THIS IS MY 73RD BLOG ON UNDERSTANDING MONEY TOOLS
Last week I got hit with an email from friends, it joked
about the Department of Energy. To synopsize, it quickly went from President
Carter hiring one person for the Department, to quickly adding more employees;
checks/balances, accounting departments, etc. Today, the Department employs about 13,000 people, which
isn’t necessarily large, and has an annual budget of approximately $30 billion.
The Department of Energy is responsible for regulating an
industry I was involved in over a ten year period, the oil and gas industry.
Because I both made and then lost a lot of money in the business I thought I
would write a brief blog on the Department, what it does and some of the major
historical points surrounding it. Unless you are older, like me, you probably
missed out on much of this history. I will concentrate on the time period that
affected me most, 1973 until the late 1980s.
What does the Department manage today?
- Oil/gas/oil
shale
- Geothermal
energies
- Solar
energy
- Wind
energies and turbines
- Renewable
energies
- Nuclear
facilities and energies
- Naval
reactors
- Weapons
that have been activated
- Environmental
matters
- Grid
systems for energy transmission
- Science
for future energy
- And….employee
pension plans
The initial department was started in1942 under Franklin D.
Roosevelt’s administration. It was then known as the Energy Commission to
oversee the Manhattan Project that created the first atomic bomb.
Now, let’s fast forward from 1942 and the Manhattan Project
to President Jimmy Carter when he created the Department of Energy Organization
Act and Congress passed it in 1977. There is a lot of interesting history
leading up to this Act.
You have heard the term OPEC? What does it stand for?…
Organization of Petroleum Exporting Countries. There are 12 countries in OPEC, not all from the Middle
East. OPEC was started in September, 1960 in Baghdad, Iraq, and the
headquarters currently are in Vienna, Austria. OPEC was initially created to
stabilize the price per barrel of oil, as there is a finite amount of oil in
the world, although with modern technology we keep finding more fields.
Currently, OPEC approximates they have enough oil to supply the world for 113
years. Someone has an exacting calculator!
Oil prices were very low until the early 1970s. The first
disturbance to OPEC was the United States going off the gold standard on August
15, 1971 under President Nixon. (I have covered this topic pretty thoroughly in
previous blogs and the association with the Bretton Woods Agreement.) OPEC,
like many countries, trades with US dollars and the US going from a “gold
standard” currency to a “Fiat” based currency rocked the boat a bit.
Then, several things happened in close proximity around
1973. At that time our exportations of food staples like wheat and sugar along
with cement for construction tripled in price; OPEC was not happy as they paid
in “petro-dollars” and they had held oil pricing stable and low for many years.
Compounding this in the same time frame, Syria and Egypt attacked Israeli
positions, and the US aided Israel.
In retribution, OPEC set up what was known as the October
1973 OPEC oil embargo. We couldn’t
get enough oil, gasoline was rationed and long lines appeared at every gas
station around the US. The OPEC
embargo lasted until March, 1974, and with that conclusion the price of oil
went up 400% in one and a half years.
There was very little domestic drilling by United States
independent oil/gas producers. Besides low oil pricing producers had to contend
with taxes like the “Windfall Profits Tax”. The cost of producing a barrel of
oil in countries like Saudi Arabia was next to nothing. They drilled shallow
wells through sand with enormous results. At that time, their cost per barrel
was about $4-6 per barrel.
Okay, now we are back to 1977 and the Department of Energy.
Many people find fault with the presidency of Jimmy Carter, but frankly I, and
many US independent oil producers, made a lot of money during his presidency.
What did the Department of Energy do? At that point in time only about 1/3 of
all oil used in the US came from American producers. Since 1973 and the embargo it was recognized that we were at
the mercy of OPEC. The government knew we needed oil and gas independence for
our own national security. They looked at other industries in the US like
farming and dairy and many were government subsidized. The Energy Department along with the
government took similar measures subsidizing the US oil and gas producers. Also, in 1978 they assisted in passing
the “Gas Guzzler” Bill to push for better environmental standards and more
efficient engines.
These subsidized regulations considered many variables. Amongst these regulations were sets of
“standards” for the difficulty of drilling, depth of drilling etc, and were defined as Sections; for instance,
Sections 102, 103, 104, 107. These included tight gas sand drilling and depths
below 10,000 feet that are long-lived wells but very expensive to drill and
operate.
Then, in 1979-1980 more things occurred. Oil prices started
escalating to a high of $39 per barrel and that was very inflationary to most
goods and services, especially transportation. Paul Voelker, head of the
Federal Reserve, decided to deter the further rise of inflation using Keynesian
Economics. The Federal Reserve raised interest rates to a high of 20%, and the
prime rate reached 21.5%. This tactic essentially shut down spending except for
essentials. (In previous blogs I have discussed a few economists and their
theories. The Federal Reserve has greatly used Keynesian economics since 2008.)
In November 1979 the Shah of Iran was overthrown and a new
regime entered, and has continued ever since. Along with this displacement of a
dictator who worked well with the United States about 50 hostages were taken.
The tensions brought oil prices to highs. Soon after President Reagan was
elected Iran released the hostages, and internationally things calmed down.
President Reagan had different economic views from Jimmy
Carter, quite big business and free market. The controlled subsidized oil
business under the Department of Energy was done away with. Large oil companies
joint ventured and supplied foreign countries with technology and engineers. By
the mid 1980s the independent oil and gas producer was for the most part gone
and bankrupt. I personally felt
the attitude was to use other countries oil assets and save ours here in the
US. Oil plummeted from the $39 high and natural gas $5.75 an average contract
down to a respective $8.50/barrel for oil and $.87 for natural gas. As the
proud owner of many interests in various US oil and gas wells and fields it was
not a happy time to be producing energy at far greater costs than what we could
sell the product for at market. The independent US producer walked from their
mineral rights and wells or shut them in. The problem with shut in wells is
that a Pew Clause was standard. That means that you need to drill a new
development well every so many days based upon contract with the mineral owner,
(many times the same party as the land owner), or you forfeited your mineral
rights.
In 2000, with the election of President George W. Bush most
Americans knew we would have a resurgence of oil interest in the USA. The Bush
family has been in the industry for generations, including strong business
alliances and partnering with the Royal Saudi Family. Resurgence in drilling
and higher oil prices were expected. With higher oil prices and better
technology in oil and gas drilling it made the economics once again viable for
US independents, making the Department of Energy even more necessary.
Since the late 1980s my interest in the Department has
waned. With technology advancements and new sources for energy both available
today and on the horizon the responsibilities of the Department of Energy are
significantly greater.
I hope you have found this brief recap on the Department of
Energy and time in history of interest and value.
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