Science & the First Energy Crisis


Perhaps the deepest fault line separating the enlightened cultural gardens of the Adorables from the dark fever swamps of superstition and prejudice providing refuge to Deplorables is Science. Like any border between two people that neither understand or like each other, it is a tense place where barely concealed animosities ignite skirmishes threatening conflagration. Just as Germany and France have fought over Alsace Lorraine since the time of the Caesars, Adorables and Deplorables tangle over Science.

The latest flash point in this battle over lebensraum is Climate Change, or Global Warming as it was once known. When the gap between prediction and reality became too great a problem, self-interested advocacy demanded a change highlighting change, not warming. Fossil fuels, carbon dioxide, adorable polar bears, flooding cities and continental deserts are a potent mix calculated to steam up people if not their environment. Perhaps the fact that most Adorables live at sea level has a strong effect on their beliefs. Perhaps those beliefs have been biased by the fact that Adorables are so much more susceptible to classroom indoctrination. In any case, one might say with justification that Adorables believe in Climate Change, Deplorables don’t.

As with anything in the real world, Climate Change is a complicated subject. Stephen Colbert and Jimmie Fallon are confident, but other less scientifically knowledgeable people might still have doubt. If Climate Change were a case in a criminal court and subject to rules of evidence, there would be a great deal of posturing by attorneys, but few facts meeting courtroom standards. Even Judge Judy might declare the only indisputable fact allowed into evidence is the rising level of carbon dioxide (CO2) in the atmosphere.

If the two sides were reasonable- (smiley face) – they might agree that the rising levels of CO2 in our atmosphere are the result of burning fossil fuels. There are a great bundle of other “facts” bandied about, but reasonable people of similar learning and experience can and will dispute whether they are in fact – facts.

More than anything else, Climate Change is a question of First Things. One might even say faith. The real issue underlying the fire and fury surrounding Climate Change is the proper relationship of Mankind with the natural world in which human beings exist. In the Middle Ages, theologians debated how many angels could dance on the head of a pin. Theologians in 21st Century America, now calling themselves Scientists, continue to debate abstract niceties of grand theories. Where once it was about how many angels could fit onto the head of a pin, today’s debate is how much CO2 raises temperatures a century from now. But it is still theology.

Theology seldom intrudes into the lives of real people, at least in our earthly lifetime. But as Henry VIII and Anne Boleyn discovered, theology sometimes gets serious in the here and now. Theology becomes action and mountains move for the faithful. And so it is with Climate Change. If rising CO2 levels are to be stopped, human beings have to stop using energy or alternatively use a source of energy that doesn’t result in CO2. As previous generations of Adorable theologians such as Jane Fonda have declared nuclear power to be a work of the Devil, rising CO2 levels must be fought by reductions in fossil fuel use. But when it comes to effective action, people being people, even Adorables, talk a good game rather than act.

In short, combating Climate Change requires government and lots of it. The Adorable point of view is that Climate Change is an existential threat to human beings requiring a wartime type response by Humanity. In this case, Climate Change requires government control of energy by direct means as well as through the usual sleight of hand party tricks, i.e. regulation, subsidy and incentive. If human civilization, at least the Adorable vision of it, is not to vanish beneath the oceans’ waves or the sands of continent wide deserts, civilization must be forced to adopt emergency measures.

As a Deplorable living among the Adorables, I have my own opinions of course. This is a blog after all. What would be the point of a blog if not to vent my suppressed juvenile fantasies masquerading as opinions? But in an unexpected divergence from past practice, I will reminisce rather than bloviate. It was my fate to work in the energy business for nearly forty years and I found, perhaps unsurprisingly, government has always been involved in energy.

Government’s regulation of energy has a long history as well as broad reach. Our government, like virtually every other government, has always responded to the concerns of the people, at least the people with money to hire lobbyists. As you might expect, those legislating energy policies for our government have always been concerned about votes and campaign funding. Government’s advisors and consultants, the people actually creating that policy, are concerned with those most basic of human motivations.

This might lead my readers of a certain bent to jump to conclusions about the Rube Goldberg nature of renewable energy. Other than Conan O’Brien or Energy Department staffers, who could disagree? After all, wind power and solar power are useful character actors pressed into starring roles by politicians and celebrities, the utility infielder finding himself batting cleanup in the World Series. But only a lawyer or medieval theologian would feel comfortable with the meandering complexities required to make renewable energy relevant in any meaningful way. The present manifestations of wind and solar power are entirely creatures of the government, faithfully reflecting other creations of governmental committees.

But even before Al Gore parlayed a losing election into celebrity and wealth, the government had its fingers deeply buried in the energy business. Well before the creation of the renewable energy business, the federal Frankenstein had done its work on power generation from fossil fuels.

One must buy a ticket on the Wayback Machine to fully appreciate how we came to our present situation. Come with me back to the days of Richard Nixon. Oil sold for $3/barrel, natural gas for 35 cents and coal for $ 6.30 per ton. In 1973, the first year of Richard Nixon’s second term, the nation of Israel was attacked by a coalition of Arab states. That war came to be known as the Yom Kippur War. Unlike the Six Day War in 1967, Israel was surprised, coming near to humiliating defeat in the first few days. But weathering the initial surprise, Israel prevailed and won a costly victory. But Israel’s victory only came because of substantial American material, diplomatic and financial support.

Israel’s victory in the Yom Kippur War caused rioting in the streets of places like Cairo, Damascus and Baghdad. America’s support for Israel meant that our nightly news carried pictures of angry mobs burning US flags. Rioting by young unemployed men in the Arab street is always frightening to the ramshackle governments in the region. Our friends in OPEC felt the need to do something, to placate the dangerous mobs in the streets.

Our friends, the sheiks of Saudi Arabia and their fellow plutocrats around the Arabian Gulf, declared an embargo on oil exports to the United States. Virtually overnight the price of imported oil in the United States went from $3/barrel to $12/barrel. The nightly news carried the gravelly voice of Walter Cronkite reporting on cars queuing up to wait overnight at gas stations that might have gasoline tomorrow.

This oil embargo and resulting shortage of gas came on top of a nation already convinced the world was falling apart. America was experiencing rampant inflation, malaise over the Vietnam War and riots on university campuses. Crisis demands a response otherwise there is no telling what might happen. Power exists to be used. If the people with power don’t use it, someone else will.

And so the Federal beast reacted. Over the course of the next few years, our legislators and regulators brought about far reaching changes in energy markets. Just as today, the lawyers and administrators of government implemented the actions of legislators relying on the wisdom of learned academics in elite Universities and think tanks.

This combination of academic wisdom and governmental power gave us the nationwide speed limit of 55 mph. I can testify from personal experience that unlike today’s speed limits, law enforcement was serious about the 55 mph limit. That parody of a platypus, the Department of Energy was born. CAFÉ (Corporate Average Fuel Economy) came into existence, stamping paid on the foreign dominance of the American auto market with the loss of millions of blue collar jobs in the US still weighing us down. The Rust Belt was born.

Of course that is simply my opinion. Other, equally erudite opinion flingers might choose to differ. But there is no doubt that the Federal Government enormously expanded its reach into the energy business. And since energy is an integral part of everything else, this expanded regulation touched everyone and everything. One might consider expanded regulation to be a good thing or a bad thing, but in the 1970’s it became a much bigger thing.

The Federal Government’s did a lot of amazingly dumb things in response to the oil embargo, but by far the dumbest was the imposition of price controls on oil and gas at the wellhead. Amazingly enough, these price controls on oil & gas were endorsed by leading economists at Ivy League schools. Perhaps these eminent professors should have sat in on some of the economics classes they were supposedly teaching.

But in their defense, it is necessary to think about price controls in light of the Science of the time. The concern of the scientific community in the 1970’s was Climate Change, just as it is now. But testifying to the media savvy of today in changing from Global Warming to Climate Change, Science in 1970 forecast a near future of ice rather than flooding.

In the 1970’s, Science was certain that the Earth was coming to the end of the latest Interglacial Warming Period (we probably have) and the Ice Ages were returning (they probably are). Articles in mainstream science journals noted rising CO2 levels in the atmosphere and expressed hope that CO2 would continue to rise. Scientists opined the warming effect of this increased CO2 level might well lessen the ferocity of the next cycle of ice age believed to be only decades away, perhaps by 2010.

But of more immediate concern to Science was the imminent disappearance of fossil fuels. Science believed that the Earth was rapidly running out of oil & gas supplies. The Scientific community told us that Earth’s reservoirs of fossil fuels were almost gone, used up by our irresponsible wasteful use. Because of our wasteful habits, we were leaving our children to live in a world coated with ice, a world with no fuel to warm itself. Science has always looked on the unwashed among us, now known as the Deplorables, with barely concealed distaste.

Popular magazines’ of the time featured artist’s sketches of New York City covered by two miles of ice, mammoths trudging through snowfields above Central Park. But amid the angst of crisis, there was reason for hope. This popular panic over the oil embargo provided political cover for responsible authorities, properly credentialed of course, to put themselves rather than ignorant consumers and producers in control of US energy.

Perhaps the proudest moment of these nascent Adorables was in 1978 when Congress passed the Power Plant and Industrial Fuel Use Act. This law banned the construction of power plants using natural gas as fuel. The law was declared necessary by our lawmakers because of the rapid decline in natural gas supplies. Congress believed the responsible thing was to conserve remaining natural gas supplies for heating homes.

It is true that at the time there were intermittent shortages of natural gas and oil. Of course, non-tenured Economics teachers laboring in junior colleges and high schools could have predicted shortages. The Law of Supply and Demand taught in entry level Economics courses explained what was happening. Natural gas supplies were drying up because price controls kept the price artificially low. But what did those simple fellows know? Science had spoken. The Earth was running out of natural gas. The Law of Supply and Demand didn’t work for oil and gas.

But what do you know? The Law of Supply and Demand did work! Eventually even Jimmy Carter was forced to concede to this Inconvenient Truth. And so burning the midnight oil, the Federal Government working alongside its credentialed advisors and consultants produced some of its finest work. If those fat cat oil and gas producers would drill new wells allowing faster depletion of shrinking oil and gas reservoirs, the Federal Government would in turn allow a higher price for these new supplies. But these deplorable producers would still be required to charge the old low price for existing production, now given the official title of Old Oil. No way were oil & gas companies going to be allowed “windfall profits”, a phrase sure to appear in any media mention of energy! And thus was born New Oil.

Old Oil would continue to be sold for $3/barrel, but New Oil would be allowed to sell for $8/barrel. As the artificial shortages continued and the price of imported oil continued to climb, the Federal Government was persuaded to create another new category and thus was born, New New Oil. Plugged in lobbyists whispered of the coming New New New Oil to their clients.

Life was good for the sensible and responsible administrators bringing competent management to the nation’s energy supply. Oil and gas production were natural resources, scarce resources, a resource held in trust for the people. It had been a fool’s game to allow oil and gas to be produced and used by people without proper credentials in a market without strict regulation. Now a system was in place, backed by the wisdom and power of the State, to ensure that energy was being used in a proper manner as well as being priced properly.

And in the systematic way of all good governmental ideas to help the people, the government spent money to jump start solutions for perceived problems. The thinking of the time was that while natural gas would be gone by the turn of the century with oil perhaps lasting a couple of decades beyond, coal supplies would probably last through the 21st Century. So in an effort to put off the inevitable, government would subsidize the construction of coal gasification plants to make natural gas from coal and oil from oil shale.

A great sucking sound was heard as dozens of multi-billion dollar plants were planned, a Manhattan Project for energy. And this is how I came to be in the energy business. Since nobody except the Nazi’s of WWII vintage knew how to build a coal gasification plant or an oil shale plant, lots and lots of engineers were needed. Working at a factory in Lincoln, Nebraska, a big engineering company in Southern California offered me a job at a salary 25% higher than I was making at the time. I looked at my prospects in eastern Nebraska and compared them to California. I was soon on the way to Surf City USA.

By a stroke of luck, I soon found myself working on a different sort of boondoggle than coal gasification. Plastic bags were then a product in good standing with America’s consumers rather than a threat to the very existence of Mother Nature. A company called Dow Chemical was in the business of making plastic bags. Plastic bags are made out of ethane, a component of natural gas. But since Science had declared natural gas to be rapidly disappearing, Dow needed to find an alternative or they would be left to rely on their rapidly diminishing napalm sales for the existence of the company.

Chemical engineers, being an ingenious lot, hit upon a solution. Distill crude oil and take the lightest part of it known as naphtha, then crack it into ethane. So Dow decided to build a refinery dedicated to making naphtha for its plastic bag plant. And so for a large part of four years, that’s what I worked on.

During those years, I got to know one of Dow’s engineers pretty well. He was an older gentleman, a typical Texan with a good Texas name, Harmon Hoot. We hit it off pretty well, beginning my career long appreciation for all things Texan. When the refinery was built and ready to begin operation, Harmon Hoot took me along to Freeport, Texas to start it up.

There was a problem however. Dow Chemical didn’t have any crude oil to begin startup operations and there wasn’t any available. The Earth was running low and government was slapping hands for haphazard trading of oil. But Dow Chemical did have Harmon Hoot. A little known and under-appreciated fact was that Mr. Harmon Hoot was the Chairman of Brazoria County’s Democratic Party. Mr. Hoot was persuaded to make a few phone calls and . . . mirabile dictu . . . an oil tanker with a few hundred thousand barrels of crude oil appeared offshore a week later. And that is how the big boys do business in case you were wondering.

But then the unthinkable happened. Ronald Reagan was elected President. Against the advice of virtually every reputable advisor in government and university, Ronald Reagan deregulated the price of oil and gas. All during the 1980 Presidential campaign, Science experts had warned the public that Reagan’s promises of deregulation would be a disaster. If energy were actually freed from price controls, prices for energy would skyrocket. The only thing protecting helpless consumers from the greed for “windfall profit” seeking oil companies were governmental price controls. The market would fall into chaos. Children would freeze to death in unheated schools and houses as natural gas supplies disappeared.

And then the unthinkable happened again. Ronald Reagan ignored the wisdom residing within the Energy Department and removed price controls. The price of oil and gas dropped dramatically. Almost in a heartbeat, the nation was awash in cheap oil and natural gas. The nation breathed a sign of relief. Lines of cars at gas stations were a curiosity of the unlamented 1970’s. Children didn’t freeze in unheated apartment rooms, at least if they didn’t have drug addicts for parents.

And then the unthinkable happened once more. Utilities, those most protected of all businesses, started to go bankrupt. As creatures of the government, utilities had been required to operate in accordance with the prevailing wisdom of government. The government had been requiring utilities to operate with the expectation that natural gas prices would continue to rise and that supplies would soon begin to disappear.

State regulators forced captive utilities to contractually assure both price and quantity, seeking at least twenty-year contracts if possible. And so the regulated utilities obediently engaged in a heated nationwide battle for future natural gas supplies in the market place. It was dog eat dog. Detroit’s consumers might freeze in the dark, but Chicago would have high priced heat and light, at least for another twenty years.

But now in a deregulated market, the utilities not only stood as fools but on a ledge gazing down into a dark abyss. They had eagerly entered into contracts obligating the utility to take far more gas than they needed. The thinking of the regulators was that in a future time when other utility customers froze in fiercer and longer winters, their own utilities could sell excess natural gas at a handsome profit. I guess “windfall profits” were ok for utilities. The utilities had also agreed to pay prices substantially higher than the now deregulated market price. The utilities and their regulators had thought themselves smart to lock in prices before future scarcity made the price of natural gas even more exorbitant.

In a market where natural gas prices ranged around $2, many contracts locked in a price of $5 for “New” supplies. In compliance with the wishes of their government masters the utilities had signed long term “take or pay” contracts. Whether the utilities took the gas or not, they had to pay for full quantity at full price. Under this burden, utilities started to go bankrupt.

Again, remember that government responds to the concerns of the people, or at least people with money for lobbyists. Governmental bodies pressured counterparties to the now disastrous contracts; contracts were adjudicated in sympathetic courts and utility regulators hurried to modify rates. Ratepayers and stockholders found themselves caught in an involuntary game of musical chairs apportioning the costs of the governments’ epic foolishness. The press of the time remained silent as the sausage that is political compromise was made, as all good sausages is made, out of sight.

Blog writers like myself are free to indulge in outrage and condemn hypocrisy, but politics is the art of the possible. No matter the cause or who was at fault, the energy markets had to be put back together and politics is the art of the possible. Politics is how things get done. After a time the energy markets regained some stability. Of course there was a great deal of collateral damage.

Even with the best efforts of regulators, most utilities suffered financially, beginning a long decline torn by periodic restructuring, divestiture and takeovers until the resurrection brokered by green energy some twenty years in the future. The oil and gas industry was savaged, suffering through two long decades of privation and bare survival. Unlike the utilities, the oil and gas industry was left to work its own way out of the disaster that was the Energy Crisis.

The feeding frenzy engaged in by the utilities had a terrible effect on the energy producers. The utilities had required long term hard dollar contracts for greatly increased supplies at greatly increased prices. All those “take or pay” contracts had provided assurance for the capital spending necessary to bring large new oil and gas supplies into being. After deregulation and the utilities default of their contracts, the energy business was awash in a glut of overcapacity. Prices plummeted. Hundreds of thousands were laid off. Companies disappeared.

Remember that oil refinery to make naphtha for Dow Chemical? It was no small thing. A refinery that can process 280,000 barrels of crude oil a day is a lot of steel and money. Dow had given it the pixyish name of “The Oyster Creek Crude Processing Facility”. Engineers are all poets at heart you know. But we started it up in 1980, just before deregulation. Once that we proved it worked, deregulation was upon us and the refinery was put into mothballs. Ethane just kept showing up in the pipelines feeding Dow’s plastic bag plants. Years later the plant was sold off piecemeal to junk dealers. There was a lot of that going on in the 1980’s.

But the market continued to work as it always does. When government and their captive utilities conspire to make sausage, ratepayers are at the bottom of the hill when the brown stuff flows. Even though the metaphor is mixed, it was true this time as well as every other time before or since. As was to be expected, ratepayers paid the for the sausage no discounts allowed, particularly industrial ratepayers. But sometimes it’s true that every dog really does have his day.

Back in 1978, back in the good old days of the Energy Crisis before Ronald Reagan and price decontrol, Congress had passed another law, known as PURPA – The Public Utility Regulatory Policies Act. Convinced by Science of the oncoming disappearance of fossil energy supplies, Congress passed the PURPA legislation to make the most of the vanishing natural gas supplies. PURPA would force energy conservation by requiring energy use efficiency.

As you may have guessed, PURPA was a complicated piece of legislation intended to achieve many goals, most of them mutually exclusive. But PURPA, almost by accident, created a new entity in the energy business, known as a QF. QF was shorthand for a Qualifying Facility under the PURPA legislation. If a power generation facility was a QF, the local utility was required to buy its electrical power at the “avoided rate”. As you might guess, definitions such as QF and “avoided rate” provided ample employment for lawyers and consultants.

But PURPA was also the first rumbling of an coming earthquake in the energy business. The fiascos and resulting compromises necessary to contain the damage brought about by governmental regulation in the Energy Crisis had left a lot of energy consumers angry, even the ones with lobbyists. But as the decade of the 1980’s wore on, new truths began to emerge.

  • Science knew that natural gas supplies would soon be exhausted, but for now, natural gas was plentiful and cheap.
  • Most industrial facilities were very unhappy with their utility, the price for electricity was too high and the service from a monopoly provider was what you might expect.
  • New generations of gas turbines were becoming available. These turbines were reliable, efficient and cheap
  • A natural gas fired gas turbine in an industrial facility that could use the heat from the turbine exhaust was an ideal QF per PURPA. High utility rates in effect after the Energy Crisis made QF’s very profitable.

The fiasco of the 1970’s Energy Crisis brought a flood of new people into the energy business and given them experience, people like me. Most of these people were now unemployed. Given their circumstances, they had no choice but to be entrepreneurial. Their natural employers, oil companies and utilities, weren’t interested in their talents.

The restructuring and shake up of the Energy Crisis had changed those companies. Legal/regulatory/financial expertise had been what counted in the Energy Crisis and were the new career ladder in those companies. Now with gluts of oil and gas, these companies weren’t building anything now or in the foreseeable future. So there was little need for technical people. Marketing people in a utility or in a surviving oil company, surely you jest?

On top of that, the surviving oil & gas producers in the United States had learned their lesson. Even if they could find new oil & gas reserves in the United States, the Energy Crisis proved that any profits from these reserves could and would vanish at the government’s whim. So they went overseas.

And so for ten years, the pot simmered.

3 Responses to “Science & the First Energy Crisis”

  1. Barry says:

    We had a cold week in Bryan, Tx. Cold enough for me to check record Hi and Lo temps. It was shocking to see that no monthly Hi or Lo records were set in 2000s or 10s. The era of extreme weather. 3 out of 12 monthly Hi’s were set in the 50s. 4 out of 12 monthly Lo’s were set in the 70s. If I could remember math from 6-Sigma courses, it might be easy to show how improbably this is in a Mann-Hockey-Stick World. Check your town: http://www.intellicast.com/Local/History.aspx?location=USTX0170 .

  2. jeff esbenshade says:

    When govt distorts markets there will be people to take advantage of the situation.

    I was part owner of a oil well in western Kan about time Pres Carter’s term was up

    The old oil and new oil program was phased out. At a certain point I paid a windfall profit tax to the Feds on each barrel of “new” oil

    A Mr. Marc Rich was buying old oil putting on barges took it to Gulf Mexico and shipped it back as new oil. Feds were after Mr. Rich before he fled to Switzerland
    for tax fraud.

    With his profits of old oil he started Glencore Trading Company.which grew to a world wide company. He bought oil from Iran sold it to South Africa&Isreal

    His ex wife made a very large gift to the Clinton Library and on the last day
    of the Clinton President, Bill gave a pardon to Mr. Rich.

  3. Dave says:

    That was really an interesting blog. It filled in a lot of information that I was unaware of, having lived through that time.

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