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03/29 00:01 Looming Energy Bottlenecks Might Sap U.S. Recovery: Art Pine By Art Pine

Washington, March 29 (Bloomberg) -- America's looming energy shortage is threatening to impede the nation's economic growth rate over the next several years, possibly muting the expected recovery.

It isn't just California, or electricity or oil. One way or another, the squeeze is expected to show up in the entire gamut of energy sources, including natural gas, U.S. energy experts say. The problem won't be easy to solve.

``There's a serious problem, and it's going to remain serious,'' said Philip K. Verleger, an energy economist with the Brattle Group in Cambridge, Massachusetts. ``The U.S. economy could be constrained by the energy problem for three or four years.''

The problem comes mainly from a shortage of refineries, gas pipelines, high-voltage transmission lines and generating stations. Lulled by low prices and dependable energy supplies, the U.S. hasn't built enough of those to meet today's needs.

``All of our energy sectors are extremely tight,'' said John Felmy, chief economist for the American Petroleum Institute, who has been tracking the situation closely. They're operating at the limit of their capacity.

Surging Demand

The U.S. Energy Department estimates that overall energy demand is likely to grow by 30 percent between 2000 and 2020. Demand for oil is expected to rise by 33 percent, electricity 43 percent and natural gas 54 percent, the agency says.

``These are indications that going forward the U.S. is going to need a lot more energy -- how are we going to get it?'' Felmy asks. Most forecasters expect that additional pipelines, refineries and other equipment needed to provide that energy won't be nearly large enough.

The problem reflects a variety of factors: The 10-year-old economic boom boosted demand for all kinds of energy. Utility generators have switched from coal to natural gas. Environmental rules are tougher. The Internet consumes huge amounts of power.

The reluctance of consumers -- and governments -- to permit construction of refineries and generating stations in high-demand areas also has played a significant role. In some areas, no new power plants or generating stations have been built in decades.

Nuclear Power

Nuclear power is stymied, too. No new permits for construction of nuclear power plants have been granted since 1979, and many of the 103 existing plants aren't expected to seek renewal of their licenses because regulation is so strict.

Finally, sweeping changes in the structure of U.S. business also have exacerbated the situation, as huge companies that used to handle every stage of a production process have parceled out major portions of their businesses to specialty firms.

That, combined with deregulation and just-in-time inventory practices, Verleger says, has eliminated longtime incentives for energy companies to build up large stocks of petroleum or gas or to maintain sizable reserve capacity for power-generation.

``Nowadays, if something breaks as demand surges, you immediately have a problem,'' he said.

As a result, the U.S. now faces a shortfall of electric generating capacity, bottlenecks in the transmission of oil, natural gas and electricity, a shortage of natural gas supply and impediments in petroleum production and transportation.

The blackouts in California haven't been the only warning signs. The Northeast escaped a similar fate in 2000 only because of cool weather. Gasoline refiners were thwarted by a pipeline disruption. Heating oil prices soared when tankers were scarce.

1,900 New Plants Needed

Energy Secretary Spencer Abraham estimates that if demand for electricity grows at the same pace as it has in the past decade, the U.S. will need almost 1,900 new generating plants by the year 2020 -- and power lines and transformers, too.

The consequences have begun spreading beyond the energy sector. Higher prices already have forced the shutdown of some manufacturing plants. Farmers are growing soybeans rather than corn because prices of nitrogen fertilizers are so high.

How much the energy squeeze will constrain economic growth in the U.S. is difficult to predict. Verleger says it will impede any recovery and depress productivity growth and investment, keeping the economy in the doldrums for years.

Former President Bill Clinton essentially ignored the energy situation. While Clinton sent Energy Secretary Bill Richardson to the Middle East to ask Arab states to boost production when oil prices rose, he did nothing to head off today's energy squeeze.

President George W. Bush has warned that the U.S. faces a ``major energy supply crisis'' reminiscent of the oil embargoes of the 1970s and has set up a high-level task force -- headed by Vice President Dick Cheney -- to craft a national energy policy.

Spurring Exploration

Cheney is expected to propose new steps to help spur more oil and gas exploration -- partly by permitting oil drilling in Alaska's Arctic National Wildlife Refuge -- and to speed construction of new generators and pipelines.

Although the administration is unlikely to emphasize it, its energy program also will give a green light to keeping prices relatively high to help encourage new exploration, conservation and construction of pipelines, generating stations and the like.

Verleger, for one, says that won't be sufficient. He wants to impose new energy taxes to spur consumers to conserve, and he says governments should speed up construction of more energy projects such as generating plants and pipelines.

He also says the government should identify U.S. industries that are energy-inefficient and prod them into shutting down. ``We're going to have a triaging of the nation's economy, whether it's orderly or disorderly,'' he said.

Stephen P. A. Brown, an energy economist at the Federal Reserve bank of Dallas, argues that the markets can do the job of sorting out survivors better than Uncle Sam.

``If we look at situations where the government has tried to pick winners and losers, they're terrible at it,'' Brown said.

`No short-term fixes'

Nevertheless, as Bush himself has pointed out, there are ``no short-term fixes.''

The gasoline shortages of the 1970s primarily involved letting pump prices rise enough to force Americans to cut back their driving and persuading Arab oil producers to end their embargo.

The current situation calls for a broad array of changes, among them convincing consumers and states to permit construction of new generating stations, pipelines and the like in areas where demand is highest -- and paying higher prices to support them.

That will take a long and steady education campaign, without the help of a bogey man -- such as the Arab oil producers provided in the 1970s -- to help rally public support for painful policy prescriptions. It also will take billions of dollars.

Meanwhile, the outlook seems stark. Energy analysts warn that even with the economy slowing, the shortages might begin to show up as early as this summer, with temporary blackouts in the Northeast. Soaring energy prices also will worsen inflation.

``Although a short-term recession will curb some demand, a fast recovery will just re-trigger the capacity and price problem'' in the energy sector, said Carole L. Brookins, head of World Perspectives Inc., a Washington consulting firm.

``No matter what is decided about drilling today and opening up access to new sources of reserves, those supplies will take five to seven years to come onto the market,'' Brookins pointed out. Energy will be a drag on the economy until that is fixed.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Latest%20Columns&touch=1&s1=blk&tp=ad_topright_bbco&T=markets_fgcgi_content99.ht&s2=blk&bt=blk&s=AOsLBjhUaTG9vbWlu

-- Martin Thompson (mthom1927@aol.com), March 30, 2001