy Advisory 
Board. The group was charged with reviewing and assessing the Department's energy research and 
development programs. 

.According to the Task Force, energy R&D funding by the Department of Energy has already been 
"substantially reduced" — by 75 percent in constant dollars — from S9.7 billion in 1978 to today's 



[MORE] 



412 



level of $2.5 billion ($1.75 billion irt applied energy R&D, and $750 million in basic energy R&D). 
Federal energy R&D currently is only about one-half of one percent of the Nation's annual energy 
expenditures. 

Energy Security Margin Eroding 

World energy demand is expected to grow by 40 percent over the next 15 years; and by the year 
2010, the United States will be importing a minimum of 60 percent of its oil, says the Task Force. 
Although noting that the energy situation has become much more favorable in recent years — "helped 
by the movement to market principles around the world" — the report observes that "current trends 
point to stress and tension as the Nation's hard-won 'energy security margin' erodes into the next 
century." 

"Technological advances emerging out of R&D will be critical to meeting future energy and envi- 
ronmental needs, reducing stress on the supply and consumption systems, diversifying risk, and 
avoiding or at least minimizing any future crises that might develop in an uncertain world," says the 
Task Force. 

"The world oil market is tightening again," continues the report, pointing to the "critical capacity 
utilization indicator." Utilization of global crude oil production capacity, which was well over 90 
percent in the early 1970s, before the first oil crisis, and then fell to 85 percent before the 1986 price 
collapse, is now back to 96 percent. 

The report notes that, despite the global movement away from regulation and state control, there is 
still a "continuing and critical security component to energy, especially oil." More than 450,000 
American U-oops went to the Persian Gulf during the 1990-91 Gulf Crisis, and 20,000 American 
troops remain in Kuwait today. "'But, unlike the Allied Coalition in the Gulf Crisis, innovation and 
technological creativity cannot be summoned into service on short notice," says the report. "Energy 
R&D is a long-term investment — a modest investment by comparison to the costs of disruption — 
ihai is made to assure a more secure and productive future." 

Commenting on the Task Force's efforts, Yergin said: "Given the imponance of energy to our 
economy and our national security, and considering the major cuts that already have hit energy 
R&D, this is not a time to be abruptly cashing in our energy R&D stocks. The dividends from these 
investments will be critical to our future standard of living and are part of the inheritance for the 
next generations." 

tnergy R&D on the Decline 

The Yergin Task Force says that private sector energy R&D amounts 'o about S3 billion, but is 
tailing, reflecting the overall trend of private sector R&D in the United States. "The 'R&D head- 
lights' are being lowered in the private sector, where 'long-term' is now only five years — and 
^•imetimes only three," says the repon. 



[MORE] 



413 



Noting that public and private sector R&D has been one of the most important "drivers" of U.S. 
economic growth in the five decades since World War II, the report adds that the shrinking of U.S. 
R&D will "reduce economic growth, damage the U.S. standard of living and America's interna- 
tional competitiveness — and erode American leadership." 

"Today, it is hard for American companies, energy and non-energy alike, to invest in R&D beyond 
a three- to five-year time horizon, in significant part because companies are being judged on quar- 
terly performance by financial markets," said Dr. Maxine Savitz, vice chair of the Task Force and 
General Manager of AlliedSignal Ceramic Components. "But it takes more than five years to de- 
velop new energy technologies." 

Opportunities for Savings 

In December 1995, several months into its study, the Task Force was asked by Secretary O'Leary to 
help the Department identify $1.2 billion in savings over five years from DOE's $1.75 billion 
annual applied energy R&D programs. The Task Force concluded that deep cuts should not be 
made in funding that reaches scientists and engineers but that significant savings reductions, as 
much as 15 percent per year, in energy R&D costs can be achieved primarily through a major 
overhaul in the way the programs are directed and managed. 

"DOE can strengthen energy R&D, while achieving significant savings for American taxpayers, by 
reducing bureaucracy and cutting reams of red tape," said Mason Wilh"ich, vice chair of the Task 
Force and former CEO of PG&E Enterprises. "But Congress must cooperate to make this possible 
by reducing its own micromanagement, the costly 'over-compliance burden,' and the chronic insta- 
bility in funding." 

The Task Force expressed particular concern about excessive overhead and administrative expenses 
that "drive up costs, divert energy and attention, constrain creativity, and waste resources." Adds 
the report, "undoing the unnecessary compliance burden is a matter of urgency if the R&D pro- 
crams are to be efficieni." 

The Task Force recommends "that the Federal Government continue to provide leadership, focus, 
and substantial financial support for energy R&D to ensure that the national goals of U.S. energy 
security, economic growth, environmental quality, and national leadership in science and technol- 
ogy are effectively achieved. Such support is essential to our Nation's future well-being." 

"Our Nation's scientific and technical base is one of the country's most valuable resources," con- 
cludes the report. "But, without investment, it cannot be maintained." 

The Task Force reviewed DOE's energy research and development activities, which include pro- 
grams in fossil energy, energy efficiency and renewable energy, nuclear energy, fusion, and basic 
energy research. The Task Force receiv ed testimony from dozens of experts from the private sector, 
research organizations, universities, the Office of Technology Assessment, and the National Acad- 
emy of Sciences, as well as the Department of Energy. 



[END] 



414 




The Secretary of Energy 

Washington, DC 20585 



August 2, 1995 



The Honorable Dana Rohrabacher 
U.S. House of Representatives 
Washington, DC 20515 

Dear Congressman Rohrabacher: 

Thank you for your letter of June 30, 1995, concerning the Final Report of the Secretary of 
Energy Advisory Board (SEAB) Task Force on Strategic Energy Research and Development 
(R&D). Your letter requested details on direct and indirect Department of Energy funding 
during fiscal years 1991 through 1995 for 31 entities that were listed for affiliation purposes 
for the Members of the Task Force. Please find enclosed the data you requested. 

The data presented in the enclosure covers funding relationships between the Department of 
Energy and the entities listed in your letter, including grants, contracts and cooperative 
agreements. In addition, subcontracting relationships were included for those Department of 
Energy national laboratories with significant energy R&D programs. The data are presented 
in the two categories of applied energy R&D and energy-related basic research. These two 
categories constitute the full scope of the SEAB Task Force. Additional notes are provided in 
the table to describe other funding relationships outside of these categories, for example, with 
weapons research, laboratory management, or joint planning of R&D. 

Your letter expressed the view that the Task Force "endorses the status quo, but bemoans the 
fact that even more taxpayers' dollars are not being spent on energy R&D." You also found 
it "disturbing" that many members of the Task Force are employed by or affiliated with 
entities that receive funding from the Department of Energy. I feel the need to address each 
of these issues directly. 

On the first matter, I simply caimot agree with your assessment that the Yergin Task Force 
produced a status quo document recommending increased federal funding for energy R&D. 
To the contrary, the Task Force provided a broad range of recommendations on how the 
Department should change its energy R&D programs. Through implementation of these 
recommendations-particularly in the area of management efficiencies--the Task Force 
concluded that the Department could "reduce total energy R&D costs by 15 percent." This 
translates into a reduction of approximately $1.2 billion over five years. The Task Force did 
not recommend increased funding. 

Your second concern is more troubling, since it challenges the integrity of the individuals 
who agreed to serve as members of this Task Force. 



415 



Your inference is that the Task Force presented a biased report due to possible financial 
relationships between the affiliated organizations of the Task Force members and the 
Department of Energy. This is not supported by the facts. As you will note from the 
enclosed table, 17 of 31 entities--a clear majority of the Task Force-received no direct 
funding for energy R&D over the past five-year period. Five more entities had funding 
relationships totaling less than $100,000. Thus, 22 of 31 members were affiliated with 
entities having no or relatively minor funding relationships with the Department. 

Beyond these statistics, however, I feel compelled to defend both the membership of the Task 
Force and the process used to determine its composition. 

By almost any measure, this Task Force represented one of the most impressive collections of 
seasoned energy experts that has ever advised the Department on its energy R&D programs. 
Members of the Task Force are internationally recognized leaders who hold a broad diversity 
of views. Daniel Yergin made the principal decisions about membership, based on 
recommendations from sources including representatives in the private sector, relevant staff 
directors of the National Academy of Sciences and Office of Technology Assessment, and our 
own experiences in die energy field. Financial relationships between the Department and 
organizations affiliated with candidate Task Force members were never a consideration and 
all Task Force members were informed of the conflict of interest rules governing Federal 
Advisory Committee activities. 

The Federal Government gains essential advice from external experts who assist with the peer 
review processes of R&D agencies and serve on advisory bodies throughout the government. 
These advisory functions would be severely crippled and the administration of the nation's 
R&D programs would suffer if one were to summarily disqualify from these processes all 
individuals with an organizational relationship with the agency being advised. The SEAB 
Task Force members performed a service to the Department and to the Nation through the 
commitment of their time and effort. Their guiding purpose was to render a collective 
judgement-based upon deep professional experiences-on how the nation might best address 
its long-term energy needs. 

I am sorry that we disagree on the value of the SEAB Task Force report, but I look forward 
to continuing to work with you as Congress further deliberates on issues affecting the 
Department of Energy. 



Sincerely 




Leary 



Enclosure 



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Department of Energy 

Washington, DC 20585 



flIiG 1 7 1995 

Mr. Harlan Watson, Staff Director 
Subcommittee on Energy and Environment 

Committee on Science 
U.S. House of Representatives 
Washington. DC 20515 

Dear Harlan: 

This letter provides supplemental information concerning your request of June 30, 
1995, regarding the Final Report of the Secretary of Energy Advisory Board Task 
Force on Strategic Energy Research and Development. Your letter requested details 
on direct and indirect Department of Energy funding during Fiscal Years 1991 through 
1995 for 31 entities that were listed for affiliation purposes for the Members of the 
Task Force. 

In the Department's response of August 2, 1995, a table was enclosed providing the 
information you requested. Since then, the Department has explored two additional 
lines of inquiry. The first was to search our data bases for names of entities that were 
not on your list, but were corporately related to those on your list. This search 
revealed a contract with Garret Ceramics Components, Inc., a subsidiary of Allied 
Signal. It also revealed a number of contracts with Combustion Engineering, Inc., 
which is now part of ABB Combustion Engineering, Inc. 

A second line of inquiry was to have the Department's program offices review more 
completely any indirect funding relationships, through our national laboratory 
contracting systems, that might exist with the entities of interest. As a result, two 
additional entities, initially reported to have received no funding from the Department 
over the last five years, were found to have indirect funding through laboratory 
subcontracting. Some additions to earlier reported totals for six other entities also 
were made. 

A revised table reflecting this additional information is enclosed. These revisions do 
not affect the thrust of our initial response of August 2, 1995, nor our view of the value 
and independence of the SEAB Task Force Final Report. 

Sincerely, 




VICZ.// 

Acting DeputyyAssi^tant Secretary for 
House Liaison 



Enclosure 



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Q14. On page 14 of your prepared testimony, you state: "Energy R&D has helped keep 
energy prices low, and can do so in the future." 

Please document how "[e]nergy R&D has helped to keep prices low." 

A14. Examples of research and development that have helped keep energy prices low include: (1) 
Sandia National Laboratones' polycrystalline diamond dnll bit that lowers the cost of drilling 
by as much as $1 million per well, reduces lost-time accidents and fatalities, has annual sales 
in excess of $200 million, and has delivered a total national benefit in excess of $1 billion; (2) 
four building technologies— fluorescent lamp electronic ballasts, advanced energy-efficient 
windows, analytical software for energy-efficient building design, and a high-efficiency 
refrigerator/ ft-eezer compressor-developed with DOE support of about twenty-five million 
dollars, have already saved consumers and businesses a net of more than $5 billion in lower 
energy bills. 

Q15. On page 14 of your prepared testimony, you also state: "... Sandia National 
Laboratory in New Mexico solved a drill-bit problem that industry scientists had 
tried for two decades to solve. The resulting polycrystalline diamond drill bit lowers 
the cost of drilling by as much as $1 million per well, reduces lost-time accidents and 
fatalities, has annual sales in excess of $200 million, and has delivered a total 
national benefit in excess of $1 billion." 

Q15a. Please detail, by appropriate fiscal year, the DOE R&D investment in this 
technology, including a listing of the recipients of this funding. 

At 5a. [Note: DOE sent two different answen to this question. Both responses are included below^ 

Answer 1 : The total R&D investment at Sandia National Laboratories by the DOE 
Geothermal Division and the Fossil Energy Office over the years 1974-86 is 
estimated to have been $5,262,000, distributed as follows: 



YEAR 


INTVESTMENT 


1974 


$207,000 


1975 


$227,000 


1976 


$248,000 


1977 


$308,000 


1978 


$331,000 


1979 


$525,000 


1980 


$559,000 


1981 


$505,000 


1982 


$424,000 


1983 


$447,000 


1984 


$470,000 


1985 


$494,000 


1986 


$517,000 


TOTAL 


$5,262,000 



428 



of this total, approximately $750,000 covered contract work with General Electric 
(5520,000), Brigham Young University ($25,000), Drilling Research Laboratory 
($90,000), and Tulsa University ($115,000). These data are extrapolated from pp. 67- 
68 of 'Technology Transfer Impact Profiles," S. Falcone, University of New Mexico, 
November, 1995. (The annual distribution of funds is estimated based on the total 
cost and the annual labor distribution given in the report.) 

Answer 2 : DOE fijnding for this technology was through Sandia National 
Laboratories, and totaled {^proximately $7.5 million. Although precise year-by-year 
funding figures are not available, contractor funding was during the FY 1976 to FY 
1984 period, and totaled about $0.75 million. General Electric received about 40% 
of this funding, and the rest was split among Brigham Young University, Drilling 
Research Laboratory, and Tulsa University. Sandia expenses during this period 
accounted for the remaining $6.75 million, mosdy for labor. 

Q15b. Please detail, by appropriate fiscal year, private sector investment in this 
technology. 

A15b. Private sector investment figures are not available, but it is likely that General 
Electric (GE) invested a considerable sum. GE produced the first synthetic 
diamonds on prototype drill bits in 1973, and marketed the first commercial bit in 
1977. See question 15g for information on how DOE-fiinded activities 
complemented GE's efforts and contributed to the overall success of this 
technology. 

Q15c. Please provide detailed documentation of the total national benefit in excess 
of $1 billion. 

At 5c. The benefits for this technology are documented in detail in "Technology Transfer 
Impact Profiles," by Santa Falcone, University of New Mexico School of Public 
Administration, November 1995. The two major sources of benefits are $ 1.1 billion 
for regional economic impacts, and $0.7 billion for drilling cost savings. Regional 
economic impacts were derived by estimating total sales and using a Department of 
Commerce output multiplier. Drilling cost savings were developed by estimating the 
number of wells drilled with diamond bits (currendy about 14% of domestic wells, 
including most of the expensive ones), and multiplying by estimated cost savings per 
well. There are many articles on savings for particular wells using diamond bits, so 
the estimates used are considered very credible. 

Q15d. Does DOE hold the patents for this technology, and if not, why not? 

A15d. DOE does not hold the patents for this invention. Numerous Federal statutes and 
Presidential policy statements govern the ownership or control of intellectual 
property arising from federally-sponsored research and development. These rights 
vary with different circumstances. In general, it is the broad intent of these Federal 
statutes to allow the contractor or inventor to retain the rights of any invention. 
Moreover, it is DOE's objective to encourage private development and deployment 
of new and advanced energy technologies that might contribute to the national 



429 



interest and the public purposes for which Department's energy R&D was 
undertaken. Conveying patent and other rights to the contractor or inventor 
furthers this objective. 

Q15e. If DOE holds the patents for this technology, what licensing agreements does 
DOE have with private sector firms? Which firms? 

Al 5e. DOE does not hold the patent for this technology. 

Q15f. If DOE has licensing agreements with private sector firms, what licensing 
fees has DOE received from such licenses? 

Al 5f. DOE does not hold the patent for this technology. 

Q15g. Please provide evidence that the polyciystalline diamond drill bit technology 
would not have been developed and commercialized without the DOE 
funding. 

A15g. In the late 1970's GE was marketing a diamond drill bit. However, because of high 
bit failure rates, and a reluctance by larger bit manufacturers to embrace the new 
technology, GE began to disband its program. Small specialty bit companies 
stepped in to fill the void, but failure rates due to a host of technical reasons, 
combined with inconsistent results, threatened the commercial viability of the 
diamond drill bits. In the Department's view, DOE funding sustained research 
during this period, where competition for drilling contracts was fierce, profit 
margms were not hi^ enough to support R&D, and the expertise did not exist 
among the drilling and service companies (which were small and numerous) to 
substantially advance drilling technology. Sandia research findings and computer 
models on mechanics, hydraulics, thermal properties, force and wear provided the 
needed foundation for technology advancement. In an industry article summarizing 
bit advances and breakthroughs fi-om 1981 to 1986, almost half of the citations are 
to DOE-fiinded work at Sandia. 

Q16. At the bottom of page 14 and top of page 15 of your prepared testimony, you state: ". 
. . four building technologies— fluorescent lamp electronic ballasts, advanced energy- 
efficient windows, analytical software for energy-efficient building design, and a 
high-efficiency refrigerator/freezer compressors-developed with DOE support of 
about twenty-five million doDais, have already saved consumers and businesses a net 
of more than $5 billion in lower energy biUs." 

Q16a. Please document this daim, and provide supporting documentation. 

A16a. The estimate of $5 billion is conservative. Consumer energy savings for the four 
innovations listed above total over $ 10 billion, as described below. 

Advanced Eneigy-Effident Windows-. Cumulative consumer energy savings were 
developed by combining industry sales information with computer simulations of 
energy savings per unit of low-E gazing installed in residential and commercial 



430 



buildings. Glazing industry market sources were used to establish yearly sales of 
low-E glazing (in billion square feet) for the time period of 1984 to 1995. Computer 
simulations were used to estimate the annual energy savings per square foot of 
window, for several different climates and then averaged over climates, and account 
for HVAC system efficiency and fuel/electricity costs. The computer simulations 
were validated by comparison to results from outdoor test cells and measurements 
in buildings. The table on the following page provides the specific calculations 
supporting the development of the $1.8 billion estimate of cumulative savings. 





Estimated Consumer Energy Savings-Low Etnissivity Window 


Coatings 




YEAR 


RESIDENTIAL 

SAI F.S 

(BILLION SQ. FT.) 


COMMERCIAL 

SALES 

(BILLION SQ. FT.) 


RESIDENTIAL 
SAVINGS/ 

YEAR 
(»/SQ. FT.) 


COMMERCIAL 
SAVINGS/ 

YEAR 
($/SQ. FT.) 


ANNUAL 
SAVINGS BY 

VINTAGE 
($ BILLION) 


SAVINGS BY 
STOCK IN A 
GIVEN YEAR 
(J BILLION) 


1985 


0.006 


0.001 


0.200 


0.410 


0.002 


0.002 


1986 


0.059 


0.012 


0.200 


0.400 


0.017 


0018 


1987 


0.120 


0.024 


0.190 


0J90 


0.032 


0.050 


1988 


0.170 


0.034 


0.190 


0.380 


0.045 


0.096 


1989 


0.180 


0.036 


0.180 


0.360 


0.045 


0.141 


1990 


0.160 


0.032 


0.180 


0.350 


0.040 


0.181 


1991 


0.170 


0.034 


0.170 


0.340 


0.040 


0.221 


1992 


0.190 


0.038 


0.170 


0.330 


0.045 


0.266 


1993 


0.210 


0.042 


0.160 


0.320 


0.047 


0.313 


1994 


0.230 


0.046 


0.152 


0.282 


0048 


0361 


1995 


0.230 


0.046 


0.154 


0.284 


0.04S 


0410 


1 Total 


1.725 


0J45 






0,409 


2059 



Cumulative Savings (1988-1995) -> $2.1 Billion 
Cumulative Savings as of April 1995 — > 1.8 Billion 

("Success Stories" was published on May 22, 1995. Interpolating the annual data to find the estimated 
savings through the end of April 1995 yields the $1.8 billion figure.) 



Analytical Softivan for Energjl-Efficient Building Design: Tlie $1.9 billion in energy savings 
for buildings constructed through 1993 is based on a 1994 survey of users of the 
DOE-2 building energy simulation program. The savings estimates are documented 
on pages 17-20 of From the Lab to the Marketplace, January 1995, Lawrence Berkeley 
Laboratory, Berkeley, California. A copy is being provided. [Attached at the end of 
this question.] Fluorescent Lamp Electronic Ballasts Savings of $750 million for the 
florescent lamp electronic ballasts are documented in the following spreadsheet: 



431 



Estimated Consumer Energy Sa 


vinffs-Fluorescent Lamp Electronic Ballasts 




\liAR 


1988 


1989 


1990 


1991 


1992 


1993 


1994 


1995 1 


Magnetic Ballasts Shipped 

(1,000s) 


74,609 


76,285 


78,363 


80.386 


83,710 


82,730 


76,184 


69.246 


Total BaUast Market (1,000s) 


75.673 


77,711 


81,364 


88,729 


96.860 


107.130 


110,344 


113,654 


Electronic Ballast Market Share 


1% 


2% 


4% 


9% 


14% 


23% 


31% 


39% 


Total Stock of Electronic Ballasts 
(1,000s) (assumes 12-year 
life/ retirement 


1,064 


2,490 


5,491 


13,834 


26.984 


51,384 


85,544 


129,952 


Electronic Ballasts Replacing Original 
Magnetic Ballasts (1000s) 


1,064 


2,490 


2,490 


2,490 


2,490 


2.490 


2,490 


2,490 


Electronic Ballasts Replacing Efficient 
Magnetic Ballasts Shown (1000s) 








3,001 


11,344 


24,494 


48.894 


83,054 


127,462 


Electricitj' Savings for Stock in Year 

(GWh) 


112 


261 


387 


738 


1,290 


2,315 


3,750 


5,615 


Value of Electricity Savings in Year 

Shown ($1993 million) 


8 


18 


27 


52 


90 


162 


262 


393 



Engineering Assumptions CiimiJativc Savings (1988-1995) -> 1,012 

Annual operating hours: 3500 hours Cumulative Savings as of April 1995 ~> 749 

Assume ballast powers: Two 32 watt lamps 

("Success Stories" was published on May 22, 1995. Interpolating the annual data to find the estimated 
savings throu^ the end of April 1995 yields the $750 million figure.) 



Annual Energy Savings vs Base Case 

Basecase for years 198&-1989 
Basecase for 1990-1995 
Electronic ballast 



90 watts 105 kWh 
72 watts 42 kWh 
60 watts 



Note; 1 GWh = 1 billion watt-hotjrs=l miUion kilowatt-hours 

High-Efficiency Refrigerator/ Free;^ Compressor. Frotn 1978 through 1980, ORNL 
sponsored a research subcontract for DOE with Columbus Products Company to 
develop a high-efficiency (energy efficiency ratio, or EER, of 5.0) compressor for 
household refrigerators. By making design changes to the motor, suction muffler, 
and compressor valve assembly and piston Columbus Product achieved a 44% 
improvement over the compressor technology used in refingerators at the time 
(EER 3.5). 



The resulting technology was incorporated into a compressor product line 
manufactured by Greenville Products Co. (Kelvinator) of Grand Rapids, Michigan, 
which produced and sold them through the mid-1980's. The technology was then 
transferred to Americold Compressor Co. of Cullman, Alabama. Americold 
continued improving compressor designs on their own through the 80's and 90's 
and have exceeded the performance standards set by the DOE-supported 
development. They are now marketing refrigerator compressor with EERs of 5.2- 
5.5 for use with R-134a (replacement for CFC-12) and are developing a new line of 
R-134a compressors for refrigerators and fi-eezers, manufacturing over 4 million per 
year. 



432 



The availability of high efficiency compressors was a major reason refrigerator 
energy use (on a shipment-weighted-average basis) dropped from about 1500 
k\X^/yr in the late 1970's to about 900 kWh/yr in 1990. Availability of improved 
compressors pioneered by DOE's research effort is responsible for approximately 
half of this improvement 

The shipment-weighted average energy use of new refrigerators in the late 70's 
(when DOE-sponsored research started) was about 1500 kWh/yr. New 
refingerators were produced at an average rate of about 6.25 million units/yr 
between 1980 and 1990. By incorporating energy efficiency improvements into the 
refrigerator, 150 billion kWh or 1.7 quads of cumulative energy have been saved with 
energy efficient compressor accounting for 75 billion kXXAi. At an average utility 
cost for electricity of |0.08/kWh this results in $6 billion in energy cost savings. 

Q16b. Please document the private sector investment in these technologies. 

A16b. Advanced Energy-Efficient Windows: Private sector investment is very difficult to 
estimate since this type of information is generally considered as confidential by 
industry. Southwall (formerly Suntek) initially raised more than $10 million in 
venture capital in the early 1980's after successfiilly demonstrating the potential for 
low-E technology. These funds were used to complete product development, 
perform engineering design of the equipment required to produce low-E coatings 
and set up the initial production facility. 

The success of Southwall producing and marketing low-E technology subsequently 
stimulated other companies to make even larger investments over time to provide 
competitive low-E window products. The industry appears to have made a 1150 
million investment in low-E production capability over the last 15 years, based on 
the following assessment: 

Current low-E production is about 300 million sq. ft. per year which is the output of 
about 10 sputtering machines at 20 million sq. ft /machine and five on-line coaters 
at 20-50 million sq. ft. Each sputtering machine or on-line coater represents a direct 
manufacturing investment of about $10 million, or a total of about $150 million. 

In addition, substantial R&D investments were made by industry to bring low-E 
technology to high-rate, cost-effective production. This investment is estimated at 
approximately 10 percent of the production investment, or $15 million. Additional 
investment was made by glass producers in testing and marketing the coatings, and 
by the window manufacturers who had to make R&D and marketing investments in 
the transition from use of standard insulating glass to low-E insulating glass. 

Analytical Software for Ener^-Efficient Building Design: The private sector funding in the 
DOE-2 building energy simulation program, is shown below (in thousands of 
dollars), along with ratio of private to government funding. 



433 



YEAR 


PRIVATE SECTOR INVESTMENT 
INIX)E-2 


RATIO OF PRIVATE SECTOR TO 
GOVERNMENT FUNDING 


FY76-89 


1,500 


15% 


FY90 


170 


60% 


FY91 


180 


53% 


FY92 


230 


61% 


FY93 


998 


333% 


FY94 


1,125 


205% 


FY95 


1,150 


209% 


F\'96 


750 


136% 


Total 


6,103 


47% 



Fluonscent Lamp Electronic Ballastr. It is extremely difficult to estimate private sector 
cost since manufacturer investment data is generally considered as confidential. To 
estimate this value, we note that there were approximately 12 small ballast 
manufacturers, other than Iota and Stevens, that began to manufacture electronic 
ballasts starting in 1977 (see attached Figure 1.6). If each of these 12 companies 
invested only JIOOK annually over the five years ft-om 1980-1984 (a very 
conservative number), the total industry investment would be %6 million (12 
companies x $100,000/yr x 5 yrs = $6 million). This provides a lower bound on the 
private sector investment in this technology for the five year period 1980-1984. The 
actual investment was probably much larger. 

High-Efficiency Rrfrigerator/ Fne:^ Compressor. The private sector cost share was 
$276,000 by Columbus Products Company in the DOE sponsored research and 
development effort. 

Q16c. Please provide evidence that these four building technologies would not have 
been developed and commercialized without the DOE funding. 

A16c. Advanced Energy-Effideni Windoar. Low-E coating technology would probably have 
been developed eventually by industry. However, its initial introduction would have 
been much later and resulting market penetration would have been slower. 

Two key events, both directly influenced by DOE investments, moved low-E 
commercialization forward in the late 1970s and early 1980s: 



1) DOE funding direcdy resulted in the first firm (Suntek, later renamed 
Southwall) offering low-E windows for sale. The company came to DOE 
for R&D funds when it was unable to obtain private sector investment for 
its R&D because it was a small company and its technology was seen as 
unproved and too risky. After 3 years of federal support for R&D the 
company was able to raise the venture capital needed to complete 
production engineering and, ultimately, to procure its first low-E coating 
machine. 



434 



2) The first major window manufacturer to adopt low-E was Andersen 
Windows, who utilized low-E coated glass produced by Cardinal IG, a major 
U.S. glass manufacturer. Both Anderson and Cardinal stated that DOE- 
funded efforts in the late 1970s and early 1980s were important factors in 
the critical decisions that led them to make major-capital investments in 
these new coating technologies. 

Analj/tical Software for Ener^-Efficient Building Design: The private sector and other 
agencies have developed building energy simulation models, but none approach the 
level of capability of DOE-2, and since many opportunities occurred without the 
development of such capability, it is reasonable that it would not likely have 
occurred without the DOE program. 

In a 1995 survey of users of the DOE-2 building energy simulation program, the 
reasons respondents gave for selecting DOE-2 over other, public and private sector 
building energy simulation programs include: "flexibility, range of modeling options, 
equipment configurations, and ability to compare complex energy systems", 
"recognition", "peer acceptance", "accuracy", "best available", "speed", 
continuously improving", "industry standard", "international credibility", "other 
programs considered self-serving", "unbiased", "validated", "client preference", 
"support", "reliability", "completeness", "hourly", "detailed hourly reports", "whole 
building", and "parametric run capability". 

DOE-2 has the largest user base of any public or private sector building energy 
simulation program-more than 1200 users. Most private sector building energy 
simulation program have fewer than 100 users. The only other major public sector 
building energy simulation programs, BLAST (developed by the Department of 
Defense and no longer under development) and TRNSYS (developed by the 
University of Wisconsin with support from federal agencies) both have fewer than 
400 users. 

In 1992, the Electric Power Research Institute decided to develop a new building 
energy simulation program. They first reviewed all the available public and private 
sector tools, concluding that none of them except the DOE-2 building energy 
simulation program would meet their needs. They then started a joint effort with 
the Department of Energy's Lawrence Berkeley National Laboratory to develop a 
new version of DOE-2. Since 1992, the Electric Power Research Institute and its 
member have expended approximately $3 million in this development effort. The 
new version of DOE-2, PowerDOE, will be released in early FY 1997. 

Fluorescent Lamp Electronic BaUastr. The electronic ballast would probably have been 
eventually developed by the ballast industry, but market introduction would have 
been delayed (perhaps as long as 5 years) and market penetration would have been 
slower. Indirect evidence of the above statement is as follows: 

Large ballast manufacturers produce most of the electronic ballasts shipped 
today. But when LB/DOE released RFPs for electronic ballasts in 1976, no 
large manufacturers responded, even though 90% of conventional magnetic 



435 



ballasts at that time were produced by only two large manufacturers. The 
small companies who won the RFP had been unable to attract the capital to 
commercialize the electronic ballast technology. It was not until the 
injection of DOE funding for the production of manufacturer prototypes 
and LBL/DOE's testing at the Pacific Gas and Electric Company 
demonstration site (and other sites) that the larger ballast manufacturers 
started to take notice and invest in the technology. In 1983, Magnetek 
entered the electronic ballast market— the first major manufacturer to do so. 
Universal (another large ballast company) acquired Stevens Luminoptics in 
1981 with the intent of commercializing the electronic ballast technology. 
The other major ballast manufacturer. Advance Transformer, did not enter 
the electronic ballast market until 1987. 

High Efficiency Refrigerator-Free^ Compressor. There is no firm evidence that advanced 
reftngerator/ freezer compressors would not have eventually been developed without 
DOE ftjnding. However, prior to the issuance of the DOE competitive solicitation 
for advanced compressor development, there was negligible energy performance- 
related R&D being carried out by the major U.S. refiigeration systems 
manufacturers. The technology developed by DOE led to a compressor which was 
44% more efficient than any available at that time, and this technology dominated 
the market until 1990 when efficiency standards and other influences began to 
propel compressor development forward again. 




From the Lab to the Marketplace 

Making Americas Buildings More Energy Efficient 

Lawrence Berkel^ Laboratory 
U. S. Department of Energy 



437 



For further information about the programs described in this report, 
contact Dr. Evan Mills: 

510/486-6784 

Email: einjlls@lbl.gov 

World Wide Web: httpV/eande.lbl.gov/Building_Science.html 



438 




From the Lab to the Marketplace 

Making America's Buildings More Energy Efficient 



Prepared by 

Lawrence Berkeley Laboratory 
University of California 
Berkeley, California 94720 

Revised March 1 995 



439 



^$\ ^ 

SUMMARY 

Since the mid 1970s, DOE has invested some $70 million in research and devel- 
opment at Lawrence Berkeley Laboratory (LBL) for development of advanced 
energy-efTicient building technologies, software, and standards. That investment 
has helped spawn a $2.4-billion U.S. market for key products — energy-efficient 
lighting and advanced window coatings — and efficiency standards for residential 
equipment and computerized tools for more efficient building design. By 1993 
DOE'S initial investment had reduced consumers' energy bills by an estimated $5 
billion ($1.3 billion in 1993 alone). By 2015 we estimate that the products of that 
investment will save consumers $16 billion annually. 

LBL research partnerships address a host of other building technology issues as 
well — building technology issues whose economic benefits are less easy to 
quantify but whose overall worth is equally important. We analyze public policy 
issues such as the role of efficiency options as a mitigation strategy for global 
climate change. We develop planning and demand-management methodologies 
for electric and gas utilities. We identify technologies and analytical methods for 
improving human comfort and the quality of indoor air. We contribute to the 
information superhighway. We focus on the special problems and opportunities 
presented by energy use in the public sector. And we do all these things at the 
local, national, and international levels. 

At LBL, we are part of the multi-laboratory, interdisciplinary approach to building 
technology research supported by DOE's Office of Energy Efficiency and Renew- 
able Energy. We also participate in buildings-related research supported by 
DOE's Office of Health and Environmental Research, other federal agencies, and 
industry. This document describes LBL's role within this wider effort. 



k- 



4 



440 



From the Lab to the Marketplace 

BRINGING NEW TECHNOLOGIES TO MARKET 

As part of the DOE national laboratory system, Lawrence Berkeley Laboratory has acted as a catalyst in 
the energy-efficiency marketplace for two decades, providing an extraordinary rate of return on the 
federal research investment. From the outset, our approach was not one of belt-tightening, but rather a 
coordinated technological and deployment-oriented strategy for doing more with less energy and, at the same 
time, saving money. Partnerships with industry, utilities, government agencies, universities, and others are an 
integral part of that strategy. LBL's accomplishments in the building sector provide an example of how the 
national laboratories can serve the nation today and into the next century. 

With a $500 billion per year national energy bill and more than half of our oil supplied by foreign sources, U.S. 
energy use has become a matter of strategic importance. There is little disagreement that wise management of our 
energy consumption is a national priority, and we are making substantial progress toward that goal. Thanks in part 
to new technologies and policies focusing on the efficient use of energy, leveraged by research and development 
(R&D) at the DOE national labs, the national energy bill is about $100 billion lower today than it would other- 
wise have been. 

Programs addressing energy and the environment promise relief for some of the most pressing issues of our time: 
the rising national energy bill, industrial competitiveness, international security, urban and indoor air pollution. 



Components of the $500-Billion U.S. Annual Energy Bill 

Detail of U.S. Buildings Energy Costs (1994) 




*- 



/>?''♦.///' ■^ 






and the specter of global climate change. At the same time, it is recognized that energy-saving objectives must be 
coupled with goals of enhanced comfort, quality, productivity, and safety in the built environment. 

LBL's interdisciplinary research programs are positioned to guide new technologies from the lab to the market- 
place. Research and development plays an important leveraging role in the marketplace by accelerating the 
commercialization and consumer acceptance of new technologies, while ensuring the quality of the indoor 
environment. This work is rooted in collaborations with equipment manufacturers, building professionals, utili- 
ties, and other national laboratories active in the energy sector. New technologies nurtured at LBL with multimil- 
lion-dollar research programs are yielding multi/>/7/ion-dollar savings nationally as they successfully capture 
market share. 



441 




^ 



sy / 



n 






1 






ii 




lI 


:^^^=^^^ 





Lawrence Berkeley Laboratory 

Four Highlights 

In the following pages, we present four case studies along with a discussion of future 
directions in each area: 

• The electronic ballast, a technology that improves the efficiency of fluorescent light- 
ing systems by up to 30% and enhances their quality and flexibility. The current market 
share of electronic ballasts is 23% of all ballasts sold. Other LBL efTicient lighting 
breakthroughs are also entering the marketplace. 

• Advanced energy-efficient window coatings — largely invisible to the human eye — 
thatoffer a one-third efTiciency advantage over ordinary double-glazed windows by 
selectively blocking unwanted heat gain or loss. The current market share is 36% of all 
windows sold. 

• Residential equipment and appliance standards development, in which LBL pro- 
vides the technical and economic analyses used by the government to set mandatory 
efficiency levels for household appliances and heating and cooling equipment. The 
current market share is virtually all major appliances, air-conditioners, and furnaces 
sold. 

• DOE-2, a powerful computer-based design tool for reducing energy use in build- 
ings. Tlianks to this computer software, building designers can now evaluate the energy 
implications of complex design alternatives. IX)E-2 is currently used in the design of 
about 5% of all commercial buildings by floorspace. Users report that DOE-2 enables 
them to routinely identify an extra 20% energy-savings opportunity. 

Each of the preceding four examples documents a different path to energy savings — 
with, in each case, a different role for LBL in capturing these savings. This report 
assembles the best available data and provides the framework for understanding how 
DOE's investment ultimately serves the U.S. consumer. 



CanwiMmM. < moHtntf) 



Martlet Penetration of New Technologies and Tools 

^00 f- , Appliance Standards 



^^__ Window Coatings 
Electronic Ballasts 




Design Toots 



1995 2000 2005 2010 2015 



Note: " Buildings " includes windows, equipment, 
lighting, and all other end uses. 



Note: Market shares for windows, ballasts, and tools represent 
perceraage application in new buildings: for appliance standards. 
the share represents the rate at which new appliances meeting the 
standard replace existing stock. 



442 



From the Lab to the Marketplace 

ACCELERATING THE MARKET FOR EFFICIENT LIGHTING 



$38 Billion 




Lighting costs U.S. businesses and consumers nearly $40 billion each year. The strategic 
use of research dollars can trim billions from this annual bill. LBL's early work on the 
electronic ballast illustrates the potential payoff from lighting research and working with 
industry. Virtually unknown in the mid 1970s when the $3-million LBL research effort 
began, the electronic baUasI today has captured a nearly 25% market share, with annual 
U.S. sates of about 24 million units ($200 million incremental retail value). It has 
already saved $400 million in consumer energy bills. Net savings will grow to $13 billion 
by the year 2015. In current research efforts, LBL has transferred new light fixture 
design strategies to all major U.S. manufacturers and is fostering the development and 
commercialization of the world's most efficient while light sources. Other work on the 
effect of various types of light sources on humans may revolutionize the way efficiency 
and lighting are measured and thereby improve productivity in the workplace. 

The Electronic Ballast — An Early Success 

Fluorescent lights require ballasts, which help start and then control the current flowing through the lamp. An 
annoying flicker, hum, and energy loss are infamous hallmarks of the magnetic ballast, the industry standard for 
decades. More than ten years ago, LBL played a catalytic role in developing the high-frequency electronic ballast 
and in encouraging its market growth. Electronic ballasts not only eliminate flicker and hum, they also save 
energy by reducing electrical losses in both the ballast and the lamps. Electronic ballasts can also be designed for 
dimming, and can be made smaller and lighter than standard ballasts. 

When our research on the electronic ballast was just beginning in the late 1970s. LBL contracted with three small 
companies to produce commercial models of high-frequency electronic ballasts for conventional fluorescent 
lamps. (At that time, no electronic ballasts were commercially available — even though the high-frequency opera- 
tion of fluorescent lamps was known to improve energy efficiency.) The intent of this early effort was to accelerate 
the availability of electronic ballasts by demonstrating the energy efficiency and reliability of these new, energy- 
saving products in typical building environments. After the ballasts were tested by LBL to assure compliance with 

specifications, they were installed at a demon- 
gQ 1^2 stration site in a utility office (PG&E) in San 

Francisco. The results of these early demonstra- 
tions were widely publicized at technical and 
trade conferences and showed that electronic 
ballasts could operate satisfactorily in a typical 
building environment and reduce lighting energy 
use by up to 30%. 

As a result of research efforts and continued 
quality improvements, the electronic ballast has 
developed from a laboratory curiosity to a 
proven and successful energy-efficient lighting 
technology. By 1993 electronic ballasts repre- 
sented 23% of total ballast sales, and the elec- 
tronic ballast is now an accepted mainstream 
product. They will likely replace magnetic 
ballasts in more than 75% of applications by 
2015 as a consequence of utility and other 
incentive programs, and federal programs and 
standards. 



power in 




60 Hz 



Standard Magnetic Ballast 



Two lamps plus ballast 
consume -90 watts 



20 - 40 kHz 




60 Hz 



Two lamps plus ballast 
consume -60 walls 



Electronic Ballast 



443 



Lawrence Berkeley Laboratory 



The federal investment in electronic ballast R&D is about $3 million, leveraging a cumulative energy savings 
attributable to electronic ballasts from 1988 to 1993 of $400 million. Based on energy savings "in the pipeline," 
i.e., for technologies installed as of 1993, businesses and consumers will ultimately save $700 million (net of their 
extra capital investment), which will grow to $13 billion for technologies installed through the year 2015. In 
2015, environmental emissions of approximately 73 million tonsof CO2. 157,000 tons of SO2, and 144,000 tons 
of NOx will be avoided through the use of electronic ballasts. 

Beyond Ballasts 

Current research focuses on LBL-industry collaborations to improve other lighting systems through advanced 
lamps, luminaires, controls, and daylighting strategies. One major area of emphasis is the search for near-term 
improvements to the traditional incandescent lamp. Although incandescent lamps are the most inefficient light 
source currently available, nearly two billion such lamps are manufactured annually in the U.S. LBL is working 
to optimize the performance of one alternative — compact fluorescent lamps (CFLs), which are four times as 
efficient as today's incandescent light sources. Lamp manufacturers have shown keen interest in the LBL design 
concepts. Osram, one of the world's largest lighting tnanufacturers, included the LBL work in its widely used 
Compact Fluorescent Handbook. 

In 1989. lighting researchers began work with major manufacturers of compact fluorescent lamp fixtures. Early 
on, LBL researchers specifically targeted the recessed "can" fixture industry, which has annual sales of about 20 
million units in the U.S. and has the fastest sales growth of any type of fixture. LBL pioneered a series of opti- 
mized low-cost fixture improvements that use conductive cooling or convective venting designs to eliminate 
excess heat buildup, thereby allowing up to 25% greater light output Manufacturers such as Cooper Lighting, 
Delray, Edison Price, Indy Lighting, Kurt Versen, Lightolier, Lithonia, Microflect, Mitor, Prescolite, Reggiani, 
Staff, and Zumtobel have already incorporated LBL's efficiency-enhancing strategies into their product lines. 
Manufacturers see these improvements as enhancing their position in markets where many consumers are dissat- 
isfied with the amount of light produced by conventional compact fluorescent fixtures. From the standpoint of 
national energy use, these improvements widen the market niche for CFLs and appreciably increase potential 
savings. 



Standard Recessed Fixture WHtiout Venting Vented Fixture Witii Tilted L^mp Compartment 




Allowing for passive ventilation and tilting the lamp to keep excess mercury 
away from hot lamp electronics iru:rtase fixture light output up to 25%. 



! 



444 



From the Lab to the Marketplace 



In another effort, LBI. researchers are working with Fusion Lighting to create a novel light source that is about 
50% more efficient (~ 1 30 lumens/watt) than the best-available fluorescent systems and yet provides a far superior 
spectrum, similar to that of true 
sunlight. The so-called "sulfur lamp" 
contains no environmentally trouble- 
some mercury, offers an extremely 
long service life, and has "tunable" 
color properties. It is dimmable and 
delivers efficiency unmatched by any 
currently available white light source. 

LBL expertise in coupling radio- 
frequency power to electrodeless 
lamps has enabled Fusion Lighting to 
downsize a pre-existing product that 
was unlikely to ever reach the com- 
mercial marketplace. The large origi- 
nal lamp produces as much light as 
175 lull-sized fluorescent lamps and 
requires a microwave power supply 
and its own miniature air conditioner. 
Two new versions are downsized to tht 
size of a coin and require no active 
cooling. One generates as much light 
as fifty fluorescent tubes, the other as 
much as two tubes. However, several 

technical and economic challenges must be overcome before the sulfur lamp will be commercially viable. Such 
intense light sources require a fundamental rethinking of the light fixture, which has spurred a program of R&D 
on "light guides" — long reflective tubes that can conduct and distribute this bright light over a large indoor area. 
Integrating these guides with architectural daylighting offers the prospect of buildings lit by daylight deep in their 
interiors. LBL helped demonstrate sulfur lamp and light guide systems at DOE's headquarters and at the Air and 
Space Museum, both in Washington, DC. 




LBL researcher examines prololype suljiir lamp. 



The Future 

Complementing LBL efforts in technology development are research activities investigating lighting design and 
applications, and the human response to lighting. Interdisciplinary research performed in collaboration with 
medical experts has demonstrated that the fundamental measure of light — the "lumen" — is a poor measure of how 
people actually perceive light. This research suggests that by "tuning" the spectrum of light sources to optimize 
the responses of rods and cones in the eye, we will be able to see better and with less energy needed for illumina- 
tion. 



"Market transformation" is another development frontier LBL researchers are providing technical support to 
groups that design innovative deployment strategies for efficient lighting. LBL has assisted DOE in developing 
national standards aimed at improving lighting efficiency and is supporting DOE and U.S. Environmental Protec- 
tion Agency (E.r'A) efforts to improve the market penetration of efficient residential lighting technologies. 



445 



Lawrence Berkeley Laboratory 




LBL researcher inspects a centralized light guide system consisting of a 
250-watt metal halide lamp, a high-efficiency beam splitter, and four 
hollow light guides. This results in a lighting load of only 60 watts per 
work station with light levels even higher than those provided by typical 
fluorescent syslems-and superior light quality. Eventually, sulfur lamps 
will be used with this type of system. 






26-794 97-15 




446 



From the Lab to the Marketplace 

SEEING WINDOWS THROUGH 

Energy lost through residential and commercial windows costs U.S. consumers about $25 
$25 Billion billion a year, a loss comparable to the value of the oil delivered by the Alaska pipeline. 
LBL pioneered the commercialization of "low-emissivity" windows and labeling systems, 
which reduce the energy lost through normal, double-glazed windows by 35%. Thanks to 
LBL's close collaboration with window manufacturers, and a DOE investment of $3 mil- 
lion, the market share for these advanced windows has reached about 35% (with an annual 
market value of $630 million). Cumulative U.S. energy savings to date from these windows 
is $760 million and will reach $17 billion — net of added up-front costs — by 2015. 

In 1976, in response to the energy crisis, DOE began a program at LBL to exainine tiie 
potential of new, more efficient window technologies. In 1993, after almost 20 years of an R&D partnership with 
industry, that effort has resulted in sizable energy savings to U.S. building operators, and the development of a 
new line of energy-efficient window products that are generating sales and profit opportunities for window 
manufacturers. 

Our initial goal was to develop a clear understanding of the heat transfer mechanisms in windows and identify the 
technical opportunities for reducing those gains and losses. In cold climates, low-emissivity coatings allow 
sunlight to enter while reflecting back to the interior the long-wave infrared radiation that accounts for more than 
half the heat loss. Although the principle of how these coatings work was then understood, no U.S. manufacturer 
had yet developed a commercial product. At the time, there was no market demand (the benefits were unclear to 
purchasers), and it appeared impossible to produce coatings of high quality at low cost. 

LBL awarded subcontracts to several firms to develop prototype coatings and new, low-cost, thin-film deposition 
processes. The performance of the coatings was tested at LBL and new computer models were developed to 
determine the best use of the coatings in the overall window system. 

Encouraged by these efforts, by 1980 several large manufacturers were actively involved in low-emissivity 
window development, making major investments in msmufacturing systems for new coatings. Initial product 
introductions in 1981-82 by a few innovative fums stimulated major manufacturers to offer products of their own. 
Second-generation products emerged that had greater durability and suitability for a wider range of climates. They 
were tested at LBL to demonstrate their market potential. By the mid 1980s, virtually every window manufacturer 
was offering low emissivity (low-e) windows. By 1987, low-e windows claimed 17% of window sales (18 million 
square meters per year). 

Laboratory analyses at LBL showed that the next step to improve window energy efficiency for cold climates was 
to eliminate the air inside the double-paned insulating unit, replacing it with low-conductivity gas (such as argon). 
LBL simulation tools, as well as laboratory and field test data, helped convince manufacturers to incorporate this 
technique into their product and to inform purchasers that this was a reliable, cost-effective approach. Double 
glazings with both low-e coatings and gas fills lose only 50% of the heat lost by conventional double glazing. 

Although substantial efficiency improvements had been achieved, leading manufacturers were interested in 
pushing the technology further. Analysis suggested that windows with specific thermal and solar gain properties 
would perform so well that they would have a lower winter heating load than the best insulated walls. LBL staff 
developed a new "superwindow" concept for a multiple glazed window using two low-e coatings and a new 
krypton gas fill. LBL teamed with five manufacturers and suppliers (Andersen, Cardinal IG, Owens-Coming 
Fiberglas, Pella, and Soudiwall Technologies) and the Bonneville Power Administration to convert this window 
concept into commercial prototypes. Within two years, one participating manufacturer introduced the first com- 
mercial "superwindow" to the market. 



10 



447 



GLASS PANES 



KRYPTON /ARGON 
GAS FILLS 



LOW-EMISSIVITY 
COATINGS 



Lawrence Berkeley Laboratory 

Spectrally selective glazings are a recent variant on low-e 
coatings. Designed for hot climates, they work by selectively 
filtering out solar heat gain while minimizing the loss of visible 
light transmission. This advance means potential additional 
savings in the Sunbelt states and in commercial buildings where 
cooling loads should be reduced without loss of useful daylight- 
ing. In some cases, downsizing the cooling systems (made 
possible by reduced cooling loads) can offset the added cost of 
the more efficient windows. 

Energy and Environmental Benefits 

In 1990, the low-e market share rose to about 25%, and in 1993, 
it reached 36%, The widespread availability of ratings and 
labels — a development in which LBL plays a lead technical 
role — should help further accelerate market penetration of more 
efficient windows. 



The cumulative energy savings attributable to advanced window 
coatings installed as of 1993 was $760 million. Based on energy 
savings "in the pipeline," i.e., for low-e-coated windows in- 
stalled as of 1993, businesses and consumers will ultimately 
save $400 million (net of their extra capital investment), which 
will grow to $17 billion for technologies installed through the 
year 2015. These enormous savings were leveraged by a cumulative DOE investment through the early 1980s of 
just $3 million. The environment will also benefit from the use of advanced window coatings; In 2015, energy 
savings from advanced windows will allow us to avoid the emission of 7 1 million tons of CO2, 1 57,000 tons of 
SO2, and 142,000 tons of NOj. 




"Superwindow " concept, based on multiple 
glazing, low-emissivity coatings, and gas fills. 



The Future 

Advanced coating technology will lead to "smart windows" by the year 2000. A smart window uses a dynamic 
coating whose optical properties change from clear to reflective in response to a small electrical current. In 
partnership with industry, LBL scientists have developed promising prototypes with good performance. In homes, 
these windows will combine energy efficiency (by reducing summertime solar heat gain and wintertime heat 
losses) with better comfort and privacy. In the office of the future, smart windows will control solar loads while 
admitting daylight, allowing electric lights to be dimmed with electronic ballasts. 



Toward this end, ion-beam technology 
developed in LBL's Accelerator and 
Fusion Research Division is being redi- 
rected by LBL's Windows Group to 
improve energy-efficient window coat- 
ings. These ion-assisted processes result 
in coatings with superior optical proper- 
ties, longer lifetime, and lower cost. These 
devices were previously used as sources 
of particles in accelerators and more 
recently for some semiconductor process- 
ing steps like ion implantation of dopants. 




Spectrally selective glazing transmits high levels of 
visible light while reflecting invisible solar heat. 



11 



448 



From the Lab to the Marketplace 



Labels to Make Windows Clearer 

Purchasers of windows are confronted with many difficult decisions. New window features and technolo- 
gy add value, but builders and building owners have little interest in confusing technical details — they 
simply want to know how the products compare in total performance. In 1989, LBL began working with 
the window industry, utilities, and state agencies to create a new organization, the National Fenestration 
Rating Council (NFRC). The goal of the Council is to develop labels for windows that accurately and 
simply rate their overall performance. LBL has taken the lead in working to develop cost-effective accu- 
rate technical procedures for the NFRC. which uses LBLs WINDOW program as the primary rating tool. 
In 1993 California became the first state to require that all windows sold have an NFRC label. 





The WINDOW 4.0 software and manual were published 
on a CD-ROM disc for initial distribution to 15.000 
building industry professionals attending the A/E/C 
Systems Show. The WINDOW software is the basis of 
NFRC labels shown below. 



f C National Fenestration 
Rating Council 



AAA Window Company 



0.40 Model #1 500 Horizontal Slider 
38 ^^' ^ Space. Low^e 0.2 



ana may ml De ootyrKtonaU loi datarmnog m at o natanarsyitatomurca 
^w addTmna/ sitomndor' cwWbcT /.IFfK iXOSffnng Straal Suna iK 
S.f^Sfif^ MO XSia lai iXuse^NFIK Fa- i30r;58a^8M 



12 



449 



$110 Billion 




Lawrence Berkeley Laboratory 
SETTING THE STANDARD FOR ENERGY EFFICIENCY 

Residential consumers spend $110 billion each year on energy for appliances and heating 
and cooling equipment. At LBL, our energy policy work includes developing and analyz' 
ing appliance standards, many of which have become law. These standards have already 
saved U.S. consumers $1.9 billion and will result in a $58 billion savings, net of extra up- 
front costs, by the year 2015. The cumulative federal investment has been $50 million — 
just one one-thousandth of the benefits to be realized by consumers. Extending these 
standards to commercial-sector products can pay even higher dividends. 

The DOE national laboratories have supported public policy efforts by serving as a key 
resource for legislators seeking definitive, independent data and technology assessments. As 
part of this effort, LBL has become the national center for appliance standards analyses. 
New generations of appliances have been spawned by these efforts. In addition to saving 
energy for consumers and the nation, these standards help make U.S. manufacturers more 
competitive in the global marketplace. 

LBL's program provides the technical, economic, and manufacturer-impact analyses on 
which DOE bases mandatory standards that now apply to all major U.S. appliances: air 
conditioners, clothes washers and dryers, freezers, furnaces, heat pumps, refrigerators, 
televisions, and water heaters. In addition to technology research, LBL has provided DOE 
with pivotal support for understanding how the market functions and how certain market 
barriers to energy efficiency warrant legislative measures such as standards and labeling. 
Representatives from many countries come to LBL for guidance on developing their own 
appliance standards. 



LBL monitors emerging technologies, identifying those developments that enable commercially viable improve- 
ments in appliance efficiency. For inclusion in proposed standards, new technologies must reduce the total life- 
cycle cost of buying and operating an appliance, while maintaining or increasing the level of service provided. 

Energy and Environmental Benefits 

DOE has invested about $50 million in standards. This sum includes development of test procedures, technical 
analyses, the administrative costs of public hearings, publication of laws and supporting documents, and program 
management. 

Current appliance standards have already saved consumers $ 1 .9 billion in energy costs and will ultimately save 
them $58 billion (the lifetime savings of units installed between 1990 and 2015, net of the extra investment costs). 
Coincidentally, U.S. consumers will avoid having to pay for the construction of eighty 250-megawatt electric 
power plants. These standards yield a benefit-to-cost ratio of almost 2.5 for consumers — energy savings are 2.5 
times greater than the up- front cost premium paid for the appliance. 

Appliance standards yield sizable environmental benefits as well. In 2015, these standards will enable us to avoid 
emissions amounting to 53 million tons of CO2, 1 1 1 ,000 tons of SO2, and 108,000 tons of NO,. (These savings 
assume that chlorofluorocarbons will be phased out of refrigerators and freezers beginning in 1996.) 



13 



450 



From the Lab to the Marketplace 



Refrigerator Standards Eliminate Many Inefficient Models 



n 1989 models (before standards) 
■ 1 993 models 



1500,- 



B 1990 standard 



standard 




10 



15 20 25 

Adjusted Volume (cu. ft.) 



The two sets of data reveal the dramatic impact of appliance standards. The 1990 refrigerator standard eliminated many 
models sold on the market as of mid 1989. None of the pre-1990-standard models met the forthcoming 1993 standard. By 
1993. however, some products heat the standard by as much as 15%. Each point represents a specific top-mounted 
refrigerator-freezer with an automatic defrost feature. (Note that the standards are expressed as a linear relationship between 
a refrigerator's volume and its energy use, rather than as single energy-use values. "Adjusted volume" is an adaptation of 
the nominal refrigerator volume, in which freezer volume is inflated by a factor of 1.63 to yield an equivalent refrigerated 
volume.) 





Energy and Economic Benefits of U.S. Appliance Standards 




(1990-2015) -, 


10 




■ 






--8 


. 


H 






in 










■a 




^^H 


-- 




ra 










3 










o 




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- 




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>. 






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<D 


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30 



25 



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(1) 




<n 




<l) 








U. 


5 


■5 



Fumaces Room Air Central Air Electric 
Conditioners Conditioners* Heaters* 



Energy Savings 



Water Refrigerators Freezers 
Heaters 

•includes savings Irom more efficient fieat pumps 

1993$ Net Benefits 



14 



451 



Lawrence Berkeley Lahoralory 

Standards for the Residential Building Envelope 

About half of all residential energy is used for heating and cooling. Although improving the efficiency of air 
conditioners and furnaces is important, for optimal savings the building's envelope must also be considered. For 
more than ten years, LBL has provided technical support to efforts by government and industry to develop build- 
ing energy standards and guidelines. 

Between 1980 and 1983, LBL researchers 
created a large database of energy con- 
sumption in prototypical new houses in 45 
U.S. locations using the DOE-2 program. 
We then converted this technical informa- 
tion into "Energy Calculation Slide Rules" 
that could be used by the general public. 
This project, conducted for DOE's Afford- 
able Housing through Energy Conserva- 
tion Program, won the 1984 Progressive 
Architecture award for research. 

Recognizing in 1986 the growing impor- 
tance of personal computers, LBL con- 
verted this database into a simple comput- 
er program, PEAR (Program for Energy 
Analysis of Residences). PEAR gave 
builders and architects a fast and accurate 
method to estimate heating and cooling 
energy needs for any location in the U.S. LBL also gave the database to Pacific Northwest Laboratory (PNL) 
researchers, who were developing the mandatory building energy standard for federal buildings (known as COST- 
SAFR), and to ASHRAE (American Society of Heating, Refrigerating, and Air Conditioning Engineers), to 
provide the technical basis of ASHRAE's 90.2 Residential Energy Standard, completed in 1993. 




In 1987, LBL became a PNL 
subcontractor, charged with 
updating the PEAR database 
for PNL's flexible computer 
tool, ARES (Automated 
Residential Energy Standards), 
which can generate custom 
energy budgets for many 
locations in the U.S. In addi- 
tion, LBL has distributed 
several hundred copies of the 
PEAR program to home 
builders, energy offices, and 
government and utility organi- 
zations. We have also used the 
databases in our forecasting 
and policy analysis efforts. 



USE ARROW KEYS TO MOVE THE CURSOR ( ► •< A T ),<Space> TO EDIT, ? FOR HELP 
<PgDn> FOR NEXT SCREEN, <PgUp> FOR PREVIOUS SCREEN, (End) TO QUIT 



GENERAL INPUT 



State GEORGIA Keywd. 

City ATLANTA Keywd. 

Prototype 1 S Keywd. 

FoundatlonType SLAB Keywd. 

Floor Area 

Wall Perimeter 

Cross Wall Area.. 



North Window Area 
South Window Area 
East Window Area 
West Window Area 



1548.0 sq.ft. 
166.0 «. 
1328.0 sq.ft. 

38.5 sq.ft. 
38.5 sq.ft. 
38.5 sq.ft. 
38.5 sq.ft. 



Run Name BASE CASE 



CONSERVATION MEASURES 



Celling Insulation. 
Roof Color 



Wall Insulation. .. 
Wall Mass Location. 
Wall Color 



Foundation Insulation. 
Floor Insulation 



Window Layers 

Window Sash Type 

Window Glass Type 

Window Movable Insulation. 

Infiltration 



11.0 R-Val 
DARK Keywd 

0.0 R-Val 
NONE Keywd 
DARK Keywd 

NONE Keywd 
0.0 R-Val 

1 Pane 

PLAIN Keywd 

REG Keywd 

NONE Keywd 

1.0AC/hr 



HEATING ENERGY 749 THRM. 



COOLING ENERGY 2968 KWH. 



15 



452 



From the Lab to the Marketplace 

The Future 

The U.S. still does not have a uniform building energy standard, although standards exist for federal buildings and 
federally assisted housing, and an increasing number of states have residential energy standards. The ASHRAE- 
90.2 residential energy standard was approved in 1993 after a nine-year effort. Although it has no legal force, this 
standard will be influential as it represents the consensus of much of the building industry. Consequently, many 
states may be motivated to adopt or adapt it, particularly those that have no standards. LBL will continue to 
provide technical support for the development and implementation of residential building energy standards. 

Built into the national legislation for establishing appliance standards are provisions to periodically revise and 
update them. As technology continues to advance, and economic conditions change, existing standards become 
obsolete and potential avenues for new savings are created. DOE recently proposed new standards for eight 
appliance products: water heaters, fluorescent ballasts, room air conditioners, pool/spa heaters, mobile home 
furnaces, non-ducted heating equipment, ranges and ovens, and televisions. LBL analysis has shown that the 
proposed standards would save as much money and energy as all existing standards and would result in an actual 
reduction in total residential energy demand — despite the projected growth of the buildings stock. LBL will 
continue to provide technical support for this process. 

LBL is spearheading new efforts to establish efficiency standards for systems used to distribute cooling within 
residences (i.e., duct systems). Our efforts include conducting technical analyses to support stricter codes for duct 
installation and leading an ASHRAE effort to standardize efficiency determinations for residential thermal distri- 
bution systems. The California Institute for Energy Efficiency is an important partner with LBL in this work. 

National energy policy is just beginning to apply efficiency standards to nonresidential uses. LBL has analyzed 
ballast standards and is working on standards for lighting in commercial buildings and small motors. LBL has 
been given the task of assessing new technologies specified in the Energy Policy Act of 1992. 

LBL is helping DOE evaluate the technology and policy options for the nonregulatory development and commer- 
cialization of new energy-efficient products. Innovative "market-puH" approaches and major provisions of the 
Adminsistration's Energy Partnerships for a Strong Economy program will implement this Congressional man- 
date. Many new programs are partnerships with industry and utilities; others build on the buying-power of federal, 
state, and local governments to help create or expand markets for energy-saving products. 



16 



453 



$208 Billion 



Lawrence Berkeley Laboratory 
TOOLS FOR BUILDING DESIGNERS 



Operating residential and commercial buildings in the U.S. costs consumers almost $210 
billion each year. New technologies can reduce this cost, but they can be optimally deployed 
only with proper design tools. LBL incorporates the knowledge gained over nearly two 
decades of building energy research into new computerized analytical and design tools, the 
most important of which is DOE-2. About 5% of commercial floorspace today is designed 
with DOE-2. Based on a recent survey of major users of the program, DOE-2 facilitates a 
savings of $85 million annually in energy bills — about $1.9 billion cumulatively for U.S. 
buildings constructed with the help of DOE-2 through 1993. California building standards 
(developed using DOE-2) save consumers almost $1 billion each year. Efforts to make 
existing tools more user friendly are projected to boost their application to 50% of all 
buildings. 

The nation's building industry is immense, but lacks the tools for optimizing energy efficieiKy. 
Thus, in the mid 1970s, LBL accepted the challenge of developing a computer program for 
analyzing energy use in buildings. The resulting program — DOE-2 — calculates hourly build- 
ing energy use and cost from information about the building's construction; climate; opera- 
tion; heating, ventilating, and air-conditioning systems; and utility rate schedule. 

During 1975. the U.S. Energy Research and Development Administration (ERDA, which later 
became the Department of Energy), and the California Energy Commission (CEO agreed that 
a comprehensive building energy analysis computer program was needed to develop and 
support energy efficiency standards. In response to this need, LBL started a joint project with 
three national laboratories — LBL, Los Alamos National Laboratory (LANL), and Argonne 
National Laboratory ( ANL) — to develop the Cal-ERDA code, later to become DOE- 1 and 
*'*'"' then DOE-2. LBL led the effort, in charge of overall coordination and development of the 

basic user interface and simulation code. The objective was a whole-building energy analysis program that could 
simulate all building types in all climates, a program that was unbiased, well documented, and open to public 
scrutiny. ANL wrote the user documentation. LANL added active and passive solar simulation capabilities, and 
developed the engineering documentation. A private company. Consultants Computation Bureau, assisted in 
developing the interface (Building Description Language) and the programming. A steering committee with 
representatives from DOE, the California Energy Commission, and industry guided the development effort. To 
provide a program that would be technically sound and widely accepted, we based DOE-2 on algorithms devel- 
oped by ASHRAE, a respected industry organization. We also used methods from earlier programs like NECAR 
NASA's Energy Cost Analysis Program, and TWO-ZONE, a residential 
analysis program developed by LBL. 



The first version of DOE-2 was released in 1978. Fulfilling its original 
intent, it became the basis of four major standards: the California Title 24 
building energy efficiency standard, considered the most advanced in the 
world; the national Building Energy Performance Standard, which was 
abandoned during the Reagan administration before it could be implement- 
ed; the DOE/ASHRAE 90.2 standards for residential buildings; and the 
DOE/ASHRAE 90. 1 standards for commercial buildings, which are now 
voluntary and will become mandatory in each state, as required by EPACT. 

In addition, DOE-2 is now widely used for the design of energy-efficient 
buildings and for impact analyses of new technologies. During the past ten 
years, DOE, the private sector, including utilities like Southern California 
Edison. Pacific Gas & Electric, and Bonneville Power Administration, and 
utility organizations such as the Electric Power Research Institute and the 
Gas Research Institute have supported improvements to DOE-2. 



The California Energy 
Commission estimates 
that the annual energy cost sav- 
ings firom the Title 24 standard, 
which was designed with 
DOE-2, was $420 million in 
1985, $970 million in 1992, 
and will increase to $1.6 bil- 
lion in 1999. 

The cumulative California 
savings are estimated to be: 
$4.9 billion (1985-1992). and 
$13.8 bilUon (1985-1999). 



17 



454 



From the Lab to the Marketplace 



Today there are 1000 DOE-2 user organizations in the U.S. and 42 other countries. In the U.S., DOE-2 is used by 
70% of the utihties promoting energy efficiency with demand-side management programs. Most commonly used 
in the design of new buildings, DOE-2 has also found a niche in the retrofit arena. Identifying energy retrofits for 
the Audubon Society's national headquarters was one prominent application. 

A number of firms — ADM Associates (Sacramento, CA), Gable Dodd Associates (Berkeley, CA), ITEM Systems 
(Seattle, WA), Finite Technologies (Anchorage, AK), ERG International (Golden, CO), and Partnership for 
Resource Conservation (Boulder, CO) — have converted DOE-2 into a PC-based program or developed and 
marketed ancillary software. 



:iqn r'trfcnnance. LibrEiies 




Through a schematic design tool thai incorporates shadow-casting visualization, the Building Design Advisor (BDA) will 
assist building designers with initial building massing and orientation decisions, providing feedback on multiple performance 
considerations such as daylighting, solar gain, and shading from trees. The four charts compare key indicators for three 
design scenarios. DOE-2 will be the computational engine behind the BDA. 



Leveraged Energy and Economic Savings 

Although not a hardware technology, DOE-2 directly facilitates energy savings in building projects where it is 
applied. Results of a 1991 survey showed that users help design or retrofit a total of 326 million square feet of 
buildings each year with DOE-2 (equivalent to about 5% of all commercial construction), at an average energy 
savings of 20%. The energy cost savings in these buildings is about $85 million/year. Buildings designed with the 
help of DOE-2 over the past decade have achieved about $ 1 .9 billion in additional energy savings. For compari- 



18 



455 



Lawrence Berkeley Laboratory 

son, the total investment in development and support of DOE-2 to date is about $ 1 5 million. Based on a cost of 
$0.10 per square foot, the delivery of design and technical services using DOE-2 is now a $30-million annual 
industry. 

The Future 

PowerDOE — a new PC-based and user-friendly interface for DOE-2 — is being developed by a joint private/public 
team with support from Electric Power Research Institute (EPRI), utility companies, the California Energy 
Commission, and the U.S. Department of Energy. A consortium of utilities and government agencies in Canada 
recently selected PowerDOE as the basis for its next-generation design tool. Current research efforts are focused 
on developing and commercializing PowerDOE (for new and retrofit applications), which will increase ten-fold 
the number of DOE-2 users. 

.Another goal is to expand DOE-2 use among architects (the program is currently used mostly by engineers) by 
coupling it to a Building Design Advisor (BDA) software package now under development at LBL. Building 
designers will be able to use BDA to incorporate energy-efficiency considerations throughout the building design 
process, assisted by built-in, context-dependent advice on options to improve performance. 

LBL has proposed linking this energy design tool with an indoor environment model so that indoor air quality and 
energy efficiency can be evaluated early in the design process. 




19 



456 



From the Lab to the Marketplace 



MEASURING BENEFITS AND MARKET IMPACT 

Various metrics help assess the impact of the four research programs. One is market penetration. As shown 
in the table below, electronic ballasts have achieved a 23% market share in 1993. while low-emissivity and 
spectrally selective glazings have captured a 36% market share. Residential equipment standards have 
achieved full market penetration for the products regulated. DOE-2 design software is used to design about 5% of 
new commercial floorspace and as an aid in developing mandatory local standards and voluntary national guide- 
lines applicable to all buildings. Two other metrics are the retail value of products and services and the value to 
consumers of the energy saved. 



Market Impact of Energy-Efficient Products and Design Tools Aided by LBL Research and Development^ 

Residential Percenlage 

Electronic Advanced Equipment DOE-2 of U.S. 

Ruoresceni Window and Appliance Buildings Buildings 

Ballasts Coatings Efficiency Standards Design Tool'' Total Emissions 



MARKtT Impacts 
Total R&D Investment (current $ millions) 



$3 



$3 



$50 



$15 



$71 



Product market share in 1 993 (% of units sold 1 
Product market share in 2015 (% of units sold) 

Incremental value of product sales in 1993*' ($ millions. 1993 Si 
Incremenial value of product sales in 2015** ($ millions. 1993 $) 

CoNsiJMD* Benefits ($ millions, present value in 1993 dollars) 
Value of energy savings "in the bank" as of year-end 1993'" 
Lifetime value of savings for technologies installed through 1993^^ 
Lifetime value of savings for technologies installed through 201 5*^ 
Value of annual energy savings in 2015*^ 

NET present value of technologies installed through 1993*^ 
NET present value of technologies installed through 2015** 

Environmental Benefits 
Carbon dioxide emissions avoided in 2015 (million tons/year) 
Sulfur dioxide emissions avoided in 2015 (thousand tons/year) 
Nitrogen oxide emissions avoided in 2015 (thousand tons/year) 



23% 


36% 


virtually all 


5% 






77'* 


79% 


vinually all 


50% 






$200 


$630 


$1,500 


$35 


$2,365 




$:.3oo 


$1100 


$2,200 


$300 


$4,900 




$400 


$760 


$1,900 


$1,900 


$4,960 




$1,000 


$6,300 


$7,900 


$2,800 


$18,000 




$18,400 


$37,000 


$100,000 


? 


$155,400 




$5,100 


$5,300 


$6,000 


? 


$16,400 




$700 


$400 


$4,400 


$2,000 


$7,500 




$12,800 


$17,400 


$58,500 


? 


$88,700 




7.1 


71 


53 


7 


197 


8% 


157 


157 


111 


7 


425 


6% 


144 


142 


108 


7 


394 


3% 



Savings from lighting, windows, and appliance standards do not, in general, overlap. Savings gained by using DOE-2 are achieved b> a vanety of building technologies 

a. The lime frame adopted for each case spans the first yearof a product's use through the year 2015. Savings arc computed with respect to a dynamic business-as-usual 
baseline (i.e., efficiency improvements attained without the new technology). 

• For electronic balla.sis. the baseline is core-coil magnetic ballasts and Tl 2. 40-wail lamps up to 1990 and energy-efficienl magnetic ballasts and T! 2. 34-wati lamps 
(mandated by standards) from 1990 forward. The efficiency case reflects electronic ballasts and T8. 32-watl lamps — 3500 hours-per-year uic. 

• For windows, the baseline is dual-glazed windows tor the residential sector and tinted single-glazed windows for the commercial sector This baseline lends lo 
underestimate savings in the early years for households (when single-glazed windows are still prevalent) Significant savings are attributed to daylighting made possible 
by the higher visible light transmission achieved by the advanced glazings m commercial buildings No savings from gas fillings or from siick-on retrofit coatings are 
assumed. 

• For appliance standards, the baseline is a marltet projection of price-dnven improvements m energy efficiency. Minimum efficiency standards for each appliance are then 
implemented m the year called for by legislalion. 

• For DOE-2. the survey of major DOE-2 users indicated that they achieve 20% energy savings beyond what would have been the case without DOE-2. DOE-2 (or its 
descendants) will eventually be used for at lea.st 50*% of commercial construction, and eneigy performance standards will continue to be tightened based on analysis 
performed with DOE-2 However, it is too difficult lo estimate the prospective savmgs. These savings would also include parts of the impacts shown here for windows, 
lighting, and eguipmcni. 

b. Retail value is based on the mc/rmenw/ cost of the efficient technology compared to the baseline technology, eg,, comparing a $10 magnetic ballast with an $18 electronic 
ballast yields an incremental cost (retail value) of S8 per ballast. Market share is the percentage of all related product sales (e.g.. ballasts) captuted by the efficient technology 
or service shown. As the industry matures, low-e coatings decline in cost from $4 per square foot in 1985 to $! 20 per square foot in 2015 Spectrally selective coatings drop 
fruman initial cost of S5.60 per square foot in 1995 lo $1.70 per square foot in 201 5. The retail value of DOE-2 design services is estimated based on a fee of $0.10 per 
square fool. 

c. Value of energy savings, excluding added cost of efficient equipment. \1'^ real discount is used lo convert savings to a present value in 1993 dollars. 

d. Present value of energy savings, net cost of efficient equipment, A 7% real discount rale isused toconven savings to present value in 1993 dollars. Net present values include 
lifetime savings of technologies installed in each year The extra efficiency investment ("retail value"! for buildings designed using DOE-2 to date is inferred based on a three- 
year payback; values for the future have not been estimated. 

e. Excludes savings achieved by building standards based on DOE-2 analyses 



20 



457 



Lawrence Berkeley Laboratory 



Market Creation 

Value of Energy-Efficient Products and Design Tool Services in the U.S. Market 



2500 



2000 



CO 

J 1500 
a. 

to 

c 

~ 1000 u 



s 

m 



500 





$1,100 






1 in 2015 




$2,200 


1 




$1,300 


$1,500 




^B in 1993 


$200 






$630 


1 




$300 




$35 






^^^^B 


J 



Electronic 


AcJvanced 


Residential Equipment 


DOE-2 


Fluorescent 


Window 


and Appliance 


Buildings 


Ballast 


Coatings 


Efficiency Standards 


Design Tool 



Economic Benefits 



I Lifetime Savings for Tecfinologies Installed ttirougfi 2015 
I Lifetime Savings for Tecfinologies Installed tfirougfi 1993 
1 Value of Energy Savings "in tfie Bank" as of year-end 1993 



SI 8.400 
(12,800) 



$37,000 
(17.400) 



$100,000 ■ 
(58.500) • 



- Total S Savings 

-{savings nel ol all capital cosi I 



O 

a> 
at 




Electronic 


Advanced 


Fluorescent 


Window 


Ballast 


Coatings 



Residential Equipment DOE-2 

and Appliance Buildings 

Efficiency Standards Design Tool 



21 



458 



From the Lab to the Marketplace 



Pre-Oil-Crisis (1973) Home 

$2000/year energy bill 



Little or no insulation 
in walls, floor, and ceiling 
(No thermal standards.) 
High air leakage rates. 



Virtually no consideration 
of energy costs in 
home design processJ 




Inefficient incandescent 
lighting, no controls 
(indoor and outdoor) 



No labels or other consumer 
information on energy use and cost. 



No attention to roof color 
or to microclimate 
(e.g., tree location). 



Inefficient heating, cooling, 
faucets, showerheads, appliances. 
High-leakage, poorly insulated ducts. 



Construction methods very 
conducive to radon entry, building 
materials often high source of indoor 
pollutants such as formaldehyde. 



Moderate insulation 
in walls, floor, and ceiling. 
Insulation requirements sometimes 
cost-optimized (sometimes 
CFC-based foam). 



Today's Home 

$1000/year energy bill 



Few homes designed using 
computer tools. 




No attention to roof color 

or to microclimate (e.g., tree location). 



Improved efficiencies: 
healing, cooling, faucets, showerheads. 
high-leakage, marginally insulated ducts. 



Improved thermostats 
(e.g., "night setb ack]! 
capabilities). 
Tighter, double-glazed 
windows typical ill; 

(not optimized s#Pv. 

tor orientation) 



Mainly incandescent lighting 
some compact fiuorescents 
and conventional fiuorescenl 
kitchen lighting. 



Efficiency standards applied to 
all major appliances. 



Energy labels on appliances. 



Many homes with unacceptable 
"radon levels and other indoor 
air quality problems. 



22 



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Lawrence Berkeley Laboratory 



High (CFC-free) insulation 
levels in walls, 
floor and ceiling. 
Insulation requirements 
cosl-oplimized 



Tomorrow's Home 

$250/year energy bill 



Home designed and optimized 
with sophisticated but user-friendly 
computer tools. 




"Superwindows" ^^_„^ 
(optimized for ""''''''^ ^^tt 
orientation and hot or ^^^^ 
cool climates). ' " 



Improved incandescent 
lamps, high penetration of 
compact fluorescenls, 
efficient fluorescent tube: 
occupancy sensors. 



Efficiency labels on appliances. 
windows, ducts, and whole house. 



Light roof color and 
strategic positioning of trees 
to reduce cooling costs. 

Advanced building controls; 
two-way communication. 

New CFC-free cooling 
technology, high-efficiency 
furnaces. Efficient distribution 
of heating and cooling around 
the house; more efficient ducts 
or use of hydronic systems. 



[ Improved water-efficient 
faucets & showerheads. 



Expanded appliance efficiency 
standards and new technologies 
(e.g., heat pump water heaters). 



Radon -resistant construction 
and low-emission materials 
(e.g., carpets). 



In most cases, energy efficiency is "invisible " and needn 7 ajfect the appearance of a home. The three illustrations depict the 

energy attributes of pre -oil-crisis (1973) vintage home, today's home, and the home of tomorrow. Many of the improvements 
shown relate to LBL research described in this report (i.e., technologies, standards, design tools, and indoor air quality 
considerations). Most of these technologies and strategies are being applied to commercial buildings as well. 



23 



460 



From the Lab to the Marketplace 

LBL'S BROADER ROLE IN THE BUILDINGS ENERGY ARENA 



World Wide Web— 

The Center for Building 
Science now has a World 
Wide Web (WWW) home 
page easily accessible from 
the LBL home page. The 
WWW makes it possible to 
send and receive text, video, 
audio, and all types of graph- 
ics (including photographs) 
over the Internet. Mosaic is 
the user-friendly interface 
that makes it possible to view 
and manage this information. 
Through WWW and the 
Mosaic browser, Internet 
users can access LBL's 
hypertext documents, gopher 
databases, library catalog, 
publications list, and 
Quicktime movies. All that's 
required is a networked 
computer (Mac, PC, or 
UNIX) that runs Mosaic. The 
WWW address (universal 
resource locator or URL) is 
"http://eande.lbl.gov/ 
Building_Science.html". 

From the Center's home 
page, users can view, save, 
and print text and graphics 
that describe ongoing 
projects at the Center, browse 
all the issues of our newslet- 
ter, and view and perform 
keyword searches on the 
Center's publication list. All 
information is linked through 
hypertext, making it easy to 
find related topics or articles. 



^ 



Although best known for our R&D and technology spin-offs to 
industry, LBL's buildings energy research programs are 
distinguished in other areas. LBL contributes technical input 
to public policy issues such as global warming, works with utilities on 
new paradigms for energy planning, examines the effect of the indoor 
environment on health and comfort, helps the government manage its 
own facilities more efficiently, and addresses energy problems both 
locally and internationally. 

To foster the adoption and use of energy-efficient technologies in 
buildings, the Laboratory relies on its information and technology 
transfer program. The program ensures that research results are trans- 
ferred quickly to utilities, major builders, and real estate developers by 
emphasizing strong working relationships with key professional, trade 
association, and research organizations. These groups serve as interme- 
diaries and brokers in reaching manufacturers, consumers, and the 
fragmented building- sector industries. In addition, LBL publishes 
research results on the Internet. 

Education is central to LBL's strategy for promoting energy efficiency. 
To this end, the Laboratory has a relationship to a major university (the 
University of California at Berkeley) that is unique among the national 
laboratories. Dozens of faculty, staff, and students from a variety of 
disciplines work in LBL's energy-efficiency programs. Some graduates 
stay on at LBL while others move into industry or the public sector. 

After the Cold War, in a Warming World 

The end of the cold war, the Administration's new energy programs, 
and various initiatives by states and utilities have created new challeng- 
es and opportunities for the national laboratories. The U.S. produces 
one-quarter of the world's "greenhouse-gas" emissions. Laboratory 
efforts that have focused on achieving emissions reductions include 
participating in the prestigious National Academy of Sciences "Mitiga- 
tion Panel" on climate change and contributing to the Administration's 
Energy Partnerships for a Strong Economy program (the "cool commu- 
nities" action was developed at LBL). We also assist DOE in develop- 
ing and implementing its international energy-policy activities related 
to climate-change mitigation. 

Partnering with Electric and Gas Utilities 

The nation's electric and gas utilities spend $2-3 billion each year on 
energy-efficiency programs. Their investment leverages another $1 
billion in private investment, and creates jobs and markets for new, 
energy-efficient technologies. With utility companies expected to spend 
a total of $20 billion on energy programs during the 1990s, the cumula- 
"ive effect of these programs will be to offset the 20-30% of expected 
load growth during the decade with economic benefits of $40-$50 
billion. An emerging possibility is a slowdown in utility demand-side 
management (DSM) efforts, which may hamper their ability to achieve 
these projections. Whether or not utilities meet their goals will depend 



24 



461 



Lawrence Berkeley Laboratory 




Primer on 
Gas Integrated 
Resource 
Planning 



on regulatory trends across the country and other 
driving factors, including environmental goals and 
new competitive dynamics among energy suppli- 
ers. 

For some years, LBL has worked closely with a 
number of utility companies, their national trade 
associations (the Electric Power Research Institute 
and the Gas Research Institute), and especially, 
state regulatory utility commissions and the 
National Association of Regulatory Utility Com- 
missioners. LBL's energy-efficiency programs have 
aided in the development of new methodologies of 
energy-demand forecasting, evaluation of the 
impact of energy-efficient technologies on utilities, 
and market-based programs that utilities initiate to 
deploy those technologies. LBL researchers 
pioneered the procedures for making "conservation 
potential" studies, which are now used routinely by 
many utilities around the nation. Other work has 
supported the national trend toward utility regula- 
tory reforms that redefines utility profit rules to 
decouple profitability from sales volumes. This 
approach is intended to motivate utilities to market 
programs that lead to energy savings. 

The utilities team has authored definitive "primers" on integrated resource planning (IRP) for gas and electric 
utilities, which have been translated into several languages. Their other activities include operating the Advanced 

IRP Seminar for regulatory staff and providing independent 
review of energy savings estimates of utilities, for example 
for the energy commissions of California, Wisconsin, and 
Michigan. 




UAST-COST 
niUTY PLAIMMG 

A HAVDIUM )K FOR PL'BLIC ITTLm' CO.VIMISSIONEBS 

VOLUME 2 

TllE DEMAND SIDE: 

CONtKPrI 1*1, AND MfTllpDOLOGICAI, ISSUES 




NMloulA 



In the mid 1980s, LBL researchers began investigating 
electricity use and energy-saving opportunities for comput- 
ers and office equipment. At about 30 TWh, equivalent to 
the power produced by twenty-four 250-megawatt power 
plants, office equipment today represents the fastest-growing 
electricity load in commercial buildings. The savings 
potential is 25-50%, much of which is achievable at little or 
no cost by switching idle equipment to a "sleep" mode. LBL 
studies, in collaboration with electric utilities, EPRI, interna- 
tional groups, and industry provided the technical basis for 
EPA's successful "Energy Star" labeling program for office 
equipment. 

LBL has authored two handbooks to help gas and 
electric utilities incorporate energy efficiency and 
other least-cost strategies into the traditional planning 
process. The handbooks were prepared at the request 
of the National Association of Regulatory Utility 
Officials (NARUC). 

25 



462 



From the Lab to the Marketplace 




Estimated geometric mean radon concentration by 
county for Minnesota. Darker shades indicate higher 
indoor radon levels. Homes in unshaded counties have 
estimated concentrations below 2.5 pCi/L (picocuries 
per liter): darkest counties are greater than 5.5 pCi/L. 



Enhancing Indoor Air Quality 

Research on the indoor environment can help 
reduce the cost of health problems related to poor 
indoor air quality. An improved indoor office 
environment can increase worker productivity as 
well. If such measures avert even one or two 
absentee days per person, the savings can equal 
the total cost of all building energy used by that 
employee for an entire year. 

People are indoors about 90% of the time, and 
indoor air pollutant concentrations often substan- 
tially exceed outdoor levels — creating a stagger- 
ing healthcare cost of about $1 billion annually. 
Although exposure to air pollutants is dominated 
by indoor exposure, almost all research and 
regulatory attention is on outdoor air quality. 
Indoor air pollutants are responsible for premature 
deaths in 10,000 lung cancer patients annually 
(caused by radon), 1,500 deaths due to accidental 
carbon monoxide poisoning, and 10,000 related 
medical visits. Each year exposure of young 
children to environmental tobacco smoke causes 
an estimated 150,000 to 300,000 lower respiratory 
tract infections, such as bronchitis and pneumo- 
nia. Asthma — with its $6.2 billion annual U.S. 
healthcare cost — is exacerbated by poor indoor air 
quality. The indoor environment also affects the 
rates of transmission of important infectious 
diseases such as influenza, tuberculosis, and the 
common cold. More than 20 million cases of 
influenza occur annually in the U.S. 



Unless properly conceived and implemented, some energy-saving measures can create indoor air quality prob- 
lems. Mitigating these problems can waste energy — excess ventilation without heat recovery, for example. LBL 
recognized that both energy efficiency and the quality of the indoor environment must be optimized, and in the 
1970s, LBL established the Indoor Environment Program. With one of the world's premier research groups on the 
environmental effects of indoor radon, this program has provided basic insights into how radon gas from the soil 
enters homes. (After cigarettes, radon is the second largest cause of lung cancer.) LBL researchers use geographic 
information systems to pinpoint areas of the country with the highest radon levels. These results are helping to 
craft national policy recommendations for more effectively and efficiently identifying regions where houses with 
elevated concentrations can be found, and once found, to utilize energy-efficient remediation techniques. 

The well-known but poorly understood "sick building syndrome," which may affect as much as 20% of all new 
office buildings, has also been studied at the Laboratory. Among the conclusions of our research: occupants in 
structures with air conditioning suffer a greater number of building-related health symptoms than occupants in 
structures with natural ventilation. 

The productivity of the U.S. work force increasingly depends on fast and dependable electronic communication 
and equipment. Electronic equipment failures can impede work performance and engender costly repairs. There is 
substantial evidence that the deposition of aerosols on circuit boards (leading to electronic short circuits) and the 
action of corrosive gases on electronic circuits and electrical contacts is a major cause of such failures. 



26 



463 



Lawrence Berkeley Laboratory 

As an example of the economic significance of these failures, consider the telephone industry. The annual cost of 
circuit-board failures in the 300.000 telephone switching offices of the U.S. is approximately $1 billion, and about 
20% ($200 million) of these failures can be traced to indoor air pollution. Many of these failures are attributed to 
indoor environmental factors, although typical indoor environmental conditions are maintained in the telephone 
switching offices. Possible methods for reducing failures include improved filtration, better temperature and 
humidity control, and automatic control of ventilation based on outdoor particle concentrations. 

In addition to illuminating the basic processes influencing indoor air quality, LBL's program stimulates and 
accelerates technologies and strategies for measuring and controlling indoor air pollution in energy-efficient ways. 
These technologies include low-emission building materials and appliances, heat-recovery ventilation systems, 
blower-door technology (for testing air leakage in buildings), and energy-efficient radon control technologies. An 
innovative "airvest" system promises to significantly reduce spraybooth worker exposure to pollutants while 
cutting ventilation energy costs in half. Researchers have also developed passive samplers for indoor air quality 
(for example, the formaldehyde-based air samplers now sold by Air Quality Research in North Carolina). 




The full-size mannequin in these photographs simulates a worker in a spray 
booth facing the exhaust filters. In experiments designed by an LBL researcher, 
smoke was released by a prototype "Airvest" in front of the mannequin to 
simulate the spraying of paint in the booth. 



27 






464 



From the Lab to the Marketplace 



Research at LBL has made substantial contributions to twelve nationally used ASHRAE and ASTM standards 
pertaining to ventilation and air quality for the built environment. The program's leader has recently been appoint- 
ed Chair of the U.S. Environmental Protection Agency's Science Advisory Board's Indoor Air Quality/Total 
Human Exposure Committee. 

Government Partnerships 

Buildings research at LBL has helped 
several Administrations improve efficien- 
cy in federal buildings as a means of 
saving taxpayer dollars and of providing 
national leadership by example. During 
the 1980s, LBL researchers helped the 
Department of Housing and Urban 
Development to track energy use and 
identify ways of reducing the $1 billion 
per year energy bill in public housing. 
Their research also led to new legislation 
that removes barriers to energy efficiency 
in public housing and establishes new 
business opportunities for private energy 
service companies. In our most recent 
effort, we were members of an elite team 
charged with carrying out the "Greening 
of the White House" project, unveiled by 
President Clinton on Earth Day 1994. 
LBL researchers have provided technical 
support to DOE's own In-House Energy 
Management Program, which has achieved annual savings of approximately $155 million in DOE energy bills. 
The Laboratory supports the Federal Energy Management Program (FEMP) and will play a key role in carrying 
out a high-profile energy management project at the San Francisco Presidio (a former military base, transferred to 
the National Park Service in 1994) on behalf of FEMP. LBL researchers are working with the Federal Aviation 
Administration to identify advanced energy-efficient technologies and modeling tools that can upgrade the work 
environment in the nation's air traffic control towers and facilities, improving comfort, visibility, and equipment 
reliability, and thereby improving air travel safety. 




The American Institute Of Airhiteets 

3D Computer Modeling, rendering and graphics by France Israel and 

Mieczyslaw Boryslawski of View By View. Inc.. San Francisco CA. © Copyright 1994 



28 



465 



Lawrence Berkeley Laboratory 




At an Earth Day 1994 celebration. President Clinton extols the benefits of a compact fluorescent 
lamp, while a CFL production employee looks on. Also in attendance were Vice President Al 
Gore and eight cabinet members. Photo by Marvin Jones, courtesy Osram Sylvania, Inc, 



29 




466 



From the Lab to the Marketplace 

Providing a Helping Hand to States 

LBL has worked with individual states for two decades. For example, the Wash- 
ington State Energy Office asked LBL to provide technical assistance on their 
residential construction projects and proposals for creating a new energy efficiency 
code. LBL also conducted projects with the New York State Energy Office and the 
New York State Energy Research and Development Administration involving 
ventilation and infiltration in low-income multifamily buildings. Over the past few 
years, LBL has provided technical evaluation for the "Energy Edge" project, in 
which the Bonneville Power Administration funded the Washington State Energy 

Office and the Oregon Department of Energy to build and ev aluate state-of-the-art commercial buildings 

throughout the Pacific Northwest. 

From its inception, the energy-efficient buildings program at LBL has been particularly attentive to California 
energy issues. In the early 1970s, Laboratory scientists scrutinized projections that electricity demand in 
California would grow at six percent per year — a rate that would require dozens of new electric power plants 
by 1985. We maintained that increased energy efficiency could cost-effectively reduce that growth rate to only 
one or two percent, generating vast economic savings for the state. Many disagreed with this position, but it 
proved true. Thanks in part to energy efficiency policies, programs, and standards, California has built no large 
power plants in a decade and none are currently planned. 

LBL researchers have provided technical support to the California Energy Commission almost since its 
inception, assisting the state's energy-demand forecasting process, providing tools for developing building 
standards, evaluating spending plans for PVEA (oil overcharge) funds, and developing methods for implement- 
ing home energy rating systems. The Laboratory has collaborated on a broad range of topics with each of 
California's major electric and gas utilities (Los Angeles Department of Water and Power, Pacific Gas and 
Electric, Sacramento Municipal Utility District, San Diego Gas and Electric, and Southern California Edison). 

Marking an important watershed in utility regulation, the Laboratory played a supporting role in the so-called 
"California Collaborative," in which all the state's utilities (and their regulators) agreed to reform utility profit 
rules to provide new economic incentives to pursue energy efficiency. More recently, LBL has been part of the 
steering team of Pacific Gas and Electric's $20-million Advanced Customer Technology Test (ACT^). This 
project is the nation's largest high-profile demonstration of the technical and economic potential of energy- 
efficient technologies and practices in commercial and residential buildings. 

LBL is also the home of the California Institute for Energy Efficiency (CIEE), an innovative partnership of 
California's energy utilities, the California Energy Commission, the California Public Utility Commission, the 
University of California, and DOE. Each year CIEE funds and coordinates a substantial program of research at 
California universities and university-affiliated DOE laboratories, focusing on technologies crucial to the state 
and the region. The Institute emphasizes applications that simultaneously improve end-use efficiency and 
lower utility operating costs. 



30 




467 



Lawrence Berkeley Laboratory 

International Activities 

Many of the DOE efficiency-related activities have spun off beneficial 
ideas and information to other countries. Several countries have emulated 
LBL methodologies for developing appliance and building standards. 
Low-e windows and electronic ballasts are also finding overseas markets. 
The DOE-2 computer program is used in 42 other countries and has been 
used to develop building energy efficiency standards in, among others, 
the ASEAN nations (Singapore, Thailand, Malaysia, Indonesia, and 
Philippines), Canada, Brazil, Kuwait, Saudi Arabia, Hong Kong, Australia, and Switzerland. 

LBL's own activities in the international arena include energy demand and policy analysis for industrialized 
and developing countries and formerly planned economies. Two special projects focus on Russia and China, 
which include helping Russian window companies identify efficiency-enhancing technologies within their 
defense industry, establishing an Energy Efficiency Center in Beijing, and assisting in the formation of joint 
ventures between U.S. and Chinese industries. DOE laboratories have provided general training and technolo- 
gy transfer for dozens of utilities and energy planners from outside the U.S. 

LBL's international group helps scientists and energy policy makers from 16 countries in Eastern Europe and 
the former Soviet Union, Asia, Africa, and Latin America assess their opportunities for reducing emissions of 
greenhouse gases. With this goal, the Laboratory has established networks of experts in energy and forestry 
for die U.S. Environmental Protection Agency, the federal entity responsible for creating the developing 
country emissions scenarios used by the prestigious Intergovernmental Panel on Climate Change. LBL is 
participating in DOE's Country Studies Program. This initiative grew out of the commitment made by the U.S. 
at the 1992 Earth Summit to help countries comply with the Framework Convention on Climate Change. The 
program is designed to help developing and transitional countries to ( 1 ) develop inventories of their anthropo- 
genic emissions of greenhouse gases, (2) assess their vulnerabilities to climate change, (3) assess their ability 
to mitigate greenhouse gas emissions, and (4) formulate and evaluate response strategies for mitigating and 
adapting to climate change. LBL was selected to provide technical support for the third task — mitigation 
assistance — because of its substantial knowledge of the technologies, policies, and analytical methods for 
reducing greenhouse-gas emissions. In support of this activity, LBL brought together a technical support team 
of 30 researchers from academic, private, and government institutions experienced in global climate change 
issues. In addition to LBL, the team includes five U.S. national laboratories: Oak Ridge National Laboratory, 
Pacific Northwest Laboratory, Brookhaven National Laboratory, Argonne National Laboratory, and the 
National Renewable Energy Laboratory. This group's first project was a two-week, intensive, hands-on 
workshop attended by 60 representatives of the target countries. 

In addition, we have established an informal program through which energy researchers from developing 
countries work at LBL on projects of mutual interest. Over the past ten years, more than 100 researchers have 
spent more than 50 person-years at the Laboratory on such projects. 



31 



468 



From the Lab to the Marketplace 

FROM THE LAB TO IMPLEMENTATION 
The Center for Building Science Applications Team 

The Center for Building Science's Applications Team (the "A-Team") marshals LBL's unique capabilities and 
networks to conduct field projects whose purpose is to deploy advanced energy-efficiency and indoor environmen- 
tal quality concepts in both the U.S. and overseas buildings sectors. The aims of the Team are to: 

• Demonstrate proven and emerging building technologies in order to accelerate their adoption by consum- 
ers and building professionals. 

• Elevate professional standards of practice. 

• Transfer new energy management methods and tools to the private sector. 

• Provide feedback to the federal energy R&D planning process. 

The A-Team's philosophy is to apply an integrated approach to retrofitting existing buildings and designing new 
ones. This approach encompasses the various stages of a building life cycle as seen from the perspective of 
facilities management, addressing the areas of energy, illumination, comfort, and the indoor environment. 

The A-Team assembles project teams from the 250-person staff in the Center's three research programs, LBL's In- 
House Energy Management Program (IHEM), other research organizations and laboratories, and private firms. 
The IHEM program managed a study and retrofit budget of $18 million through 1994 for LBL's own facilities, 
including project planning, financial analysis, engineering, procurement, construction management, commission- 
ing, monitoring, and evaluation. One of IHEM's notable achievements was completion of DOE's first comprehen- 
sive performance contracting agreement with a private energy services company for retrofit of a laboratory 
building. 

The Facilities IManagement Building Lifecycle 



Re-evaluate 
cpostraints/opportunities 

Jdtntify 
Changes of use, constraiMts/opportunitics Partnering 

occupan^; equipment, ' " (utilities, trade allies, 

renovation researchers) 




Desi^audit/ 
instrumentation 



Demonstration/ 
pilotproject 



y 



32 



469 



Lawrence Berkeley Laboratory 



To accomplish its goals, the A-Team also makes use of its relationships with other professionals in energy- 
efficiency implementation from R&D centers across the country — government agencies, electric and gas utilities, 
state energy offices, manufacturers of energy-efficient technologies, and technical committees that define energy- 
related standards and guidelines. 

Bridging R&D in Practice 

The A-Team forges a new link between existing DOE building R&D activities and deployment initiatives. A-Team 
activities will benefit R&D program planners by providing improved feedback and recommendations for eliminat- 
ing inefficiencies and missed opportunities during the implementation of new technologies and methods in the 
field. More specifically, the A-Team 

• Develops, implements, and evaluates proven, cost-effective energy-efficiency measures in existing build- 
ings. 

• Assembles confidence-building demonstrations of emerging technologies and energy management prac- 
tices not commonly used by building professionals. 

• Develops and disseminates state-of-the-art field guidelines and protocols, for example, for measurement 
and verification. 

• Demonstrates the potential for achieving energy savings while maintaining or improving indoor environ- 
mental factors influencing human productivity and well-being such as indoor air quality, lighting quality, 
and thermal comfort. 

• Transfers design and application methods and tools to private-sector practitioners such as architecture and 
engineering firms that collaborate with the A-team. 

• Supports energy savings performance contracting on a national level. 

In the Field 

The A-Team benefits private-sector building profes- 
sionals by raising market awareness of the value of 
energy efficiency, for example, through high-profile 
demonstrations and independent verifications of 
performance and cost-effectiveness and by partnering 
with private-sector firms on specific projects. FeCidback 
from these efforts is also valuable in product develop- 
ment and marketing. 

A-Team services are available to federal agencies, 
utilities, states, regional or national efficiency program 
designers, and large public, private, or institutional 
building owners. To maximize their impact, the A- 
Team chooses projects selectively, emphasizing high- 
visibility, replicability, and the specialized services and 
resources possessed by LBL and project collaborators. 
Examples include creating a master plan for energy 
efficiency retrofits at the Presidio of San Francisco in 
cooperation with DOE and the National Park Service, 
conducting super-audits of the Federal Aviation 
Administration's air traffic control towers and other 
facilities, and investigating ways that California 
industries can reduce energy costs in their laboratory 
facilities. 




San Francisco 's Presidio viewed from 
the top of the Golden Gate Bridge. 



33 



470 



From the Lab to the Marketplace 

AWARDS AND CITATIONS 

National Fenestration Rating Council Technical Achievement Award - 1994 

Dariush Arasieh 

In recognition of exemplary contributions to the NFRC mission through outstanding scientific and technical 

achievement and leadership in the development of NfTiC technical procedures. 

Federal Laboratory Consortium Award for Excellence in Technology Transfer - 1994 

Michael Siminovitch 

Thermally efficient compact fluorescent downlights. 

U.S. Department of Energy, Sadi Camot Award - 1993 

Arthur Rosenfeld 

For lifetime achievement in the field of energy conservation and renewable energy. 

U.S. Federal Energy Management Program Sustained Exemplary Service Award - 1993 
LBL In-House Energy Management Program 

National Research Council's Transportation Research Board Fred Burggraf Award - 1993 

Jonathan Koomey, Deborah Schechter, Deborah Gordon 

Excellence in transportation research by researchers 35 years of age or younger. For the article entitled "Cost 

Effectiveness of Fuel Economy Improvements in 1992 Honda Civic Hatchbacks." 

Federal Laboratory Consortium Special Award for Excellence in Technology Transfer - 1993 

Stephen Selkowitz and Dariush Arasteh 
Superwindows. 

Popular Science Magazine 's Best New Product Award - 1991 

Dariush Arasteh, Stephen Selkowitz, Brent Griffith 

Grand award in home technology category for development of gas-filled insulating panels. 

PEW Charitable Trust Award - 1991 

Ashok Gadgil 

Award of $150,000 over three years, for work related to promoting energy efficiency in developing countries. 

Energy Efficient Buildings Association Technical Award - 1991 

Stephen Selkowitz 

Recognizing exceptional technical contributions to energy-efficient buildings design and practice. 

Federal Laboratory Consortium Special Award for Excellence in Technology Transfer - 1989 

Fred Winkelmann. Ender Erdem, Kathy Ellington, Bruce Birdsall, Fred Buhl 

For developing, documentmg, disseminating, and supporting the DOE-2 program for simulating building energy 



34 



471 



Lawrence Berkeley Laboratory 

Citation from Progressive Architecture Magazine - 1989 

Stephen Selkowilz. Dariush Arasteh. Michael Wilde. Bob Sullivan, Francis Ruhenstein 

For development of a Skylight Design Manual and accompanying software to help architects and engineers use 

skylights in a more energy-efficient manner. 

American Physical Society's Leo Szilard Award for Physics in the Public Interest • 1989 

Anthony Nero 

For work on indoor radon, nuclear proliferation, and reactor safety. 

A SHRAE Willis H. Carrier Award -1988 

Joseph Elo 

For best presentation by an author under the age of 32 describing work using DOE-2 to study economic impacts 
of then-pending revisions to the ASHRAE standards for ventilation. 

ASHRAE Crosby Field Award ■ 1988 

Joseph Elo 

For the best technical paper describing work using DOE-2 to study economic impacts of then-pending revisions to 
the ASHRAE standards for fresh air ventilation. 

Federal Laboratory Consortium Special Award for Excellence in Technology Transfer - 1988 

Stephen Selkowitz and co-workers 

For developing and transferring to industry the WINDOW thermal analysis computer program. 

U.S. Department of Energy, Sadi Carnot Award - 1988 

Sam Berman 

For contributions to the development of high-frequency solid-state ballasts and advances in energy-efficient 

windows. 

American Physical Society 's Leo Szilard Award for Physics in the Public Interest - 1986 

Arthur Rosenfeld 

For advancing energy-efficiency technologies. 

Citation from Progressive Architecture Magazine - 198S 

Stephen Selkowitz and co-workers 

For developing the sky simulator that enables architects and engineers to realistically test daylighting designs. 

Citation from Progressive Architecture Magazine - 1984 

Ron Ritschard and Joe Huang 

For developing energy calculating slide rules. 

ASHRAE Willis H. Carrier Award - 1979 

Stephen Selkowitz 

For best presentation by an author under the age of 32 of a paper describing advanced window system perfor- 



35 



472 



From the Lab to the Marketplace 

USER FACILITIES AND RESEARCH LABORATORIES 

LBL's energy-efficient buildings programs operate several user facilities and research laboratories, some of which 
are available by arrangement to building industry professionals, architects, manufacturers, the academic commu- 
nity, and other national laboratories. 




MoWiTT 




IR Thermography Lab 

The Energy-Efficient Fixtures Laboratory is dedicated to the development of optically and thermally efficient long-tube 
and compact fluorescent fixture systems. Testing devices characterize the thermal and photometric performance of fixtures 
and advanced compact fluorescent prototypes, and include temperature-controlled photometric integrating chambers and 
experimental plenum systems for studying the performance of recessed downlights using compact fluorescent lamps. 
The Integrating Sphere is used for relative photometry of light sources. The total lumen output of any source can be mea- 
sured under standard thermal and electrical conditions. The sphere is used extensively by the LBL's Lighting Systems Group 
to measure the efficacy and lumen output of a broad range of light sources. 

The Infrared Thermographic Lab includes a high-resolution, infrared imaging camera, a computer processor/printer, and a 
cold/hot chamber to hold samples for testing. The camera system is portable and can measure surface temperatures that can 
be correlated to various heat loss or gain parameters. The IR camera is useful for assessing heat loss from existing buildings 
in the field as well as from building components and appliances in the laboratory. 

The Mobile Window Thermal Test Facility (MoWiTT) contains two highly instrumented, side-by-side calorimetric test 
chambers that are used to lest the thermal performance of window and wall elements under actual outdoor conditions. The 
facility may be rotated to face in any direction and is currently located in Reno, Nevada, which experiences both summer and 
winter extreme climate conditions. The facility can directly measure solar heat gain and can determine window and shading 
system properties for a wide variety of solar control options. With 200 data channels collecting data every few seconds. 
MoWiTT can directly measure cooling load shapes on peak summer days with excellent time resolution. The facility can also 
be used to validate computer models and to compare various technologies in real time. Industry has used MoWiTT results to 
justify new product development. 

The Radon Test House, located in Richmond, California, is used for studies of the transport and behavior of radon progeny 
and indoor aerosols. 

The Environmental Chamber can be conditioned to maintain desired temperature, humidity levels, and ventilation rates. 
The facility is used by LBL researchers and collaborators for a variety of indoor air pollution studies such as assessing 
emissions from consumer products and building materials. 



36 



473 



Lawrence Berkeley Laboratory 




Thin Film Deposition 
and Characterization 




Solar Heat 
Gain Scanner 




Sky Simulator 



The Sky Simulator is a 24-foot-diameter hemispherical faciUty used to test dayhghting performance in scale-model build- 
ings under controlled and reproducible conditions. Computerized control of light sources within the hemisphere can create 
luminous distributions typical of clear, uniform, or overcast skies representative of any desired location, orientation, climate, 
and season on Earth. It can also be used as a sun simulator to test shading strategies in scale models up to 1.5 square meters 
in size. Light levels within the models are measured by 60 photosensors, and the measurements are used to predict daylight 
illuminance conditions in full-sized buildings. The facility is well-suited to test the effect of shading from overhangs, fins, 
awnings, shade systems, vegetation, and adjacent obstructions. 

The Solar Heat Gain Scanner is used to characterize the complex optical properties of shading systems such as Venetian 
blinds. The system measures transmitted and reflected energy and light at all incidence and outgoing angles. The only facility 
of its kind in the U.S., it has become the basis for a new procedure to predict solar heat gain through shading systems. This 
work is cost-shared by DOE and the American Society of Heating, Refrigerating and Air Conditioning Engineers ( ASHRAE). 
The Thin-Film Materials Laboratory houses a wide range of apparatus to deposit and analyze thin-film, spectrally selective 
coatings for energy control purposes. The laboratory also includes spectrophotometers to measure solar, near IR, and far IR 
properties. 

The Geographic Information System (GIS)/Image Processing Laboratory has image processing software operating on a 
SUN SPARC workstation that runs image processing and vector-based and raster-based GIS software. A PC-based GIS 
system is also available 

The Hypermedia Laboratory is used to develop design tools of the future that will not only have faster and better modeling 
algorithms but will also have vastly improved user interfaces incorporating new multimedia software and hardware capabili- 
ties. The ability to integrate data and text with advanced graphics, animation, sound, and video will enhance the value and 
usefulness of the next generation of design and analysis tools. The hypermedia computer lab has the equipment necessary for 
experimenting with these emerging technologies and prototyping and testing promising solutions. The laboratory has been 
used to develop several prototypes including an interactive computerized kiosk with videodisk for Southern California Edison. 

37 



474 



From the Lab to the Marketplace 

KEY PUBLICATIONS 

Generat 

"EtTicient Use of Energy: Pari I - A Physics Perspeciive." W. Carnahan, K.W. Ford. A. Prospereiti. G. Rochlin. A.H. Rosenfeld. M.H. Ross. J. E. Roihberg. 
G.M. Seide. R,H. Socolow, ,4mcr/r(;n Institute of Physics Conference Proceedings, Vol. 25 ( !975). 

Supplying Energy Through Greater Efficiency. A, Meier, J. Wright, and AH. Rosenfeld. Universiiy of California Press ( 1983). 

"The Role of Federal Research and Developmeni in Advancing Energy Efficiency: A S50 Billion Contribution to the U.S. Economy," H. Celler. J. Harris. M. 
Levine. A.H. Rosenfeld. Annual Revwiv of Energy 12. pp. 357-395 ( 1987). 

"Energy for Buildings and Homes,'" R. Bevington. A.H. Rosenfeld. Scientific American 263 (3). pp. 77-86 (September 1990). 

Getting American Back on the Energy-Efficiency Track: No-Rvgrets Policies for Slowing Climaie Change. H.S. Geiler, E. Hirst. E. Mills. A.H. Rosenfeld. M. 
Ross. American Council for an Energy-Efficient Economy. Washington. DC ( 1991 ). 

"Realistic Mitigation Options for Global Warming." E.S. Rubin. R.N. Cooper, R.A. Frosch. T.H. Lee, G. Marland. A.H. Rosenfeld. D.D. Stine. Science 2S7. 
pp. 148-49. 261-266 (July 1992). 

"The New Downstream: Increased Efficiency and Renewabtes As Competitive Energy Resources," E. Mills, in The Future of Energy Gases, U.S. Geologic 
Survey (D. Howell, ed.). U.S. Geological Survey. Professional Paper 1570. U.S. Government Priming Office, pp, 849-867(1993). 

"Energy Efficiency. Market Failures, and Government Policy." M.D. Levine. E. Hirst. J.C. Koomey. J.E. McMahon. A.H. Sanstad. Lawrence Berkeley 
Laboratory Repon No. 35376 and Oak Ridge National Laboratory Repon No. 38^ ( 1994). 

Center for Building Science News. E. Mills (ed.). published quarierly. LBL PUB-731. available from the Center for Building Science. Lawrence Berkeley 
Laboratory, Berkeley. California. 

Lighting 

"Energy Efficiency and Performance of Solid-State Ballasts." R. Verderber, S. Selkowitz, S. Berman. Lighting Design <4 Application, pp. 23-28 (April 1979). 

"Energy Savings with Solid-Stale Ballasts in a Veterans Administration Medical Center." R.R. Verderber. O.C. Morse. A. A. Arthur. F. Rubinstein. IEEE 
Transactions on Industry Applications IA-18 (6), pp. 653-65 (November/December 1982). 

"Thermal Perlbrmance Characteristics of Compact Fluorescent Fixtures." M.J. Siminovitch, FM, Rubinstein. RE. Whiieman. Proceedings of the lEEE-IAS 
Annual Conference. Seattle. WA (October 1990), 

"Energy Efficiency Consequences of Scotopic Sensitivity," S.M. Berman. Journal of the Illuminating Engineering Society (Winter 1992). 

Advanced Lighting Ciadelines, C. Ely, T.M. Tolen. J.R. Benya, F. Rubinstein, and R. Verderbei. DOE/EE-0008 (1993). 

Windows 

"A Discussion of Heat Mirror Film: Performance. Production Processes and Cost Estimates." B. Levin. P. Schumacher, Lawrence Berkeley Laboratory 
Report No. 7812 (October 1977). 

"Thermal Performance of Insulating Window Systems," S. Selkowitz, ASHRAE Transactions 85 (2), (June 1979). 

"Window Performance and Building Energy Use: Some Technical Options for Increasing Energy Efficiency." S. Selkowitz, in Energy Sources: Conser\-ation 
and Renewables. AlP Conference Proceedings No. 135, Washington. DC (April 1985). 

"Savings from Energy Efficient Windows; Current and Future Savings from New Fenestration Technologies in the Residential Market," K. Frost. D. Arasteh. 
J. Etc, Lawrence Berkeley Laboratory Report No. 33956 (April 1993). 

"Determining Thermal Performance of Window Systems." D, Arasteh. F. Beck. W.C. duPont. R.C Mathis, ASHRAE Journal .36 (8). pp. 16-20 (August 
1994). 

"Advances in Window Technologies: 1973-1993." D. Arasteh, in Advances in Solar Energy. Vol 9. The American Solar Energy Society. Boulder. CO 
(September 1994). 

Appliance and Building Standards 

"U.S. Residential Appliance Energy Efficiency: Present Status and Future Policy Directions." 1 Turiel. D, Berman. P Chan. T Chan, J. Ktiomey. B. Lebot, 
M.D. Levine, J.E. McMahon. G. Rosenquist. S. Stoft. Proceedings of the 1990 Summer Study on Energy Efficiency in Buildings. American Council lor an 
Energy-Efficient Economy. Washington. DC. pp. 1.213- 1. 234 (August 1990). 

"Patterns of Energy Use in Buildings," in Solar Heating Technolttgies: Fundamentals and Applications, A.H. Rosenfeld. M.D. Levine. E. Mills. B. Hunn; B. 
Hunn (ed.). MIT Press ( 1994). 

Design Tools and Other Software 

"DOE- 1: A New Stale-of-the-Art Computer Program for the Energy Utilization Analysis of Buildings." G.S. Leighlon and H.D. Ross; A.H. Rosenfeld, F.C. 
Winkelmann. M. Lokmanhekim. LBL Report No. 7836 and Proceedings of the tniernaiional Sympt>sium on the Use of Computers for Environmental 
Engineering Related to Buildings. Banff. Canada (May 1978). (The current version is DOE 2. IE.) 



38 



475 



Lawrence Berkeley Laboratory 



CIRA — a PC-based lool for residentiaJ retrofit analysis, now marketed as EEDO by a private firm (Bun Hill Kosar Riltclmann and Associates. Butler, PA). 

PEAR — a simplified PC-based tool, based on extensive DOE-2 simulations, readily usable by builders, architects, or lenders to provide reliable estimates of 
building energy consumption. See "Program for Energy Analysis of Residences: Pear 2.1 User's Manual," LBLPub-6 10 (March 1987). 

RADIANCE — a computer generated graphic simulation of lighting in indoor environments that is photometrically accurate and ultra-realistic. See "The 
Radiance Lighting Simulation and Rendering System," G. Ward. Computer Graphics. Association for Computing Machinery (July 1994). 

SUPERUTE — a mainframe and microcomputer program that calculates daylight illuminance distributions for complex room and light source geometries 
with tested accuracy. Sec "The DOE-2 and SUPERLITE Daylighting Programs." S. Selkowitz. JJ. Kim, M. Navvab. F. Winkelmann, Proceedings of the 7th 
National Passive Solar Conference. International Solar Energy Society (June 1982). 

Utility Accounting Program for Public Housing Authorities — a spread sheet -based microcomputer program for tracking utility consumption and costs, 
designed especially for public housing authorities. See "The Utility Accounting Package; Version 1.0." KM. Grecly, E. Mills. R L. Ritschard. S. Bartlett, 
prepared for the Innovative Technology and Special Projects Division, U.S. Department of Housing and Urban Development, LBL Pub-638 ( 1989). 

WINDOW — a thermal analysis computer program that is the de facto standard used by U.S. window manufacturers to characterize product pertonmance. See 
"W1NIX)W 4.0: Documentation of Calculation Procedures," E.U. Finlayson, D. K. Arasteh, C. Huizenga. M,D. Rubin. M.S. Reilly. LBL Report No. 33943 
(July 1993). 

COMIS (Conjunction ofMultizone Infiltration Specialists) — An advanced computer model thai simulates the air flow distribution in multizone buildings. 
This program was developed in an international effort by researchers from nine countries. See "The COMIS Infiltration Model — A Tool for Multizone 
Applications." HA. Feustel, M.H. Sherman, Proceedings of the XXI Symposium of the International Centre for Heat and Mass Transfer, pp. 771-779. 
Dubrovnik, Yugoslavia. LBL Report No. 26550 ( 1 989). 

Intemadonai 

■Efficient Energy Use and Well-Bcing: The Swedish Example." L. Schipperand A. Lichlcnbeig, Science, 194. pp. lOOl-IOI 3 ( 1976). 

Proceedings of the ASEAN Conference on Energy Consen'ation in Buildings. K.H. Olson. W.W. Ching (eds.). U.S. Agency for International Development 

(1984). 

Energy E^tciency and Hu/nan Activity: Past Trends. Future Prospects. L. Schipperand S. Meyers, Cambridge University Press ( 1992). 

China Data Book, J.E. Sinton. M.D. Levine. F. Liu. W.B. Davis. J. Shenping. Z. Xing. J. Kejun, Z. Dadi (eds). prepared by Lawrence Beiiceley Laboratory 
and Energy Research Institute. State Planning Commission of China, LBL Report No. 32822(1992). 

UtUity Planning 

Least-Cost Utility Planning: A Handbook for Public Utility Commissioners. F Krause. J. Eto. prepared for the NationAssociation of Regulatory Utility 
Commissioners. Washington DC (December 1988). 

Primer on Gas Integrated Resource Planning, C- Goldman. G.A. Comnes, J. Busch. S. Wiel. prepared for the National Association of Regulatory Utility 
Commissioners. Washington DC (December 1993). 

Indoor Environment 

"Infiltration-Pressurization Correlation: Simplified Physical Modeling." M.H. Sherman. D.T Gnms,ru6, ASHRAE Transactions S6 (2). pp. 778-807 (1980). 

"Characterizing the Source of Radon Indoors," A.V. Nero and W.W. Nazaroff. Radiation Protection Dosimetry 7. pp. 1 2-39 ( 1984). 

"Distribution of Airborne Radon-222 Concentrations in U.S. Homes," A.V. Nero, M.B. Schwehr. W.W. Nazaroff, K.L. Revzan. Science 234, pp. 992-997 

(1986) 

"Residential Duct System Leakage: Magnitude. Impacts, and Potential for Reduction," M.P Modera, ASHRAE Transactions, 95 (2). pp. 561-569 ( 1989). 

"Phase I of the California Healthy Building Study." WJ.Fisk.M J. Mendeil. J.M. Dai&ey. D. Faulkner, AT. Hodgson, M. Nematollahi, J. M. Macher. //u/oor 

/\(r3. pp. 246-254(1993). 

Global Climaie 

Policy Implications of Greenhouse Warming: Mitigation. Adaptation, and the Science Base. National Academy of Sciences. National Academy Press (AH. 
Rosenfeld served as member of Mitigation Panel) (1 992). 

Federal Energy Efficiency 

"The U.S. Dcpanmeni of Energy's In-House Energy Management Program: Meeting the Challenges of Federal Energy Management." S. Greenberg. E. 
Mills, D. Lockhart. D. Sartor. W. Lintner. Proceedings of the 1994 AC EEE Summer Study on Energy Efficiency in Buildings (August 1994). 

"Deterrents to Energy Conservation in Public Housing." E. Mills. R.L. R\\sx\iax^,C.\.QQ\6maj\, Energy Systems and Policy W (3). pp. 169-183 (1987). 



39 



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From the Lab to the Marketplace 



Industry Partners 

AB Volvo 

ADM Associates 

Aerovirotiment 

Air Quality Research 

American Society ol Heating, 

Refrigerating, and Air- 

Conditiuning Engineers 
Andersen Corporation 
Apple Computer 
Asahi Glass 
Association of Home Appliance 

Manufacturers 
Bellcorp 
Cardinal IG 
Chevron 
Conoco 

Consolidated Edison 
Cooper Lighting 
Delray Lighting 
Edison Price 

Electric Power Research Institute 
ERG International 
Exxon USA 
Finite Technologies 
Fusion Lighting 
Gable Dodd Associates 
Gas Research Institute 
General Electric 
Honeywell 
Indy Lighting 
ITEM Systems 
Libbey Owens Ford 
Lightolier 
Lithonia 
Lumatech 
Microflect 
Mitor Industries 

National Fenestration Rating Council 
Northern States Power 
Osram 

Owens-Coming Fiberglas 
Philips Lighting 
Pacific Gas and Electric 
Partnership for Resource 

Conservation 
Peerless Lighting 
Pella Windows 
Prescolite 
Reggiani 
Rolscreen 

San Diego Gas and Electric 
Shell Oil 

Southern California Edison 
Southern Company Services 
Southwall Technologies 
Staff Lighting 
Zumtobel 
3M Corporation 



Some of Our Partners... 



The Lawrence Berkeley Laboratory has repeatedly been on the forefront of 
demonstrating that energy efficiency can not only compete effectively with energy 
production, but can offer significant advantages in terms of environmental and economic 
impacts and competitiveness. . . LBL has earned the support and trust of the entire energy 
efficiency industry and deserves the opportunity to continue this work in the critically 
important role of getting our national energy strategy working. 

Peter F. Gerhardinger 
Manager-New Products Teclmology, Libbey Owens Ford Co. 



We have been working with LBL's Lighting Systems Group in an effort to adapt 
their technology for commercialization. . . We can now see a clear role for these 
technologies in our products. The implementation of this technology should greatly en- 
hance an already attractive market. . . As taxpayers we are pleased to see us getting so 
much bang for our buck. The LBL group will be responsible for a great deal of energy 
savings. They should please everyone but OPEC. 

Bruce Pelton 
Vice President, Lumatech Corporation 



With the information I recently received from LBL concerning the perfor- 
mance of compact fluorescent lamps with attached reflectors, we can now im- 
prove the quality of our product with minimum investment while at the same time pro- 
viding the end user with greater light output at even uct efficiency. . . LBL"s work not 
only benefits the original equipment manufacturer, providing insight on how to produce 
a more efficient product, but in the long term benefits the consumer and society with 
reduced emissions and reduced energy bills. Clearly the output of LBL benefits society, 
manufacturers and end users. 

Steve Johnson 
President, Mitor Industries Inc. 



Investment by the Department of Energy allowed Southwall Technologies, working 
closely with LBL, to introduce in 1981 the first insulating glass containing a heat 
reflecting, low emissivity coating. . . [The product] served as the catalyst in creating a 
high performance window industry. 

Southwall Technologies, Press Release 



We committed well over a year ago to early in-depth data gathering, analysis, coop- 
eration and communication with DOE and LBL, and we're very pleased with the 
results of that effort. 

Charles Samuels 

Association of Home Appliance Manufacturers, Government Relations Counsel 

U.S. Department of Energy Public Hearings on Appliance Standards 



Refrigerator manufacturers have been working closely with LBL for over a year now 
to evaluate design options and develop cost data for this appliance standards 
rulemaking. We very much appreciate the cooperation and professionalism that LBL has 
shown throughout this process. 

Terry Thiele 

Senior Counsel for Government Relations, GE Appliances 

U.S. Department of Energy Public Hearings on Appliance Standards 



40 



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Lawrence Berkeley Laboratory 



Lawrence Berkeley Laboratory is one of the founders of so- 
called end-use-based economic engineering analysis and utility least 
cost planning. These two revolutionary advancements in energy analysis and 
planning are considered key to creating a burgeoning, lucrative global market 
in super-efficient environmentally superior products and services. . . LBL is 
one of the most respected energy R&D laboratories in the world. . . which has 
catalyzed development of super-efficient technologies and building design soft- 
ware. 

Senator John Glenn 
Senator Herb Kohl 



The long-standing LBL-EPRI relationship has greatly improved the fore- 
casting abilities of the electric power industry. With the resulting end-use 
models and associated databases, utilities can more easily integrate the impacts 
of demand-side management programs, efficiency standards, and new technolo- 
gies into their long-term forecasts. This improves the quality of a variety of 
utility functions. 

Phil Hanser 

Manager, Demand-Side Management Program 

Electric Power Research Institute 

World-renowned Lawrence Berkeley Laboratory has performed 
critical work leading to the development of important new building tech- 
nologies like electronic ballasts for fluorescent lighting and low-emissivity win- 
dows. These two products alone have created important new global markets 
for U.S. companies and saved Americans millions of dollars. 

Ed Smeloff 
Director, Sacramento Municipal Utility District 



The Lawrence Berkeley Laboratory has been a major motivating force for 
energy efficiency in California for over 15 years. As early as 1978, the 
intellectual leadership of LBL staff highlighted that efficient appliances could 
pay for themselves by reducing consumer utility bills, and also eliminate the 
need for a large nuclear plant in Southern California. LBL pioneered the con- 
cept of "conservation supply curves" that has facilitated the economic compari- 
son of efficiency with conventional energy supplies, and resulted in the Califor- 
nia Energy Commission establishing conservation as the state's preferred source 
of new energy supply. They have also consistently shown the link between con- 
servation with environmental benefits, which has led to efficiency being the 
foundation of California's efforts to meet our environmental goals. . . LBL also 
has advised the legislature on regulatory and policy improvements that should 
be made to help California achieve its energy and environmental goals which 
resulted in the introduction of 20 new bills in the last legislative session. The 
Commission is implementing efficiency programs that can trace their roots to 
LBL's long-standing efforts toensure that advances in science also improved 
California's economy and enviroiunent. 

Charles R. Imbrecht 
Chairman, California Energy Commission 



Public Sector or 
Non-Governmental Partners 

Agency for International Development 

Alliance to Save Energy 

American Council for an Energy-Efficient 

Economy 
Audubon Society 
BoimeviUe Power Administration 
California Air Resources Board 
California Department of Health Services 
California Energy Commission 
California Instimie for Energy Efficiency 
Central European University 
Cigarette and Tobacco Surtax Fund of The State 

of California 
Danish Energy Agency 
Environmental Defense Fund 
European Association for the Conservation of 

Energy 
Federal Aviation Administration 
General Services Administration 
Green Buildings Council 
International Association for Energy-Efficient 

Lighting 
International Energy Agency 
Kuwait Insdmie of Scientific Research 
Los Angeles Department of 
Water and Power 

Mexican National Commission on Energy 
National Association of Regulatory Utility 

Commissioners 
National Heart, Lung and Blood Institute 
National Instimte of Environmental Health 

Science 
Namra] Resources Defense Council 
New York Slate Eneigy Research and 

Development Authority 
Organization for Economic Cooperation and 

Development 
Pew Charitable Trust 
Rockefeller Family and Associates 
Rocky Mountain Institute 
Russian Lighting Research Institute 
Sacramento Municipal Utility District 
Sierra Club 

Stockholm Environment Institute 
Swedish National Board for Industrial and 

Technical Development 
Texas Governor's Energy Office 
The Energy Foundation 
U.S. Consumer Product Safety Commission 
U.S. Department of Energy 
U.S. Department of Housing and Urban 

Development 
U.S. Environmental Protection Agency 
U.S. Food and Drug Administration 
U.S. Navy 

University of California 
World Energy Council 



Listed are companies or organizations that have funded or otherwise participated in LBL research projects or directly utilized the 
research results. Further information available on request 



41 



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From the Lab to the Marketplace 



n 



About the Center for Building Science 



Addressing significant energy-related issues, the Lawrence Berkeley Laboratory's Center for Building 
Science has become an international leader in developing and commercializing energy-efficient 
technologies and analytical techniques, and documenting ways of improving the energy efficiency and 
indoor environment of residential, commercial, and industrizil buildings. 

The Center is the home of three programs — Building Technologies, Energy Analysis, and Indoor 
Environment. It serves as a national and international source of information for energy-efficient 
technology, provides technical support to energy and environmental policymakers, supports and 
creates institutions and demonstration programs, provides a training ground for students in the energy 
field, and facilitates transfer of technology and information to the private sector. 

Researchers at the Center recognize that despite significant, steady progress since the energy crises of 
the 1970s, a large potential for energy savings remains to be realized. The Center's interdisciplinary 
staff of 250 studies a wide spectrum of environmental, economic, and technical aspects of energy- 
efficiency activities, each helping to document that energy efficiency is a new and highly cost-effective 
energy resource. 

Colophon: This report prepared by Evan Mills and edited by Allan Chen and JeffKahn. Original 
graphics and interior design by Sam Webster Cover design by Flavio Robles. Cover photography by 
Richard Blair. 



42 



I Printed nn recycled siffcit wiih soy based inks. 



479 



This work was funded by the Assistant Secretary for Energy 
Efficiency and Renewable Energy, Office of Building Tech- 
nologies of the U.S. Department of Energy under Contract No. 
DE-AC03-76SF00098. 



DISCLAIMER 

This document was prepared as an account of work sponsored by the United 
States Government. Neither the United States Government nor any agency 
thereof, nor The Regents of the University of California, nor any of their 
employees, makes any warranty, express or implied, or assumes any legal 
liability or responsibility for the accuracy, completeness, or usefulness of 
any information, apparatus, product, or process disclosed, or represents that 
its use would not infringe privately owned rights. Reference herein to any 
specific commercial product, process, or service by its trade name, trade- 
mark, manufacturer, or otherwise, does not necessarily constitute or imply 
its endorsement, recommendation, or favoring by the United States Govern- 
ment or any agency thereof, or The Regents of the University of California. 
The views and opinions of authors expressed herein do not necessarily state 
or reflect those of the United States Government or any agency thereof or 
The Regents of the University of California and shall not be used for adver- 
tising or product endorsement purposes. 



Lawrence Berkeley Laboratory is an equal opportunity employer. 
PUB-758 (Rev. 3/95) 



480 



Q17. On page 15 of your prepared tesdmony, you state that "recent studies make clear 
that private sector R&D has been fairly flat since 1991, and U.S. companies have 
been shifting away from basic and applied research toward a focus on incremental 
product and process improvement. Increased international competition and 
downsizing of corporate laboratories have shortened the time horizon of most private 
sector R&D." 

Please provide specific documentation for these statements. 

A17. According to data from the National Science Foundation, real private sector investment in 
research and development declined by - 0.3% from 1991 to 1995 as shown in the following 
data: 

PRIVATE SECTOR R&D INVESTMENT 
(BILLION DOLLARS-CONSTANT 1995) 

1991 = 1102.0 

1992 = $103.5 

1993 = 1102.6 

1994 = $102.5 

1995 = $101.7 

Survey data from the Industrial Research Institute indicates that industry has shifted their 
focus away from basic and applied research toward a focus on incremental product and 
process improvement according to the following data: 

PERCENT OF PRIVATE COMPANY RESEARCH BUDGETS 



Phase of Research 


1988 


1994 


Basic Research 


6.0% 


1.7% 


Applied Research 


21.0% 


15.4% 


Product Development 


34.0% 


41.8% 


Process Development 


20.8% 


22.5% 


Technical Services 


18.2% 


18.5% 



These trends are documented in a recent Department of Energy report, "Corporate R&D 
in Transition-Changing Patterns of Private Sector Investment in Research and 
Development," published by the Office of Policy in March 1996. 

Q18. On page 15 of your prepared testimony, you state: "Low energy prices have further 
undercut private sector investment in new energy technologies. Since the mid-1980s, 
real private sector investment in energy R&D has dropped 35 percent." 

Please provide specific documentation for these statements. 

A18. According to data collected by the Energy Information Administration and the Federal 
Energy Regulatory Commission on private sector investment in energy research and 



481 



development by major energy producers, major pipeline companies, and investor-owned 
electric utilities, real investment declined by -34.9% from 1984 to 1993, as shown in the 
following data: 

PRIVATE SECTOR INVESTMENT IN ENERGY RESEARCH 
AND DEVELOPMENT (BILLION DOLLARS-CONSTANT 1995) 





1984 


1993 


Major Energy Producers 


2.718 


1.505 


Major Pipeline Companies 


0.192 


0.193 


Investor-Owned Electric Utilities 


0.768 


0.695 


TOTAL 


3.678 


2.393 



Between 1984 and 1992, real energy prices fell by about -28%. According to the Energy 
Information Administration's "Annual Energy Review 1994", the real energy expenditure 
price index was 127.7 in 1984 and 92.3 in 1992. 

These trends are documented in a recent Department of Energy report, "Corporate R&D 
in Transition-Changing Patterns of Private Sector Investment in Research and 
Development," published by the Office of Policy, in March 1996. 

Q19. On page 15 of your prepared testimony, you also state: "Continued federal funding 
in advanced gas turbine technology, fuel cells, and other high-efficiency fossil fuel 
combustion technology is essential for keeping the costs of consuming energy low, 
as is continued funding for energy-efficient transportation, building, and industrial 
technologies." 

Please provide specific documentation that these technologies will not be developed 
and commercialized without DOE funding. 

A19. It is difficult analytically to determine the probability of the development of a particular 
technology absent federal R&D fijnding. However, private R&D in technology 
development has steadily fallen for the last five years as increasing numbers of businesses 
are reluctant to make risky long-term investments. This is true for a number of reasons- 
including the speed of technology development, shareholder focus on near-term profits, 
difficulty in protecting intellectual property rights, vasdy increased costs of developing 
technologies, etc. To avoid developing technologies that might be developed absent federal 
funding, EERE uses a test in designing programs that ascertains the need for a government 
role before embarking upon any program. We only fund a technology if: 

• the private sector won't do it by itself; 

• there is a high social rate of return; and 

• there is a strategic need of the country. 

Because we use this test at the front end, the large majority of benefits resulting from 
EERE programs would either not occur or be substantially delayed without DOE funding. 



482 



In either case, the result would be substantial losses to the American people in terms of 
energy savings, pollution, competitiveness and jobs. 

Q20. On page 19 of your prepared testimony, you state "that the United States ... is now 
the leader in most areas of renewable technology. . ." 

Q20a. Which specific areas of renewable technology is the U.S. the leader? 

A20a. In terms of worldwide sales, U.S. PV and geothermal firms lead their competitors. 
The U.S. has about 44% of the PV market. Japan is second with about 22%. The 
technology level in U.S. products is second to none and, in our view, is advancing 
faster than that in competing countries. In the 1990 to 1995 time period, U.S. 
geothermal companies captured about 30% of the market, with Italy and Japan close 
behind and New Zealand, Mexico, Russia, and France serving primarily their own 
domestic markets. The principal reason for U.S. geothermal leadership is the more 
sophisticated technology U.S. firms are able to bring to projects. There are 
currentiy no significant sales of solar thermal systems or of advanced biomass 
systems of the type under development in our program. However, the U.S. is 
poised to commercially introduce new technology in each of these areas over the 
next 1-3 years that should begin market life as world leaders. 

Q20b. Which specific areas of renewable technology is the U.S. not the leader? 

A20b. Wind is the principal technology area where the U.S. lags. Currendy, U.S. firms 
capture an estimated 10% of the world market, trailing Denmark, Holland, and 
Germany. Recent sales spurts in India and China following the Secretary's visit are a 
hopefijl sign but the principal boost is expected to occur as a result of the DOE 
cost shared effort now underway with several U.S. firms leading toward significantly 
advanced "next generation" wind turbines. 

Q21. On page 20 of your prepared testimony, you state that "in the past decade, German 
and Japanese companies snapped up several major American PV companies that 
accounted for 63% of the PVs manufactured in the United States." 

Q21a. Which specific American PV companies did they "snap up"? Please provide 
the name of the specific PV companies. 

A21a. The following companies were "snapped up" by German and Japanese companies 
over the past decade: 

• ARCO Solar, Camarillo, CA, was purchased by Siemens Solar Industries 
(SSI), Camarillo, CA, in 1989. Siemens Solar Industries is a subsidiary of 
Siemens, USA (an American company owned by Siemens AG, a global 
German company). 

• Mobil Solar, Inc., Billerica, MA, was purchased by ASE Americas, Inc., 
Billerica, MA, in 1993. ASE Americas (an American company) is owned by 



483 



ASE GmbH, which is a joint venture of the global German Daimler Benz 
Aerospace AG and Germany's largest utility, RWEAG. 

• Solec International, Hawthorne, CA, was purchased by the Japanese Sanyo/ 
Sumitomo Sitex joint venture in 1994 and retains its name as Solec 
International, Hawthorne, CA. 

• Blue Ridge Associates, Large, PA, was purchased by the Japanese Ebara 
Corp. in 1994. 

Q21b. Please provide the DOE level of funding, by fiscal year, provided to each of 
the companies listed in Q21a, as well as the rationale of spending U.S. tax 
dollars to subsidize foreign-owned finns. 

A21b. The amount of DOE funding of these companies over the past several years is 
shown in the following table: 



SUMMARY OF DOE R&D SUPPORT-DOLLARS IN MILLIONS 

(DOE Funds/Company Funds) 




COMPANY 


F\- 
1991 


FY 
1992 


FY 
1993 


FY 
1994 


FY' 
1995 


FY 
1996 


Siemans Solar Industries, Inc. 














PVMat R&D Funding 




1.66/1.83 


1.64/1.80 


1.70/1.86 




0.85/0.85 


Thin Film R&D Funding 


0.60/0.55 


0.60/0.55 


0.60/0.55 


0.60/0.55 


0.75/0.75 




ASE Americas, Inc. (Since 1994) 














PVMat R&D Funding 














Solec International 












0.44/0.65 


Ebara International 














United Solar Systems Corporation 














Thin Film R&D Funding 


0.78/0.78 


0.78/0.78 


0.78/0.78 


1.11/1.10 


0.83/0.82 


0.83/0.82 


Energy Conversion Devices, Inc. 














PVMat R&D Funding 




1.50/1.76 


1.67/1.96 


1.81/2.12 






Thin Film R&D Fundmg 








0.50/0.24 


0.50/0.24 


0.50/0.24 



The Department's rationale for spending U.S. tax dollars is based upon that derived 
from the following events and experiences: 

Both Siemens Solar Industries and ASE Vknericas have closed down their 
production facilities in their home countries to concentrate their investments 
in the U.S. Similarly, the Japanese companies are making most of their 
photovoltaic investments in their U.S.-located subsidiaries. 

Having in a large measure fostered the rapidly-growing photovoltaic power 
industry as a U.S.-focused manufacturing technology providing thousands of 
U.S. jobs today, the DOE photovoltaic program continues to support R&D 
for U.S. -based companies that agree to continue expanding their production 
in the U.S. Siemens Solar has recently expanded production in its 
Vancouver, WA, plant by a factor of three; ASE Americas is expanding its 



484 

Billeria, MA, plant production by a factor of two. Both companies have 
announced plans for additional expansion. 

Since Solec International was sold to the Japanese Sanyo Corp. in 1994, 
production in Hawthorne, CA, has been increased by a factor of two and 
plans have been announced to increase it by a factor of four to five more 
times. Solec has not received DOE R&D funds to date, but the new owners 
are investing large sums in U.S. manufacturing facilities perceived to be a 
result of U.S. technology dominance. 

Ebara Corp, a Japanese company, purchased the rights to dendritic web 
crystalline silicon technology that was largely developed by the Westinghouse 
Corporation during the 1980's at their Large, PA, plant facilities, and that 
was supported by the DOE photovoltaic program for many years. They are 
now using the facilities, manpower, and technology in a pilot production of 
commercial products. 

The United Solar System Corp. (USSC) is a joint venture between the U.S.- 
owned Energy Conversion Devices, Inc., developer of amorphous silicon 
technology and manufacturing in numerous cooperative activities with the 
DOE photovoltaic program, and the Japanese Canon, Corp., which 
provided the investment capital for the recentiy dedicated 5 megawatt 
amorphous silicon manufacturing plant in Troy, MI. 

Scientific staff firom Siemens, ASE Americas, and USSC are teamed with 
scientists from U.S.-owned companies, universities, and DOE laboratories in 
resolving technical problems in a number of photovoltaic technologies 
including amorphous silicon copper indium diselenide, and cadmium 
telluride. The contributions of these three companies to the resolution of 
outstanding technical issues has been exemplary in that continuing advances 
in U.S. engineering and manufacturing technology. 

Under these circumstances, the continuing competitiveness of the U.S. in 
technology and the expansion of U.S.-based manufacturing jobs of high- 
technology photovoltaic cells, modules, and systems is tied to a significant 
extent to the continuing interactions of the program with all of the U.S.- 
based photovoltaic companies. 

Q22. On page 21 of your prepared testimony, you state that "Germany and Japan . . have 
far larger governmental incentives for the use and export of renewable energy. . . " 

What, specifically, are these "far larger government financial incentives"? 

A22. Wind, photovoltaics and geothermal are examples of renewable technologies benefiting 
ft-om foreign government incentives for use and export. For example in Germany, 
electricity from wind power plants is purchased at a subsidized price set at 85 per cent of 
the retail. This price is approximately $.08/KWH compared to about $0.03 in the U.S. In 
addition, under the German "250 MW Wind" program, wind plant operators are further 



485 



subsidized $0.04 or f0.06/kWh for 10 years, depending on whedier the energy is used by 
the operator or sold to the grid. The resulting subsidized price for wind energy is $0.11 to 
$0.14/k\X'h. Wind energy is further supported by subsidies offered by some German states, 
and by the "Eldorado" export assistance program that pays up to 70 percent of the cost of 
turbines sold in certain countries. 

Japan encourages utilities to pay a 10-percent premium over retail for kWhs of renewable 
electricity fed into their grid, has a nationwide net-metering policy, and has instituted 
uniform utility interconnection standards nationwide. The residential roof-top Building 
Integrated Photovoltaic (BIPV) initiative received $40 million or 30 per cent of the annual 
PV budget. The residential BIPV funding is expanding in an effort to meet the ambitious 
goals of 65,000-70,000 residential systems by the year 2000. 

In Japan, geothermal energy development is supported by incentives for both domestic use 
and export. Geothermal resource exploration in Japan is supported by a $100 million fund. 
Export is encouraged by favorable financing packages including long-term, low interest 
loans (under 5%) with grace periods up to 7 years. Japan has also implemented a major 
financial subsidy for photovoltaics. A 7-percent tax credit has been established for 
enterprises installing PV systems. 

Q23. On page 23 of your prepared testimony, you say that DOE has been forming 
partnerships with the steel, aluminum, petroleum refining, chemicals, pulp and 
paper products, glass and metal casting industries to develop clean technologies. 

Q23a. Please provide a detailed listing of these partnerships. 

A23a. The Secretary of Energy has signed partnership compacts with industry 
representatives of the Forest Products, Steel, Metal Casting and Glass Industries. 
The Aluminum Industry is scheduled to sign a partnership compact in September. 
The partnership compact with the Chemicals industry is planned later in 1996 as 
soon as their vision document is complete. The Refining industry has initiated steps 
to develop an industry vision. These research partnerships center around the 
research needs identified in each industry's vision of the future. The vision 
document developed by the industries identify the characteristics of each industry 
both past and present, the drivers for fiiture technological change, and targets for 
future characteristics such as the level of emissions, recycling, productivity and other 
key industry characteristics affecting competitiveness. 

Q23b. For each of the partnerships listed in Q23a, please provide the level of both 
DOE funding and private sector fiinding for each of FY 1993-FY 1997. 

A23b. Although the industry-lead partnerships developing from the Industries of the 
Future (lOF) strategy are a new way of doing business between industry and 
government, OTT has a history of developing advanced energy efficiency and 
renewable energy technologies with the process industries. The table below 
provides this history of partnering with industry in research activities. The lOF 
strategy builds on this history and places industry in the lead in identifying their 
research needs and allows OIT to actively meet its customers'/partners' needs. 



486 





FUNDING aN THOUSANDS OF $) FEDERAL/NON-FEDERAL | 


INDUSTRY 


PARTNERS 


FY 1993 


FY 1994 


FY 1995 


FY 1996 


FY 1997 


Aluminum 


6 Companies 


4,300/1,038 


4,222/1,736 


2,699/1,374 


1,341/601 


6,587/3.091 


Chemicils 


70 Companies 


3,000/ 


10,000/ 


20,000/ 


13,000/ 


13.000/ 




15 Universities 


10,000 


10,000 


20,000 


13,000 


13.000 


Forest 


442 Companies 


5,518/ 


6,495/ 


9,688/ 


11.278/ 


13,104/ 


Products 


13 Universities 
USDA Forest Service 
2 Trade Associations 
1 Industry Environmental 

Association 
17 National Laboratories 


2,791 


3,214 


6,110 


7,895 


10.484 


Glass 


12 Companies 


0/ 


0/ 


2,292/ 


1,396/ 


5.182/ 












3,500 


2,164 


8.032 


Metal 


175 Companies 


1,500/ 


2,000/ 


2,500/ 


1,700/ 


5.500/ 1 


Casting 


14 Universities 

4 Trade Associations/ 

Societies 


1,760 


2,320 


2.900 


2,000 


5.500 


Refining 


38 Companies 


8,424/ 


11,279/ 


9,686/ 


6,550/ 


6,839/ 




8 Universities 


2,808 


3,760 


5,779 


4,079 


4,413 




8 National Laboratories 














4 Trade Associations/ 
Societies 












Steel 


17 Companies 


5,345/ 


4.564/ 


4,447/ 


6.618/ 


10,050/ 




1 Universities 


2,208 


1,948 


1,580 


2,777 


3,517 1 




5 Federal Laboratories 














1 Trade Association 













Q24. On page 2 of your prepared testimony, you state: "The government has a role in 
advancing pollution prevention for several reasons. First, pollution prevention 
technologies often benefit many companies only a small amount, so no one 
company has the incentive to spend the money by itself. Second, prevention has so 
many public benefits not fully captured in the marketplace: reduced resource 
consumption, improved environment, reduced energy consumption, and increased 
jobs and competitiveness. Thus the private sector will inevitably underinvest in 
R&D on clean technologies." 

Please explain why 'Hhe private sector will inevitably underinvest in R&D on clean 
technologies," and provide the supporting documentation to support this 
explanation. 

A24. We now have over twenty years of evidence that the private sector has underinvested in 
R&D on clean technologies. Industries not only underinvested in clean technologies for 
twenty years, they very rarely invest . The period of environmental regulation from 1970 
to at least 1990 was characterized by cosdy investments in compliance with command-and- 
control type of regulations, NOT in avoidance or prevention. These compliance costs 
approach 1150 billion/year according to a November, 1990, EPA report "The Cost of a 
Clean Environment." The 20-year legacy of compliance is a legacy of the failure of the 
private sector to anticipate and to prevent pollution . Only since about 1990, have a few 
forward-looking companies like Dow and 3-M embraced the concept of pollution 
prevention and have followed their beliefs with investments. The DOE portfolio of 
energy-efficient technologies are at the forefront of a large and fundamental change in the 
thinking of the private sector from reactive compliance to proactive prevention. Because of 



487 



the close connection between energy production, consumption and pollution, the 
Department of Energy currently provides over 70% of all federally-funded R&D for 
pollution prevention technologies. (National Science and Technology Council, "Techttologjifor 
a Sustainable Future," ]\Ay, 1994.) 

Q25. During your oral testimony, on page 38 of the hearing transcript, you stated: "By 
2010, this diversified investment portfolio, we believe could reduce oil imports by 1.5 
million barrels of oU per day, a $1 billion per year savings to the country." 

Q25a. Please document the claimed reduction in oil imports of "1.5 million barrels 
of oil per day." 

A25a. The estimated potential oil reduction of 1.5 million barrels of oil per day in 2010 has 
been documented as part of the performance metrics for the FY 1997 budget for 
the Office of Transportation Technologies. The oil reductions came from the 
following specific programs with the assumptions explained below: 

MBPD 

1. Hybrid Vehicles .49 

2. Biofuels .41 

3. Heavy Duty Trucks .20 

4. Electric Vehicles .13 

5. Alternative Fuel Vehicles .11 

6. Other Technologies .16 

TOTAL 1.50 

1. Hybrid Vehicles . Hybrid vehicles that are 70% more efficient than 
conventional vehicles enter the market in 2002 and hybrids that are 150% 
more efficient enter the market in 2006. Collectively, they gain 27% of light 
vehicle stock and save .49 MBPD because they are more efficient. A vehicle 
choice model (based on a stated preference survey) is used to project the 
market share of hybrid sales relative to conventional vehicles and the other 
alternative vehicles. 

2. Biofuels . The R&D being done on this program results in a supply potential 
of 12 billion gallons of ethanol from grasses and trees in the year 2010. This 
fuel would be used in flexfijel and dedicated alcohol vehicles. The vehicle 
choice model projects that 19% of the light vehicles will be flexfueled in 
2010 and that 1.1% will be dedicated alcohol vehicles. The 12 billion gallons 
of ethanol used by these vehicles will replace 0.41 MBPD of oil through 
substitution. 

3. Heavy Trucks . This OTT program results in an advanced diesel engine for 
class 7 and 8 trucks (those over 26,000 gross vehicle weight) that is 20% 
more efficient than conventional diesel engines. These advanced diesels 
start penetrating the market in the year 2000 and make up about 15% of the 
stock of heavy trucks in 2010. They would replace 0.20 MBPD of oil 
through efficiency. 



488 



4. Electric Vehicles . Electric vehicles enter the market in 2000 and grow to 3% 
of the light vehicle stock according to projections from the vehicle choice 
model. This number of electric vehicles would displace 0.13 MBPD of oil 
via substitution. 

5. Alternative Fuel Vehicles . This includes CNG and LPG (propane) vehicles. 

These two vehicle types each attain a .9% share of the light vehicle market 
and together reduce oil use by 0.11 MBPD in 2010 via substitution. 

6. Other Technolog ies. The oil reductions from fuel cell vehicles (only 0.7% of 
the vehicle stock in 2010), lightweight conventional vehicles (7.6% of the 
2010 stock), and advanced diesels (6.3% of the 2010 stock) combine to 
reduce oil consumption by 0.16 MBPD in 2010. 

Q25b. Please document the claim of "a $1 billion per year savings to the country." 

A25b. The savings of $1 billion to the country was a typographical error. It should have 
read $13 billion for the year 2010. Because of the increased efficiency of hybrid, 
electric, fuel cell, advanced diesel, and lighter conventional vehicles, their owners will 
purchase less fuel. This reduction in fuel costs in 2010 is |23 billion. (To put this 
number in context, in 1995 vehicle owners spent over $110 billion for motor fuel.) 

But some of the alternative vehicles purchased in 2010 will have higher purchase 
prices than conventional vehicles, so these incremental costs must be deducted from 
the fuel savings total to obtain a net value. The 2010 incremental expenditure for 
the alternative fuel vehicles is $10 billion. Thus, this $ 10 billion subtracted from the 
gross reduction in fuel costs of $23 billion results in a net reduction of $13 billion 
for vehicle owners in 2010. 

Q25c. Please provide evidence that these claimed reductions and savings would not 
occur without DOE funding. 

A25c. The largest potential oil reduction benefits in the year 2010 came from the hybrid 
vehicle program and from the biofijels program. Without DOE funding, neither of 
these programs would exist. The hybnd program was started by DOE and would 
not have been pursued by the Big Three auto companies without DOE funding. 
The biofuels program would not exist (except for the current com ethanol activity) 
without DOE funding. The need to develop renewable motor fuels from a non- 
food crop would not be researched without the funding in the OTT budget for this 
program. 

For the other vehicle programs (advanced diesels, electric vehicles, lightweight 
vehicles, and fuel cells) it is unlikely that they would come to market as soon as 
assumed without DOE support for R&D. 



489 



Q26. During your oral testimony, on page 38 of the hearing transcript, you stated: "Were 
Congress to make the cuts they are thinking about, it would make the oil crisis 
scenario more likely." 

Q26a. Please document the cut that Congress is "thinking about." 

A26a. On October 12, 1995, the U.S. House of Representatives passed H.R. 2405, the 
Omnibus Civilian Science Authorization Act of 1995. Funding levels contained in 
that bill for Energy Efficiency and Renewable Energy programs represented a 
reduction of 55% and 40% respectively from prior year funding levels. 

Q26b. Please document the claim that cuts to DOE funding 'Svill make the oil crisis 
scenario more likely." 

A26b. Research and development on energy efficient and renewable energy technologies 
represent an opportunity to reduce our oil dependence and counter the effects of 
the threat of disruptions to imports of oil from often unstable regions, and place 
some restraint on the economic and geopolitical impact of the increased 
dependence on Persian Gulf oil. At the same time, domestic jobs are created when 
money that would have gone overseas to purchase foreign oil instead goes to U.S. 
workers manufacturing technologies for highly-efficient cars and trucks, or for 
growing domestic biofuels. 

Q27. During your oral testimony, on page 40 of the hearing transcript, you say that 'Sve 
have completely changed the program design of the Department of Energy's 
programs." 

Q27a. Please explain the "old" program design. 

Q27b. Please explain the "new" program design and elucidate specific changes. 

A27. Every year EE assesses the benefits and costs of it's energy efficiency and renewable energy 
portfolio prior to developing a budget request. This includes soliciting input from 
customers, assessing likely fiiture benefits, responding to Congressional guidance and 
pursuing strategic goals. Over the course of the last three years, the EERE portfolio has 
been re-designed to respond to vital national issues, maximize benefits to taxpayers and 
businesses— both large and small-and to be as customer-oriented and customer-responsive 
as possible. In addition, to modifying our portfolio to meet new market realities and likely 
futures, the Office of Energy Efficiency and Renewable Energy has re-engineered how we 
implement our programs. We have reinvented how government interacts with the private 
sector. This affects our programs in a number of ways. 

1) We work more closely with our customers, building voluntary partnerships with 

industry, business, state and local governments and energy consumers. Instead of 
assuming that government knows best, we use the talent and creativity of our 
customers to help design and implement these programs. 



490 



2) We use relatively small amounts of Federal money to leverage large amounts of 
private investment. 

3) We stress flexibility and innovation. And rather than sweeping, over-reaching 
programs, we help small businesses, consumers, large companies and others move 
to a new energy future throu^ a balanced program of next generation technologies 
and market driven incremental improvement. 

4) We have cut administrative costs and overhead and we are downsizing operations 
and learning how to operate more efficiently. 

5) We listen to our customers and acting on their needs where appropriate. For 
example. States told us there was room for improvement in the delivery of our grant 
programs. Subsequent cuts in our administrative overhead have allowed us to 
consolidate our State grant programs to meet State and local needs more effectively. 

6) We are committed to continuous improvement, customer involvement and market- 
driven action. We strive to operate more like a business, and less like a bureaucracy. 

7) We set clear goals and annual progress targets so that we may show that 
technologies with inherent risk are making expected progress or needed adjustments 
to deliver a better future and larger return on investment. 

Q28. During your response to a question by Mr. Roemer, on page 69 of the hearing 
transcript, you say that "[t]he nation's energy bill is $500 billion a year." 

Please document that claim. 

A28. According to the Yergin Report-"Energy R&D: Shaping our Nation's Future in a 
Competitive World", June, 1995, pp. 6-7-the United States is spending $500 billion per year 
on energy. 

Q29. During your response to a question by Mr. Wamp, on page 77 of the hearing 
transcript, you state: "In the case of Oak Ridge, just one example, which is 
advanced refrigerator/freezer compressors, a $1 million investment in Oak Ridge has 
saved the U.S. economy $5 billion in the 1980s." 

Q29a. Please document this claim, and provide supporting documentation. 

A29a. From 1978 through 1980, ORNL sponsored a research subcontract for DOE with 
Columbus Products Company to develop a high-efficiency (energy efficiency ratio, 
or EER, of 5.0) compressor for household refrigerators. By making design changes 
to the motor, suction muffler, and compressor valve assembly and piston, the 



491 



Columbus Products compressor achieved a 44%' improvement over the 
compressor technology used in refrigerators at the time (EER 3.5). 

The resulting technology was incorporated into a compressor product line 
manufactured by Greenville Products Co. (Kelvinator) of Grand Rapids, Michigan, 
which produced and sold them through the mid-1980's. The technology was then 
transferred to Americold Compressor Co. of Cullman, Alabama. Americold 
continued improving compressor designs on their own through the 80's and 90's 
and have exceeded the performance standards set by the DOE-supported 
development. They are now marketing refrigerator compressors with EERs of 5.2- 
5.5 for use withR-134a (replacement for CFC-12) and are developing a new line of 
R-134a compressors for refrigerators and freezers, manufacturing over 4 million per 
year. 

The availability of high efficiency compressors was a major reason the refrigerator 
energy use (on a shipment-weighted-average basis) dropped from about 1500 
kWh/yr in the late 1970's to about 900 kWh/yr in 1990. Availability of improved 
compressors pioneered by DOE's research effort is responsible for approximately 
half of this improvement. 

The shipment-weighted average energy use of new refrigerators in the late 70's 
(when DOE-sponsored research started) was about 1500 kWh/yr. New 
refrigerators were produced at an average rate of about 6.25 million units/yr 
between 1980 and 1990. By incorporating energy efficiency improvements into the 
refngerator, 150 billion kWh or 1.7 quads of cumulative energy have been saved with 
energy efficient compressors accounting for 75 billion kWh. At an average 
consumer cost for electricity of $0.08/kWh this results in $6 billion in energy cost 
savings. 

Total funding for the high-efficiency refrigerator/freezer compressor program was: 





DOE 


FY 78 


$112,000 


FY79 


$264,000 


FY80 


$226,000 


FY81 


Jaz.'i.ooo 


Total 


$827,000 


Columbus Products co-fiuid = 


$276,000 


Total program funding = 


$1,103,000 



Q29b. Please document the private sector investment in this technology. 

A29b. The private sector cost share was $276,000 by Columbus Products Company in the 
DOE sponsored research and development effort. 



'Staelin, R., and Redinger, R.P., "Research and Development of Energy Efficient Appliance 
Motor-Compressors, Vol. 2 - Market Evaluation," ORNL/Sub/7229/2, December 1980, 
page iii. 



492 



Q29c. Please provide evidence that advanced refrigerator/freezer compressors 
would not have been developed and commercialized without the DOE 
funding. 

A29c. There is no firm evidence that advanced refiigerator/fireezer compressors would not 
have eventually been developed without DOE funding. However, prior to the 
issuance of the DOE competitive solicitation for advanced compressor 
development, there was no energy efficiency-related R&D being carried out by the 
major U.S. refrigeration system manufacturers. The technology developed by DOE 
led to a motor/ compressor which was 44% more efficient than the state-of-the-art 
at that time, and this technology dominated the market until 1990 when efficiency 
standards and other influences began to propel compressor development forward 
again. 

Q30. During your response to a question by Mr. Ehlers, on page 89 of the hearing 
transcript, you state "that the Japanese out spend us just on photovoltaics by over 
two to one." 

Please document this statement, and provide supporting documentation. 

A30. The Japanese programs in renewable energy technology are documented by the Resources 
TotaJ System Co., Ltd. 2-7-11 Shinkawa, Chuo-ku, Tokyo 104, Tel. (81)-3-3551-6345. Mr. 
Osamu Ikki, President, provided a document to DOE staff containing a summary of PV 
related budget items in 1996 amounting to 13. 10 billion yen, or more than $130 million. 

These same numbers are reported b PV News, March, 1996, Vol. 15, number 3, p. 5, and PV 
International Report, Vol. SV, No. 1, January, 1996, p. 2. "Report from Japan: Japanese 
Renewable Energy Budget Increased: PV Rooftop Program Growing", etc. 

[Note: Copies of these documents are attached^ 



493 



PV Activities in Japan .npnpmber 1995 



Resources Total System Co., Ltd. 

Osamulkki 

2-7-11 Shinkawa 

Chuo-ku, Tokyo 104 

Tel. (81)-3-3551-6345 ■ 

. Fax. (81)-3-3553-8954 

E-mail: ged02723@niftyserve.or.jp 



Considering business recovery was the main deciding factor when the 
government decided about next year's ■ budget in December. The original bill 
presented by the Ministry of Finance reflected general fiscal conditions, budget 
demand was met with stringency, but as a result of recovery debates almost the 
whole amount was accepted. See PV related budget items below. 





• 




(bi lion yen) 


PV related budget items 


1995 
budget 


1996 
demand 


1.996 
budget 


PV system promotion 


11.89 


14.12 


13.10 




Residential PV system monitoring 


3.31 


4.42 


4.06 


PV field test on public facilities 


1.70 


2.55 


1.90 


Development of solar grade silicon production technologies 





0.05 


0.04 


Development of PV system application technologies 


6.88 


7.10 


7.10 


R 


egional new energy promotion 


0.70 


1.21 


0.95 




Regional new energy vision policy 


0.27 


0.70 


0.47 


Regional new energy projects 


0.43 


0.51 


0.48 


C 


ther policies 


0.37 


0.59 


0.39 




International new energy model projects 





• 0.20 





Research for new energy standardization 


0.37 


0.39 


0.39 


Promotion of service stations for emergency 







0.17 



The item that attracts most attention is probably the 'Residential PV 

^monitor project' that was allotted 4.06 bill, yen, a 22% up, under today's strict fiscal 

restrictions. This item will become an important moving factor for 1996 and it will 

'be beneficial both for the industry and private citizens considering the installation 



494 
Renewable energy related budget items in 1996 




isy/f/"^ 



1.PV system promotion 13.10 ,,, 

O Residential PV system monitoring .4.06 ■^l3oKlo 
O PV field test on public facilities 1.90 

O Development of solar grade silicon production technologies 0.04 

O Development of PV system application technologies 7.10 

2. Promotion of waste generation 8.81 

O Waste generation development subsidy 1.08 

O Techrrology development for new type of solid waste fuel power generation 

0.67 
O High efficiency waste generation technologies 2.53 

O Promoting the establishment of environmentally friendly energy communities 

4.53 

3. Clean car popularization program and others 2.22 
O LNG car popularization project 1.35 . 
O Electric vehicle popularization project 0.12 
O Infrastructure for environmentally friendly cars ('Eco-Station 2000") 

0.75 

4. Regional new energy promotion 0.95 

O Regional new energy vision policy 0.47 

O Regional new energy projects 0.48 

5. Other policies 

O Wind generation field tests 0.31 

O Research for riew energy standardization 0.39 

O Promotion of service stations for emergency • ■ 0.17 . 



495 



of residential PV systems. Good news before Christmas. This application is not 
- well established yet, but at least a 6 to 7 MW market has been created. This 
system has been is place for 3 years and it became popular with strong public 
support. How long it can go on, is a future issue though. We should rather think 
that the time has come, when further expanding of this market mainly depends on 
free market decisions and not subsidized demand. Otherwise, when the 1000 
rooftop project (2250 in Germany) is finished, the PV industry will lose directions, as 
it happened in Germany, and development will stagger. Since the solar cell 
manufacturer CANON and in the housing construction Interested Asahi Solar are to 
enter the market In 1996, to attract customers fervent price competition, with the 
earlier manufacturers, can be anticipated. 

Good news for manufacturers of crystalline cells is that the new budget 
. provides for developing manufacturing technologies for solar grade silicon. Solar 
cell manufacturers around the world feel uncertain about the future of silicon raw 
materials, so we can only hope that the project will lead to viable new technologies 
in this special area. On the other hand it is unfortunate that the International New 
Ene'rgy Model Project did not get approved. America and Europe consider 
developing countries an important market Japan is too conservative in that respect. 
it is very difficult to change this practice, but soon Japan has to deal with the 
problem how to approach the overseas market. 

Also other ministries have approved budget items for PV installations. For 
example the Ministry of Construction has included the design and establishment of 
PVs in its expanded list of items financed under the Urban Environmental Model 
Project. , • • 

It has been one year since the New Energy introductory Plan was adopted, 
but to test the plan on the basis how many systems have been installed would be 
inappropriate. PV technology could be introduced through residential monitoring 
programs, PV field tests, utility companies, various ministries, agencies or local 
governments, industries or private Individuals, but the amount of PV system 
installations haven't been analyzed yet. The plan can not be realized in the 5 years 
to 2000, unless an action program gets prepared and items of the program get 
carried out, otherwise estimates are meaningless. For the introduction- a 
framework has to be created to facilitate cooperation among suppliers, legislators, 
instedlers and customers. Hopefully we will see this happen in 1996. Fortuniately, 
NTT has announced plans that would make it a major corporate customer and 
.^'Various agencies and local government bodies started working on introduction too. ' 
It would be nice to see feverish activities picking up this seedling of an industry. 



496 



As for the government, we could see PV related budget items appear again 
in MiTI's budget. ' As a result of negotiations with the Agency of Natural Resources 
and Energy, the Residential PV System Monitoring Project got 4.06 bill, yen allotted 
what is close to the full amount of the requested 4.42 bill. Also the 'Development 
of solar grade silicon production technologies' project got 40 mill, put of a 
requested 50 mill., although according to unofficial previous assessments it was not 
accepted as a budget item. In the energy related budget of the Ministry of 
Construction, besides expanding the Ecocity Program under . the 'Urban 
Environmental Model Project', subsidies will be provided for the installation of PV 
systems and similar to improve energy saving. Further the Ministry has 
contributed to the development of environmentally friendly blocks of apartments 
which effectively utilize rainwater and sunshine to save energy and improve the 
neighboring environment. Such blocks of apartments have been established in 
several locations and are selling well. There are three locations where apartments 
are currently available. Including new ones still on designing boards, test houses 
of real estate agencies there are 16 places with environmentally friendly blocks of 
apa'rtments. The Environment Agency issued a PV introduction manual for local 
public organi'zations. This is a collection of information needed in case an 
organization decided to install PVs. 

As for power companies. Central Research Institute of the Electric Power 
Industry and Electric Power Research Institute held the 'America-Japan PV 
Workshop', which dealt with questions of utilization, on Miyako Island in Okinawa. 
Information has been exchanged in relation to effective legislation and efforts in the 
two countries. Tohoku Electric Power Company completed the installation of a 
5kW PV system on the rooftop of its Iwate branch and started testing. Chubu 
Electric Power Company installed an 18kW PV system on. its Shizuoka branch 
rooftop and outer walls. 

As for manufacturers, Japan Photovoltaic Energy Association is planing its 
incorporation as a public company, in reaction to PV promotion efforts by MITI. It 
is expected that functions can be broadened and cooperation with MITI and other 
ministries or agencies becomes more effective. MSK established PV test and 
research facilities on its factory site in Nagano to reinforce its application 
development. M. SETEK decided to increase, in 1996, its 12 casting lines in China, 
in response to growing demand of single crystal silicon solar cells. Hitachi starts 
experimental sales of emergency PV products like emergency service stations,. 
/Which can be fully energy and water self supporting in case of emergencies, similar 
support systems for schools and emergency toilet water supply systems. 

As for customers, KAJIMA has completed environmentally friendly bachelor 



497 



flats which utilize rainwater and sunshine. Amorphous solar panels are integrated 
in the roofing material and output is 20kW. Asahi Solar and Sharp in cooperation 
with major property developers will advance into the housing market. The majority 
of the products will be residences with PV modules or solar thermal equipment 
integrated in the roofing material. fVllNOLTA is getting involved with PV operated 
lighting control systems. . . ,■:.." 

As for hew products and product applications, Week has developed a small 
emergency power supply utilizing PVs. MINOLTA launched its new lighting. 
control system on the market. 



498 

Objectives of the Rscal Year (FY) 1996 New Energy Budget 
Demand (PV related) ■- 

.,,.■'■: Sept 1995 

Energy Conservation and Alternative Energy Policy Division 

Agency of Natural Resources and Energy 

Ministry of International Trade and Industry 

(NOTE: Translated by Resources Total System Co., Ltd.) 



Basic policy 

To increase the budget for technology development and introduction of 
photovoltaic energy to realize the Basic Guideline for New Energy Introduction 
adopted in December 1994 from the perspectives of energy security and 
environmental issues such as measures for CO, emission. 



1. PV system promotion 

L14.12 bill, yen (11.89 bill, yen)] 
(1) Residential PV monitor subsidies 

4.42 bill, yen f3.31 bill, ven) 
_ People participating In this program can get a 50% subsidy for installing a 
PV system and, by becoming a monitor, contributing to the further development of 
system performance to better match of customer needs. 
(Proj>ctforFY1996) 

1) Residential PV system monitoring 

• numtier of houses': 1,800 houses (3.5kW per house) 
(in FY 1995 1,200 houses (3kW per house)) 

- subsidy rate: equal to 50% (fixed amount) . 

- amount of subsidy: maximum 650,000 yen per kW (850,000 yen in Pf 1995) 

• subsidy administration: New Energy Foundation 

2) PV promotion guidance 

Guiding companies, performing PV constnjction, with laitest know-how. 
Educating new owners on maintenance and management, and providing 
information on available products. — — ^^^ 

-subsidy administration: New Energy Foundation /. />t^ sLsJlim'^^ //.8T00 



499 



(2) Subsidies for Dromotino field tests on p iiblic facilities 

g.55 bill, yen (1.7 bill, yen) 

In the period between FY 1992 and FY 1994 to collect basic data, preparing 
for the most advanced level of PV applications, PVs have been established on 
museums, schools, public halls and other public establishments. 

From FY 1995, since the main factor hindering wider use of PVs is the price 
compared to other existing generation systems, system standardization and jjrice 
reduction have been schemed by the appropriate authorities. 
(ProiectforFyi996) . 

- number of sites: 40 sites (22 in FY 1995) 

• subsidy rate: 2/3 of the expenditures for field tests 

- subsidy administration: New Energy and Industrial Technology Development 
Organization (NEDO) 

f3) Subsidies for deyelopino solar grade silicon production 
f^chnoloaies 

50 mill, yen (new) 

Silicon used for PV applications, S06-Si, does not need to be purified to 
that super high level that Is required for semiconductors. Anticipating wide use of 
PV systems, dictates the need for eariy establishment of large capacity, cheap 
production technologies. 

For the eariy application of the solar grade silicon production technologies 
developed by NEDO and others, technological testing is carried out. 
(Project for FY 1996) 

• objectives of the technological tests 

process structure integrating 

final refining into the casting technology 

setting particulars of the detailed project, quality evaluation method 

planing to produce development schedule, substrate equipment by FY 

1997 

• subsidy administration: New Energy and Industrial Technology Development 
Organization (NEDO) 

(A) Deyelo pment of PV system apDlication fechnoloflj^y 

7.1 bill, ysn r6.88 bill, ven) 
As part of the New Sunshine project, research is directed toward new 
production technologies to significantly decrease the cost of solar cells and system 
development. 



500 



2. Regional New Energy Promotion 

. [1.21 bill yen (0.7 bill, yen)] 
f1) Subsidies for the Regional New Energy Vision policy 

700 mill, yen r270 mill, ven) 
This subsidy is there to compensate expenses incurred by regional public 
organizations when investigating New Energy applications and economies,. for 
preparing their 'Vision', that is a plan for fitting PV applications into the harmony of 
the given region. 
(Project for FY 1996) 

- Subsidy rate: fixed amount . 

- Recipient: municipalities 

- Number of recipients: 34 authorities (13 authorities) 

(2) Regional New Energy Projects 

510 mill, yen (430 mill, yen) 

• • Under this project, the local public organizations promote the use of 
regional energy sources, by conducting feasibility studies on such operations and 
assisting the creation of model projects. 

(Project for FY 1996) 

1) Regionai New Energy development, consumption and generation feasibility 
tests 

- Subsidy rate: 50% 

- Recipient: regional public organization 

- Number of recipients: 9 organizations (7 organizations) 

2) Regional New Energy development, consumption and generation model 
projects 

• Subsidy rate: 30% 

- Recipient: regional public or private organizations 

- Number of recipients: 9 organizations (7 organizations) 

3. Other Policies 

[590 mill, yen (370 mill, yen)] 
(1) Subsidy for International Nevv Energy Model Proiects 

200 mill, yen (new) 

This project helps developing countries to acquire modern New Energy 

technologies (PV systems, wind turbines, etc.). In cooperation with the recipient 

countries feasibility studies are conducted, experts dispatched and model projects 

established. 

■ ^ 

6 



501 



(Project for fY 1996) 

-Items: 

1. feasibility study ... 

2. expert dispatch 

■ 3. International model projects fornew energy introduction 

- New Energy: PV systems, wind power . 

- subsidy administration:" New Energy and industrial Technology Development 
Organization (N EDO) 

f2) Research for New Energy standardization 

390 nnili. ven (370 mill, ven) 
Standardization of installation methods and collecting various data to 
promote new energy such as PV, wind and others, . 



502 



Cbuo-ku, Tokyo 104 

Tel. (81)-3-3551-6345 

Fax. (81)-3-3553-8954 

E-mafl: ged02723@niftyserve.or.jp 



PVin Japan 



/v^ iff^ 



(Market) 

® Production of Solar Cell 

(Value) 
- FY 1992 16.1 MW 15.5 billion Yen 

FY1993 13.9 

FY1994 12.8 (estimation) 

(D Application- (FY 1992) • .(FY 1993) 

Consumer Use 7,311 kW 6,679 kW 

Power Use 8,016 kW 7,773 kW 

Test. R&D 780 kW 217 kW 

Total 16,107 kW 14.669 kW 

(D Technology (FY 1992) (FY 1993) 

Single Cry. Si 2,371 kW 2,129 kW 

Poly Cry. Si • 5,631 kW • 6,012 kW 

•' a-Si 7,179 kW . 5,653 kW 

CdTe and Others 926 kW 874 kW 

Total 16,107 kW 14,669 kW 

® Market Sector ' (FY 1992) (FY 1993) 

Domestic 6,880 kW 6,662 kW 

. Export 9.227 kW 8.007 kW 

Total 46,107 kW 14,669 kW 



/ 



503 



- (Government Policy) 

©Cabinet 

Establishment of Basic Guidelines for New Energy Introduction 
ForPV 400 MW by the year 2000 (FY) 

,. 4600 MW by the year 201 (FY) 

(D Mltl • 

1) Energy Policy 

Promotion of Dissemination of distributed type Electric Power 
Generation 

2) R&D Program 

New Sunshine Program (1993 ~) 

Cell, PV System, BOS, Building-integrated PV Module 

3) Introduction & Dissemination Policy 
• PV Field Test (1992 -) 

• . 1992 235 kW (1 1 system s) . 

1993 481 kW (19 systems) 

1994 285 kW (11 systems) 
Subsidization (2/3 of Total installation cost) 

PV Home Project 

1994 577 PV Homes (2100 kW, Ave. 3.6 kW/home) 

1995 1200 PV Homes (3600 kW, at 3 kW/home) 
Subsidization 

(1/2 of Total installation cost or ¥ 850,000/kW in 1995) 

4) International Cooperation 

Nepal 44 kW (1992 -1996) 

Mongol- 40 kW (1992 - 1996) 

Thailand 44 kW (1992 ~ 1996) 

Malaysia 110 kW (1992 -.1997) . •" 

(2) Other Ministries 

Start of Using PV System by their Budgets 
f.e. Ministry of Constructiorr 

Ministry of Post & Telecommunication 



504 



<SoIar Cell & BOS Manufacturers) 

(D Putting Emphasis on 

Grid Connected PV Home 

Grid Connected PV System for Various Buildings .- 

such as Public Facilities 
• PV Integrated Building Materials 

(D Tie Up with Housing Sectors 

Kyocera - Higashi Nihon House, ... . 
Sharp - Mitsubishi Homes, ... 
MSK/ Solarex - Misawa 
Showa Shell / SSI - Mitsui Homes 
Matsushita / BP Solar - Pana Home 
Sanyo / Solec - Sanyo's own route 

(D Price 

¥ 6,000,000/3kW 1994 PV Home Project 

(All Companies) 

¥4,300,000/3kW 1995 PV Home Project 

(Depend on Companies) 

® Inverter Manufacturer 

Commercialization of Inverter for Grid Connected PV Home 

(D New Comer 

Canon (1 MW/year Plant by a-Si Technology, 1 996) 



(Electric Power Companies) 

PV Introduction Target by the year 1 995 (FY) 2400 kW 

1993 PV Installation : 498 kW 

1994 PV Installation 506 kW 

1995 PV Installation 969 kW (planed) ' 
(at Their Facilities, Technical Lab., Branches.) 

PV Introduction Target by the year 2000 (FY) Under Planning 

• Purchase of Surplus Electric Power from PV System 
Purchasing Price = Selling Price 
f.e. ¥ 25/kW in Tokyo for Home Use 



505 



fabrication capability shortly. According to president Mark Farber, "As Evergreen looks to its 
second year, our goal is to begin pilot manufacturing by Spring of 1996, with initial products 
used for qualification testing and market introduction. We're facing a few months of hard work 
to get new processes and' equipment operating and integrated, but we're committed making our 
first solar cells soon." Contact Evergreen Solar, Inc., 211 Second Ave, Waltham, MA 02154 
USA. Phone 617 890 7117. Fax 617 890 7141. 

NR£L has scheduled restructuring and reduction in its work force in response to impending 
reductions in federal research budgets. Work force reductions may eliminate more than ten 
percent of its present 900 employees. The reduction will occur in two phases. The first phase 
will be a voluntary separation program in November and December. The second phase, if 
necessary Xq meet budget requirements, would include involuntary separations to begin in 
January. 1996. The full sequence of reductions and reassignments is expected to be completed 
Spring 1996. "This is a very challenging time for NREL and its research partners in industry 
and universities," said NREL Director Dr. Charles Gay. 'Congressional budget cuts are forcing 
reductions in research programs at the very time when renewable energy technologies are proving 
their real value and commercial potential in a wide array of applications here in the United States 
and as exports to countries around the world. NREL is implementing fundamental changes in how 
it operates to improve its efficiency so that the lab can fulfill its science and technology mission 
at reduced budgets now being discussed in Washington," Gay said. 

Kirk Collier forms Enerscope. Kirk, previously manager of Photovoltaics at "the Florida Solar 
Energy center has formed Eneiscope, Inc. , "An Energy Research and Development Company". 
Kirk can be reached at Enerscope, 109 Tequesta Harbor Dr., Merrin Island, FL 32952. Phone 
407 454 4136.. Fax 407 454 4171. 

INTERNATIONAL NEWS 

JAPANESE SET GOALS FOR FY "96 NEW ENERGY (?V) BUDGET 

The Japanese Energy Conservation and Alternative Energy Policy Division of the Ministry 
of International Trade and Industry (Mill) has released detailed spending plans for its 
Photovoltaic Energy Conversion program for Fiscal Year 1996 (4/1996-3/1997). . The Japanese 
PV program is composed of three major elements: ?V Systems Promotion (1 1.89 billion Yen ^ 
- SI 19 million). Regional New Energy Promotion (.7 b Yen — $7 million), and Other Policies 
(.37 b Yen - $3.7 million.). PV NEWS thanks Osamu Ikki of Resources Total Systems Co. Ltd. 
for providing the translation. (2F Kanya Bldg, 2-7-11 Shinkawa, Chuoku, Tokyo 104, Japan). 
Osamu Ikki's translation is provided below: 
■ L PV SYSTEMS PROMOTION 

1. Resideatial PV monitor subsidies ( 3.3 b. Yen • $33 million) Program participants can get a 
150 % subsidy for installing a PV system and. becoming a monitor contributing to the further 
development of system performance to better match customer needs. 
Residential PV system monitoring 
> - 1800 houses - 3.5 kW per house. (In FY 1995. 1200 houses ~ 3 kW per house) 

- Subsidy rate of 50 % 

- Subsidy maximum 650,000 Yen/kW - $6,500 per kW installed. (850,000Y in 1995) 

- Subsidy administered by New Energy Foundation 
PV promotion guidance 

-Guiding companies performing PV construction with latest know-how. Educating new 



506 



owners on maintenance and management and providing infonnation on available prodycts. 
•Administered by New Energy Foundation 

2. Subsidies for promotins field tests on public facilities (1.7 b Yen • S17 million) The goal of 
this program is to collect basic data on PV in museums, schools, public halls and other public 

'establishments. Since high price is hindering the wider use of PV, system standardization and 
price reduction have been targeted as program goals by the appropriate authorities. 

-number of sites -40 (1995-22) ' 

-subsidy rate 2/3rd of expenditures for field tests 

-subsidy axlministradon: New Energy and Industrial Technology Development 

Organization (NEDO) 

3. Subsidies for developing solar grade silicon production technologies. (50 million Yen) 

Silicon used in the production of PV cells does not need to be purified to the level 
required for semiconductor device production. The anticipated wide use of PV systems, dictates 
the need for early establishment of large capacity, using low-cost processes. 

The FY 1996 project has the following objectives: 
'-process structure integration 

-final refining for ingot casting 

-selecting specifications of the detailed process 

-develop quality evaluation method 

- to produce development schedule, key equipment by FY 1997 

-administered by New Energy and Industrial Technology Development Organization ). 
*4. Development of PV system application technologies ( 6.88 b Yen - S69 million)) 

As part of the New Sunshine Project, research will be directed toward new production 
technologies in order to significantly reduce the cost of solar cells and system development. 
JL REGIONAL NEW ENERGY PROMOTION (.7 b Yen- $7 million) 

1. Subsidies for die Regional New Enei^ Vision Policy (.27 b Yen- S2.7million) 

This subsidy is to compensate regional public organizations for expenses incurred 
investigating "New Energy" applications and economics for preparing their "Vision", that is, plans 
for fitting PV applications into the harmony of the given region. The FY 1996 project has: 

-fixed subsidy amount 

-mimicipalities are recipients . . 

-number of recipients: 34 

2. Regional New Enei:Ey Projects ( .43 b Yen-$ 4.3 million) 

Under this project, the local public organizations promote the use of regional energy 
sources, by conducting feasibility studies on such operations and assisting the creation of model 
projects. TTie FY 1996 project involves: , ' 

-Regional New Energy development consumption and generation feasibility tests. 

-subsidy rate 50 % ' 

-recipient: regional public organization 

-number of recipients: 9 organizations 
^ -Regional New Energy development, consumption and generation model projects. 

-subsidy rate -' 30% 

-recipient: regional public or private organizations 

-number of recipients: 9 organizations 



507 



m. OTHER POUCnS (.57 b Yen-$5.7 million) 

i. Subsidies for latemational New Enei^ Model Projects (.2 b Yen) 

This project helps developing countries to acquire modem New Energy technologies (PV, Wind, 

etc). In cooperation with the recipient countries, feasibility studies are conducted,- exports 

dispatched and model projects established. The FY 1996 project involves: 

•feasibility studies 

-exports 

•international model projects for new energy introduction 
2. Research for New Enei^ StandanlizatioD (.37 b Yen) 

5tandardizati6n of installation methods and collecting data to promote ne>y energy such as PV, 
wind and others. 

SANDIA CONTRACT HELPS DEPLOY PV IN RURAL VIETNAM 

A joint solar electrification project-funded in pan by the Department of Energy through 
the Saodia National Laboratories is helping people in remote areas of Viemam enjoy the benefits 
of electricity forthe first time. The pilot project, which was completed last spring, used U.S. PV 
home systems fh>m USSC to electrify 1 00 households. Thirty more households , five community 
power and lighting systems, and street lights at two village markets were installed using products 
from other manufacturers including BP Solar, Siemens Solar, Solar Outdoor Lighting, and ASH 
Americas. The project helped more than 2000 people gain access to electric light, which in most 
places replaced kerosene lamps, and provided sufficient electrical power to operate televisions 
and radios. The project was a joint effort by Sandia's International Renewable Energy Design 
Assistance Center (DAC), the Solar Electric Light Fund (SELF), a nonprofit organiz^on and-, 
contractor to Sandia and Unisolar, San Diego CA. It was carried out in assQciation with the 
Viemam Women's Union, the largest women's organization in 'the world with 11 million 
members. Sandia provided S3S,000 of the project's total S87,000 cost. SELF and the Rockefeller 
Brothers Fund provided the remainder of the funding. 

SELF introduces solar power systems to rural areas throughout the developing world to 
demonstrate their commercial viability and to stimulate their continued and expanded use as an 
economical and financially feasible means of providing electricity in rural area of developing 
countries. The SELF project manager Marlene Brown spent two months in Viemam training 
technicians, supervising and helping to install the systems. The project began in January 199S 
in two Provinces in southern Viettam in the Mekong Delta, and in one province in the North. 
130 families in five villages received the 22 watt, Unisolar Kits with three fluorescent lights, a 
charge controller, and a battery. All systems were provided with an outlet to power radios and 
black and white televisions. According to SELF, the project in Viemam is already resulting in 
volume sales through the VWU and the private sector. Viemam represents a huge potential 
market for U.S. energy products. Of the country's 71 million people, otily 20 percent have access 
to electricity. For details on this and other PV home projects in the developing world contact 
Neville Williams. SELF, 1734 20th Street, N.W., Washington DC 20009. Phone 202 234 7265. ' 
Fax 202 328 9512. email "solarlectricigselforg"' Marlene Brown can be contacted.at 505 844 
0032 in Albuquerque, NM and Sandia manager Michael Ross can be contacted at 505 844 5550. 



508 



Q31. During your response to a question by Mr. Olver, on page 106 of the hearing 
transcript, you state: 

"To give just a couple of examples, just so we can stop being 
abstract about this and get very factual, we issue detailed analysis of 
what the cost of conserved electricity from our standards is. Typically, 
the cost of conserving electricity is two cents a kilowatt hour, three 
cents a kilowatt hour. 

The proposed— one of the refrigeration standards that we are 
considering would have a cost of conserved electricity of 2.9 cents a 
kilowatt hour and a payback to the consumer of 3.7 years. Most 
consumers are paying eight and a half cents per kilowatt hour." 

Please document these statements, and provide supporting documentation. 

A31. In most cases, efficiency standards increase the fir'^t cost of appliances and decrease the 
operating (energy) expense. The cost of conserved energy (CCE, in |/kWh) is the ratio of 
increased purchase pnce (amortized over the life of the appliance) to annual energy savings, 
and provides a means of comparison between the cost of saving, instead of supplying, 
energy. The CCEs for each class of refrigerators (7 classes) and freezers (3 classes) were 
presented in the U.S. Department of Energy, Technical Support Document: Energy 
Efficiency Standards for Consumer Products: Refrigerators, Refngerator-freezers, & 
Freezers (DQE/EE-0064) which was published in July, 1995. The table below shows those 
CCES, and a conversion of those results from 1992$ to 1995$. 



Cost of Conserved Energy (CCE) 



Proposed Refrigerator and Freezer 
Product Class 


Standard 

Share in 

2000 


DOE/EE-0064 
Quly, 1995) 


1995$/1992$ 
CCE 
1995$ 


Payback 
(Years) 


Refrig., Refrigerator-Freezer 


100% 








Compact Refrigerator 


13.1% 


0.010 


0.011 


0.9 


Top mount refrigerator-freezer 


65.4% 


0.029 


0.032 


3.7 


Side-by-side refrigerator-freezer 


8.3% 


0.031 


0.034 


4.0 


Bottom mount refrigerator-freezer 


1.2% 


0.032 


0.035 


4.1 


Top mount refrigerator-freezer with 
through the door service 


1.2% 


0.072 


0.078 


9.2 


Side-by-side refrigerator-freezer with 
through the door service 


10.8% 


0.021 


0.023 


2.6 












Freezers 


100% 








Manual defrost upright freezer 


38.6% 


0.004 


0.004 


0.5 


Auto defrost upright freezer 


12.7% 


0.031 


0.034 


3.9 


Manual defrost chest freezer 


48.7% 


0.022 


0.024 


2.8 



For example, for the most popular class of refrigerator-freezer, the top-freezer automatic 
defrost with no through-the-door service, the average retail price of a new refrigerator- 
freezer in 1998 with no change from the current standards was projected to be $559.52, 
while the price with proposed revised standards was projected to be $623.89. The increase 
in purchase price is $64.37 (1992$) to achieve annual energy savings of 196 kWh (difference 



509 



of 680 kWh/yr with existing standards, and 484 kWh/yr with proposed revised standards). 
The amortized purchase price (using an interest rate of 6% real, and a refrigerator lifetime of 
19 years) is 64.37/1 1.2=$5.77, giving a CCE (1992$) of S5.77/196=$0.029/kWh (1992$). To 
convert to 1995$, the ratio of Consumer Price Index (CPI) (1995)/CPI(1992) is 1.086, so 
CCE (1995$)=$0.032/kWh (1995). 

This cost of conserved energy can be compared to the cost of supplying energy. According 
to the Annual Energy Outlook, 1996, the residential electricity price is $0,087 /kWh in 1995, 
and projected to be $0,086 in 1998.' 

The Technical Support Document also contains details of the calculation of payback to the 
consumer. The payback period (PBP) measures the amount of time needed to recover the 
additional consumer investment in increased efficiency through lower operating costs 
Continuing the example of the top-mount auto-defrost refrigerator-freezer with no 
through-the-door services the increase in purchase price is $64.37 (1992$). The average 
annual operating cost at $0.088/kWh (1992$) is $59.86 with existing standards, and $42.62 
with proposed revised standards, or a savings of $17-24 per annum. The payback period is 
the ratio of the increase in purchase price to the decrease in annual operating cost, 
$64.37/$17.24=3.7 years. The Table above shows payback from proposed standards for 
each class of refrigerators, refrigerator-freezers, and freezers in the right most column. 

SUCCESS STORIES: THE ENERGY MISSION IN THE MARKETPLACE 

Q32. The following "success story" appears on pages 175 and 176 in Annex 3 of the Final 
Report of the Task Force on Strategic Energy Research and Development of the U.S. 
Department of Energy's Secretary of Energy Advisory Board: 

"Fluorescent Lamp Electronic Ballasts 

Department of Energy research and development created the current 
state-of-the-art electronic fluorescent lighting ballast, which was 
unknown in the mid-1970s. The electronic ballast not only improved 
lighting quality, but has saved consumers $750 million in consumer 
energy bills from a $3 million research and development investment. 
This new industry's sales totaled $275 million in 1992, accounting for 
25 percent of total ballast sales. Electronic ballasts are expected to 
replace magnetic ballasts in at least 75 percent of applications by 
2015." 



'U.S. Department of Energy, Energy Information Administration. Annual Energy Outiook. 1996, 
Washington, D.C., DOE/EIA-0383 (96), January, 1996. (p.78). (Convert residential electricity pnce 
from dollars per nniilion Btu to dollars per kilowatt-hour by multiplying by 0.003412 million Btu per 
kWh. Convert from 1994$ to 1995$ by multiplying by CPI(1995)/CPI(1994)=152.4/148.2 =1.028.) 



510 



Q32a. Please detail, by appropriate fiscal year, the $3 million DOE R&D investment 
in this technology, including a listing of the recipients of this funding. 

A32a. Approximately $500,000 was spent in the form of contracts to two small companies 
(Stevens Electronics and Iota Engineering (which became Excel, then EETech, 
then, finally EBT, which is today a major manufacturer of electronic ballasts)) over 
the fiscal years FY77-FY82. These included initial subcontracts to produce a small 
number of prototype electronic ballasts, as well as follow-on subcontracts to 
produce approximately 700 ballasts for installation at the Pacific Gas & Electric Co. 
building demonstration site in 1977. From FY 1976-1984 DOE funded researchers 
at LBL of approximately $2 million to support industry R&D by establishing early 
demonstration sites for electronic ballasts, conducting laboratory testing of 
prototypes produced under subcontract (as well as prototypes by other 
manufacturers not under subcontract, for example Triad Utrad) and developing 
specifications for electronic ballasts. The $2 million figure includes LBL costs to 
manage the first electronic ballast demonstration site at PG&E (1977-1979) and 
disseminate the results as well as providing technical assistance to the ballast industry 
in the development of standards for electronic ballasts (primarily through ANSI 
technical committee). This figure also includes DOE/LBL co-Rinding of an 
electronic ballast demonstration at the Veteran's Administration hospital in Long 
Beach California where approximately 400 dimming electronic ballasts were installed 
in 1979. As a result of die demonstration, the hospital became the first federal 
facility to specify the use of electronic ballasts. 

Q32b. Please detail, by appropriate fiscal year, private sector investment in this 
technology. 

A32b. It is extremely difficult to estimate since manufacturer investment data is jealously 
guarded as confidential. To estimate this value, we note that there were 
approximately 12 small ballast manufacturers, other than Iota and Stevens, that 
began to manufacture electronic ballasts starting in 1977. If each of these 12 
companies invested only $100,000 annually over the five years from 1980-1984 (a 
very conservative number), the total industry investment would be $6 million (12 
companies x $100,000/yr x 5 yrs=$6 million). This provides a lower bound on the 
private sector investment in technology for the five year period 1980-1984. The 
actual investment was probably much larger. 

Q32c. Please provide detailed documentation of the $750 million in consumer 
savings. 

A32c. Detailed documentation of the $750 million in savings is provided in the table 
below. GAO has audited this success story and notes that the $750 million is gross 
savings; that the analysis by which it was derived did not consider the additional cost 
of electronic ballasts ($8 each); and that when this premium is considered, 
consumers spent $52 million more for ballasts than they saved in electricity during 
the period examined. Despite this, GAO recognizes the value of this technology. It 
states: "Yet, over a longer period, ... electronic ballasts still save money. Carried 
over several years, the value of the energy savings will offset the higher initial costs 



511 



of the electronic ballasts. According to DOE's analysis, this net savings will total 
$1.3 billion by 2000." 

The ballasts have a payback time of 2.7 years, and a service life of 12 years, so of 
course in the early years (the DOE claim ended in 1995), consumers will see a 
negative cash flow. But the life-cycle saving is $17 per ballast. By April 1995, about 
100 million electronic ballasts were purchased and in place, saving electricity for the 
next 12 years. During their service lives their net saving will thus be about $1.7 
billion. [The $17 life-cycle saving is calculated as follows: $25 from electricity savings 
(discounted at 6% real interest rate) less the $8 cost premium.] 



Estimated Consumer Energy Savings-Fluorescent Lamp Electronic Ballasts 




YEAR 


1988 


1989 


1990 


1991 


1992 


1993 


1994 


1995 


Magnetic Ballasts Shipped 

(1,000s) 


74,609 


76,285 


78,363 


80,386 


83,710 


82,730 


76,184 


69,246 


Total Ballast Market (1,000s) 


75,673 


77,711 


81,364 


88,729 


96,860 


107,130 


110,344 


113,654 


Electionic Ballast Market Share 


1% 


2% 


4% 


9% 


14% 


23% 


31% 


39% 


Total Stock of Electronic Ballasts 
(1,000s) lassumes 12-year 
life/ retirement 


1.064 


2,490 


5,491 


13,834 


26,984 


51,384 


85,544 


129,952 


Electronic Ballasts Replacing Original 
Magnetic Ballasts (1000s) 


1,064 


2,490 


2,490 


2,490 


2,490 


2,490 


2,490 


2,490 


Electronic Ballasts Replacing EfBcient 
Magnetic Ballasts Shown (1000s) 








3,001 


11,344 


24,494 


48,894 


83,054 


127,462 


Electricity Savings for Stock in Year 

(GWh) 


112 


261 


387 


738 


1,290 


2,315 


3,750 


5,615 


Value of Electricity Savings in Year 
Shown ($1993 miUion) 


8 


18 


27 


52 


90 


162 


262 


393 



Engineering Assumptions Cumulative Savings (1988-1995) —> 1,012 

Annual operating hours: 3500 hours Cumulative Savings as of April 1995 —> 749 

Assume ballast powers: Two 32 watt lamps 

("Success Stories" was published on May 22, 1995. Interpolating the annual data to find the estimated 
savings through the end of April 1995 yields the $750 million figure.) 



Annual Energy Savings vs Base Case 

Basecase for years 1988-1989 
Basecase for 1990-1995 
Electronic ballast 



90 watts 105 kWh 
72 watts 42 kWh 
60 watts 



Note: 1 GWh = 1 billion watt-hours=l million kilowatt-hours 



Q32d. Does DOE hold the patents for this technology, and if not, why not? 



A32d. DOE does not hold the patents for this invention. Numerous Federal statutes and 
Presidential policy statutes govern the ownership or control of intellectual property 
arising firom federally-sponsored research and development These rights vary with 
different circumstances. In general, it is the broad interest of these Federal statutes 
to convey the rights of any invention to the contractor. Moreover, it is DOE's 
objective to encourage private development and deployment of new and advanced 
energy technologies that might contribute to the national interest and the public 



512 



purposes for which the Department's energy R&D was undertaken. Conveying 
patent and other rights to the inventor further this objective. See Appendix A for 
details on Federal statutes and the Presidential policy statements. [Nole: Appendix A 
is at the end of the ansa/ers to question 84.\ 

There were many patents issued in the early 1970's for electronic ballasts, 
particularly by Lutron, which produced an expensive ballast that lost money and was 
discontinued. In an article written by Gene Foley, researcher at the Alliance to Save 
Energy, called "High Frequency Electronic Ballasts," he shows that it took a 3-way 
collaboration of industry, government, and utilities to commercialize electronic 
ballasts 

Q32e. If DOE holds the patents for this technology, what licensing agreements does 
DOE have with private sector firms? Which firms? 

A32e. See answer to sub-question (d). Licensing agreements are typically entered into by 
firms negotiating with the patent hold, which is usually the contractor, not DOE. 
See Appendix A for details on applicable Federal statutes. If DOE does hold the 
patent, licensing is done per 35 U.S.C. 208 and the regulations issued by the 
Department of Commerce. 

Q32f. If DOE has licensing agreements with private sector finns, what licensing 
fees has DOE received from such Ucenses? 

A32f. See answers to sub-questions (d) and (e). Any licensing fees or royalties stemming 
fi-om an invention would go to the holder of the intellectual property rights, which 
is usually the contractor, not DOE. Federal statutes normally do not provide 
authorities to the government to require the reporting of this information when 
received by a non-M&O contractor. See Appendix A for details on relevant 
statutes. DOE can list the fees it has received. 

Q32g. Please provide evidence that the electronic fluorescent lighting ballast would 
not have been developed and commercialized without the DOE funding. 

A32g. The electronic ballast would probably have been eventually commercialized by the 
ballast industry, but market introduction might have been delayed. As noted in part 
(b) above, there were 10 other companies starting to manufacture electronic ballasts 
about the same time as the two companies DOE funded. It is not clear whether 
major ballast manufacturers would have been interested in the technology without 
doe's investment, however. 

We note that Universal (a large ballast company) acquired Stevens Luminoptics in 
1981 with the intent of commercializing the electronic ballast technology. DOE's 
funding of Stevens certainly contributed to Universal's interest. 



513 



Q33. The following "success story" appears on page 176 in Annex 3 of the Final Report of 
the Task Force on Strategic Energy Research and Development of the U.S. 
Department of Energy's Secretary of Energy Advisory Board: 

"Advanced Energy Efficient Windows 

A 20-year Department of Energy research and development 
partnership with industry culminated in the development at Lawrence 
Berkeley Laboratory of an advanced energy-efficient window that uses 
low-emissivity coatings to block heat gain or loss. No U.S. 
manufacturer had invested in this technology before the Department's 
R&D investment. Cumulative consimier energy savings attributable 
to using low-emissivity windows are $1.8 billion. This enormous 
savings was leveraged and catalyzed by a Department of Energy 
investment of just $3 million through the early 1980s. The Department 
teamed with five window manufacturers (Andersen, Cardinal IG, 
Owens-Coming Fiberglass, Pella, and Southwall Technologies) and 
the Bonneville Power Administration to convert the concept into 
commercial prototypes. Today, every major glass and window 
manufacturer offers low-emissivity products. Their market share is 
one-third of all residential windows." 

Q33a. Please detail, by appropriate fiscal year, the $3 million DOE R&D investment 
in this technology, inc