You asked for a discussion of legislative options for addressing the possibility of “peak oil,” i. e. , global production of conventional oil peaking and falling short of global demand in the relatively near future, leading to substantially higher prices and supply disruptions.

SUMMARY

A number of analysts believe that (1) global production of conventional petroleum will peak in the relatively near future, perhaps in a decade or less; (2) production of conventional petroleum will decline substantially after this peak occurs; (3) global petroleum consumption will continue to grow rapidly before and after the peak; (4) while production from non-conventional sources will grow it will not be sufficient to meet the shortfall in conventional production; and (5) the combination of these events will lead to dramatic increases in the prices of petroleum products and supply disruptions. This view is commonly referred to as the “peak oil” theory. As discussed below, there are a wide range of views on the validity of the premises that underlie this theory.

The legislature has a wide range of options in addressing “peak oil” issues. These include: (1) becoming better informed on how oil is used in the state, the state's potential vulnerability to higher prices and supply disruptions, and how other jurisdictions are addressing “peak oil”; (2) addressing “peak oil” concerns in existing state plans, such as the state Plan of Conservation and Development and transportation plans; (3) requiring state agencies and other key institutions to prepare contingency plans to address potential price increases and supply disruptions; (4) promoting increased energy efficiency, particularly with regard to petroleum products; (5) promoting fuel diversity, particularly in the transportation sector; (6) using tax policy to reduce consumption of petroleum products; and (7) identifying ways in which “peak oil” may present opportunities for the state.

PEAK OIL

A February, 2005 report sponsored by the Department of Energy (DOE), Peaking of World Oil Production: Impacts, Mitigation, & Risk Management states:

The Earth's endowment of oil is finite and demand for oil continues to increase with time. Accordingly, geologists know that at some future date, conventional oil supply will no longer be capable of satisfying world demand. At that point world conventional oil production will have peaked and begin to decline.

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“Conventional oil” is normally defined to include petroleum produced by traditional wells or by secondary recovery methods such as pumping water into partially depleted oil fields, as well as petroleum-like fuels such as natural gas liquids. Unconventional petroleum typically is defined to include petroleum from sources such as tar sands and oil shale, as well as petroleum produced from ultra-deep undersea locations. Some types of unconventional petroleum are already being extracted in significant quantities, e. g. , petroleum from Canadian tar sands.

According to International Energy Agency, most countries outside the Middle East have already reached their peak in conventional oil production, or will do so in the near future. U. S. total petroleum production peaked around 1970 at close to 10 million barrels per day and fell by half by 2005. The DOE's Energy Information Administration (EIA) anticipates that U. S. deepwater production will slightly boost total U. S. production in the near term. However, according to EIA, this increase will end about 2016, and then U. S. production will continue to decline. As a result, future increases in U. S. demand for petroleum would need to be met through increases in production in the rest of the world. In October 2006, Carl Sell, deputy secretary of DOE, noted that while the earth is not running out of energy resources, “above ground” risks such as infrastructure constraints and resource nationalism (nations using their energy resources for political purposes) may produce a result that is similar to a “peak oil” scenario.

While there is a consensus that conventional oil production will peak, there are a wide variety of views as to when this will happen, the ability of unconventional sources to make up any shortfalls, and the impact of peaking production on society. There is substantial disagreement as to the extent of global conventional petroleum reserves. Moreover, the timing of the peak of conventional petroleum production depends on multiple, uncertain factors that will influence how quickly the remaining oil is used, including how much of the oil in the ground can be ultimately produced, and future oil demand. Other important sources of uncertainty about future production are the political and investment conditions in the countries where oil is located. For example, more than 60% of world oil reserves, on the basis of Oil and Gas Journal estimates, are in countries where relatively unstable political conditions could constrain exploration and production.

The Government Accountability Office analyzed 23 recent studies on petroleum production prepared by U. S. , foreign, and international agencies; private corporations; and academics. Most of the studies estimated that conventional global petroleum production will peak sometime between now and 40 years from now. Many of the estimates had wide ranges, in several cases decades, of when the peak will occur. The analysis is available online at www. gao. gov/new. items/d07283. pdf.

Some analysts believe that global production will peak in the near future, while others believe it already has peaked. For example, Chris Skebowski, editor of the journal Petroleum Review, believes that global production will peak in 2011 or 2012, and that production of oil that enters international trade may peak even sooner. In a 2005 study prepared for the Department of Energy's Oak Ridge National Laboratory, R. L Hirsch et al. state that peaking will result in dramatically higher oil prices, which will cause protracted economic hardship in the United States and the world. The authors believe that while these problems can be mitigated, “mitigation will require a minimum of a decade of intense, expensive effort, because the scale of liquid fuels mitigation is inherently extremely large. ” This study is available online at www. pppl. gov/polImage. cfm?doc_Id=44&size_code=Doc.

On the other hand, a number of analysts believe that the peak will not occur for quite a while and will be followed by a lengthy period in which production remains more or less stable. A 2006 study by Cambridge Energy Research Associates argued that the remaining global oil resource base is three times as large as the 1. 2 trillion barrels estimated by the “peak oil” proponents. They claimed that the proponents' argument is based on faulty analysis that could distort critical policy and investment decisions and cloud the debate over the energy future. The analysis saw no evidence of a global peak before 2030. Thereafter, production would plateau for one or more decades before declining slowly. According to this analysis, global resources, including conventional and unconventional petroleum, are adequate to support strong production for a half century or more. A summary of this study is available online at www. cera. com/aspx/cda/public1/news/pressReleases/pressReleaseDetails. aspx?CID=8444.

LEGISLATIVE OPTIONS

Increase Awareness

The legislature could take various steps to increase its awareness of how oil is used in the state and the potential vulnerabilities and challenges posed by peak oil. For example, the legislature could seek information on the extent to which state agencies use petroleum and the degree to which they have alternatives if there was a supply disruption. It could also require key institutions, such as hospitals and law enforcement agencies to do this.

By law (CGS § 16a-38), state-owned and -financed buildings must undergo a life-cycle cost analysis before they are built or substantially renovated. This analysis estimates the cost of alternative building systems (heating, cooling, etc. ) over the building's life. The legislature could amend this law to require a sensitivity analysis to determine what would happen to the building's costs were substantially higher or lower than projected. It could also require the analysis to estimate the costs of reducing the state government's dependence on oil.

The legislature can also track what other jurisdictions are doing about the “peak oil” issue. In June 2006, Sweden published a national action plan that articulates programs and policy measures that are expected to reduce oil consumption in Sweden by as much as 50% by 2020. The plan is described at www. energybulletin. net/15922. html. The city of Hamilton, Ontario commissioned a study in 2006 to address how to reduce energy use in transportation, buildings, and land use planning.

The study also identifies the city's alternative energy opportunities. The study is available at http: //www. richardgilbert. ca/Files/2006/Hamilton--Electric%20City%20(Web). pdf.

In this country, the Southern California Association of Governments held a regional forum on issues related to “peak oil” in March 2006. The forum proceedings are available at http: //www. scag. ca. gov/rcp/energy-summit. htm. The association is currently assessing peak oil and regional energy demand and supply for its 2007/08 comprehensive and transportation plans. Some American municipalities, notably Portland, Oregon and Oakland, California, have created task forces to address the issue. Further information about Portland's initiatives is available www. portlandonline. com/shared/cfm/image. cfm?id=145732. In Oakland, the task force is charged with developing a plan for the city to become oil independent by 2020. The task force is scheduled to present a final report in December 2007. Further information about Oakland's task force is available at www. oaklandnet. com/oil

Finally, the legislature may seek to identify barriers to decreasing the state's dependence on petroleum. For example, there may be statutory or regulatory provisions that impede the construction or operation of facilities that use forms of energy other than petroleum.

Address Peak Oil in On-Going State Plans

The legislature could require that “peak oil” be addressed in future editions of relevant state plans. These could include, among others, the energy plan prepared by the Connecticut Energy Advisory Board (CEAB), the Climate Change Action Plan, the state Plan of Conservation and Development (C&D), and state transportation plans.

State Energy Plan. The current CEAB energy plan (available online at http: //www. ctenergy. org/pdf/2007_Energy_Plan. pdf) addresses a wide range of energy supply and demand issues. It establishes goals that the state reduce its dependence on fossil fuels and its annual peak electric demand by 10% each by 2010. The legislature could require future editions of the plan to develop specific recommendations on how to reduce consumption of petroleum products, particularly in the transportation sector. It could also require the plan to address the state's increasing dependence on natural gas in the electric power sector.

Climate Change Action Plan. In 2005, various state agencies and other parties developed the state's Climate Change Action Plan (available online at ctclimatechange. com/StateActionPlan. html). The plan includes several recommendations that could reduce the state's consumption of petroleum products as well as reduce emissions of greenhouse gases. Some of these recommendations, notably adoption of California's low emission vehicle standards, have been passed by the legislature. However, the current plan does not specifically address issues associated with “peak oil. ” The legislature could require the plan to be updated to address these issues and provide recommendations for further legislation.

Plan of Conservation and Development. The Plan of C&D (available online at www. ct. gov/opm/lib/opm/igp/cdplan/adopted2005-2010cdplan. pdf) is organized around six growth management principles. The current plan, which covers the period 2005-2010, discusses energy use at several points but does not discuss the concept of “peak oil. ” The legislature could require that future plans specifically address how land use policies can reduce the state's dependence on petroleum products and make the state more resilient if there are interruptions in supply.

Transportation Plans. Under federal law, DOT's long range transportation plan must promote energy conservation and improve the quality of life, among other things. The most recent (2004) plan seeks to support programs and efforts to minimize fuel consumption and single-occupancy vehicle trips, as well as to address the environmental and health costs associated with non-renewable fuel emissions. It has specific measures to promote ride sharing and to encourage employer participation in demand management programs, such as ridesharing, reduced work week, and telecommuting.

The legislature could require future editions of this and other transportation plans to discuss its underlying energy assumptions, in terms of the effect of gasoline and asphalt prices (the price of asphalt is closely linked to the price of petroleum). The legislature could also require future editions to (1) discuss transportation options under low, expected, and high price trends for petroleum products and (2) provide options to minimize the state's potential vulnerability to higher prices and supply disruptions.

Prepare Contingency Plans

The state's energy emergency plan was last updated in 1994, according to the Office of Policy and Management (OPM). The legislature may wish to require OPM to update the plan with regard to the state's response to potential supply interruptions and to discuss what the state would do if the price of petroleum products were to increase dramatically. The legislature may also wish to require key institutions, such as hospitals, law enforcement agencies, and social service agencies, to prepare similar contingency plans.

Promote Energy Efficiency

The legislature has taken many steps in recent years to encourage energy efficiency, most of which have focused on electricity use. It has set efficiency standards for a wide variety of appliances, established a funding mechanism to support electric conservation programs, required utilities to obtain a growing proportion of their power from renewable resources, and promoted distributed (on-site) generation. While these measures have significant environmental benefits, they have a limited effect on petroleum consumption because most electricity generated in the state comes from nuclear, natural gas, and other sources. PA 07-242 does have several measures that will promote more efficient use of petroleum. These include rebates for energy efficient residential oil furnaces and higher efficiency standards for new or substantially renovated commercial and public buildings. It also establishes a heating oil conservation program, whose funding is capped at $ 10 million year in FY 08 and $ 5 million per year thereafter. In contrast, the electric conservation fund received approximately $ 71 million in 2006 and is not capped.

The legislature could take a wide variety of steps to further increase efficiency in the use of petroleum products. It could expand the furnace rebate program to include furnaces in commercial buildings, raise or eliminate the funding cap on the heating oil conservation program, tighten energy efficiency standards in the state building code for residential buildings, require that municipalities consider energy consumption in making land use decisions, increase state support for mass transit, more vigorously enforce highway speed limits, or require higher fuel efficiency levels in the state fleet.

Diversify Fuels

Connecticut relies on a variety of fuels to generate electricity. According to the EIA petroleum was used to produce just 3% of electricity generated in the state in 2006. Although heating oil is widely used in residential buildings, natural gas and electricity account for the majority of energy used in buildings. In contrast, Connecticut, as well as the country as a whole, relies almost entirely on petroleum products in the transportation sector.

The legislature could take a variety of steps to increase the diversity of fuels used in this sector. It could extend the alternative fuel requirements that currently apply to state agency fleets (CGS § 4a-67d, as amended by PA 07-4, June Special Session) to municipal fleets. It could also establish alternative fuel requirements for trucks, buses, and other heavy duty vehicles in agency fleets.

The legislature could identify regulatory barriers to new fuel technologies and facilitate siting of alternative fuel facilities. For example, it may want to place the siting of biofuel refineries under the jurisdiction of the Connecticut Siting Council. Finally, the legislature has a wide range of tax policy options, described below, that it could use to promote fuel diversity.

Use Tax Policy to Reduce Petroleum Dependence

The legislature has historically used tax policy to advance energy and environmental goals. For example, it has exempted energy efficient furnaces from the sales tax, exempted biodiesel from the petroleum products gross earnings tax, allowed municipalities to exempt hybrid and other high efficiency vehicles from the property tax, and provided tax credits to businesses that contribute to energy conservation programs.

The legislature could adopt similar measures to reduce the state's dependence on petroleum products. For example, it could expand the tax exemptions and credits that apply to alternative fuel vehicles and filling stations (CGS §§ 12-217i and 12-412). Currently, “alternative fuel” for motor vehicles includes natural gas and electricity. The legislature could expand this definition to include fuels such as ethanol and biodiesel. The legislature could also extend the tax benefits, which are currently set to expire next year. The legislature could also exempt fuel that contains more ethanol than currently required by law (10%) from motor fuels taxes.

The legislature could also tie the sales tax applicable to a vehicle to its fuel efficiency. For example, it could increase the tax rate for vehicles that are in the bottom third of efficiency ratings for their vehicle class while decreasing the rate for vehicles in the top third. The tax could be designed to be revenue neutral, if the legislature so desired. The state's 2005 Climate Change Action Plan recommends the adoption of a similar mechanism, called a “feebate. ”

Identify Opportunities

As discussed above, Connecticut will face a wide range of challenges if conventional oil production peaks relatively soon and this leads to substantially higher prices or shortages. However, these conditions may present the state with new opportunities. For example, these circumstances could benefit alternative energy firms located in the state, notably the fuel cell industry. Similarly, if higher oil prices make it more expensive to ship food from other parts of the country or abroad, Connecticut's agriculture industry may be able to grow to take advantage of its proximity to major metropolitan markets in the Northeast. If the state chooses to promote energy efficiency as a means of addressing “peak oil,” this could create job opportunities in a wide range of occupations ranging from insulation installers to engineers.

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