Critical Choices in Energy

(Vernon R. Eidman, University of Minnesota, Presiding)

Our Energy Transition: The Next

Twenty Years
Wallace E. Tyner

About 150 years ago, Macaulay wrote the fol- first coal and then oil and natural gas became
lowing passage regarding the prevailing mood the fuels of economic growth. The previous

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of the time: transitions involved not so much substitution
We cannot absolutely prove that those are in error
of one source for another, but the use of the
new e~ergy source for new economic activity.
who tell us that society has reached a turning point,
that we have seen our best days. But so said all who That IS the fundamental difference between
came before us, and with just as much apparent rea- our previous energy transitions and the cur-
son. . . . On what principle is it that, when we see rent one. In the current transition, much of the
nothing but improvement behind us, we are expected attention is focused on decoupling economic
to see nothing but deterioration before us? growth and energy consumption (energy con-
It is true that doomsday prophesies have been servation) and on developing unconventional
with us for hundreds of years. Has the time e?ergy sources like oil shale, coal liquids, and
come for us to believe the prophets of doom, biomass to substitute for oil. The era of cheap
energy to fuel economic growth is gone; the
or can we see hope for improvement in the
question is what will the transition away from
future? In forecasting our nation's energy fu-
that era look like. That is the subject of this
ture, there is ample cause for both despair and
paper.
hope. The hope is premised on our ability to
perceive accurately the nature of our energy Because of all the interest in this energy
problem and take prompt, effective actions to transition, there have been a host of major
solve it. My own beliefs, which are reflected in multimillion dollar studies on our energy tran-
the remainder of this paper, comprise a mix- sition published in the last few years. The major
ture of optimism and pessimism, which I like ones are included in the references to this pa-
to characterize as guarded optimism. per. While I have reviewed these studies in
Our current situation is that we are in an preparing this paper, I cannot discuss the re-
energy transition from petroleum fuels to al- sults of each because of space limitations.
ternate energy sources. The notion of energy Rather, I will reference specific points adopted
transition is not new to our country. We have from each study.
been through two previous energy tran- My procedure in addressing this very com-
sitions-one from wood to coal and the plex question in such a brief paper will be to
second from coal to oil and natural gas. first discuss the technical and economic poten-
Through the 1880s, biomass (primarily wood) tial of some major energy alternatives and then
was the major energy source in the United to integrate the separate pieces into a personal
States. From the 1880s through the mid-1940s view of this transition. Once this is completed,
coal was the dominant energy source, and oil I will discuss some of the policy issues related
and natural gas have been the major energy to the energy transition.
sources since then. (Today, oil and natural gas
constitute about three-fourths of our total
Conservation and Energy Consumption
energy consumption-one-half oil and one-
fourth gas.) In the previous energy transitions,
Forecasting demand for anything twenty years
into the future is always difficult, but forecast-
Wallace E. Tyner is associate professor, Department of Agricul- ing energy demand twenty years hence bor-
tural Economics, Purdue University. ders on soothsaying. From the 1920s through

Copyright 1980 American Agricultural Economics Association

 958 December 1980 Amer. J. Agr. Econ.

the 1960s the real price of energy fell, yet the
energy gross national product (GNP) ratio
also declined during that period (Resources
for the Future). That is, even with declining
energy prices, the use of energy per unit of
GNP fell with GNP growing at 3.1% and
energy consumption growing at 2.5%, or 80%
as fast. In the 1970s energy prices began rising
in real terms, so we would expect the
energy/GNP ratio to decline reflecting the
higher energy prices. The question is how
much will it decline over the next twenty
years. To accurately answer this question we
would need to understand thoroughly the
energy-pricing policy is shifting from regulated
prices to market prices and that impact is yet
to be felt. Because these changes take so long
to occur, we have no reliable statistical base
from which to make demand projections.
Since the early 1970s, there has been a gen-
eral decline in the level of all energy demand
forecasts (table 1), regardless of the bias of the
forecasters. The 1972 forecast of the low-
growth advocates is about equal to the 1978
forecast of the high-growth advocates. None
of these forecasts incorporate the doubling of
oil price in 1979. Even if we disregard the two
extreme groups of forecasters (' Beyond the

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feedback relationships between energy and
GNP and to have reliable price and income
elasticity estimates for each major energy
source. (The CON AES study does the best
job of estimating these elasticities and incor-
porating them in demand projections.) Fur-
thermore, we would need to make assump-
tions about the rates of development and
adoption of new energy conserving tech-
nologies.
One major problem in obtaining good long-
run elasticity estimates is that much of the
change in energy consumption requires a
turnover in capital stock, which takes place
over a long time period. We have yet to see all
the conservation impacts on our economy re-
sulting from the 1973 oil price increase. Turn-
over of the automobile fleet takes about eight
years, and the housing stock is replaced in
approximate fifty-year cycles. We have hardly
begun to see the energy conservation induced
by the 1979 oil price increases. In addition,
Pale" and "Superstition") and seriously con-
sider only the middle two groups (table 1), the
difference amounts to about 30 quads or 15
million barrels of oil equivalent per day in
2000, which is 38% of our 1979 energy con-
sumption. My own belief is that energy de-
mand will increase in the range of 0 to 2.0%
per year, with a most likely range of 1.0% to
1.5% per year. This implies a year 2000 energy
consumption of 78 to 115 quads, with a most
likely range of 95-105 quads.'
My forecasts are at the low end of "conven-
tional wisdom," because I believe price-
induced conservation will occur at increasing
I In arriving at these figures, I assume GNP will grow 2.0% to
2.5% per year, real energy prices will increase 2% to 3% per year,
the income elasticity of energy is 1.0, and the own-price elasticity
of demand is - .25 to - .50. These assumptions are consistent with
the modeling results from the CONAES study (pp. 529-612). The
95 and 105 quad demand levels are lower than the RFF study and
within the range of values used in the CONAES study. The
EXXON forecast for 2000 is about 101 quads.

Table 1. Energy Demand Forecasts

Year of Beyond the Conventional
Forecast Pale Heresy Wisdom Superstition

1972 125 140 160 190

(Lovins) (Sierra)" (AEC) (FPC)
1974 100 124 140 160
(Ford zeg) (Ford to (ERDA) (EEl)
1976 75 89-95 124 140
(Lovins) (Von Hippel) (ERDA) (EEl)
1977-78 33 67-77 96-101 124
(Steinhart) (NAS I, II) (NAS, III, AW) (Lapp)
Note: Amory Lovins put together this table showing the downward drift in forecasts. Figures represent total U.S. energy demand in year
2000 or 2010.
Source: Science, 208(June 1980):1353.
a Abbreviations: Sierra, Sierra Club; AEC, Atomic Energy Commission; FPC, Federal Power Commission; Ford zeg, Ford Foundation
zero energy growth scenario; Ford tf, Ford Foundation technical fix scenario; Von Hippel, Frank Von Hippel and Robert Williams ofthe
Princeton Center for Environmental Studies; ERDA, the Energy Research and Development Administration; EEl, Edison Electric
Institute; Steinhart, 2050 forecast by Committee on Nuclear and Alternative Energy Systems (CONAES); AW, Alvin Weinberg study
done at the Institute for Energy Analysis, Oak Ridge; Lapp, energy consultant Ralph Lapp.
 Tyner Critical Choices in Energy 959

rates in the future. Auto fuel economy will
increase even faster than government stan-
dards, and retrofitting will increase conserva-
tion in the industrial and residential sectors.
Energy Supply
Before discussing each of the major supply
options, I will provide an overview of our cur-
rent consumption, reserves, and energy re-
sources. Several important points emerge
from examining our energy reserves and re-
sources (table 2). First, the magnitude of the
value. (Included in social cost would be items
such as the national security externality, envi-
ronmental externalities, and risk premiums as-
sociated with some of the energy sources.)
Third, the extent of our energy reserves and
resources depends critically upon whether or
not the fast breeder reactor is developed.
Uranium reserves and resources are multi-
plied by 60 to 100 times with the breeder reac-
tor. In addition, we have vast reserves of
thorium which can be used in a breeder cycle.
However, large uncertainties remain and
safety, waste disposal, and proliferation prob-
lems are not resolved for nuclear power.

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reserve and resource numbers clearly demon-
strates that we have huge amounts of energy
reserves and resources. relative to our current
consumption. Our reserves could last from 70
to 170 years and resources could last from 250
to 320 years, assuming energy demand in-
creases at 1% per year and that we maintain
our current level of import dependence.
Second, our energy problem is one of the
discrepancy between/the forms of energy we
are consuming and-the forms we have in re-
serve domestically (table 3). Half our con-
sumption of energy is oil and one-fourth
natural gas, but our reserves of these sources
are no more than 7% of total reserves. Our
energy problem is really the national security
problem of being dependent on the rest of the
world for half our liquid fuel needs. The
energy problem is best characterized as the
transition from our current patterns of energy
supply and demand to patterns offering a bet-
ter match between social cost and social
Another point of interest regarding the re-
serve and resource numbers is that they do not
include renewable resources (flows) such as
solar, hydropower, and biomass. Use of re-
newables for a portion of our energy consump-
tion would extend the stocks beyond the time
periods indicated above. Potential for the
major renewable resources will be discussed
below.
Coal
With the recent publication of the WOCOL
study and the Venice summit pronouncements
on coal, interest in the future potential of coal
is quite high. The WOCOL study estimated
that coal could provide one-half to two-thirds
of the increase in world energy consumption
over the next twenty years. In line with the
CONAES, RFF, OTA, and WOCOL studies,
I estimate that U.S. coal production could
grow at an average rate of 4%-5% per year

Table 2. U.S. Energy Reserves and Resources

Reserves Resources

% with % with % with % with

Resource Type Amount LWR FBR Amount LWR FBR

Coal 5,747 89.2 21.5 58,614 87.0 41.1

Oil and NGLa 212 3.3 .8 694 1.0 0.5
Gas 224 3.5 .8 706 1.0 0.5
Shale oil 0 0.0 0.0 6,084 9.0 4.3
Unconventional gas 0 0.0 0.0 336 0.5 0.2
Uranium-LWR 257 4.0 910 1.4
Uranium-FBR 20,510 76.8 76,200 53.4
Total-LWRb 6,640 100.0 67,344 100.0
Total-FBRc 26,693 100.0 142,634 100.0

Note: Our current energy consumption is about 78 quads per year plus 2 quads of wood.
Sources; These estimates were derived from the CONAES, RFF, and FORD studies and other sources. The uncertainty in these
estimates is quite large, and other sources may show numbers that differ substantially from these. Generally, these numbers are about
midway between the CONAES supply panel estimates and the RFF figures.
a The oil and NGL resource numbers include enhanced oil recovery.
b Light water reactor.
C Fast breeder reactor.
960 December 1980
Table 3. U.S. Energy Consumption, Reserves, and Resources
Resource
Type Consumption
----------------------------- % -------------------------------
Oil and NGL 47
Natural gas 26
Coal 19 89 87 41
Oil shale 0 0 0 9 4
Nuclear 4 4
Others 4 1
Totals 100
Sources: 1979consumption from Department of Energy. Quarterly Report: Energy Information, Apr. 1980; reserves and resources from
table 2.
between now and 2000, which means that 2000
coal production would be 2.2 to 2.7 times the
current level. Coal could increase from 19% to
as much as 36% of total energy consumption
by 2000. Coal exports may increase also.
However, the use of coal, whether it is di-
rectly combusted or converted to liquid or
gaseous fuels, causes environmental prob-
lems. In addition, high levels of coal use may
strain capital or equipment markets, cause
transportation bottlenecks and social disrup-
tions like the boom town growth in the West.
Environmental problems include land recla-
mation, CO2 effect, acid rain, air pollution,
water pollution, and destruction of scenic
beauty. Economically, coal-generated electricity
compares favorably with oil-generated power
even when all environmental control costs are
included. For example, in Japan, where envi-
ronmental control laws are strict, imported
coal costs about $45 per ton and environmen-
tal costs add $35 a ton for a total of about $80
per ton compared to a cost of about $165 a ton
for fuel-oil power generation. Comparison of
coal to nuclear power is not so simple, and the
answer depends very much on the assump-
tions used in the analysis. Generally, how-
ever, coal-generated power is as cheap or
cheaper than nuclear power. The decision on
the extent to which each will be used depends
as much on the evaluation of nonmarket costs
as on market costs.
Coal can substitute for liquid and gaseous
fuels in several ways. We normally think of
the most direct route technically, which is to
liquify or gasify the coal. The CONAES study
estimates that coal liquid and gas production
in 2000 would be 2.3 and 3.5 quads, respec-
tively, under the business-as-usual case. (No
coal liquid or gaseous fuels are being produced
commercially today in the U.S.) For the na-
Amer. J. Agr. Econ.
Reserves Resources
LWR FBR LWR FBR
3 1 1 1
4 1 1
22
76 1 53
1
100 100 100 100
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tional commitment scenario these levels
reach 4.7 and 4.5 quads. Current estimates for
coal liquids cost range between $40 and $65
per barrel. Coal liquids plants will require a $2
billion capital investment. High BTU coal-
synthesis-gas costs range between $3 and $5
per million BTUs (1,000 cubic feet).
Another means of using coal to substitute
for liquid fuels is by converting to electric
vehicles and trains for motive power. Railroad
electrification is one means of substituting
electricity generated by domestic coal or nu-
clear sources for diesel derived from imported
oil. Assuming 1,000 route miles per year of
new electrified track and a 2% annual growth
in freight, preliminary research results indi-
cate that the oil savings by 2000 would be
about 100,000 barrels per day or the equivalent
of two syn-fuel plants." The capital investment
required to achieve this savings is roughly the
same as for an oil shale syn-fuel plant-
$35,000 per barrel of daily capacity. However,
the operating cost is considerably lower than
for a syn-fuel plant.
Use of electric vehicles also would bring
about substitution of coal or nuclear power for
imported oil by displacing gasoline. By the
year 2000, electric vehicles could achieve an
oil savings of about 500,000 barrels per day, or
ten syn-fuel plants (1 quad). The capital cost
in new plant and equipment for achieving this
savings is estimated to be about $31,000 per
new daily barrel of oil saved. Electric vehicles
are projected to be competitive at gasoline
costs slightly less than $2.00 per gallon
($1980). (These preliminary results also come
out of the Purdue energy transition study.)
2 These are preliminary results from an ongoing study of the
energy transition by an interdisciplinary group at Purdue Univer-
sity. The unit of syn-fuel plant is a convenient measure to compare
alternatives because many energy planners think in terms of this
unit, which is about 0.1 quads/year.
Tyner Critical Choices in Energy 961

We can expect to see increased efficiency in tion in the CONAES study is .0,4.0, and 7.7
coal power generation over the next twenty quads in the three scenarios. Direct use of
years by the successful development of solar is often more expensive than conven-
technologies employing cogeneration, fluid- tional sources. Without substantial economic
ized bed combustion, and Magneto-hydro- incentives, solar energy will remain quite low
dynamic (MHD) coal power generation." In- over the next twenty years.
creased power generation efficiency will both
lower the cost and reduce the primary energy Nuclear
requirement of coal-based power.
Nuclear energy is a large question mark for
Oil Shale our country for the next twenty years and for
the next century. The energy potential from
As indicated above, this nation has vast re- nuclear energy is very high, yet so are the
sources of oil shale, but the development of perceived social and environmental risks. The
shale likely will not come close to the resource CONAES estimates for nuclear energy for

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potential. The constraints on oil shale devel- 2000 are 12.5, 29.5, and 27.5 quads. Current
opment will be environmental and social. The nuclear power generation is about 3 quads.
OTA oil shale study concluded that a 400,000 Even the CONAES business-as-usual case en-
barrel per day (eight plants) industry could be tails a quadrupling of nuclear power by 2000.
developed by 1990without serious difficulties, Whether nuclear power will achieve that level
but that a 1 million-barrel-per-day industry or anything higher is an open question.
would unavoidably violate environmental air
quality standards and cause serious economic Biomass
and social disruption to the producing areas.
Apparently, the environmental, economic, The biomass energy category includes a wide
and social systems can accommodate a certain variety of sources including wood, forage
level of development, but once this threshold crops, crop residues, grains, and municipal
is reached, the social costs of further devel- solid wastes. Wood currently supplies about 2
opment increase rapidly. quads of energy primarily in the forest prod-
A 50,OOO-barrel-per-day oil shale plant is ucts industry. The OTA biomass report attrib-
projected to cost $1.7 billion or $34,000 per utes the highest potential within the biomass
daily barrel of capacity. Oil shale costs are category to wood followed by forage crops.
projected to range between $35 and $60 per (Municipal solid waste was not included in this
barrel depending on the crude oil price in- OT A report.) The most immediate biomass
crease and rate-of-return used. potential is for ethanol for gasohol from
grains. Recent projections for ethanol capacity
Oil and Natural Gas are for 60,000 barrels per day oil equivalent
(1.2 syn-fuels plants) by 1983 (Meekhof, Gill,
The CONAES study projects U.S. oil produc- Tyner). By 1990, ethanol capacity could be 2
tion to range from 12 to 20 quads in 2000, billion gallons per year of 145,000 barrels per
depending on the level of national commit- day oil equivalent (about 3 syn-fuels plants or
ment to increased oil production. Most other .3 quads). Whether or not grain alcohol pro-
studies project domestic oil production in 2000 duction will increase beyond that level will
including enhanced oil recovery to be lower depend on the impacts alcohol production has
than the 1979 production level of 17 quads. on feed/food prices and the policy response
Domestic gas production in 1979 was about 19 that occurs. Current research res ults indicate
quads. Domestic production of natural gas for that alcohol production levels substantially
2000 ranges between 7 and 17 quads in the higher than 2 billion gallons could cause corn
CONAES study. prices to increase substantially (Meekhof,
Tyner, Holland). By the mid 1980s, most au-
Solar thorities believe that cellulose conversion
technologies will be commercially available to
The Harvard study projects solar energy to produce ethanol from crop residues, forage
provide 4 quads by 1990. Solar energy utiliza- crops, wood, or municipal solid waste. It is
too early to tell whether cellulosic biomass
3 Magneto-hydro-dynamic power generation probably is more
than twenty years away from commercialization, but has a good will be gassified, directly combusted, or con-
potential for the next century. verted to methanol or ethanol. The CON AES
962 December 1980 Amer. J. Agr. Econ.

biomass estimates for 2000 are 0.1, 1.9, and we face several critical choices in the next few
5.4 quads. (These figures exclude 2 quads of years that will influence our ability to make the
wood energy not currently included in U.S. transition away from oil to other energy
energy statistics.) The most likely sequencing sources. We have already begun to deregulate
of biomass resources is an initial surge in grain oil and natural gas prices-steps which are
alcohol followed by greater use of wood, mu- absolutely essential if we are to achieve the
nicipal solid waste, and other cellulosic conservation and alternative fuels develop-
sources later in the 1980s. ment levels outlined in this paper. I think we
should go further and place a tax on crude oil
to internalize the national security externality
Time Phasing of Supply Alternatives caused by our dependence on oil. A crude oil
tax would reduce demand growth as well as
In the very near term, the next five years, the stimulate development of energy alternatives.
most important changes in our energy picture The other major choice we must make over

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will be increased conservation and ethanol the next decade is between the economic po-
production from grain. The 1979 oil price in- tential, environmental disruption, and societal
crease plus the phased deregulation of domes- risks associated with coal power and nuclear
tic oil and gas will induce much greater con- power. We will need some of each, but the
servation than has occurred in the past. Within choice concerns emphasis. I expect we will
the next five years, there will be no commer- spend the next five to ten years developing
cial syn-fuels production from coal or oil both coal and nuclear power, but during that
shale, little use of electric vehicles, small in- time we will have to decide how best to handle
crease in nuclear power, and a very low the externalities and risks imposed by each of
growth in solar energy. It takes six years to these major power sources.
build a syn- fuel plant and ten to twelve years Table 4 summarizes where I think we are
to bring a nuclear power plant to completion. likely to be in the year 2000 for two demand
A grain alcohol plant can be completed in two levels. Note that I do not expect us to be on
years, and I expect to see the equivalent of at either a "hard" or "soft" path exclusively,
least two syn- fuel plants of ethanol before the and I reject the notion that "hard" and "soft"
first coal or oil shale plant comes on stream. paths are mutually exclusive options. We will
Over the next decade, syn-fuel plants will have some of each, with the "hard" path
come into production as will electric vehicles being dominant over the next two decades.
and rail electrification. By 1990, savings due to When we reach the vantage point of the year
rail electrification likely will be less than one 2000, I hope we will be able to look back and
syn-fuel plant equivalent, but electric vehicle see that we have developed to some extent the
savings could be about three syn-fuel plants wide variety of energy sources we have dis-
equivalent, roughly the same as biomass alco- cussed here including oil shale, coal syn-fuels,
hol production. Oil shale syn-fuels could be as electric motive power, nuclear power, solar,
much as eight plants with roughly the same and biomass. If that is the case, we will be in a
amount from coal gasses and liquids. By 1990, much better position in the year 2000 to pro-
methanol from coal will be in production with ject to 2020 than we are in today. My own
the major use probably for turbine electric feeling (from the 1980 vantage point) is that
power generation (displacing fuel oil) for peak- nuclear and solar energy (perhaps strange bed-
ing power. Methanol from coal will grow fairly fellows) will provide much of the growth in
rapidly for stationary plant energy needs and energy from 2000 to 2020 and beyond. We may
perhaps for motive power as well. not be able or willing to greatly expand the
In the 1990s, syn-fuels from coal will grow syn-fuels industry or biomass because of the
fairly rapidly along with solar, biomass, elec- serious environmental degradation that could
tric vehicles, and nuclear power. During the occur. Synthetic liquid fuels may be only
next two decades the absolute level of our transition fuels. To the extent that we are not
dependence on foreign oil will decline very able or willing to expand nuclear power,
little, but the percentage of our dependence coal-based power is the most likely alterna-
could decline from about 21% of total energy tive. If that becomes the case, growth in coal-
today to 130/0-15% in 2000. based syn-fuel development almost certainly
Because of the long lead times involved in will be limited and conservation and solar al-
the development of the energy alternatives, ternatives become much more important.
 Tyner Critical Choices in Energy 963

Table 4. Energy Supply and Demand for 2000

2000 2000
1979 (Demand = 95) (Demand = 105)
Resource
Type Quads (%) Quads (%) Quads (%)

Oil and NGL 20.4 25.5 12 12.6 14 13.3

Natural gas 19.2 24.0 11 11.6 13 12.4
Coala 15.1 18.9 35 36.8 37 35.2
Nuclear 2.8 3.5 8 8.4 10 9.5
Shale oil 0.0 0.0 I 1.1 1 1.0
Geothermal 0.0 0.0 1 1.1 I 1.0
Solar 0.0 0.0 2 2.1 3 2.9
Biomass" 2.0 2.5 4 4.2 5 4.8
Hydro and other 3.0 3.8 5 5.3 5 4.8
Oil imports 16.6 20.8 14 14.7 14 13.3

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Gas imports" 0.9 1.1 2 2.1 2 1.9
Total 80.0 100.0 95 100.0 105 100.0
Source: Data for 1979are from Department of Energy. Quarterly Report: Energy Information, Apr. 1980. Projection's are the author's.
a In 1979 coal production actually was 17.4 quads, with 1.7 quads exported and 0.6 quads change in stocks. Year 2000 coal numbers
include synthetics.
b Biomass production and consumption, primarily wood in the forest products industry, currently is not included in official DOE
statistics. The 2 quads of biomass explains the different between the DOE 78 quads and the 80 quads shown here.
C Natural gas imports in 1979 actually were 1.2 quads. The figure is adjusted here to make production plus imports balance with

consumption.

Clearly, this has been a personal view of our
energy future and the critical choices we face.
As I said earlier, I approach the energy transi-
tion with guarded optimism. I am optimistic
because I see market forces both inducing
conservation and increasing energy supplies.
Detroit is on a crash program to produce fuel
efficient autos not because Washington re-
quires them to, but because you and I-the
consumer-have required them to. Oil-drilling
rates have set new records in the U.S. in 1980
in part because of oil price deregulation. We
see entrepreneurial activity all over the coun-
try in developing and marketing conservation
products and new energy alternatives. This
does not mean that government policy is un-
important. Development of syn-fuels will not
occur without government assistance-at least
initially because the private risks are too great.
Also, weighing externalities and societal risks
against private costs must be accomplished in
the political arena. We as economists have a
tremendous educational role to play in this
regard to convey the nature and importance of
these critical energy choices.
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