Chapter Ill

U.S. Energy Consumption Patterns, 1952-82

Page

Energy Consumption and Intensity Averaged Over the Entire U.S. Economy . . . 41.Energy Consumption by End-Use Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

All Fuel Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Oil Consumption . . . . .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Petroleum Product Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Motor Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Distillate Fuel Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Residual Fuel Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Ethane and Liquefied Gases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46Jet Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46Other Petroleum Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

The Combination of Oil Product Mix and Four Demand Sectors . . . . . . . . . . . . 47Residential and Commercial Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Electric Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

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

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

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

TABLES

Table No. Page

3. EIA Petroleum Product Categories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454. Refined Petroleum Products Supplied to End-Use Sectors, by Type, 1982 . . . 475. Growth Rates for Alternative indices of Mining and Manufacturing Output . . 51

FIGURES

Figure No. Page

6. Total Oil Consumption and Price per Barrel . . . . . . . . . . . . . . . . . . . . . . . . . . 397. Total Natural Gas Consumption and Average Price . . . . . . . . . . . . . . . . . . . . 408. Average Price of Electricity Sold by Electric Utilities, 1960-82 . . . . . . . . . . . . 409. Consumption of Energy by End-Use Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

IO. Energy Consumption-GNP Ratios, 1962-82 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4111. Energy Use and GNP Growth Rate Trends, 1952-82 . . . . . . . . . . . . . . . . . . . . 4212. Refined Petroleum Products Supplied to End-Use Sectors . . . . . . . . . . . . . . . 4413. Consumption of Natural Gas by End-Use Sector.. . . . . . . . . . . . . . . . . . . . . . 4414. Industrial Energy intensity Using the FRB Output Index . . . . . . . . . . . . . . . . . 4915. Industrial Energy Intensity Using Census Data . . . . . . . . . . . . . . . . . . . . . . . . . 5016. Gross National Product Overtime. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5217. Total Investment and Expenditures for Durable Goods... . . . . . . . . . . . . . . . 52

Chapter Ill

U.S. Energy Consumption Patterns, 1952=82

During the past decade, U.S. energy use changedconsiderably in response to a series of fuel supplyshocks and reversals in energy supply/cost trends,By far, the most important fuel supply shocks in-volved oil imports. The first of two import dis-ruptions occurred in 1973-74 as a result of theArab-Israeli war. The second occurred in 1979-80 as a result of the Iranian revolution.

Both shocks had long-term effects on oil mar-kets, effects that preview the expected conse-quences from a possible third disruption in thefuture. These effects on oil prices and total oil useover time are summarized in figure 6. As shown,average refiner acquisition prices more or lessdoubled during each disruption, and total oil usepeaked. 1 Two years after the Arab oil embargo— . ———

‘The price of imported oil actually tripled during the 1973-74 cur-tailment, but the net effect on prices paid by refiners was reducedby the blending of imports with domestic production. Prior to 1973,domestic prices were much higher than import prices, and after1973, domestic prices were temporarily held below internationalprices.

Figure 6.—Total Oil Consumption (MMB/D) andPrice per Barrel (1982 dollars)

38

A

I I I I I I 1 I1968 1970 1972 1974 1976 1978 1980 1982

Year

SOURCE: Energy Information Administration, 1962 Annual Review of Energy,Washington, DC, April 1963, pp. 67, 91.

of 1973-74, total U.S. oil use had dropped toabout 1 million barrels per day (MMB/D) belowits 1973 peak. After the initial shock of the sec-ond oil disruption, total oil consumption declinedfor 4 years. In 1982, U.S. oil demand was morethan 3 MMB/D below its all-time high of 18.8MMB/D in 1978.

In addition to oil import disruptions, U.S. en-ergy use has also been affected in the last dec-ade by a series of events involving economic ad-justments related to energy supply/cost trends.These include the longest coal miners’ strike inU.S. history; a reversal in natural gas production,which had been rising rapidly during the 1960s;a reversal in the cost of electricity, which hadbeen declining for decades; the introduction ofFederal and State environmental quality stand-ards; and a dramatic shift in the financial cost ofcapital in 1979. Although the 1977-78 coal miners’strike, which lasted 109 days, may have had onlytemporary significance in terms of disrupting sup-plies, it boosted oil use during the period justprior to the Iranian revolution and thus increasedoil demand at a crucial time. The other four eco-nomic adjustments deserve more attention be-cause they continue to influence energy markets,as well as the potential flexibility of market re-sponses to future oil import curtailments.

In 1972, domestic natural gas production hita peak, after rising steadily since World War II

(see fig. 7). The decline in total production re-sulted from a depletion of natural resources andfrom Federal price regulation, which held pricesbelow the rising costs of producing gas from newreserves. At the same time, demand was expand-ing rapidly because gas is a good substitute foroil used in stationary heating applications, be-cause gas can meet environmental emissionstandards at relatively low capital costs, and be-cause the price of gas was held down by regula-tions while the price of oil rose sharply.

At about the same time that natural gas pro-duction peaked, the price of electricity sold byutilities bottomed out after decades of steady de-cline and began to rise during the 1970s (see fig.8). This reversal resulted from several factors, in-

39

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

Figure 7.—Total Natural Gas Consumption (TCF/yr)and Average Price (1982 dollars/TCF)

$6.00

G-

SOURCE: Energy Information Administration, 1982 Annual Review of Energy,Washington, DC, April 1963, pp. 107, 117.

Figure 8.–Average Price of Electricity Sold byElectric Utilities, 1980-82

6.50

5.50

4.50

SOURCE: Energy Information Administration, 1982 Annual Review of Energy,Washington, DC, April 1963, p, 165.

eluding rising fuel costs, rising costs of meetingenvironmental regulations, and the rising cost ofcapital. In addition, during this period there werefew technological advances to maintain or lowerthe capital cost per kilowatthour of generatingcapacity and/or to reduce the Btu input of fuelper kilowatthour of electricity produced.

Furthermore, the introduction of national envi-ronmental quality standards affected energy useduring the past decade. The Clean Air Act and

Amendments established a national system of airquality regulation, which included ambient airquality and prevention of significant deteriorationstandards. Partly because of these emissionsstandards and the uncertainty about future stand-ards, many opportunities for switching to coal,which appeared economic on the basis of fuelcosts alone, have not been pursued. Other rea-sons why switching to coal may not have beencost effective include the costs of conversion,handling equipment, transportation, and storage.Even today, coal still appears to be too bother-some and unreliable to handle and burn for anybut the largest installations.

Finally, in 1979, a sharp increase in interestrates limited the growth potential for the entireeconomy and made it more difficult to reduceU.S. economic dependence on oil. Both of theseeconomic limitations arose because the high costof capital reduced the level of investment, de-creased employment and worker productivity,and slowed improvements in energy efficiencyand conversions to less expensive fuels. The highcost of capital particularly constrained growth inthe electric utilities industry, which produces themost capital-intensive energy commodity, andmade conversions from oil to coal extremely ex-pensive.

This chapter discusses in detail how energy usepatterns have changed during the past decadeas a result of these developments, with particu-lar emphasis given to oil and natural gas. Natu-ral gas is examined in nearly as much detail asoil because it is an exceptionally good oil substi-tute for all stationary heat and power applications,provided the user can connect to a distributionpipeline. 2 Together, oil and gas are consideredthe premium fossil fuels.

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

those in the home, where it can be delivered by pipeline insteadof by truck and where it burns more cleanly than oil. Furthermore,gas offers superior flame control in process heating and is the leastcostly source of hydrogen. However, as a gaseous fuel with a low-energy density per unit volume, it is inferior to oil as a transporta-tion fuel because so little of it (measured in Btu) can be stored ina tank in between fillups.

Ch. Ill—U.S. Energy Consumption Patterns, 1952-82 Ž 41

ENERGY CONSUMPTION AND INTENSITYAVERAGED OVER THE ENTIRE U.S. ECONOMY3

Prior to 1974, total U.S. energy use grew in stepwith the economy. Total energy use increasedi n every year for 20 years after 1952 except two,when minor declines occurred during economicrecessions (1 954 and 1958) (see fig. 9). The ratioof Btu per dollar of gross national product (GNP)stayed within a narrow band centered around59,000 (see fig. 10).

From 1952 to 1972, oil and natural gas ac-counted for nearly all (97 percent) of the increasein total energy use.4 Until 1970, gas grew at amuch higher rate than oil because of the rapidexpansion of transmission and distribution linesbuilt during World War II and because of thehuge inventory of gas reserves discovered dur-ing oil exploration in the first four decades of thiscent ury.

3The primary source of data for this and the next three sectionsis the 1982 Annual Review of Energy, El A/DOE.

4The increased demand for coal for electricity production wasmore than offset by the decline in the direct use of coal in the in-dustrial and transportation sectors.

Figure 9.–Consumption of Energy byEnd-Use Sector

1952 1957 1962 1967 1972 1977 1982

Years

(Without electricitydistributed)

SOURCE Energy Information Administration, 1982 Annual Review of Energy,Washington, DC, April 1983, p. 8

However, all of these trends changed in theearly 1970s. Total energy use declined in 1974and 1975 (see fig. 10). After 2 years of significantdecline, total energy use bounced back in 1976and 1977 and increased in 1979, reaching themost recent peak at just under 79 quadrillion Btu(quads).5 Since then, total energy use has de-clined on the average by more than 2.7 percentper year through 1983.

Since 1973, oil and gas use has followed a sim-ilar pattern. The upward trend in oil use reverseditself after the Arab oil embargo of 1973-74. Itshould not be surprising that the upward anddownward movements in total energy use andpremium fossil fuel consumption would be sim-ilar, since the latter accounts for most of the total.It is also worth noting that the premium fuel sharein total energy has steadily declined from a peakof 78 percent in 1972 to 67 percent in 1983.

Beginning in the early 1970s, a dramatic changeoccurred in the growth rates for oil and gas rela-tive to the GNP. Before 1970, use of both pre-mium fossil fuels grew more rapidly than theGNP, as shown in figure 11. Since 1973, both

‘One quad = 1 quadrillion (1015, Btu.

Figure 10.—Energy Consumption-GNP Ratios,1962-62

1950 1955 1960 1965 1970 1975 1980 1985

YearsSOURCES Energy Information Admmlitration, 1982 Annual Review, of Energy

Washington, DC, April 1983; Department of Commerce, Survey of Cur-rent Business, March 1984 Bureau of the Census, Statistical Abstractof the United States 1983, Washington, DC, 1983.

3 7-8 3 3 0 - 84 _ 4

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

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

1952-60 1960-69 1970-73 1973-75 1975-79 1979-82

Natural gasconsumption

Petroleumconsumption

GNP growth

r I

SOURCES: National Income and Product Accounts of the U.S. Department of Commerce, Bureau of Economic Analysis,September 1981; and Energy Information Administration, l&Z Annual Review of Energy, Washington, DC, April 1983.

rates have either grown more slowly or, when increases motivated all premium fossil fuel usersGNP decreased, declined more rapidly than the to reduce their consumption. The price increasesGNP. As measured by the ratio of fuel used to also gave domestic oil and gas producers strongeconomic activity, oil peaked in 1973 at 27,000 new incentives to increase exploration and pro-Btu per dollar and declined steadily to 19,800 Btu duction. The domestic natural resource base hasper dollar in 1983. Natural gas peaked at 14,000 not increased significantly, however, and domes-Btu per dollar in 1970 and declined to 11,300 Btu tic oil production has declined since 1970, ex-per dollar in 1983. cept for the addition of Alaskan oil. Domestic nat-

The major reason for these changes in fuel useural gas production also dropped below its 1973

was rapidly increasing prices, after taking general peak, although the actual decline in production

inflation into account. Figure 6 shows that since capacity is somewhat obscured by current uncer-

1972, oil prices more than quadrupled and nat-tainties associated with Federal price regulation

ural gas prices almost tripled. These enormous and possible deregulation.

—

Ch. Ill—U.S. Energy Consumption Patterns, 1952-82 . 43—

ENERGY CONSUMPTION BY END-USE SECTOR

Using conventional energy accounts, totalenergy use can be divided into five sectors: 1)residential; 2) commercial; 3) industrial; 4) trans-portation; and 5) electric utilities. Residential andcommercial energy use figures are often com-bined because data are not collected separatelyfor all fuels. Fuel use data for electric utilities arealso folded into total energy use by the other sec-tors because electricity is valued in the economyonly as an intermediate input into the consum-ing/producing activities associated with the otherfour divisions. What is commonly called the in-dustrial sector includes the activities of manufac-turing, mining, construction, and agriculture,

Data are gathered for all five sectors, when pos-sible, because each has a distinctive economicobjective (e. g., residential, commercial, and in-dustrial) or engages in a distinctive activity (e.g.,transportation and electric utilities). Furthermore,with the exception of the transportation sector,each sector comprises a different group of deci-sionmakers with different economic problems.The combination of distinctive objectives andproblems means that the sectors may follow trendlines distinct from one another as the economygrows and contracts over time.

All Fuel Products

When separated, electric utility fuel use dis-plays by far the strongest growth trend, increas-ing by almost 500 percent and doubling its shareover 30 years (see fig. 9). All sectors generally in-creased their energy use from 1952 to 1972, al-though industrial consumption declined some-what during the recession years, particularly 1954and 1958.

During the next 10 years (through 1982), resi-dential/commercial energy use (excluding elec-tricity) declined by about 20 percent, and indus-trial consumption declined by about 22 percent.Measured in terms of share in total fuel use, theresidential/commercial sectors declined morethan 3 percentage points during the last 10 years,compared to a 2-percentage-point decline dur-ing the 1952-72 period. The industrial sector sharedeclined by 7 percentage points during the last

10 years, compared to a decline of 8 points dur-ing the previous 20 years. From 1972 to 1982,electric power generation increased its share by8 percentage points and transportation increasedits share by about 2 points.

When electricity fuel use data are folded intototals (at 10,000 Btu per kilowatthour [kWh]) forthe three end-use sectors, the trend for the resi-dential/commercial share is reversed. Instead ofdeclining during the 30-year period, the sharerose steadily, and actual energy use stayed rela-tively stable after 1974. Electrification, in otherwords, was of major importance. In the indus-trial sector, the addition of electricity made onlyminor changes in both share and actual usetrends. There was still a long-term, steady declinein the industrial share of total energy and a sig-nificant decline in actual consumption over thelast 10 years. In fact, no long-term trend in sharesof energy use by sector was reversed during thepast decade of oil price inflation and other energymarket turmoil.

Oil Consumption

As shown in figure 12, oil use in all four sec-tors grew steadily prior to 1973. The electric util-ities sector experienced the most rapid increase,growing by an average annual rate of about 10percent and more than tripling its share of totaloil use over the 20-year reporting period. Oil useby the residential/commercial sector grew mostslowly over the same period, showing an aver-age annual growth rate of about 3.2 percent. In-dustrial sector oil use grew at about 3.7 percentper year, while transportation sector use grew atthe rate of 4 percent annually.

Since 1973, oil use has been shifting to thetransportation sector. The industrial sector hasmaintained its share in total oil use in the last dec-ade, principally because nonfuel use of oil—e.g.,as a raw material—has grown, offsetting the de-cline in fuel applications. In contrast, the residen-tial/commercial sector continued to lose its shareof total oil use, and at a rate faster than that ex-hibited in the previous 20 years. Finally, afterholding its total use and its share of total oil use

44 Ž U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

Figure 12.–Refined Petroleum Products Supplied toEnd= Use Sectors

1 I

8

01952 1957 1962 1967 1972 1977 1982

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

Washington, DC, April 1983, p. 66.

constant until 1978, electric utilities have sincelowered both sharply.

Natural Gas

Natural gas use data are available for all fiveend-use sectors. However, only four sectors showsignificant trends (see fig. 13). In the transporta-tion sector, gas use has remained constant at 3percent of the total since 1952 because it is usedalmost exclusively as a fuel for pipelines. Theother four sectors steadily increased gas use un-til 1972. During the last decade natural gas usedeclined in all sectors, with the greatest declineoccurring in the industrial sector.

In terms of natural gas shares over the 30-yearperiod, the industrial sector had the largest drop,declining from 55 percent of the total to about38 percent of total natural gas consumption,while the commercial sector experienced thelargest gain, increasing its share from 7 to about15 percent, The electric utilities sector also in-

0

Ch. Ill–U.S. Energy Consumption Patterns, 1952-82 ● 4 5

PETROLEUM

Refineries convert crude oils into a variety ofproducts. Although most of the products arefuels, crude oils can also be refined to producepetrochemicals—i e., feedstocks for the manufac-ture of a wide variety of plastics, synthetic fibers,paints and coatings, adhesives, piping, and thelike.

Each of these products offers different oppor-tunities for material substitution and conservationin its end-use applications. By examining the cur-rent product mix and its applications (next sec-tion), and how these have changed over time,the nature of U.S. economic dependence on oilcan be described.

Out of at least 15 distinct product categories,the Energy Information Administration reports a30-year consumption time series for six (see fig.12 and table 3). The “other products” categoryincludes kerosene, petrochemical feedstocks, lu-bricants, wax, petroleum coke, asphalt, road oil,still gas, natural gasoline, unfractionated stream,plant condensate, and miscellaneous other prod-ucts. This category is a mixture of fuels andmaterials.

Before describing trends in greater detail foreach of these product categories, it is importantto note that production for all six increased dur-ing the 1952-72 period. A growing economy thatrequired greater numbers of engines, greaterquantities of heat and steam, and larger volumesof petroleum-based chemicals and synthetic ma-terials was the primary force in driving oil use up,

Table 3.—EIA Petroleum Product Categories

Percent oftotal Iiquidsa used

in 1982

1. Motor gasoline . . . . . . . . . . . . . . . . . 41.52. Distillate fuel oil. . . . . . . . . . . . . . . . 18.83. Residual fuel oil . . . . . . . . . . . . . . . . 13.04. Ethane and Iiquified gases. . . . . . . 6.55. Jet fuel . . . . . . . . . . . . . . . . . . . . . . . . 6.86. Other products . . . . . . . . . . . . . . . . . 13.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0alncludes natural gas liquids and all products made from crude oil.

SOURCE: Energy Information Administration, 1983 Annual Review of Energy,Washington, DC, April 1983.

PRODUCT MIX

However, consumption of all products slippedin 1974 and 1975 as a result of rapidly rising fuelprices. After the initial price shock wore off andas real prices declined, the economy began togrow again in the mid-197@ and product de-mand rose until 1979. In the last 4 years, all butone product category —ethane and liquefied gases–declined as a result of price escalation, the eco-nomic recession, and the higher fuel efficiencyof new cars. Each of the six major product cate-gories is discussed below.

Motor Gasoline

Gasoline is used almost exclusively in auto-mobiles and light trucks. Since 1952, the shareof gasoline in total oil use has stayed in theneighborhood of 40 percent. When real oil priceswere steady, growth in gasoline demand was rela-tively low, and when prices rose sharply in thelast decade, consumption declined at a relativelyslow pace. Since total oil consumption peakedin 1978, gasoline use has declined by a smallerpercentage than four of the five other productcategories. Perhaps a much sharper decline is im-minent, as expected technological change wouldsuggest (see ch. V). Because gasoline representssuch a large portion of all petroleum products,however, even a small percentage decline trans-lates into larger volume declines.

Distillate Fuel Oil

Distillate (#1 or #2) is used primarily for heatand mechanical motion (diesel). While #2 fueloil and diesel are chemically distinct, they aregenerally considered as one fuel product becausethey come from the same boiling fraction in a bar-rel of crude oil and refineries can trade them offwith little change in operations. Like gasoline,distillate has maintained over 30 years its sharein total oil use, but its roughly 18-percent shareis less than half that of the predominant product.

Residual Fuel Oil

The next largest single petroleum product cat-egory (measured by volume) is residual fuel oil(resid). As its name implies, it is the residuum,

46 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

or bottom, of a barrel of crude, which remainsafter all other fractions have vaporized into thedistillation column. Residual oil is generally tooviscous to flow without preheating and specialpumping. Therefore, its use is limited to largeboilers. Residual fuel has been the only productcategory to lose its share of total petroleum usecontinually over the 30-year period, going from21 percent in 1952 to 11 percent in 1982. Its mostrapid share loss has occurred during the past 4years, primarily because of the large decline inuse by electric utilities. In general, this decliningshare has been the result of its relatively low end-use value, the availability of good fuel substitutes(e.g., coal and natural gas), and the increasingability of refiners to crack large resid moleculesinto higher valued fractions, such as gasoline anddistillate.

Ethane and Liquefied Gases

These relatively light hydrocarbons are usedprimarily as petrochemical feedstocks and sec-ondarily for high-quality process and space heat-ing, particularly in remote areas. Over the past30 years, this category sharply increased its sharein total oil use (from 4 to 10 percent) becauseboth demand and supply conditions were fa-vorable.

On the supply side, unlike other refined petro-leum products, liquefied gases have an alterna-tive source of supply in natural gas reserves. Sincegas use expanded more rapidly than oil over thisperiod, the potential supply of liquefied gases ex-panded at more than twice the rate of other pe-troleum products.

On the demand side, these light liquids areused primarily for chemical feedstocks, and de-mand for feedstocks has continued to be strongeven during periods of sharply rising prices. Thestrength of this demand may be explained by therelatively rapid growth of the chemicals industry6

GMeasu res of relative growth for the chemicals industry arerendered imprecise by relative price changes over such a long timeperiod (30 years). However, two growth rate comparisons areavailable which nevertheless clearly show the strength of this in-dustry. First, as reported by the Department of Commerce (The Na-t/ona/ /rrcome and Product Accounts of the United States, 1929-76,

and by the relatively low-cost share of feedstockmaterials in total petrochemical product costleading to relatively low price elasticity for pe-trochemicals.

Jet Fuel

Jet fuel is the other product category that hassharply increased its share among all oil productsover the last 30 years. However, this increaseoccurred entirely before 1973. Since then, itsshare has remained relatively steady. This cate-gory (slightly less than 7 percent of total prod-uct) is the least important of the five major prod-ucts, as measured by volume consumed.

Other Petroleum Products

A diverse group of products are included in thiscategory, making it difficult to generalize aboutend-use trends except to note that about 90 per-cent of the end uses are used in the industrial sec-tor. The nonindustrial uses are primarily forkerosene for space heating and hot water and lu-bricants for transportation. Since the share of in-dustrial activity in the economy has been steadilydeclining (see later section in this chapter), theshare of this petroleum product group may tendto decline, as well. However, since 1952 thiscomposite category has maintained its share intotal oil consumption at around 13 percent. Al-though its share declined to about 12 percent in1982, this appears to be the result of a temporarydecline in industrial output associated with thedeep recession in that year. The reasons for thisshare stability are the same as those for liquefiedgases, given above.

Statistical Tables, pp. 229-233), income generated (current dollars)by “chemical and allied products” grew at an annual rate of 7 per-cent, while the economy grew at 6.7 percent. Of course, the relativedifference would be much greater if inflation were removed. Sec-ond, from 1969-80, the growth in the Federal Reserve Board in-dex for the chemicals industry was 3.9 percent, while that for allmanufacturers grew at 3,25 percent. (See /ndustria/ Production, An-nual, Board of Governors of the Federal Reserve System.)

Ch. Ill—U.S. Energy Consumption Patterns, 1952-82 . 47

THE COMBINATION OF OIL PRODUCT MIX ANDFOUR DEMAND SECTORS

U.S. oil use can be further examined by in-tegrating oil product mix and end-use sectors.Table 4 shows major petroleum products cate-gories supplied to each end-use sector for 1982.

Residential and Commercial Sectors

Residential and small commercial buildingowners typically use distillate or liquefied petro-leum gas for space and water heating becausethese fuels are very convenient to use in equip-ment of moderate cost. On the other hand, re-sidual oil is used only in the largest boilers in verylarge apartment and commercial buildings. Thisfuel is less expensive, but handling is more diffi-cult and costly. Since 1977, #2 distillate fuel oiluse has declined greatly, and use of #6 residualfuel oil and liquefied gases has declined by aneven greater percentage (see fig. 12). A sharplyrising trend in electricity use by these two sec-tors indicates that a substantial amount of oil isbeing saved by the substitution of electricity,which now exceeds oil as a heating source. Nat-ural gas is used also as an oil substitute in thesesectors. However, its increased use as an oil sub-stitute is being offset by the use of more energy-efficient technologies and equipment and otherconservation measures.

Electric Utilities

Ninety-three percent of the petroleum used byutilities in 1982 was residual fuel burned inboilers. Over the past 30 years, utilities havesharply reduced oil use, primarily by substitut-ing coal and nuclear power. Most recently, largereductions in the use of #6 residual fuel haveoccurred because actual demand for electricityhas fallen far below estimates. When faced withexcess capacity, utilities will shut down oil boilersfirst to maximize savings in fuel costs. If demandsuddenly increases, however, oil use will climbto the extent that coal and nuclear generating ca-pacity are not available.

Transportation

Gasoline, diesel, and jet fuel are the primaryproducts used by the transportation sector. Gas-oline accounts for the largest share—65 percent;diesel–l 5 percent; and jet fuel–11 percent. Twoof the three most important fuels, gasoline andjet fuel, are used almost exclusively in the trans-portation sector. Furthermore, the amount ofdistillate burned as diesel fuel in transportationis about equal to all other uses of distillate com-bined, and much of the distillate used in indus-

Table 4.—Refined Petroleum Products Supplied to End-Use Sectors, by Type,1982 (thousand B/D)

Residential/ ElectricFuel commercial Industrial Transportation uti l i t ies Total a

Motor gasoline . . . . . . . . . . . . . . 50 70 6,420 0 6,540Distillate fuel oil (#2) . . . . . . . . 700 620 1,310 40 2,670

—Hot water and steam—Engine—Other

Residual fuel oil (#6) . . . . . . . . . 170 460 440 640 1,720—Hot water and steam—Marine fuel

LPG . . . . . . . . . . . . . . . . . . . . . . . 260 1,210 20 0 1,500—Heat and hot water—Industrial feedstock

Jet fuel . . . . . . . . . . . . . . . . . . . . 0 0 1,010 0 1,010Other b . . . . . . . . . . . . . . . . . . . . . 60 1,700 100 10 1,860

asum of the parts may not equal the total because of rounding.blncludes (In order of ,mpodance) asphalt, other petroleum feed stocks, still gas petroleum coke, lubricants, kerosene, speciat

naphthas, av!atlon gasoline, wax, and road oil,

SOURCE: Energy Information Administration, 1983 Annual Review of Energy, Washington, DC, April 1983, p 69

48 . U.S. Vulnerability to an Oil Import Curtailment: The Oil Replacement Capability

try is also diesel fuel for engines, such as in agri-cultural, mining, and construction equipment. Inaddition to these fuels, smaller amounts of resid-ual fuel oil are used in marine

Industrial

ships.

The mix of petroleum products used in the in-dustrial sector is by far the most varied. The onlymajor petroleum products not used in this sec-tor are the two aviation fuels (jet fuel and avia-tion gasoline). The industrial sector is the majorconsumer of asphalt, lubricants, road oil, and theother products included in the “other” category.

Compared to the other three sectors, the in-dustrial sector employs the most diverse, com-

plex, and rapidly changing technologies, andthese make it difficult to predict future consump-tion patterns. However, industrial users have op-tions to adjust to higher oil prices that are notavailable or at least not as effective for the otherdemand sectors. These include shifting away fromproducts that use more oil to products that useless, changing production processes in order toswitch fuels or to use oil more efficiently, and sub-stituting skilled labor and control technology inorder to maximize fuel efficiency. In lieu of anextensive description of fuel use technology inspecific industries, behavior of this second mostimportant oil-consuming sector is described firstin terms of time trends in energy intensity andsecond in terms of historical analysis, which sug-gests the effect of petroleum price inflation onproduct mix.

INDUSTRIAL SECTOR ENERGY INTENSITY

Only two out of the four energy-consumingsectors—the industrial and utility sectors—measurethe value of their activities or output by marketprices. In the residential/commercial and trans-portation sectors, the value of goods and serv-ices produced can be estimated on the basis ofthe value of purchased inputs, but this providesonly a lower boundary for value of output. Pre-sumably, residential customers and automobile/truck drivers purchase petroleum because theheat and transportation derived from the fuel areworth more than its cost. However, since theseare sales to final users, there is no market priceto measure the value of actual end-use services.

For electric utilities, there is a market test ofvalue. Since only a single commodity is pro-duced, electricity, the value of production issimply the price per kilowatthour multiplied bythe number of kilowatthours of electricity gen-erated. Thus, in this case, energy intensity is pro-portional to engineering efficiency. Engineeringefficiency rose significantly from about 21 per-cent (Btu electricity out per Btu fuel input) in 1952to 29.5 percent in the mid-l960s and hasleveled out since then.7 Consequently, the energy

7Energy Information Administration, 1982 Annnual Review ofEnergy, Washington, DC, April 1983, p. 13.

intensity (value of output in constant pricesdivided by Btu inputs) declined by almost 30 per-cent by the mid-l960s, but has held steady since.

Industrial output can be measured in at leasttwo different ways: 1) as an index of physical out-put, or 2) as an economic product. Both typesof measurements involve difficult data analysisbecause of the diversity of industrial activities.Each of these output measures are discussedseparately below because they give differentperspectives on industrial energy intensity,

The Federal Reserve Board (FRB) has devel-oped an index of industrial output designed toapproximate the physical quantity of goods pro-duced in mining and manufacturing. It does notinclude agriculture or construction. For this in-dex, the FRB collects constant dollar or relatedphysical unit measures of output or economicactivity by 4- to 6-digit SIC8 industries. In orderto aggregate this large number of separate out-put indices into a single national index, the FRBnormally uses fractional weights representing theshare of each industry in total U.S. industrial valueadded. In other words, if plastic milk bottle mak-

8The Standard Industrial Classification (SIC) defines industries inaccordance with the composition and structure of the economyand covers the entire field of economic activities,

Ch. Ill—U.S. Energy Consumption Patterns, 1952-82 Ž 49

ers contribute 10 times as much to real nationalproduct as contact Iense makers, then the multi-plicative weight applied to the output index num-ber for milk bottles would be 10 times as largeas the corresponding weight for contact lenses.Note that value-added weights eliminate double-counting of the plastic that goes into both prod-ucts. That value is attributed to plastic manufac-turers.

Dividing the FRB index of industrial output intoenergy used by mining and manufacturing yieldsthe first indicator of industrial energy intensity.As shown in figure 14, all pertinent measures ofenergy per unit of output have fallen steadily,with the exception of a brief reversal around1970. Based on these data, it is reasonable to con-clude that technological advances over the last20 years have permitted steady, substantial re-ductions in the amount of energy needed to pro-duce industrial commodities.

A somewhat different view results if anotherreputable time series of industrial output is used.Industrial sector economic product is also meas-ured as “value added” by, or “gross productoriginating” (GPO) from industry.9 In 1952 total

9There is a range of reputable time series estimates for industrialoutput since estimation involves many theoretical choices aboutwhat should be measured and problems related to how data areactually gathered. Discussions with data-base specialists indicate

Figure 14.—lndustrial Energy IntensityUsing the FRB Output Index

I I 1I01 9 6 0 1965 1970 1975 1980 1985

Year

SOURCES: Energy Information Administration, State Energy Report, 19600Through 1981, DOE/ElA41214@l), Washington, DC, June 1983; Month/yEnergy Review, DOE/EIA-0035@3/07); Council of Economic Advisors,“Report to the President,” app. A, in The 1983 Eccmorrric Report ofthe President, Washington, DC, February 1983.

industrial GPO equaled about 38 percent of grossdomestic product (GDP), but has since declinedsteadily, to about 31 percent in 1982. This meas-urement, in dollars, is obtained via two alterna-tive methods. From the perspective of incomegenerated from production, value added shouldequal payments to all workers and investorsengaged in mining, manufacturing, construction,and agriculture, plus taxes paid by firms that arealso so engaged. In terms of product sales, thesame value should also be obtained by subtract-ing the sales value of all intermediate products(as defined above) from total industrial sales.

In fact, because of data limitations, both ap-proaches are used to estimate industrial eco-nomic product, whether it is called value addedor “gross product originating, ” and to cross-check data sources. Differences that arise be-tween the two approaches must be reconciledby experienced judgment. The last step in thedata analysis involves elimination of general priceinflation by dividing the industrial product timeseries by a price deflator, which is based on arepresentative sample of industrial products. Itis important to notice that upward or downwardtrends in the relative price of industrial productsand changes in the product mix can make thistime series behave differently than the index ofphysical output.

Industrial energy intensity as measured by theratio of gross energy inputs to gross productoriginating is shown in figure 15. Prior to 1972,industrial energy use and dollar output grewapace; therefore, the intensity ratio stayed roughlyconstant at about 75,000 Btu/dollar. The prob-able reasons for this constancy, compared to thesteady decline of the ratio of energy used to phys-ical output (see above), are decreasing relativeproduct prices and changing product mix. After1972, energy use declined at an annual averagerate of about 1.4 percent, while output continuedto expand on the average of a little more than1 percent per year. In other words, industrial

that, in general, the FRB index tends to show more rapid outputgrowth than indices based on the quinquennial Census of Manufac-tures. The latter includes the estimates for industrial output, whichare published as part of the National Income and Product Accounts(N I PA).

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

Figure 15.—lndustrial Energy IntensityUsing Census Data

8

7

1

YearSOURCES: Department of Commerce, The National Income and Producf Ac-

counts of the U. S., 1929-76, Statistical Tables; and the Survey ofCurrent Business; and Energy Information Administration, 1982 An-nual Review of Energy, Washington, DC, April, 1983.

energy intensity made a sharp break from its pasttrend as it declined sharply over the last decade.

Compared to all sources of energy, the use ofoil has moved more in step with industrial activ-ity over the last 30 years, so industrial oil inten-sity has been relatively stable. This conclusion in-cludes the last decade, when oil prices rose sharply.While total energy intensity declined by about24 percent, oil intensity declined by only about14 percent. Movements in natural gas intensity,on the other hand, were relatively large. Whilethe other two intensity indicators exhibited mi-nor fluctuations from 1952-1972, gas intensitygrew by about 28 percent; and while overallenergy intensity declined by about 14 percentduring the last decade, gas intensity declined byabout 35 percent.

INDUSTRIAL PRODUCT MIX SHIFT

When oil or gas prices increase, the costs andprices of goods and services, which use signifi-cant amounts of these fuels as inputs, also rise.This cost increase for final products can be mod-erated by investments in fuel efficiency improve-ments but cannot be entirely eliminated withouttechnological innovation. Fortunately, higher fuelprices motivate innovations. Another importantreaction to these rising prices is a shift in the over-all mix of goods and services. In some productmarkets, rising prices induce sharp reductions inpurchases, and so demand is said to be priceelastic. However, in other markets, higher pricescause little change in sales volume, and so de-mand is called price inelastic.

For example, the demand for plastic milk con-tainers is price elastic for two reasons: 1) the costof plastic is a significant fraction of the total priceof the milk to the consumer, and 2) paper con-tainers are highly competitive both in cost andperformance. Consequently, if the price of oildrives up the cost of plastic to bottlers, those bot-tlers will probably switch to paper. Over time,the shares of plastic and paper milk containersfollow their relative prices.

In contrast, the demand for plastic in the man-ufacture of contact lenses is price inelastic. Forthis product, the price of plastic is not a majorfraction of total cost and so an oil shock does notsignificantly raise the price of contact lenses. Fur-thermore, there is no good substitute material formaking contacts and the other major alternativetechnology, eyeglasses, are also made primarilyfrom plastic, so those with imperfect vision cando little else but pay the price.

After the two major oil price increases of the1970s, large product mix shifts across the entireeconomy began to occur, and these shifts willtake years to complete. Attempts to describe em-pirically the shifts that have accompanied thesepast oil disruptions are circumscribed by poordata and difficulties in isolating the impacts of anoil disruption from the effects of other disturb-ances and trends. Nevertheless, a useful snapshotof product mix shift following the 1973-74 disrup-tion is provided in table 5. These data are basedon industrial data collected by the FRB (see pre-vious section) and on a number of related nation-al indices, as described below.

.

Ch. Ill–U.S. Energy Consumption Patterns, 1952-82 . 51

Marlay has constructed a number of additionalnational indices using other weighting schemesbased on fuel use for the same set of SIC indus-tries. 10 Each industry was given a weight equalto its share in total industrial use of oil to con-struct an oil-weighted national index of industrialoutput. Similarly, a natural gas-weighted indexwas constructed, and so on for other fuels andcombinations of fuels.

These alternative indices of industrial outputare then compared in terms of their growth ratesover time. If indeed there has been a shift awayfrom oil-intensive commodities since 1974, thenthe oil-weighted time series should suffer a moredramatic decline after that year than the FRB se-ries with value-added weights.

Table 5 reports Marlay’s findings for the ag-gregate of manufacturing and mining. As shown,the value-added index lowered its average growthrate by 1.1 points (comparing the 19 years before1973 to the 7 years after), while the oil-weightedindex dropped by 1.8 points and the indexweighted by the sum of oil and gas dropped by2.1 points. Somewhat ironically, the coal-weightedindex dropped the most (2.6 points), but that wasdue in large part to the steady decline of the in-

10 Robert C. MarIay, Industrial Energy Productivity, Ph. D. disser-

tation, Massachusetts Institute of Technology, May 1983.

tegrated steel industry, which resulted from in-ternational and domestic economic events farremoved from oil markets.

Marlay’s analysis confirms that, indeed, indus-trial sector product mix of manufacturing plantsand mines shifted toward less energy-intensivegoods, including less oil-intensive goods. Al-though the shift away from oil was slightly smallerthan the average for all fuels, the shift away fromboth premium fuels (oil and natural gas) wasslightly greater than the average. The latter shiftis relevant because of the large fuel-switching ca-pability between oil and gas for stationary heatand steam applications. And as mentioned above,the relatively large decline in the coal-weightedindex was only marginally related to the risingprice of oil.

Table 5.—Growth Rates for Alternative Indices ofMining and Manufacturing Output

Average growth rates

Index 1954-73 1973-80 Difference

Coal weighted . . . . . . . . . . 1.9 -0 .7 –2.6Gas weighted. . . . . . . . . . . 4.2 1.9 -2 .3Oil weighted. . . . . . . . . . . . 5.2 3.4 -1 .8Oil and gas . . . . . . . . . . . . . 4.5 2.4 -2.1Electricity . . . . . . . . . . . . . . 4.2 2.1 – 2.1Total energy . . . . . . . . . . . . 4.0 2.0 -2 .0Value added . . . . . . . . . . . . 4.0 2.9 – 1.1

SOURCE: Robert C. Marlay, Industrial Energy Productivity, Ph.D. dissertation,Massachusetts Institute of Technology, May 1983, ch. 7.

ECONOMIC RECESSION AND PRODUCTIVITY DECLINE

A final economic adjustment to an oil supply production process. Similarly, consumers realizeshortfall involves a decline in the overall level of that they are spending too much on oil, giveneconomic activity. While this adjustment is diffi- their lifestyle objectives and the cost and avail-cult to isolate from other factors affecting eco- ability of oil substitutes. For both, the period im-nomic activity, two basic cause-and-effect mech- mediately after oil prices have risen involvesanisms are clearly operating. retrenchment because producer revenues and

Immediately following an oil disruption, there consumer purchasing power decline. Both reduc-tions in economic activity can interact to amplifyis a temporary readjustment process analogous

to a business cycle recession. Within a short time the resulting decline in GNP, at least in the shortterm.after a sharp oil price increase, producers realize

that their factor input mix is suboptimal because Although it is extremely difficult to isolate justthey are spending too much on oil, given their how much an oil supply shortfall may have con-available options to increase profits by changing tributed to a subsequent economic recession, ittheir technology or at least by reorganizing the is worth noting that both the 1973-74 and the

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

1978-79 disruptions were immediately followedby economic recessions that apparently werecaused to a large extent by these incidents (seefig. 16). While a general recession of economicactivity is a negative impact, it also has the ef-fect of lowering demand for oil and thus oilprices.

Although this short-term adjustment process isan important stabilizing force in oil markets, theprimary subject of this assessment involves longerterm adjustments, which depend primarily ontechnological options for oil replacement and onthe willingness of investors to invest in these op-tions. Investors respond to general economicconditions as well as to opportunities created bychanging prices and technology. Immediatelyafter the last two shortfalls, investment activitydeclined more than in proportion to GNP (seefig. 17), but the economy can be expected tocome out of its post-shortfall recession, with in-vestors leading the way, if oil replacement op-tions are attractive.

Needless to say, it is exceedingly difficult toevaluate these replacement opportunities, evenafter the last decade of experience because so

Figure 16.—Gross Nationai Product Over Time(constant 1972 dollars)

1.6

1.5

1.1

1.0

01969 1971 1973 1975 1977 1979 1981 1983

Year

Fig ure 17.—Total Investment and Expenditures forDurable Goodsa (as percent of GNP)

24

20

16

12

n

“ 1971 1973 1975 1977 1979 1981 1983

Year

aProducer investment in durables is one component of total private invest-ment. Consumer expenditures for durables is not included in total private in-vestment but it is closely related because durables are investment goods.Both producer and consumer durables are also germaine to the discussion ofinvestment for oil replacement.

SOURCES: The National Income and Product Accounts of the United States,1929-76, Statistical Tables; and Survey of Current Business, “Na-tional Income and Product Accounts,” Table 1.1, July 1983 andMarch 1984.

many other factors besides oil markets have con-tributed to the performance of the economy overthat period. However, in the 5-year horizon ofthis assessment, the net macroeconomic impactof a permanent loss of oil supplies or permanentincrease in the price of oil is most likely to benegative.

Barring technological breakthroughs or majorchanges in production processes or lifestyle, GNPand average labor productivity must decline be-cause a permanent oil supply shortfall raises thecost of producing the prevailing mix of goods andservices. Conversely, a permanent shortfall re-duces the availability of a key resource input tothe economy, and thus, everything else beingmore or less the same, total output must decline,Limiting attention only to changes in oil inputsbecomes less realistic as the years pass follow-ing the onset of a shortfall. Indeed, based on thelast two shortfalls, one might expect develop-ments in technology and lifestyle to overcomeshortfall losses within the time horizon of a dec-ade, or at least to change expectations about thefuture which existed when imported oil wascheap and plentiful.

The point of this discussion is that oil consump-tion can be reduced by reducing economic activ-

Ch. III—U.S. Energy Consumption Patterns, 1952-82 ● 53

ity, and that the market economy may decide that technical analysis by showing that the economythis is a better option than technical replacement. has demonstrated resilience after the last two oilThe main objective of the following discussion supply shortfalls, both in terms of continued eco-is to evaluate the technological options for reduc- nomic growth and reduced oil intensity, presum-ing oil dependence and maintaining growth in ably because oil replacement options have beenthe event of a future shortfall. The historical anal- effective.ysis provides an appropriate introduction to the