Pre–Twentieth Century
People have always found ways to harness energy, such as using animals to do work or inventing machines to tap the power of wind or water. The industrialization of the modern world starting in the eighteenth century was accompanied by the widespread use of such fossil fuels as coal, oil, and natural gas.
Significant use and management of energy resulted in one of the most profound social changes in history within a few generations. In the early 1800s most Americans lived in rural areas and worked in agriculture. The country ran mainly on wood fuel. One hundred years later, most Americans were city dwellers and worked in industry. America had become the world's largest producer and consumer of fossil fuels, had roughly tripled its per capita use of energy, and had become a global superpower.
The United States has always been a resource-abundant nation. But it was not until the Industrial Revolution in the mid-1800s that the total work output of engines surpassed that of work animals. As the United States industrialized, coal began to replace wood as a primary fuel. Then, as industrialization proceeded, petroleum and natural gas replaced coal for many applications. The United States has since relied heavily on these three fossil fuels—coal, petroleum, and natural gas.
FIGURE 1.1
The Twentieth Century
For much of its history the United States has been nearly energy self-sufficient, although small amounts of coal were imported from Britain in colonial times. Through the 1950s domestic energy production and consumption were nearly equal. During the 1960s consumption slightly outpaced production. By the 1970s the gap had widened, and by 2003 this gap was quite significant. (See Figure 1.1.) Since the 1970s energy imports have been used to try to close the energy production/consumption gap. However, America's dependence on other countries for some of its energy needs has brought with it significant problems.
OIL CRISIS IN THE 1970s. In 1973 the United States supported Israel in the Yom Kippur War, which Israel fought against its neighboring Arab countries. In response, several of these Arab nations cut off exports of oil to the
FIGURE 1.2
United States and decreased exports to the rest of the world. The U.S. embargo was lifted six months later, but the price of oil tripled from the 1973 average to about $12 per barrel. (See Figure 1.2.) Not only did Americans (and others around the world) face sudden price hikes for products produced from oil, such as gasoline and home heating oil, but they faced temporary shortages as well. The energy problem quickly became an energy crisis, which led to occasional blackouts in cities and industries, temporary shutdowns of factories and schools, and frequent lines at gasoline service stations. The sudden increase in energy prices in the early 1970s is widely considered to have been a major cause of the economic recession of 1974 and 1975.
Oil prices increased even more in the late 1970s. The Iranian revolution began in late 1978 and resulted in a significant drop in Iranian oil production from 1978 to 1981. During this same period the Iran-Iraq war began, and many other Persian Gulf countries decreased their output as well. Companies and governments began to stockpile oil. As a result, prices continued to rise and reached a peak in 1981. (See Figure 1.2.)
OIL PRICES FALL IN THE 1980s. In early 1981 the U.S. government responded to the oil crisis by removing price and allocation controls on the oil industry. That is, the government no longer controlled domestic crude oil prices or restricted exports of petroleum products, preferring to allow the marketplace and competition to determine the price of crude oil. Therefore, domestic oil prices rose to meet foreign oil prices.
As a result of these increasingly high prices, individuals and industry stepped up their conservation efforts and switched to alternative fuels. The demand for crude oil declined. But the Organization of Petroleum Exporting Countries (OPEC), and particularly Saudi Arabia, cut its output in the first half of the 1980s to keep the price from declining dramatically. (In late 2004 member countries of OPEC were Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.)
In 1985 Saudi Arabia moved to increase its market share of crude oil exports by increasing its production. (Saudi Arabia was and still is the world's largest producer and exporter of oil, and is a key member of OPEC.) Other OPEC members followed suit, which resulted in a glut of crude oil on the world market. Crude oil prices fell sharply in early 1986, and imports increased.
THE UPS AND DOWNS OF OIL PRICES IN THE 1990s AND EARLY 2000s. In August 1990 Iraq invaded Kuwait, and the public feared an oil shortfall caused by the United Nations (UN) embargo on all crude oil and oil products from both countries. Prices rose suddenly and sharply, but non-OPEC countries in Central America, western Europe, and the Far East, along with the United States, stepped up their production to fill the gap in world supplies. After the UN approved the use of force against Iraq during the Persian Gulf crisis in October 1990, prices fell quickly. (See Figure 1.2.)
The collapse of Asian economies in the mid-1990s led to a further drop in the demand for energy, and petroleum prices dipped sharply in the late 1990s. OPEC reacted by curtailing production, which boosted prices in 2000. (See Figure 1.2.) World crude oil prices then declined through 2001 as global demand dropped because of weakening economies (especially in the United States) and a drop in jet fuel demand following the September 11, 2001, terrorist attacks.
In late 2002 terrorist attacks and counterattacks between Israelis and Palestinians caused concerns that Iraq might halt its crude oil shipments to countries that supported the Jewish state of Israel over Islamic Palestine. Additionally, concerns existed that the Middle East region might become destabilized should the United States invade Iraq, which has the second largest oil reserve in the world. Moreover, Venezuelan oil workers went on strike, which cut off Venezuelan oil imports. These three factors were the primary causes of the rise in crude oil prices by the end of 2002.
VOLATILITY AND RECORD HIGHS IN OIL PRICES IN 2003 AND 2004. In early 2003 war with Iraq seemed imminent. In addition, due to a cold winter and the Venezuelan strike, U.S. commercial crude oil inventories had declined. As a result, crude oil prices rose to a twenty nine month high—nearly $40 a barrel in February 2003. On March 19, 2003, the war in Iraq began, and Iraqi oil fields were shut down. Other oil producing countries stepped up production to offset the shortfall, however. In addition, the Venezuelan strike had ended. As a result, oil prices declined dramatically to about $27 a barrel by the beginning of May 2003.
But lower prices did not prevail. By June 2003 the price of oil rose above $30 a barrel because supplies of crude were low at the start of the summer driving season. The price of crude oil continued to climb over the summer to slightly more than $31 a barrel due to sustained political turmoil in Iraq. Then, in the fall of 2003, the U.S. dollar sank to a record low against the euro, and government data indicated that crude inventories were continuing to dwindle. By December 2003 crude oil prices had risen to nearly $34 a barrel.
Events in 2004 brought no relief to the rise in crude oil prices, which continued to be affected by political uncertainty, the weakened U.S. dollar, and tight supplies. Increases in crude oil prices in 2004 also reflected a growing demand from the world's three largest oil consumers: the United States, China, and Japan. In addition, oil prices rose as concerns about terrorism in Spain, Iraq, Pakistan, Saudi Arabia, and other troubled areas increased. Moreover, sabotage of Iraq's northern oil pipelines prevented the country from producing the oil that was expected. By March 2004 oil prices soared to a thirteen year high of about $38 a barrel. By August the price of crude reached more than $45 a barrel, and by October oil closed above $50 a barrel for the first time.
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