Order Code RL31720
Energy Policy: Conceptual Framework and
Continuing Issues
Updated December 6, 2006
Robert Bamberger
Specialist in Energy Policy
Resources, Science, and Industry Division

Energy Policy: Conceptual Framework
and Continuing Issues
Summary
As the 110th Congress assembles, energy policy continues to be a major
legislative issue, despite passage in August 2005 of the Energy Policy Act of 2005
(EPACT, P.L. 109-58). Hurricanes Katrina and Rita temporarily shut down
production of oil and gas and refining capacity in Texas and Louisiana. World and
domestic demand for oil remained strong, and other factors have placed pressure on
gasoline price and deliverability in the United States.
In the face of these developments since the passage of EPACT, and because the
prospect that this episode of elevated prices is likely to be a long one, congressional
interest in energy policy remains high. When the United States experiences a period
marked by sharp increases in the price for energy and concern about the adequacy of
essential supplies, there is widespread concern that the nation has no energy policy.
The nation has, in fact, adopted several distinct policy approaches over the years, and
many of the debates have been about determining the appropriate extent of the
federal government’s role in energy.
There were episodes from 1973-2003 when oil prices spiked, but these were
generally for comparatively brief periods; overall, the period was one of general price
and supply stability. It isn’t so much that energy policy failed to be adequately
responsive to past crises; rather, during lengthy periods of stability and declining
prices for conventional fuels, it has proven difficult to sustain certain policy courses
that might help shield the nation from occasional episodes of instability. Because
prices are now expected by some analysts to remain high, the prospect for certain
longer-range energy policies may now be more favorable. Traditionally, the energy
debate has been most vigorous over the balance to be struck between increasing
supply and encouraging conservation. However, when markets are unstable, debate
turns on another axis as well, that of short-term versus long-term policies.
Energy policy issues of continuing interest include Corporate Average Fuel
Economy Standards (CAFE) for passenger vehicles; improving U.S. energy
infrastructure, including pipelines and refineries; seeking effective means to promote
energy conservation using currently available technologies; and developing new
technologies and alternative fuels.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Energy Policy Since the 1973-74 Arab Embargo . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Period of Oil Price Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Early Effects of a Market-Oriented Energy Policy . . . . . . . . . . . . . . . . . 3
Other Responses to the Disruptions of the 1970s and 1980s . . . . . . . . . . . . . 4
The Challenge Faced by Policymakers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
An Energy Policy Schematic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Current Context: What’s Different? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Major Unresolved Energy Issues
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Petroleum and Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Clean Air Standards and Gasoline Supply and Distribution . . . . . . . . 10
Drilling in ANWR and on Other Federal Lands . . . . . . . . . . . . . . . . . 10
Natural Gas Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Electricity Regulation and Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Conservation and Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The Uncertain Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Tables
Table 1. A Schematic of Energy Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Energy Policy: Conceptual Framework
and Continuing Issues
Introduction
At the beginning of the 110th Congress, energy policy enters its eighth year as
a major legislative issue. The previous Congress passed a massive energy bill, the
Energy Policy Act of 2005 (EPACT, P.L. 109-58), but subsequent developments
worked to keep crude oil and gasoline prices high and interest in legislative solutions
active.
EPACT was enacted on August 8, 2005. Successive hurricanes, Katrina and
Rita, in late August and late September 2005, brought about the shutdown of more
than 5 million barrels per day of refining capacity in Texas and Louisiana and
initially shut down the 25% of U.S. crude oil production and 20% of U.S. natural gas
production that comes from the Outer Continental Shelf in the Gulf of Mexico.
World and domestic demand for oil has remained strong, taking up most of the
world’s spare production capacity. The phaseout of the gasoline additive methyl
tertiary butyl ether (MTBE) and a renewable fuels mandate in EPACT have placed
additional pressure on gasoline price and deliverability in the United States. In the
summer of 2006, gasoline prices returned to the post-Katrina peaks of more than
$3.00 per gallon and stayed there throughout the peak driving season. Nevertheless,
U.S. gasoline demand reached a record high, averaging over 9.5 million barrels per
day in July.
The passage of EPACT had its roots in an unexpected jump in oil prices that
began in the late spring of 1999, following a production cut by the Organization of
Petroleum Exporting Countries (OPEC). In early 2003, oil prices were reaching into
the mid-$30s. Prices rose even higher during 2004 — exceeding $50 per barrel for
a brief period — owing to growing world demand both in the United States and the
Far East, inadequate refining capacity, and Hurricane Ivan, which reduced U.S.
production from the Gulf of Mexico for several months. Crude oil and petroleum
product prices escalated further during 2005. These increases were initially
attributable to growing international demand for oil that, domestically, put a strain
on U.S. and world refining capacity. Then, in August and September, hurricanes
Katrina and Rita caused further supply disruption.
This continuing period of volatility in fuel supplies and prices has been the
fourth significant episode since 1973 to jog American awareness of the extent to
which the U.S. economy and lifestyle depend on inexpensive and plentiful energy.
However, this surge in price represents a departure from historic trends because the
rise in the price for oil fuels and energy products has occurred for more than five
years and has been sustained. Some analysts have coined the term “demand

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destruction” to describe price-induced reductions in consumption, but overall demand
for oil has proven resilient. World demand for oil has grown from roughly 78 million
barrels daily in 2001 to roughly 84 million barrels daily during 2005.1
An additional departure from past patterns is that, historically, increases in crude
oil prices owing to supply or international issues have driven product prices as the
higher cost for crude feedstock is passed on. However, crude supply and stocks in
2005 — prior to the hurricanes — were adequate. Commitments by OPEC during
the course of the year to maintain or boost production appeared to have little but
short-term effects on crude prices. Tightness in refined products prior to the
hurricanes and the accompanying rise of product prices was a function of insufficient
refining capacity in the United States to meet demand for a range of summer gasoline
formulations. The pressures on product prices appeared to work backwards to
support higher prices for crude. The hurricanes exacerbated these dynamics, further
tightening product supply owing to problems with pipeline distribution as well as
refining capacity, and introducing at the same time an uncertainty about crude supply
that had not been as strong a worry prior to the storms.
In 2006, a number of factors — new and old — contributed to an especially
brittle climate for energy supply and price. Whenever the United States has
experienced a period marked by sharp increases in the price for energy and concern
about the adequacy of essential supplies, there is widespread concern that the nation
has no energy policy. However, not only does the nation have an energy policy, it
has adopted several distinct policy approaches over the years.
This report discusses those major policy approaches, provides a conceptual
framework for categorizing energy policy proposals, and briefly describes energy
issues that remain current in the debate after the enactment of EPACT. Most
policymakers acknowledged that EPACT would provide negligible price relief in the
short term, but they contended that it would encourage domestic production of oil
and gas and further conservation and alternative fuel initiatives. At issue for
Congress is whether there should be an additional policy response in the face of
continued pressure on oil price and supply.
Energy Policy Since the 1973-74 Arab Embargo
In the 30 years since the Arab oil embargo, the United States has pursued a
number of different energy policy courses. In the course of several episodes during
this period when oil price and supply became unstable, the U.S. moved from a set of
policies more reliant on the federal government, to policies more dependent upon
markets. This history is briefly summarized in the section to follow.

1 U.S. Department of Energy, Energy Information Administration, International Petroleum
Annual
: [http://www.eia.doe.gov/emeu/ipsr/demand.html]

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The Period of Oil Price Controls
In the aftermath of the Arab oil embargo in 1973, many looked to government
to solve the problem, for both the short- and long-term. By 1975, refiner acquisition
costs for imported crude oil had roughly tripled, rising from an average cost of
$4/barrel (bbl) in 1973 to $12.50/barrel in 1974. However, refiner acquisition costs
for domestic crude did not even double — rising from $4/bbl to $7/bbl — owing to
a system of federal price controls that kept the price of domestic production below
the market price. This discouraged domestic production and encouraged imports.
However, controls may have helped insulate consumers from some of the price
increase, which was the intended effect.
Automobile fuel economy standards were enacted during the late 1970’s to
reduce gasoline consumption in the transportation sector. At the same time, hopes
were invested in government-funded research and development of conservation
technologies and alternative fuels.
A second supply interruption was triggered in1979 by the fall of the Shah of Iran
and a greatly reduced flow of Iranian oil to world markets for several months. A
phased deregulation of oil prices, enacted in 1975 in the Energy Policy and
Conservation Act (EPCA, P.L. 94-163), was designed to enable prices to become
more responsive to market conditions. But the pace of the deregulation was
conceived to be gradual. At the time of the Iranian revolution, gasoline prices in the
United States were still subject to some control. The result was long lines at U.S. gas
pumps.
The Early Effects of a Market-Oriented Energy Policy
Letting the market set prices, supporters of deregulation had argued in the 1975
debate, would encourage the development of additional domestic supplies of oil as
well as the development of alternative energy sources. Shortly after assuming office
in 1981, President Reagan accelerated the EPCA schedule for price decontrol.
Energy policy, in general, became more market-oriented, and the government role
was lessened.
Sustained high crude oil prices contributed to a reduction in U.S. petroleum
consumption from 18.8 to 15.2 million barrels per day (mbd) from 1978 to 1982;
there was more substitution of other fuels for oil, more efficient consumption of oil,
and price-induced conservation. Higher prices resulted in new oil production from
non-OPEC nations, allowing the United States and other consuming nations to
diversify their sources of supply. Faced with a loss of market share and revenue,
OPEC increased its own production in the mid-1980s, thereby lowering the price for
crude oil. In the course of the year from 1985 to 1986, world oil prices plunged. In
the United States, refiner acquisition cost for imported oil fell from $27/barrel to
$14/barrel.
Prices remained depressed until a fresh round of spikes in oil prices occurred in
1990-91 following Iraq’s invasion of Kuwait in early August 1990. That resulted in
a cut-off of 4.3 million barrels per day (mbd) from world markets. The price of oil,

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which had averaged $16/bbl at the end of July 1990, exceeded $28 by late August
and reached $36/bbl in September 1990.
Responding to the Iraqi threat, Western and Middle Eastern nations found
common ground that would have been unimaginable a decade earlier. By the late
1980s, recognition had grown of the interdependence of oil-producing and oil-
consuming nations; the OPEC nations had come to recognize that long-term demand
for their oil was jeopardized by any prolonged period of high oil prices. Most did not
wish to repeat the cycle of the early- to mid-1980s and boosted their production to
make up for some of the lost supply. Consuming nations also coordinated the release
of strategic stocks of crude and products. Prices began to fall in mid-October 1990
when the United Nations approved the use of force against Iraq. Prices fell more
sharply after the United States and a consortium of nations began conducting air
strikes on Iraq in mid-January 1991.
Other Responses to the Disruptions of the 1970s and 1980s
During all of these episodes, importance was placed on conservation, more
efficient use of energy, and development of alternative energy sources. The oil shocks
of the mid- and late-1970s spurred considerable spending on alternative energy —
including solar, geothermal, wind, clean coal, synthetic fuels, alcohol-based fuels —
and technologies to improve the efficiency of energy use. Regulations were
developed to improve the efficiency of home appliances and to incorporate more
energy-efficient designs in buildings. In the early 1980s, states and utilities promoted
energy efficiency as one form of “demand-side management” to reduce the need for
construction of new power plants. Many industries re-engineered their processes to
save energy. Conservation and efficiency were championed by some as a lower-cost
and more environmentally appealing way to achieve greater energy security than
policies to boost supply. However, largely because of the generally lower prices over
time for fossil fuels — as is noted below — these energy programs showed mixed
results.
The Challenge Faced by Policymakers
As suggested earlier, each episode of short supply and higher prices spurs
concern that the nation lacks an energy policy and has ignored past lessons.
However, it is apparent from a review of the years since the time of the Arab oil
embargo and first oil price shock in 1973 until 2004 that it is more accurate to see
this 30-year period as one of general price and supply stability that was periodically
broken by short episodes of supply disruption and price volatility. It wasn’t so much
that energy policy failed to be responsive to earlier crises; rather, during lengthy
periods of stability and declining prices for conventional fuels, it proved difficult to
sustain certain policy courses that might help shield the nation from future episodes
of instability.
An energy policy that would most effectively shield the nation and the economy
from the worst effects of supply shortages would be a policy that might well deny the
nation the full benefits of cheap and plentiful energy when markets are stable. The
periods of relative calm and stability result in a markedly uncertain environment for

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investment in alternative fuels, energy efficiency technologies, and boosting the
production of conventional fuels in regions where production costs are significantly
higher than in the Middle East. State and local regulations and codes further cloud
the climate for investment. Local opposition to new on- and off-shore production
projects, power plants, electric transmission lines, refineries, and pipelines is often
most effective during periods of price and supply stability, but sometimes eases only
after shortages have actually occurred.
However, a prolonged climate for higher prices — stemming from tightness in
the supply of products and continuing instability in Middle East regions where oil
reserves are concentrated — may introduce new changes in the character and
particulars of U.S. energy policy. This possibility is a benchmark to keep in mind
when thinking about energy policy conceptually and as subsequent debate on energy
policy continues in Congress.
An Energy Policy Schematic
Constructing a balanced energy policy that will not undermine other competing
and equally legitimate policy goals is a complex problem. How to boost energy
supply without exacting an unacceptable toll on the environment? How, then, to
reduce gasoline consumption, a commodity central to the nation’s economy and
lifestyle, when raising its price to achieve a meaningful reduction in demand could
be economically disruptive and politically unappealing? Should federal policy
encourage the use of more expensive alternative fuels and technologies that heighten
efficiency, when OPEC has generally demonstrated a capability to adjust the price
of oil to keep it far cheaper than its substitutes?
Debate over energy policy has produced an enormous range of proposals, many
of which have been adopted at one point or another over the years. In general, it is
helpful to recognize the broad categories into which most proposals fall: Most energy
policies are designed to affect either the supply of or the demand for energy products,
and they are, at the same time, designed to have an effect either in the near term or
the longer term.
Traditionally, the energy debate has been the most vigorous over the balance to
be struck between increasing supply and encouraging conservation. However, energy
policy turns on the additional axis of short- and long-term policies. In the midst of
high prices during the spring of 2001, policymakers were pressed to come up with
immediate policy responses that would afford consumers price relief. However, at
that time President Bush was advising Congress and Americans that the
Administration’s energy policy plan would focus on long-term remedies for the
nation’s energy problems and that there would be no immediate relief for consumers
paying higher prices for gasoline, electricity, and other fuels. The President and his
supporters suggested that by setting out an action-oriented and actionable
comprehensive policy, markets and consumers should feel some short-term
reassurance. This did not quell all the demands for more immediate action to reduce
energy prices. Nor were they completely quelled during the protracted debate over

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omnibus energy legislation from 2003 until the enactment of EPACT in the summer
of 2005.
It is useful to clarify the differences between short-term and long-term policy
initiatives. For example, a drawdown of oil from the Strategic Petroleum Reserve
(SPR) affects crude oil supply in the near term. However, enactment of tax
incentives for investment in new oil drilling technologies might add to domestic
crude supply further in the future. Proponents of drilling in the Arctic National
Wildlife Refuge (ANWR) argue it might add anywhere from 300,000 b/d (barrels per
day) to 1.4 mbd to U.S. domestic supply, but this, too, is a longer-term policy
initiative.
Turning to the consumption side of the ledger, boosting the federal gasoline tax
by $1.50/gallon might be expected to reduce gasoline consumption in the near term,
but increasing the corporate average fuel economy (CAFE) standards on new motor
vehicles would not take full effect until older vehicles were largely replaced, a
process that could take more than a decade.
The table below suggests a way in which many energy policies may be
visualized along these lines:
Table 1. A Schematic of Energy Policies
Affecting Supply
Affecting Demand
Short- to Mid-term
Strategic Petroleum
High energy prices due to
Reserve (SPR)
unfettered market forces
or taxation
Allowing high prices to
Policies promoting
allocate and price scarce
conservation and more
energy
energy-efficient choices
Mid- to Long-term
Tax incentives to promote
Corporate Average Fuel
production
Economy Standards
(CAFE)
Open new areas to leasing
Tax incentives to
and exploration
encourage less, or more-
efficient consumption
Research and development
Efficiency standards
Market pricing of energy
Efficiency labeling
Research and development
in efficiency technologies

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The axis of long-term/short-term, supply/demand does not capture all policy
options. For example, one of the major issues in energy policy is the price for fuels.
Energy policy generally is designed to affect price indirectly — by having price
follow, or reflect, current demand or supply for energy. There are a few exceptions.
Tax policy may address energy price directly to the extent that excise taxes on fuel
products can be raised or lowered (recognizing that these tax boosts or cuts may not
be reflected penny-for-penny in the “pump” price for fuels).
Short-term policies to affect supply, such as potential use of strategic reserves,
have been sometimes very controversial because, in the absence of a very clear-cut
and widely acknowledged physical shortage, such initiatives are perceived to be
thinly disguised efforts to grant price relief.2 Some suggest at times that high prices
— left uninterfered with — are the best policy of all, encouraging markets to provide
more supply in due course, and that federal policy should address only those most
adversely affected by sharply higher prices. The Low Income Home Energy
Assistance Program (LIHEAP) is one such effort to provide direct assistance to
families whose quality of life is especially burdened by high energy prices. LIHEAP
is a short-term policy for addressing the impact of high prices for energy.
Supply and demand may also be affected by external events, including political
and diplomatic dynamics between or among the producing nations. Weather,
seasonal or otherwise, will affect supply and demand; policy cannot affect the
weather, only its consequences. Lastly, Congress always has the option to require
study and analysis of a problem before settling on a policy course. Requirements for
such studies are regularly included in appropriations bills and other legislation.
The Current Context: What’s Different?
In every energy debate, one question is a constant: How extensive a federal role
is appropriate in energy policy? However often that question recurs, the context in
which it is raised changes. The current context has become distinctly different than
in previous episodes.
! U.S. energy policy was primarily market-based for roughly 20 years,
but policy makers have been weighing whether problems in some
sectors and with some fuels are attributable to distribution or
regulatory inefficiencies interfering with markets, or whether
government intervention may be necessary to protect consumers and
the economy from problems to which markets cannot flexibly
respond. Some critics of U.S. energy policy argue that these
inefficiencies and distortions are themselves the consequence of
2 The Energy Policy and Conservation Act (P.L. 94-163, EPCA) authorizes drawdown of
the Strategic Petroleum Reserve upon a finding by the President that there is a “severe
energy supply interruption,” or in the event of a circumstance that “constitutes, or is likely
to become, a domestic or international energy supply shortage of significant scope or
duration” and where “action taken ... would assist directly and significantly in preventing
or reducing the adverse impact of such shortage.”

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government intervention — for example, Clean Air Act
requirements that have required the manufacture of several different
regional formulations of gasoline.
! Strong economic growth during the mid- and late 1990s at a time of
declining real energy prices resulted in growth in consumption even
though efficiency of energy use is dramatically better than during the
1970s and 1980s. Growth in petroleum consumption in the United
States as domestic production declines has meant a commensurate
increase in oil imports. During the second half of 2004, growth in
demand as well from the Far East pressured spare oil production
capacity. In the midst of market uncertainties, increased OPEC
production — unlike in the past — appeared unable to exert its
historical effect of moderating crude oil prices.
! There is recognition of the interdependence of producing and
consuming nations; however, the political balance among the OPEC
nations is delicate and can influence oil production decisions and
whether OPEC is able to exert market control at all.
! There is growing recognition that the recent shortages and price
spikes in some regions of the country have been compounded by
insufficiencies in the nation’s energy infrastructure — refining
capacity, gas and oil pipelines, transmission lines, and electric
generating facilities. Some have questioned the advisability of
locating so much of the nation’s refining capacity in the Louisiana,
Alabama, and Texas.
! Problems with gasoline supply and home heating oil stocks since
2000 imply some need to develop additional refining capacity and
transport systems that will add both capacity and flexibility to
distribution. However, national and local environmental regulation
and requirements, and local community sentiment, affect the speed
and ease of siting and building such facilities. Because high prices
tend to eventually depress demand, the industry is sometimes wary
of making investment in capacity that would achieve profit targets
only during short-lived periods of unusually high prices. Uncertainty
about the course of the economy may also contribute to questions
about the profitability of these investments. Concerns about
greenhouse gas emissions add an additional measure of uncertainty.
Policymakers have debated additional measures for “refinery
revitalization” and streamlining the process for approval of refinery
siting and construction

Major Unresolved Energy Issues

The shift to a more market-oriented energy policy, additional lessons some have
taken from experiences during the 1980s and 1990s, geopolitical developments and

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developments such as those outlined above are likely to play a part in any
consideration of energy issues still pending and of interest to many policymakers in
a post-EPACT climate. Some of these issues are broadly reviewed below. Tax
policy plays a role in many of these areas. (See CRS Report RL33578, Energy Tax
Policy: History and Current Issues
, by Salvatore Lazzari).
Petroleum and Natural Gas
The latest rise in crude oil prices had its origins in March 1999, when cuts by
OPEC in world crude production sent domestic refiner acquisition costs for crude oil
on a sharp ascent from less than $11/bbl in February 1999 to $24.50/bbl by
December of the same year. Responding, in part, to intense lobbying by the United
States, the OPEC oil ministers boosted crude production and settled upon $22-$28
per barrel as a desirable “price band.” But the price band grew increasingly out-of-
touch and irrelevant as prices renewed their increase, and surged during 2004. Prices
for crude breached $70/bbl in May 2006.
Growth in demand, internationally and domestically, partly accounts for price
increases. Demand for petroleum products in the United States averaged 20.7 mbd
during each of 2004 and 2005, but was averaging 20.4 mbd during the first third of
2006.3 Increases in demand, as well as declining domestic production, have been
offset by increased crude and product imports, which are averaging 12 mbd —
hovering around roughly 10 mbd of crude and 2 mbd of refined product.
Contributing to high gasoline prices in 2006 were rising prices for crude, some
resumption in demand, and a tilt toward the manufacture of distillates that was
slowing additions to gasoline stocks. In addition, five fuel specification changes
during 2005 put additional pressure on the gasoline supply system.4 An ultra-low
sulfur diesel program that began in June 2006 required that 80% of on-highway
diesel have no more than 15 ppm (parts per million) sulfur content. The elimination
of MTBE (methyl tertiary butyl ether) placed pressure on ethanol supply and prices
and has incurred some loss to product yield in the manufacture of RFG
(reformulated gasoline).
The ability of the OPEC cartel to exert influence upon oil prices at critical times
underscores that — with respect to petroleum — the problem is less that the world
supply of oil is tight than that so much of it is concentrated in other parts of the
globe, principally the Middle East. U.S. dependence upon imported oil is now about
60% of total consumption. Absent some elusive technical “fix,” there are limited
prospects for significantly reducing that figure without incurring economic hardship
3 U.S. Department of Energy. Energy Information Administration. Monthly Energy
Review. April 2006: Table 3.1b Petroleum Overview: Disposition and Stocks
[http://www.eia.doe.gov/emeu/mer/pdf/pages/sec3_3.pdf], and Weekly Petroleum Status
Report, Table 1. U.S. Petroleum Balance Sheet: 4 Weeks Ending 05/02/2006
[http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_
status_report/current/pdf/table01.pdf].
4 U.S. Department of Energy. Energy Information Administration. Short-Term Energy
Outlook
. January 10, 2006.

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and lifestyle compromises. However, relatively modest increases in worldwide
production or reductions in demand by consuming nations can substantially reduce
the magnitude of oil price spikes.
Clean Air Standards and Gasoline Supply and Distribution. Attention
has focused on the Clean Air Act standards that regulate the oxygen content,
volatility, benzene, and the sulfur content of gasoline. Refineries face state and local
standards on how to achieve compliance with federal requirements. The expiration
in early May 2006 of the oxygenate requirement for reformulated gasoline and the
use of methyl tertiary butyl ether (MTBE) spurred demand for ethanol, leading to
higher prices and tighter supply for ethanol.
One consequence of regional variations is that gasoline supply loses some of its
fungibility; one region experiencing a shortage may no longer be able to secure
additional supply from a nearby locality with a different blend of gasoline.
Distribution becomes more complicated because different blends sharing the same
pipeline must be carefully batched to avoid contamination. In the wake of the 2005
hurricanes, and again in the spring of 2006, some standards were temporarily relaxed
in an effort to improve gasoline production and ease distribution problems.
Additionally, foreign refineries that supply the U.S. gasoline market do not make the
regional formulations.
Some have urged a rationalization of Clean Air Act standards that would permit
a “harmonization” of U.S. gasoline standards. This would introduce flexibility into
the gasoline manufacture and distribution system that might bring prices down.
Opponents of harmonization argue that it might compromise air quality, and lead to
further compromise of clean air objectives in the future. Harmonization might also
raise prices for fuel in regions that did not require the more exacting formulations.
Drilling in ANWR and on Other Federal Lands. The greater the nation’s
ability to produce its own fuels, the less vulnerable it is to unanticipated international
developments that can reduce or threaten supply. But the policy options on the
supply side, such as opening up the Arctic National Wildlife Refuge (ANWR) for
exploration, are mostly long-term. Alaskan oil production, which once touched 2
mbd, has now fallen below 900,000 mbd and, without new production, will continue
to decline.5 Low production could result in rising transport tariffs on the Trans-
Alaska Pipeline, with further adverse impacts on North Slope production.
Proponents of exploring ANWR point to advances in exploration and drilling
technology and methods that have significantly reduced the extent of surface
disturbance. While opponents concede this may be so, they argue that these advances
are limited to exploration and extraction, and that considerable risk to the
environment remains during the production and transportation phases. Opponents
also suggest that the risks are not worth bearing, especially if the resources in ANWR
turn out to be at the lower range of estimates, providing only an additional 300,000
b/d of supply. Some respond to this argument by noting that the nation has
5 There are other prospects for oil development in northern Alaska, including two fields
scheduled for development just outside the National Petroleum Reserve — Alaska (NPR-A).

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experienced periods of tight supply when even an additional few hundred thousand
barrels of crude oil per day would have significantly reduced gasoline and heating oil
prices. For some opponents, any weighing of risks and benefits are pointless because,
citing the area’s pristine character, they argue that its ecology and habitat should not
be disturbed under any circumstances.
There was some expectation that proponents of ANWR exploration would gain
congressional authorization during the 109th Congress, but they did not succeed. (For
additional information and background, see CRS Report RL31278, Arctic National
Wildlife Refuge: Background and Issues
, by M. Lynne Corn.)
The broader issue raised by ANWR — that of access to public lands for energy
exploration and development — is a significant component of the national energy
debate. There is considerable disagreement about the potential resources on federal
lands — particularly the amount of oil and gas that may be “locked up” by land-use
restrictions and other regulatory factors. The Bush Administration’s energy policy
report recommended an examination of “land status and lease stipulation
impediments” and that policymakers “consider modifications where appropriate.”
A report by the Department of Interior, on the other hand, indicates this may not be
the problem some have alleged.6 (For additional information and background, see
CRS Report RS20902, National Monument Issues, by Carol Hardy Vincent.)
Natural Gas Supply. For the past decade in the United States, natural gas
consumption was encouraged, particularly for gas-fired combined-cycle power plants
that could provide incremental electric supply to the nation’s power grid at highly
competitive prices and with few environmental constraints. Plentiful supplies, and
relatively low prices for several years, discouraged additions to natural gas reserves
during the 1990s.7 With surges in demand for electricity and a colder winter in 2000-
2001, residential and other consumers of natural gas suddenly faced sharply higher
prices as competition grew for gas supplies. At the wellhead, gas prices rose from
$2.16 per thousand cubic feet (mcf) in 1999 to $4.00 per mcf in 2001. But they
reached the $8.00 level for a few months during this period, and prices continued to
rise during 2003 and 2004.8
But these developments hardly prepared markets for Hurricanes Katrina and
Rita, which sidelined 1.5 mbd of crude oil production and 10 billion cubic feet per
day. It should be noted that there is no “catch-up” for production lost because of the
hurricanes — more than 110 million barrels of oil and more than 580 bcf of natural
gas. Natural gas price futures briefly exceeded $15/mcf (thousand cubic feet) in mid-
December. Warmer than typical weather in January 2006 caused prices to decline
to well under $10/mcf early that month. Prices had fallen below $6/mcf in late May
6 Scientific Inventory of Onshore Federal Lands’ Oil and Gas Resources and Reserves and
the Extent and Nature of Restrictions or Impediments to the Development. January 2003.
See [http://momentum.doi.gov/epca/ExecSum.pdf].
7 See [http://www.eia.doe.gov/emeu/aer/txt/ptb0410.html].
8 EIA, Monthly Energy Review, Table 9.11.

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2006. Sharp fluctuations in supply, demand, and price for natural gas can occur
suddenly between seasons.
A major potential source of additional gas is tanker-borne imports in the form
of liquefied natural gas (LNG). Expansion and refurbishment of facilities to
accommodate LNG imports continues. In addition, there are a number of proposals
for new facilities that have received certification from the Federal Energy Regulatory
Commission (FERC); these facilities would receive LNG produced abroad for
consumption in the United States. The Alaska North Slope holds large proven
reserves of natural gas. Shortly before adjournment, the 108th Congress approved an
$18 billion loan guarantee for the construction of this pipeline (P.L. 108-357), but
development of this resource has remained difficult and controversial.
Electricity Regulation and Supply
A reliable electric system depends on adequate transmission capacity. The
blackout of 2003 in the Northeast, Midwest, and Canada highlighted the need for
infrastructure improvements and standard operating rules. The regulatory regime has
shifted in the electricity industry to encourage competition in the generation sector,
but investment in transmission infrastructure has not kept up with increases in bulk
power transfers and electricity demand. Additionally, transmission lines are
congested in several regions of the United States. Difficulty in siting the lines and
regulatory uncertainty have dampened interest in investing in the transmission
system. The Energy Policy Act of 2005 includes a provision that will allow
transmission companies, under certain conditions, to petition in U.S. District Court
to acquire rights-of-way through the exercise of the right of eminent domain.
Some have argued that transmission and wholesale power markets cannot be
competitive without additional market transparency, or access to market information.
The Energy Policy Act of 2005 allows FERC to promulgate rules that will facilitate
the dissemination of information about the availability and prices of wholesale
electric energy in transmission service. Proposals have been made to require FERC
to issue rules establishing an electronic information system to provide information
about the availability and price of wholesale electric energy and transmission services
to FERC, state commissions, buyers and sellers of wholesale electric energy, users
of transmission services, and the public. However, concerns have been raised that
such a system would take away too much authority from the states.
Concern over electricity supply has also led to some reassessment of the relative
roles that natural gas, coal, renewables, and nuclear energy may have in future
electricity generation. In its energy policy report, the Bush Administration indicated
its objectives to remove barriers to the use of coal in electric power generation, with
a renewed emphasis on cleaner-burning coal technologies.
Supporters of renewable energy have urged the establishment of a national
“renewable portfolio standard,” which would require that a certain percentage of
electricity generation come from non-hydro renewable energy sources. Nuclear
energy supporters have long proposed that new nuclear generating capacity receive
incentives for helping to reduce air emissions.

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Conservation and Energy Efficiency
As has been noted, the energy policy debate has turned partly on perceptions of
the balance between supply-oriented and conservation-oriented policies that make up
an appropriate energy policy to address the current matrix of energy problems. For
example, environmental groups often ask why ANWR should be opened to leasing
if a comparable amount of oil could be saved by raising motor vehicle fuel economy.
The Energy Policy and Conservation Act (P.L. 94-163) established new car
corporate average fuel economy (CAFE) standards, beginning with model year 1978.
Currently, the standards are 27.5 miles per gallon (mpg) for cars and 20.7 mpg for
light-duty trucks, including sport utility vehicles (SUVs). Proposals to raise the
CAFE standards have been controversial. Beginning with enactment of the FY1996
Department of Transportation Appropriations Act, Congress forbade the expenditure
of appropriated funds to make any change in the current CAFE requirements.
However, a study by the National Academy of Sciences (NAS), requested by
the 106th Congress, to recommend “appropriate” CAFE standards, was released at the
end of July 2001.9 While the report did not recommend a specific level for CAFE,
it did conclude that “significant” reductions in fuel consumption could be achieved
within 15 years utilizing existing technologies. Were increases in new car fuel
economy achieved by reducing vehicle weight or disproportionately encouraging the
sale of small vehicles, the study allowed that additional fatalities could result.
However, some members of the NAS panel dissented, suggesting that the analysis
of the relationship between fuel economy and vehicle safety is extremely complex.

The Energy Policy Act of 2005 (P.L. 109-58) (1) authorizes $3.5 million
annually during FY2006-FY2010 for the National Highway Traffic Safety
Administration (NHTSA) to carry out fuel economy rulemakings, (2) requires a study
to explore the feasibility and effects of a significant reduction in fuel consumption
by 2014, and (3) requires NHTSA to adjust its test procedure for measuring fuel
economy to take into account differences in vehicles and driving habits since the test
was designed. Some of these factors include higher speed limits, faster acceleration,
differences in the ratio between city and highway driving, and the use of air
conditioning.
There is little question that the price hikes during past episodes of tight energy
supply spurred many improvements in energy efficiency. Some argue, however, that
the easiest and lowest-cost efficiency gains have been achieved, and that expectations
should be lowered about the additional efficiency gains that can be captured in the
present price framework for energy. When the Reagan Administration redirected
energy policy to a more market-oriented framework, it was argued that R&D needed
to be carefully focused on areas that were promising, but unlikely to be explored by
the private sector.
In its energy policy plan, the Bush Administration recommended a review of the
funding and performance of energy efficiency research and development for the
9 See [http://www.nap.edu/books/0309076013/html/].

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purpose of determining appropriate funding for performance-based research in
public-private partnerships.
The Uncertain Future
As apparent as it seems to many that the nation should do “something” about
energy, the preceding pages have outlined the layers of complexity that augur against
easy agreement to many of the policy options that have been proposed and debated
since the mid-1970s. A review of the history shows that every episode of instability
has had its own set of unique contributing factors — and that these may be
geopolitical, based in energy infrastructure or unanticipated natural disasters, or
triggered by extremes of heat or cold beyond anyone’s control. Making policy
decisions that will anticipate unpredictable future developments, or settling on
policies to mitigate the consequences when these events are before us, will remain
a challenge for policymakers as the energy debate continues.