Why U.S. Is Running Out of Gas

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DAVID BURNETT/CONTACT FOR TIME

Liquefied natural gas can be imported to the U.S. by ship, but only four facilities exist in the U.S. to convert it back to its gaseous form

If all goes according to plan, the U.S. Senate in the next few weeks will follow the House and approve the latest in a long line of national energy policies. This one incorporates a favorite initiative of President George W. Bush's—the hydrogen-powered car. In his State of the Union address in January, the President proposed "$1.2 billion in research funding so that America can lead the world in developing clean, hydrogen-powered automobiles." As the President explained, his goal was "to promote energy independence ... in ways that generations before us could not have imagined."

Democrats joined euphoric Republicans in signing on to the proposal. "The supply of hydrogen is inexhaustible," Senator Byron Dorgan, North Dakota Democrat, told his colleagues. "Hydrogen is in water. You can take the energy from the wind and use the electricity in the process of electrolysis, separate the hydrogen from the oxygen and store the hydrogen and use it in vehicles. The fact is, hydrogen is ubiquitous. It is everywhere."

Was this a rare instance of the two parties working together in Washington for the good of the country? Far from it. They've been doing this energy dance off and on for 30 years.

At the time of the first energy crisis, in 1974, President Richard M. Nixon put forth Project Independence to end American reliance on foreign oil through a series of energy programs, among them "hydrogen-fueled vehicles" that could be developed "to enable a shift away from oil." Takeoff date for the new technology: 1990. Members of Congress were enthusiastic about the hydrogen car then too. "Hydrogen offers us great potential as a fuel for the future," said Representative Charles Vanik, Ohio Democrat. Representative Robert Wilson, a California Republican, was equally excited: "We can now look forward to running our automobiles on water."

But hydrogen power went nowhere then, just as it went nowhere when it was trumpeted nearly a century ago. It will probably go nowhere today, for many reasons, most notably a chronic case of short attention span among American politicians when it comes to energy policy. With great fanfare, lawmakers and Presidents—both Democrats and Republicans—announce sweep- ing plans to end or ease American dependence on foreign oil and find other stable sources of energy. When the headlines and television sound bites fade away, however, they scrap the programs, which then are often reintroduced to an unsuspecting public as new in later years by another generation of lawmakers and Presidents. But changing anything as deep-seated as America's habits of energy use calls for consistency and follow through, so the failure of Washington to stick with hardly any of its plans has wound up making the U.S. more dependent than ever on foreign sources.

Now Congress is about to enact yet another doomed energy policy that promises more of the same. Take hydrogen. Ideally, the gas would be extracted from water using fusion technology. But that won't be available for decades. In the interim, a substitute energy source would be used—natural gas. Yes, the same natural gas already in short supply.

Then there's coal. The Senate bill would authorize spending $200 million a year to study and develop "clean coal" technologies. But that's a substantial comedown from the billions spent in the 1970s and 1980s to encourage development of an industry that would turn coal into oil and synthetic gas, enabling the U.S. to dramatically curb imports. It never came about.

The Senate bill also contains an assortment of goodies. It would hand out $3.5 billion to revive America's moribund nuclear power industry—even though the last order for a plant that actually went online was placed in 1973. It would parcel out nearly $10 billion in tax breaks and subsidies to oil and gas companies that will not erase falling production but instead enrich oilmen and investors. At the same time, the President's proposed budget slashes spending on wind research by 5.5%, zero-energy buildings by 50% and biomass by 19%. To add to the insult, the Administration took the money to print its 170-page 2001 National Energy Policy out of the budget for renewable fuels.

This comes at a time when Americans are heading into their first big energy squeeze since the 1970s: a shortage of natural gas, the invisible resource used to heat homes, fuel kitchen appliances, generate electricity and manufacture many of the chemicals we use. The shortage has triggered a sharp rise in prices that is likely to exact a heavy toll on low- and middle-income Americans, especially those living on fixed incomes. Home heating bills last winter more than doubled in some areas, and they are expected to go up at least another 20% this winter. Electric bills also will spike because generating plants are increasingly gas-fueled. And in places like Louisiana, where the petrochemical industry makes up a big part of the local economy, the shortage is causing a loss of jobs, with at least 2,000 layoffs so far. The entire industry may be forced to move offshore over the next few years if there is no relief.

Beth Wilson, a stay-at-home mom in Hobart, Ind., 35 miles southeast of Chicago, is still seething over last winter's bills from Northern Indiana Public Service Co., known as NIPSCO. In March 2002, Wilson paid the utility 33(cent) a heating unit for the family's two-bedroom home. By March of this year, the price had shot up to 86(cent), an increase of 161%. If the price of new cars had risen at the same pace, a midrange Ford Taurus would sell for $54,000 today. Says Wilson: "I never turn my heat up past 68. I didn't want to turn my ceiling fan on." (NIPSCO also furnishes her electricity.) "How can other people on fixed incomes pay if I can't?"

For consumers, the second part of this one-two punch is exaggerated oil prices. While the world is swimming in crude oil, it already trades at an inflated price of $30 a bbl., a level essentially dictated by Saudi Arabia with the approval of the U.S. government. This translates into swollen prices for gasoline, home heating oil and other petroleum products. What's worse is that because of Congress's three decades of fumbled energy legislation, Americans have become more vulnerable than ever to an interruption in foreign supply that would truly send prices into orbit and cripple the U.S. economy. More than 53% of America's daily consumption of oil and petroleum products comes from foreign sources, compared with 35% in 1973.

Why are Congress and the White House responsible? As part of a long-standing ritual involving Democrats and Republicans, lawmakers and Presidents have devised energy plans that add up to no plan at all—not deliberately but by default. In pursuit of different agendas, competing interests tend to cancel one another out over time, leaving the nation with no coherent direction on energy. Lawmakers launch programs to develop alternative-energy supplies but later quietly cut or eliminate the funding so there are no realistic alternative sources. They enact legislation offering incentives to stimulate crude-oil production in the U.S., when the politicians know—or should know—that the programs will not do so in any significant way. They encourage utilities, businesses and industries to shift to natural gas, then fail to ensure sufficient supplies of the fuel. The lawmakers refuse to make the tough choices on energy supplies and consumption, while they cater to the demands of campaign contributors and special interests. Worst of all, when politicians craft a conservation program that actually works, they abandon it. As a result, after three decades and dozens of energy bills, Congress has helped position Americans so they may be closer to an energy crisis than at any time since the oil shocks of the 1970s. And this time, the U.S. is finally beginning to run out of domestic oil and easily recoverable natural gas. Here is how it happened:

NATURAL GAS: THE CONGRESSIONAL FLIP-FLOP. A quarter-century ago, Congress enacted the Powerplant and Industrial Fuel Use Act, which banned after 1990 the burning of natural gas by power plants to generate electricity. The reasoning: because that fuel was in short supply and was most widely used to heat homes—it goes to half of all residences—it should be preserved for that purpose. Pete Domenici, the Republican Senator from New Mexico, told his colleagues that year, "Almost since we found natural gas we have been busy finding ways to abuse it, waste it, literally throw it away on uses that we are now finding are absolutely the wrong thing to do, and basic among those that are wasteful are ... the use of natural gas to generate electricity."

As the years slipped by, Congress reversed course. Prodded by the Reagan Administration, lawmakers repealed the ban in 1987 and opened the door to construction of natural gas-guzzling power plants. Three years later, they amended the environmental rules to discourage the burning of coal—America's most plentiful fuel—to produce electricity. Predictably, the generation of electricity with natural gas, which had fallen 17% from 1979 to 1987, has shot up 151% since then, reaching a record 686 billion kW-h last year. Nearly a fifth of all U.S. electricity is now generated with natural gas, and 88% of all new generating plants built in the past decade use the fuel. Meanwhile, U.S. production of natural gas has remained stagnant at 19 trillion cu. ft. a year, about the same as a decade ago. But the U.S. consumed 22 trillion cu. ft., up 8% during that time. Because natural gas moves more efficiently by pipeline than tanker (for which it needs to be liquefied), the difference comes mostly from Canada. Now the Canadians are running low, and exports to the U.S. are expected to be flat, or possibly even decline.

During these same years, Congress prohibited drilling for natural gas offshore for environmental reasons. Earlier, in the 1970s, it had studied and then rejected building a natural-gas pipeline from the Arctic, where there are substantial gas reserves, south through Canada to serve the U.S. The worry was that Canada would hold the U.S. economic hostage; in fact, Canada has become the largest

This time around, the energy bill calls for taxpayer subsidies to build a needlessly longer and far more costly pipeline that follows a roundabout path. Called the Southern Route, it starts at the North Slope and heads south along the Alaskan highway before turning east into Canada. A far more direct path, called the Northern Route, would have cut across the north coast of Alaska and hooked up in Canada with the recently announced Mackenzie Valley pipeline. Both lines ultimately would feed into trunk lines in Alberta and serve the U.S. market.

Why the meandering route? In 2001 the Alaska state legislature enacted a law blocking the cheaper northern pipeline. Lawmakers wanted a pork-barrel project to keep construction and supplier jobs in the state. State representative Jim Whitaker, a Fairbanks Republican who sponsored the measure, summed up the state's attitude: "The legislature has a responsibility to ensure that Alaska gas goes to market in a manner that is in the maximum best interest of the people of the state of Alaska." Congress has agreed. In the years that it will take North Slope gas to reach the lower 48 states, natural-gas prices will keep moving up. In the short run, high temperatures this summer could produce spikes in prices and regional brownouts. In June natural gas sold for an average of $5.83 per 1 million btus, up 169% from the same week in 1998. Higher prices already are taking their toll on energy-dependent industries, like those that produce ammonia, the key ingredient in fertilizer. In June 1998 the Louisiana Ammonia Producers trade association had nine corporate members with 3,500 employees. Today it has one, CF Industries. "We've lost 2,000 employees," says Jim Harris, a spokesman for the producers, who accounted for 40% of America's ammonia output. "It's been devastating. The high natural-gas costs have been the overwhelming reason plants have closed. It's completely depressed the whole area."

Other businesses have sounded the alarm, among them a consortium of nearly two dozen companies, including pharmaceutical makers (Abbott Laboratories), brewers (Coors), chemical companies (Dow) and makers of building materials (Owens Corning). They have urged President Bush "to declare war on high natural-gas prices." Heading a list of recommendations: "Maximize use of other energy sources for power generation."

At the same time that Louisiana factories are laying off workers because of gas prices, the U.S. is shipping gas to Mexico to generate electricity there. While the volume is still comparatively small, exports nonetheless have swelled 674% over the past seven years, to 263 billion cu. ft. last year. El Paso Energy, for one, pipes gas directly to the new Samalayuca II power plant, about 25 miles south of Ciudad Juarez. It serves 1 million people and some 300 factories south of the border. The potentially chronic natural-gas shortage and its impact on the economy and employment have even Alan Greenspan worried. Talking about the many industries dependent on natural gas, the Federal Reserve chairman told the Senate Energy Committee last week that "we do see the obvious loss of jobs ... because it has made us largely uncompetitive in a number of industries in which gas is a critical input." He also saw little hope that prices would fall. "We are not apt to return to earlier periods of relative abundance and low prices anytime soon," he said.

LIQUEFIED NATURAL GAS: BACK TO THE FUTURE. To meet the surging demand for natural gas in the short term, Greenspan does see a solution: liquefied natural gas (lng). He has told Congress that "given notable cost reductions for both liquefaction and transportation of lng, significant global trade is developing. And high gas prices projected in the American distant futures market have made us a potential very large importer."

Translation: Because natural-gas prices are going up—and are going to stay up—it's now time to bring in more expensive lng from the Caribbean, the Middle East, Africa and possibly Russia. To import natural gas, it must be chilled to minus 260(degree)F, which converts it to a liquid and reduces its volume. An amount that would normally fill a beach ball can fit inside a Ping-Pong ball. When the liquid arrives at terminals in the U.S., it is slowly warmed up, returned to a vapor form and sent through pipelines.

The U.S. tried to build an lng supply line once before but, in typical fashion, abandoned it. During the last natural-gas shortage in the 1970s, when lawmakers voted to ban its burning to generate electricity, they also encouraged the establishment of the lng industry with taxpayer- guaranteed loans and grants. Special tankers, the most expensive ships in the world at the time, were built along with four terminals and re-gasification facilities at Cove Point, Md., near Baltimore, as well as in Georgia, Louisiana and Massachusetts. The first lng shipments arrived in 1978. In April 1980, Morris Udall, the Democratic Representative from Arizona, told the House that a Congressional Office of Technology Assessment report concluded that lng imports, "if encouraged, could double by 1990 and meet as much as 7% to 13% of U.S. natural-gas needs." It was not to be. A series of events conspired to derail the policy. The Algerians, who shipped the lng, jacked up the price. The Carter Administration and the natural-gas and pipeline companies balked at paying more. After months of fruitless negotiations, the deal unraveled. The ships went elsewhere. Cove Point and two other plants closed. It was the end of the lng experiment. But the shortage has triggered a scramble to reverse course. Today Cove Point is being expanded and will reopen soon. The plants in the three other states are already open, and plans are on the drawing board for two dozen more.

OIL PRODUCTION AND IMPORTS: PROMISES, PROMISES. In 1973, with the country importing 6 million bbl. of crude oil and petroleum products daily, President Nixon pledged that by virtue of his Project Independence "in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving." He advanced a catalog of energy proposals that covered everything from drilling on the outer continental shelf to building more nuclear power plants, from expanding the use of coal to conducting research on potential new sources. In the end it didn't work, and the U.S. failed to come close to his goal of energy independence. While the yearly numbers rose and fell, by 1980 net oil imports had increased 400,000 bbl. a day over 1973.

After the second oil shock hit America in 1979, Washington's wandering attention was focused again on energy. Following Nixon's lead, President Carter pushed development of synthetic fuels as part of his strategy to slash imports. When he signed the Energy Security Act into law in June 1980, Carter said it would "encourage production of 2 million bbl. a day of synthetic fuels by the year 1992." That didn't work either: synthetic-fuel production ended up slightly in excess of zero, and oil imports totaled 6.9 million bbl. a day that year.

Throughout the years, in one energy debate after another, lawmakers and Presidents insisted that if they handed out enough incentives, U.S. oil production would rise, and there would be less need for imports. In each instance, legislation was accompanied by extravagant forecasts not only by lawmakers but by energy-company officials as well. In 1974 policymakers predicted that U.S. oil production "could increase to more than 17 million bbl. a day, which is more than sufficient to be at zero imports by 1985." The Reagan White House shared the optimism. A spokesman said that "the ranges that any reasonable person is considering include zero (imports) by 2000." By that year, however, imports were at their highest level ever, and domestic production had declined to levels not seen since 1950. Now President Bush has his own plan to jump-start oil production. He wants to begin drilling in a portion of the 1.5 million-acre arctic coastal-plain area of the Alaska National Wildlife Refuge (anwr), which covers a total of 19 million acres. According to the White House, the President "believes that opening this small area to environmentally responsible exploration would provide the resources necessary to reduce our dependence on foreign sources of oil and provide for greater energy security."

The reduction would be modest. Even if the anwr would yield 1 million bbl. daily of crude oil, as suggested by the President, by the time pipelines are built and production gets under way, the oil would displace less than 10% of U.S. imports. And there are no guarantees for the 1 million bbl. In the early days of the North Slope project, politicians predicted that consumers would get 3.8 million bbl. of crude oil daily out of Alaska "by the end of the century." Instead production hit a high of 2 million bbl. in 1988—the only year at that level—and then began to trail off, dropping to 984,000 bbl. last year.

To make matters worse, the U.S. is confronted with a refinery gap—just as it was in the 1973-74 oil crisis. The U.S. consumed 19.8 million bbl. a day of petroleum products last year, but its refineries could process only 16.6 million bbl. of crude oil. The 3.2 million barrel difference was made up through imports of finished products like gasoline and jet fuel, which are even more susceptible to supply disruptions than crude oil. Following the energy debacles of the 1970s, the industry began adding refinery capacity. By 1980, it could process all the crude oil required to meet demand, but that lasted only until 1985. The gap has been widening ever since.

CONSERVATION—BUT NOT FOR REAL MEN. After the 1973-74 energy crisis, when gas stations closed on Sundays and motorists waited in lines for hours to fill up, Congress enacted a series of tough conservation measures. The Energy Policy and Conservation Act of 1975 imposed stringent mileage requirements on automakers—an average of 27.5 m.p.g. on passenger cars by model year 1985—to curb gasoline consumption. It worked.

In the decade before the act's passage, gasoline consumption had risen 48%, to 6.5 million bbl. a day in 1974. In years to follow, even with millions more cars on the highways, consumption remained largely unchanged. Beginning at 7 million bbl. a day in 1976, demand went up and down in a narrow range and by 1991 was at just 7.2 million.

During the 1980s, as it became clear gasoline conservation was working, aided by a nasty recession, one energy forecast after another anticipated ever better mileage. The American Petroleum Institute, swept up by auto-industry fervor, announced in September 1981 that "forecasts of fuel efficiency for new cars now exceed those mandates (27.5 m.p.g.), suggesting an industry-fleet average of 30 m.p.g. by 1985." Not exactly: this year the average is still 27.5 m.p.g. for vehicles officially labeled as passenger cars, but for the entire fleet of vehicles, including suvs and trucks, it is much worse. The best overall fuel economy of 22.1 m.p.g. (for U.S.-made vehicles) was achieved in 1987-88. Aside from an occasional upward tick, that figure has inched steadily downward, to 20.4 m.p.g. last year.

That's because Congress lost interest in conservation and failed to keep the pressure on the car companies. Lawmakers refused to set new mileage goals. Worse, they excluded from the existing requirements light trucks and suvs, the fastest-selling vehicles and the ones that use the most gasoline. Contributing even more to the trend, they extended an extraordinary tax benefit to the gas guzzlers, so drivers who used a vehicle for work could write off the cost on their tax returns—even as much as $38,200 toward a new Hummer H2 that gets only 10 m.p.g. As might be expected, consumption rose 1.5 million bbl. a day over the past decade, to 8.8 million last year. But for owners of pricey vehicles like the Hummer, it keeps getting better. The tax-cutting bill signed into law in May expanded the write-off to $100,000.

For its part, the Bush Administration is dismissive of serious conservation. Vice President Cheney, who headed an Administration task force to devise an energy strategy—a group whose work was carried out in secret and whose papers remain secret—expressed the attitude two years ago in a now infamous way: "Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy." Representative Raymond Green, a Texas Democrat, was more blunt when the House earlier this year beat back an attempt to raise mileage standards. While allowing that he was for "better gas mileage," said Green: "We come from a big state that wants big trucks and big cars."

ALTERNATIVE ENERGY: HERE COMES THE SUN, AND THERE IT GOES AGAIN. No alternative-energy source has captured the imagination of lawmakers and Presidents like the sun. For three decades, solar energy's champions on Capitol Hill have insisted that the harnessing of this free and unlimited supply of energy was just around the corner. Representative Charles Mosher, Ohio Republican, was among the ardent supporters in 1974. "Much of the technology needed to utilize this nonpolluting source of power is nearly at hand," Mosher said in a speech on the House floor. "In fact, the consensus is that there are no major technical barriers to the widespread application of solar energy to meet U.S. energy needs."

With that notion in mind, President Carter in 1980 pushed legislation that he said would help "us to reach our goal of deriving 20% of all the energy we use by the end of this century directly from the sun." The forecast proved breathtakingly overreaching. Last year solar energy accounted for about seven one-hundredths of 1% of all U.S. energy consumption. The Bush energy package includes a $2,000 tax credit for individuals who buy and install photovoltaic or solar water-heating equipment in their residences.

Nothing new here: the government has been selling solar for years with generous tax incentives. Most of the public, though, isn't buying. And people who do often have memorable experiences. A quarter-century ago, the owners of a 13-story, 64-unit co-op at 924 West End Avenue on New York City's Upper West Side erected a steel framework on the rooftop, welded it to the building's steel beams and attached 117 solar-collector panels. Water heated by the sun flowed through pipes into a 5,000-gal. storage tank in the building's old coal bin and from there into the building's hot- water system. The project was funded in part with a $112,000 federal grant. Today the solar experiment is long gone. A building workman told Time that the collectors behaved like sails, swaying back and forth so much that water leaked into apartments below. It cost several million dollars to repair the roof, he said.

But solar is hardly the only alternative energy source that has failed to live up to the promises of its congressional supporters. Just as both parties have embraced President Bush's hydrogen initiative, they have also signed on to another of his long-shot proposals, one he says will provide "clean, safe, renewable and commercially available fusion energy by the middle of this century."

Unlike nuclear fission, the splitting of uranium atoms that powers nuclear reactors, fusion joins hydrogen atoms to unleash far more energy. The trick is to control the fusion reaction to generate electricity. It has been an elusive goal for half a century and probably will be for many decades to come. Even so, according to the President, "commercialization of fusion has the potential to dramatically improve America's energy security while significantly reducing air pollution and emissions of greenhouse gases."

That's about what President Carter envisioned more than 20 years ago—albeit with a different timetable—when he signed into law the Magnetic Fusion Engineering Act in 1980. Said Carter: "Fusion power offers the potential for a limitless energy source with manageable environmental effects." The law established as a national goal the successful operation of a magnetic fusion-demonstration plant in the U.S. by 2000.

The cost was put at $20 billion. As Congress is given to do after announcing grand projects, it slimmed down appropriations to less than $10 billion. U.S. researchers eventually teamed up with colleagues in several countries, but in 1998 Congress pulled the plug on the consortium, contending that it was too expensive. President Bush, however, reversed that decision. The White House announced last January that the U.S. "will join ... an ambitious international research project to harness the promise of fusion energy, the same form of energy that powers the sun. America will join negotiations with Canada, Europe, Japan, Russia and China to create the International Thermonuclear Experimental Reactor (iter). This will be the largest and most technologically sophisticated fusion experiment in the world." Actually, it's the same consortium to which the U.S. had been party in the 1990s and from which it then bailed out.

So it is that the U.S. is likely to be faced with recurring oil and natural-gas crises for some years to come. Their duration and severity remain to be seen. But volatile prices—as with gasoline during the Iraqi war, natural gas last winter and electricity in 2000—are all but guaranteed. The result is a hidden tax of tens of billions of dollars on American consumers. Just how many billions depends on a catalog of variables ranging from the harshness of the weather to unfolding events in the Middle East. More important, it depends on whether Congress and the White House, Democrats and Republicans, come up with a thoughtful energy policy that imposes tough conservation and efficiency measures, promotes research to develop one or two realistic alternative energy forms in commercial quantities and encourages production from a mix of existing energy sources. But none of this will be worth the effort unless the U.S. sticks with a plan long enough for it to pay off.

—With reporting by Laura Karmatz/New York and Eric Roston/Washington, with research by Joan Levinstein/New York