The National Crisis That Wasn't

The national crisis that was: gas guzzling vehicles.

In the last decade, the energy market has been transformed. Electricity costs represent the greatest portion of the residential energy bill (65%), and that's where the greatest change has occurred. Huge, plentiful domestic supplies of natural gas have become available. That, combined with increasingly stringent emissions controls, has encouraged electric utilities to build new gas-fired generation facilities and convert older oil-fired power plants to gas. Coal-fired power and even some nuclear power was also added to the generation mix. Geothermal and wind power in some regions also began to appear.

Although power generation in the United States is by no means clean, these factors have resulted in an amazingly diverse collection of electricity generation sources that few countries can rival. The same trends have encouraged thousands of apartment buildings in northeastern cities to convert from oil to gas heating.

Less visible, but just as important, have been changes in the fuel supply contracts behind them. In the past, the prices of fuel (coal, natural gas, geothermal heat, and so on) were indexed to the price of oil. If the price of oil rose, then the prices of other fuels followed in lockstep. Almost without notice, those contracts have been rewritten to remove oil price indexing, often replacing it with long-term, fixed-price terms. This is sometimes called decoupling.

The effect of decoupling wasn't apparent during the period of relatively constant energy prices. But when oil prices doubled, the full impact became apparent: Electricity prices and supplies were rock steady. Natural gas supplies were unaffected, too. In short, higher oil prices and shortfalls have become a transportation problem. Airlines, truck drivers, and SUV owners might complain, but not homeowners and landlords.

While describing the big picture, it's easy to lose sight of the small group of homes (10%) that still heat with oil. Residents of oil-heated homes didn't see any decoupling; indeed, they saw fuel oil prices double. They deserve special attention because fuel oil use is concentrated in the Northeast and in older homes and apartment buildings. These buildings are often woefully inefficient and consume more energy than comparable gas-heated buildings. Higher oil prices make the necessary retrofits more justifiable, cutting down the payback time from ten years to five. A range of policies will be needed to insulate them from future oil price fluctuations. But rather than creating a fuel oil reserve, we should make a capital reserve to fund efficiency retrofits (see "Save on Oil Heating," p. 6).

So, on the whole, the residential sector successfully avoided an energy crisis this year. (We know how bad it could have been by looking at the few homes heating with oil.) Let's heave a sigh of relief and prepare for the really big energy crisis: global climate change.

Executive Editor

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