the impact of the carter programme on the western european energy market

The impact of the Carter programme on the Western European energy market

Pierre Desprairies

The author looks at the Carter programme and focuses on those aspects that are of particular interest to Europe. He suggests that the USA should take the lead in reduc ing c o n s u m p t i o n , reconverting to coal and developing new energy sources and considers how Western European countries could emulate the US example.

Pierre Desprair ies is President du Conseil d 'Admin is t ra t ion de I ' lnst i tut Fran(;ais du P~trole, 1 et 4, Avenue de B o i s - P r e a u , 9 2 5 0 6 Rue i l Malmaison, France.

This paper is based on an address given at the University of Surrey conference 'US energy policy: its impact on Western Europe', held from 3-5 January 1978. The conference was cosponsored by the European Institute of Business Administration (INSEAD), Fontainebleau, France.

At the time of writing, the author could only suppose that the Carter programme would be adopted by Congress in a form close to that proposed, and this paper focuses on the maximum effect that this new American policy could have on the European market.

1 Cf Oil and Gas Journal, 12 September 1977. 285% came from the OPEC zone and 41% from the Arab zone of OPEC (OAPEC). 3 Petroleum Intelligence Weekly, 31 October 1977.

Main features of the Carter programme

The import picture The aspect of the Carter programme that is of most interest to Europe, and which is also the essential and final objective of the programme, is the effort it implies to reduce US imports of crude oil and oil products. Such a reduction will tend to postpone the risks of a shortfall in supplies and reduce the trend towards increasing world prices.

In 1977, the USA imported nearly half the oil it consumes, and depended on foreign countries for one-quarter of its energy consumption. This may not seem particularly impressive to Europeans, who, taking the EEC as a whole, depend on the outside world for 58-59% of their energy, not to speak of countries like France or Italy, for which the proportion is between 75 and 80%. A 25% dependence implies no catastrophic consequences for the stability of the supply position in crisis periods or for the balance of paym.ents. However, much more interesting than this is the quantity of oil that may be imported in the future, together with the USA's share of the world's supply picture.

During the first six months of 1977, the USA imported an annual rate of 440 million tonnes of oil, ~ 360 million of which were in the form of crude oil, and approximately 80 million in the form of finished products (the latter consisting principally of heavy oil from the West Indies). During this same period, imports accounted for 47% of the oil consumption of the USA. 2 The way these imports have increased in the recent past is worrying. They have more than doubled since 1971, and during the first six months of 1976 and 1977 alone the increase was 31%. Over the same period, US oil production fell off by 6%. The oil consumption of the USA, at 930 mtoe, represents one-third of world total oil consumption and is 30% greater than that of Western Europe.

Certain estimates (such as that of the Independent Petroleum Association of America) 3 suggest that the growth ofoil consumption in

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the USA should slow down to a figure of 3.5% in 1978 (as against 7% in 1977) as a result of reduced buoyancy in the economy, an increase in the output of coal and nuclear power, and the impact of 'normal' weather, and that thanks to Alaskan oil the share of imports should diminish by 2 .5%- for the first time since 1967. But the long-term trend is clearly towards increased consumption and imports: Alaska can scarcely account for more than the normal growth of US consumption over two years.

How much would the Carter programme lighten world demand? On the basis of the consumption levels predicted for 1985, official documents give figures of 225-285 million tonnes/year (4.5 to 5.7 million bbl/day) depending on whether one takes the 'normal' programme or that 'with additional economies'. Without the programme, US oil imports would be some 570 to 600 million tonnes (11.5 to 12 million bbl/day). The forecast for imports would thus be reduced by about half. 4

These estimates of reduction probably represent the maxima possible, and are considered too optimistic by many experts. These include PIRINC (Petroleum Industry Research Foundation), which thinks they cannot exceed 15-20% (not 50%) of normal consumption, or around 100 million tonnes/year and Exxon, which questions the possibility of any reduction at all. But we are supposing that the programme is successful.

The quantities that would be saved are substantial in themselves. The Carter programme at present constitutes the essential part (half all by itself) of the programme for import reduction by member countries of the lEA, decided by the Agency in Paris at the beginning of October 1977, which amounts to 26 million bbl/day (1.3 billion tonnes/year). It was consequently welcomed with much satisfaction by the Agency, as also by the EEC. Nevertheless, however praiseworthy the effort may be, the quantities concerned are not enough to straighten up the data of the world petroleum market as if by magic. If we assume a growth of 3% per year in petroleum consumption, world consumption in 1985 (3.8 billion tonnes)would be only 6-7.5% less because of it. Demand on the international oil market would be reduced by something like twice as m u c h - 12-15%. These are far from revolutionary figures. 1985 is however quite close in the context of an energy programme, and the Carter programme is intended to produce its full effect at a much later date.

4 Note the difference between the figures in President Carter's speech to the US nation on 18 April 1977 and the speech to the Senate on 20 April 1977. The first speech mentions a consumption in 1985 of 800 million tonnes/year, iea saving of 500 million tonnes/year through the plan, and not 225-285 as given in the presentation to the Senate and in the figures mentioned subsequently.

Reduc ing consumption

If we examine the methods by which President Carter proposes to arrive at the reduction in oil imports, we see that it is first and foremost an American programme, whose aim is to solve an American problem: 'The alternative to our proposals may be a national catastrophe'. The most important of the proposals cannot be transposed to Europe, or would only be of very limited effectiveness.

'The cornerstone of our policy is to reduce demand through conservation'. The programme is mainly built on consumption saving and only to a subsidiary degree on increased production. This is understandable: the stock of oil and natural gas to be found in US cars and houses is much .greater than its equivalent on the other side of the Atlantic. 'Ours is the most wasteful nation on earth,' President Carter emphasized. 'With about the same standard of living, we use twice as much energy per person as do other countries like Germany,

286 ENERGY POLICY December 1978


Japan or Sweden.' The relation between the growth in energy consumption and that of GNP is much better in Europe, and an economy policy here, though equally necessary, will produce much less in terms of tonnes of petroleum.

The US economy programme also vigorously emphasizes reducing petrol consumption. In the USA this represents 40% of total oil consumption as against 15% in Europe. Here again the US example cannot be transposed elsewhere. This is a special problem for the USA. In Europe, when we speak of consumption savings, we are mostly concerned with the industrial and housing sectors which account for 75% of oil consumption.

Developing coal production The second aspect of the Carter programme concerns the development of coal. 'We must conserve the fuels that are scarcest and make the most of those that are plentiful.' The USA (see the 1977 WEC Report) has 28% of the exploitable world reserves of coal and lignite, and the EEC has only 12% - practically all of which is in the UK and Germany. European coal is furthermore much more expensive to produce, and most of it comes from deep mines. For the other seven countries of the EEC, coal is imported energy just like oil. It is excellent that the USA should set out to develop their huge and cheap coal resources. Some of them can be produced at an equivalent cost of $1 per barrel of oil. It is planned to increase coal production between 1976 and 1985 by 500 million tonnes/year, ie by more than 80%. This is an enormous increase, and its feasibility is questioned by many experts. In any case, it is probable that the US energy market will have priority access to this coal - in view of the strong tax incentives planned to encourage its use instead of oil and natural gas. In the short term little or none of it will come onto the world or European markets, which have come more or less to rely on it. The contributions made by the US effort in the field of coal to the problem of European energy supplies will no doubt be principally accounted for by the reduction in US oil imports.

Increasing oil and gas production A third point that strikes the European observer is the fact that so little encouragement is given to increasing oil and gas production. Consumption is to be discouraged by taxation, which over three years will bring the price of newly discovered oil up to the 1977 world oil parity, though the depreciation of the dollar will be compensated for as from this date. Oil previously discovered would remain at its previous price ($5.25 and $11.28), with compensation for inflation, but to discourage consumption a tax redistributed to the public would bring its price over three years up to the 1977 level. Thus, for the US producer, the average domestic price of oil sold would remain, in respect of 'old oil', less or very much less than the world price, and for new oil in 1980 at the 1977 price. If the oil companies had been encouraged, by increased oil prices, to increase their exploration and development effort, under government control, if needed, the efficiency of the programme would have been increased, and US demand on the international market would have diminished. This has not been d o n e - intentionally, to judge from the sharp exchanges of views that have taken place between the Carter administration and the oil fraternity. The President is afraid that the latter would make excessive profits, or

ENERGY POLICY December 1978 287


that these would be used for purposes other than for increasing reserves. The result of the proposed programme, in the views of certain experts from the industry side, would reduce the total profit made by the companies producing oil and gas by some $3000 million per year by the year 1985, compared with the profit they would make on the basis of existing legislation.

The clearly expressed intention is to reconvert to coal. US oil reserves, which are in the process of running out, must be saved for the future. The only encouragement given to oil shales is purely symbolic - authorization to sell at the world market price, ie $5-10 below the cost price at present estimates. The public, the electricity industry and industry in general must make the effort to reconvert from oil to coal, and not expect supplies from domestic or external sources. Taxes increasing progressively up to $1.50 (for electricity power stations) and $3 per barrel should discourage industries from using oil as a fuel. The idea is courageous and logical. We must simply hope that the coal will be there when it is needed, and that this element in the programme will not lead for some time yet to increased imports of oil, for example from the North Sea, to supply the US market.

The proposals for natural gas are similarly designed to discourage industrial and power station consumption by usage taxes, without strongly encouraging production. The future price of gas would be limited to $1.75 per 1000 ft 3, or the equivalent of the domestic US price of oil at the beginning of 1978 ($9.60 per barrel) or again 30% approximately below the world price, towards which the price of gas sold inside the producing states of the USA was tending to move. There was incidentally a tough conflict going on over this between the President and the Senate.

Gas will therefore apparently be reserved for use in the residential and service sectors but no tax is planned to reduce the incentive to consume a product whose price will remain low. This point is important for the world and European oil market since natural gas represents one-third of US energy consumption, and a shortfall in domestic supplies would result, until sufficient coal is available, in extra demand and in increased prices for imported crude oil, heating oil or heavy fuel oil.

It is the fear that natural gas supplies could be insufficient that seems already to have been the cause of increased US purchases of heating oil and heavy fuel oil during the summer, especially as it is planned to require an authorization in future to change a utility over from natural gas to oil, and it is expected that industry and utilities will be prohibited from burning natural gas or petroleum in new boiler plant.

Thus, application measures for the US reconversion from natural gas to coal must be very carefully planned to avoid increasing US oil imports and inflating oil fuel prices. However, President Carter's statements to the press following the dollar depreciation in December 1977, and the present discussions between the Senate and the House, appear to suggest that there will be some improvement in prices and profits to enable the industry to increase domestic production.

One side effect of the Carter programme may prove important in the years to come, in view of the predictable lack of available investment capital. This is that compared to the investment conditions for oil and gas exploration and production throughout the world, and



more especially in the OPEC cartel, the conditions that would exist on the US market have in any case every chance of appearing attractive to foreign investors. The combination of secure investment and a tax regime comparatively favourable to oil investment would probably result in attracting oil capital to the USA for exploration, and enhanced recovery, since the price of oil derived from this source would remain free. There is thus a risk that capital, especially European, which could otherwise have been used in other parts of the world to produce oil for import into Europe would be diverted to finance the production of oil in the USA.

The nuclear aspect

But, for Europeans, the most questionable point in the Carter programme is certainly its nuclear aspect. Nuclear energy, which for most European countries is an essential source of tomorrow's energy, is only grudgingly admitted by the President of the country that has the largest exploitable reserves of coal in the world: 'as a last resort, we must continue to use increasing amounts of nuclear energy'. However, this refers only to classical light water stations. The President's praiseworthy political concern to prevent nuclear proliferation has led him to condemn the breeder reactor, and to refuse what he calls the plutonium era - ie the method by which one can use almost all the energy in uranium, and not less than 1% only, as is the case today. There would be no more reprocessing of irradiated uranium rods. The USA would considerably develop its capacity for uranium enrichment, giving priority to supplying foreign countries that agreed not to carry out enrichment or reprocessing.

It is clear, when we examine the world resources of uranium, that such a programme is inapplicable on a world scale. It would lead progressively to a rapid insufficiency of world uranium resources. The report on nuclear energy presented in September 1977 to the World Energy Conference shows that, in the most favourable picture, which includes development of reprocessing and breeder reactors combined with a moderate level of demand, world supplies of uranium would represent a 'really immense task, requiring the industry to multiply its production level by 15 in less than 45 years'; and the author of the study concludes that 'nuclear energy will not even be able to supply 50% of the world demand for electricity by the year 2020, unless certain advanced fuel cycles are employed'. Among these, only the breeder reactor can at present be offered on an industrial scale. Development of another cycle (for example thorium), leaving aside its technical uncertainties, probably represents a minimum additional period of 15-20 years. This constitutes a probable area of disagreement between the majority of the other industrial countries, and especially the European ones, with the US position. If they had no breeder reactors, the Americans would become fiercely competitive bidders for the small quantities of natural uranium available on the world market. It seems however that, at least in respect of the construction of breeder reactors in the USA, President Carter is reconsidering his position.

Long- term aspects o f the p r o g r a m m e

We have so far emphasized the aspects of the Carter programme that are likely only to have small or negative effects for Europe up to 1985



at least, considering especially the quantitative aspects of this programme and the movement of product and capital to which it can lead. Its positive aspects, which are mainly political, psychological and long-term in nature, now deserve equal attention.

The USA's example

First, it is extremely important that the world's leading economic power - the country that is the greatest and most wasteful consumer of energy - should take seriously the world problem of the exhaustion of cheap oil reserves and should take the lead in a movement towards a reduction of consumption and reconversion to coal and to new energies, although the USA owns the plant that prints dollars, which is to some extent a solution to the problem of paying for the oil it imports.

All or some of the European countries can imitate the USA in many important ways:

• The UK and Germany can develop their coal resources; • All the European countries can make considerable heating

economies by proper insulation of their houses, which can be encouraged by taxation: the emphasis given to heat insulation in the Carter programme 'to insulate 90% of houses and all new buildings' is an example;

• Most European countries can make substantial economies by using solar energy as an accessory source for domestic hot water production and house heating;

• By helping to reduce world demand, that of the USA and that of the countries that will imitate them, the programme will help to strengthen the position of the consuming countries as a whole.

Fixing domestic prices

An important point for the world market is that US domestic prices should be fixed at an average level lower than that of world prices, and, in the case of new oil, at a level that would not exceed the 1977 price indexed on the US domestic inflation rate. This is a favourable element for the US export industry, but it is of limited extent, and the favourable effect for the other consuming countries (including Europe) of stabilizing the domestic prices in the country which is the world's leading purchaser is the essential aspect of the question.

Effects o f the programme on worm trade

What effects can the Carter programme have on world trade in crude oil and petroleum products? Until now, US purchases of crude oil have largely concentrated on the lightest grades which are found mostly in North Africa and Nigeria; thus they were able to obtain the maximum of light and medium distillates, combined with minimum investment. With a risk of a surplus of heavy fuel oil in Europe, as a consequence of the nuclear programme, European demand for these lighter crudes is also likely to increase. This could lead to a very high price for them. They are relatively rare, representing only 30% of total world resources. Could the Carter programme, in so far as it results in a reduction in oil consumption without greatly increasing the resources of natural gas, help to restabilize the world market, by creating a demand for heavy residual and heavy crude oils? The dominant phenomenon of the US domestic market will probably be a



shortfall in natural gas resources and a slow rate of development of coal production. If the mines and transport arrangements are not organized relatively quickly, the energy demand will concentrate temporarily on heavy fuel oil. The electric power stations and industry will probably soon be persuaded to use the new coal; and the excess supply of light distillates resulting from the reduction in petrol consumption for cars could probably be absorbed by the chemical industry, which is already well advanced in its reconversion from natural gas towards naphtha and medium distillates.

It is most likely, too, that certain American homes may go back to heating oil; there are no plans yet to prevent them so doing, in the way that industrialists are to be forbidden to use heavy oil. The only requirement for homes is that they should have insulation. The tendency to consume the light and medium fractions, which are more profitable for industry, and the demand for light crudes, which, moreover, are not polluting, would therefore appear to constitute a solidly based long-term trend.

Emergency stocks

We must also consider as a positive move for security in the event of a world (and European) crisis of supply, the setting up of an emergency stock of 150 million tonnes (1 billion bbl), representing two months of normal consumption, even though emergency stocks are much higher in several European countries. The corresponding purchases, which have an inflationary effect on prices, should be made now and in the near future, at a time when the market has been largely supplied.

Limitation o f L N G imports

Lastly, if the USA were to limit its imports of liquified natural gas (LNG) as has been suggested by certain statements about the flexible ad hoc policy proposed by the President, or the rumours about a double price structure for gas - domestic and imported - the quantities made available would be welcome elsewhere, and not least on the European market. But the demand of the US market for natural gas and its anti-pollution requirements make one sceptical that there will be a serious limitation of LNG imports.

The international aspect

To European eyes, the Carter programme seems to have a serious gap: the international aspect of the question. In a programme intended to guarantee the security and price of supplies, Europeans would have been hard put to avoid including at least as a declaration of intent the principle of cooperation with the countries producing oil and natural gas - as, incidentally, the IEA did in its October meeting in Paris. Europe is fundamentally dependent on oil imports: in 1975, the nine EEC countries imported 97.5% and the 19 countries in the European zone of OECD imported 96% of their oil requirements. North Sea oil will not reverse the situation; Europe's dependence is unlikely even to fall below 75%. Consequently, the European countries cannot avoid seeking a modus vivendi with their suppliers. For example, some of them are concerned with the possibility of setting up guarantee mechanisms for oil and gas investments, to



ensure that these investments flow back once more to the developing countries and to the OPEC members. The trend in recent years has been to pass these by in favour of the industrial countries, for reasons of security of capital and contractual revenue that are easy to understand; these developing countries continue to hold most of the world's future resources of cheap oil. It is no coincidence that the abortive North-South Conference of June 1977 was held in Europe. Europeans know that one day they will have to negotiate sharing development in exchange for sharing oil. The Carter programme does not give the slightest hint of this, which seems rather surprising.

Even if the USA only imports 300 million tonnes (6 million bbl/day) in 1985, as we all hope it will, this amount will still represent at that date 33% of the country's oil consumption, and its objective of total oil independence will appear as having been postponed indefinitely, if not abandoned.

The explanation may be found in the USA's close ties with Saudi Arabia, and in the additional supplies of oil and natural gas that it hopes to receive from two neighbouring countries, Canada up to about 1982, and Mexico as from that date, with quantities that could thereafter more than compensate for the depletion of the Canadian deposits. There is talk of production prospects that could put Mexico on a par with the major Middle East producing countries, which would benefit Europe. If the deposits of conventional oil dry up throughout the world, bringing about a situation of 'intense competition for oil among nations', in President Carter's words, it would be extremely unfortunate for Europe if Saudi Arabia were to remain the sole source of oil in the Western world, and if first priority over its output were reserved for the country of origin of the companies that found it in the first place, or if Europe had to haggle for it in the market place alongside powerful American neighbours.

Conclusion

What general conclusion, then, should Europe come to on the Carter programme? Much uncertainty, of course, remains; we do not know in what state it will emerge from its passage through the Senate and the House of Representatives; nor do we know, when the laws have gone through, how effective they will be. Can energy consumption growth be reduced from 4.8% (1976) to 2% per year? Will oil consumption only increase by 35 million tonnes per year (0.7 million bbl/day) between 1976 and 19857 Will consumption of natural gas fall off slightly over the same period by an equivalent quantity? Can coal production be increased by 500 million tonnes between 1976 and 1985, taking into account the investment that this growth will render necessary (mines, transport, power stations, industrial boiler plants), and also the lead time necessary, to say nothing of ecological problems? Will, finally, the quantity of oil imported be 300 or 600 million tonnes in 19857 The discussions held between the President and Congress should result in increasing domestic production of oil and gas in future years. If this is the outcome, a significant improvement will have been made on the initial draft.

To conclude this examination, it is not the objectives of the Carter programme that one wants to question, but the time it will take to put them into effect. It is over the long term, through its psychological effects, and through the movement that it will launch, that the

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programme is important; much more so than through the quantitative effects that it may have on world and European supplies between now and 1985. These effects seem likely to be limited.

The Carter programme is one of a President elected to take care of the interests of his country. It aims at American objectives, with American resources. It is natural that, in the next few years, it should scarcely affect European interests either way, except in the nuclear field, if it were pushed to its final limits. But it has the great merit of being the first important attempt made anywhere in the world to deal with the grave danger of a world energy crisis, which manifested itself at the beginning of this decade, by attacking the real problems with appropriate means. It is to be hoped that its adoption and success will encourage Europe to follow the same courageous path towards similar objectives, using its own resources.


the impact of the carter programme on the western european energy market

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