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Western Resources:
Key to the Nation’s Energy Future
. . . Yvonne Levy

Western Manufacturing Production
. . . Joan Walsh

California — End of Growth?
. . . William Burke

The Business Review is edited by William Burke, with the assistance of
Karen Rusk (editorial) and Janis Wilson (graphics).
Subscribers to the Business Review may also be interested in receiving
this Bank’s Publications List or weekly Business and Financial Letter.
For copies of these and other Federal Reserve publications, contact
the Research Information Center, Federal Reserve Bank of San
Francisco, P.O. Box 7702, San Francisco, California 94120. Phone
(415) 397-1137.

Yvonne Levy
The United States is dedicated to a policy of
independence from foreign sources of energy.
Originally, the Administration envisioned Project Independence as a "crash" program to
achieve the national goal of complete energy
self-sufficiency by the end of the decade. Later,
in recognition of the intolerable strains such a
program would place on the environment and
on the productive capacity of the economy, the
Administration relaxed that goal to allow for a
more leisurely target deadline of 1985. At that
point, the nation would not be completely selfsufficient, but its oil imports would be sufficiently
small-3 to 5 million barrels a day-that it
would be invulnerable to disruption from oil
embargoes or worldwide price increases. 1 To
help achieve this goal, President Ford last January called for the nation to reduce its oil imports

by 1 million bid by the end of 1975 and by 2
million bid by the end of 1977.
With that as background, this article will discuss the broad trends in demand and supply
which have led to the nation's growing dependence on insecure and costly foreign sources of
energy, the supply strategies and conditions required to move the nation toward the goal of
energy independence, and the nonfinancial constraints likely to be encountered. The question
of financial constraints on development-a major topic in itself-is not considered in this
analysis. Our primary emphasis is on the prospects for increased energy development in the
West, which because of the abundant and varied
nature of its energy-resource base, is certain to
playa major role in any national effort to increase domestic energy production.

The Energy Gap
The events of late 1973-the Arab embargo
and the quadrupling of oil-import pricesfocused attention on the dangers inherent in the
nation's growing dependence on foreign sources
of energy. But that situation had been developing for over two decades, because of a growing
imbalance between domestic production and
consumption of energy. U.S. energy consumption increased at an annual rate of about 3.5
percent between 1950 and 1965, and the rate
accelerated to 4.5 percent over the 1965-73
period. (In 1974, however, consumption
dropped by 2.2 percent to 73.1 quadrillion Brit-

ish Thermal units-BTU's-under the impact
of rising energy prices, the economic slowdown
and conservation efforts.)" Although energy use
has grown even faster in other nations of the
world, U.S. per capita consumption is still six
times the world average (Chart 2).
Domestic energy production, on the other
hand, has lagged far behind the growth of demand. ProductIOn grew at a 3-percent annual
rate between 1950 and 1973, despite a steady
decline in the present decade. In this recent
period, crude-oil production dropped from a
peak of 9.6 million bid to 8.8 million bid,

while natural-gas production dipped slightly to
21.9 trillion cubic feet. Coal production, at 606
million tons last year, remains below the level of
thirty years ago. Other energy sources were of
minor importance. Nuclear power, although
growing rapidly, supplied less than 2 percent of
the nation’s total energy requirements last year,
while hydropower maintained its steady 4-per
cent share. Altogether, the U.S. produced do
mestically last year only 60.7 quadrillion BTU’s
of its total consumption of 73.1 quadrillion
BTU’s (Chart 1).

Chart 1

U.S. Energy Consumption by Source
Q u a d r illio n BTUs

Role of foreign imports

To fill the growing gap, the United States has
come to rely increasingly upon foreign imports
—primarily crude oil and refined petroleum
products. Over the past decade, oil imports rose
from 2.3 million b/d to 6.1 million b/d. For
eign nations now supply 36 percent of the na
tion’s total petroleum consumption and 16 per
cent of its total energy consumption (Chart 3).
Canada and Venezuela are still our principal
suppliers, but the Middle East has recently be
come a key supplier, especially since domestic
production has levelled off. Prior to the em
bargo, U.S. imports of Middle East crude and
refined petroleum products amounted to about
20 percent of total oil imports and 6 percent of
total petroleum consumption, and imports of
products refined from Arab crude were even
more important. Thus, the decline in imports
during the embargo was equivalent to 14 percent
of total U.S. petroleum consumption.
The impact on the economy would probably
be much more serious in the event of another
embargo. The U.S. could be importing as much
as 23 percent of its total energy requirements
by 1985 if steps are not taken to increase do
mestic supplies and to slow the growth of de
mand. Moreover, its dependence could be much
greater on Middle Eastern nations, which hold
60 percent of the world’s oil reserves. Aside
from its national-security implications, this de
pendence could have serious economic conse
quences in the form of possible disruptions in
supply, inflationary pressures and balanee-ofpayment difficulties.

From coal to oil and natural gas

Another crucial change in energy patterns has
been the shift away from coal and toward oil
and natural gas in the past two decades.3 Coal
still remains the dominant fuel for electric-power
generation, an increasingly important energy
user, but overall, coal now accounts for less than
20 percent of the nation’s total energy require
ments. Despite an upswing since 1959, coal
production still has not regained the peak level
reached in 1947. Coal’s declining importance
reflects its high sulphur content, as well as the
convenience and comparative low cost of oil
and gas.
Natural-gas consumption rose rapidly after
World War II, as pipelines were built to trans
port gas from the producing regions of the
Southwest to other areas of the nation. Between
1950 and 1970 natural-gas consumption rose
almost four-fold—twice as fast as total energy
consumption—but shortage of supplies then be
gan to restrict consumption. Nonetheless, nat
ural gas still accounts for 30 percent of total
consumption.
Since 1954, the Federal Power Commission
has regulated wellhead prices of natural gas sold
in interstate commerce. Under this regulation,
the FPC has held natural-gas prices at artificially
low levels, stimulating consumption but at the
same time discouraging producers from trying
4

to find new supplies. Since 1968 Americans
have been consuming natural gas at about twice
the rate of discovery. As a result, proven domestic reserves (including a major Alaska find)
dropped from 293 trillion cubic feet in 1967 to
237 trillion cubic feet in 1974-equivalent to
only 10 years' production at current rates. 4 Serious shortages have developed, despite a doubling of imports over the 1967-74 period to almost 5 percent of total gas consumption.
The environmental movement meanwhile has
helped to boost the demand for natural gas.
Natural gas is the cleanest-burning fossil fuel in
that it is free of sulphur and particulate matterin contrast to "dirty" coal, the traditional fuel of
power-generating plants. To meet the Federal
environmental requirements, an increasing number of power plants have had to switch to natural
gas and, during the past few years, due to the
gas shortage, to low-sulphur fuel oil.;'
In this situation, petroleum has proven to be
pivotal in balancing the nation's energy needs.
Oil consumption increased at a 5-percent annual
rate during the 1960-70 period, and then accelerated to a 6-percent rate between 1970 and
1973. In that period it grew faster than total
energy demand, so that oil's share of total consumption rose to 46 percent in 1973. (During
the 1974 crisis, of course, oil consumption declined.) Petroleum supplies nearly all of the
nation's transportation fuel, 45 percent of house-

hold and commercial usage, almost 25 percent
of industrial energy, and about 13 percent of
electric utilities' requirements.
Domestic petroleum production has trended
downward in the face of booming demand. This
decline reflects an almost uninterrupted decadelong reduction in crude-oil reserves-except for
1970, when the Alaska bonanza added 9.4 billion barrels to the nation's reserves. Proven
reserves at the end of 1974 amounted to 38.8
billion barrels-the equivalent of 12 years' supply at the current production rate. Higher prices
recently have stimulated increased drilling, but
reserves still fell during 1974.
Resources versus reserves

The recent decline in oil and gas production
can be attributed not to a scarcity of resources,
but rather to inadequate economic incentives
and environmental restrictions. Here a distinction must be made between resources and reserves. The nation's petroleum resource base
may be thought of as the total amount of oil and
gas occurring in the rocks lying within its boundaries, including the continental shelf. Resources
comprise all those materials that are potentially
recoverable, including those in deposits as yet
undiscovered. Reserves, on the other hand,
comprise that portion of the resource base that
has been identified, explored and delineated with
a reasonable degree of certainty, and from which
a usable commodity can be extracted under
existing economic and technological conditions.
The occurrence of oil and gas is finite, being
governed by geology, but the rate at which oil
and gas resources are discovered, developed and
transferred to the category of reserves is determined primarily by economics, technology, and
environmental and political considerations.
Proven reserves represent the underground assets (inventory) in which the petroleum industry has made specific investments.
Development activity in the U.S. industry,
measured by the number of exploratory wells
drilled, declined sharply after 1956 simply because the financial rewards from domestic development did not compare favorably with
more attractive opportunities abroad. especially

Chart 2

U.S. Energy Consumption by Sector
Quadrillion BTU.

80
_ Miscellaneous
I

Electrical
- - Utilities

I
I
I
I

Commercial

F"'~~'/ /

/ /

Transportation

/
/

29%

Industrial

oL-....L-----J'----.l----~-----

1950

1974

oil prices declined by 18 percent. Natural-gas
prices rose rapidly until the early 60's, largely
because gas had been drastically underpriced
when it first came into use as a by-product of oil,
but the price declined 6 percent in real terms
during the following decade. Environmental
controls meanwhile helped to raise domestic
costs, and also to curtail drilling and refinery
construction.
In August 1973, Phase IV price controls were
removed from "new oil"-defined as that oil in
excess of a property's production rate in the
corresponding month of 1972-and from a portion of "old" oil production. In January 1974,
controls were lifted for petroleum liquids produced from "stripper" wells, i.e., from properties
where average production per well did not exceed 10 bid during the preceding calendar year.
Prices on the remaining production ("old" oil)
have remained limited to $5.25 per barrel, while
prices for "new" oil have ranged from $12 to
$13 per barrel at wellhead, in line with the prices
of foreign oils of comparable quality. If all controls are lifted in the wake of this summer's intense political maneuvering, the resultant price
rise could result eventually in larger reserves and
stimulate increased production.

Chart 3

U.S. Crude Oil Imports
Millions of Barrels
-of-

1000

Total World

Africa

800

Tolal
Middle East

600
___ Saudi Arabia
.........-

400

200,
-of-

o
1950

1955

1960

1965

1970

Total
Western
Hemisphere

Canada

1974

in the Persian Gulf area. In addition, domestic
oil prices failed to rise as fast as costs or industrial prices in general. The price of crude almost
doubled over the 1947-57 period but thereafter
rose only moderately, from $3.09 per barrel in
1957 to $3.66 per barrel in 1973. In real terms,

Domestic Supply Prospects
tion, and increased Federal funding for energy
research and development. G
The FEA concluded that the long lead time
involved in bringing new production on stream
will forestall any increase in U.S. crude-oil production over the next few years, regardless of
what the Federal government does to encourage
production. Imports will thus rise in the absence of conservation strategies or direct limitation on imports. But by 1985, assuming Business-As-Usual conditions, U.S. production at a
$7 price would rise about 5 percent above current levels to 8.9 million bid. "Lower 48" production would fall almost by half, but this would
be offset by increased production from Alaska
and the Outer Continental Shelf. At an $11
price, however, domestic production would increase nearly 50 percent to 12.8 million bid,

The extent of dependence on oil imports will
depend primarily on the world price of oil,
which will in turn largely determine U.S. energy
prices, and also upon Federal government policies to slow the growth of consumption and encourage production. In its Project Independence
Report, the Federal Energy Administration
(FEA) therefore examined consumption and
production possibilities at two different price
levels-$7 and $11 per barrel-and under two
sets of assumptions: I) Business-As-Usual, assuming a continuation of policies in effect prior
to 1973 (except for those controlling prices)
and 2) Accelerated Development, assuming
changes in policies to further stimulate production, such as accelerated leasing of offshore
lands on the Outer Continental Shelf, the opening up of Naval Petroleum Reserves for produc-

Chart 4

mostly because of the more widespread use of
secondary- and tertiary-recovery techniques
(Chart 4).
The FEA claims that, under Business-AsUsual assumptions, domestic natural-gas production by 1985 would rise 10 percent above the
current level of 22.4 trillion cubic feet if the
price is deregulated, but would fall by some 30
percent if the ceiling is retained. A base price
of at least 80 cents per thousand cubic feet for
newly discovered gas is considered necessary to
elicit this 10-percent increase in output. The
Federal Power Commission already has moved
toward this price level by raising the ceiling
price of "new" gas (gas from wells producing
since January 1, 1973) in two steps to 50 cents
last December. If all new gas were permitted to
go to the 80-cent level, it would result in more
than a doubling of the average wellhead price
for "new" and "old" gas combined, or an increase of at least $5 billion in the annual cost
to consumers. Complete deregulation, which
would imply prices well above 80 cents, would
probably bring forth little additional output,
owing to the physical limits on potentially exploitable resources and the inapplicability of
secondary and tertiary recovery techniques to
gas production.
Under these circumstances, coal production
might double by 1985 to about 1.1 billion tons,
replacing both gas and oil in many industrial and
electric-utility uses. Nuclear power meanwhile
could increase its share of electric power generation from 7 percent to 30 percent. Other fuels
and energy sources, such as geothermal and
solar power, are likely to be of only marginal
importance by 1985, even under the higher
($11) oil-price assumption.
The FEA study concludes that oil imports
over the long-run will be inversely related to the
level of oil prices-the higher the price, the
lower the vulnerability. At an $Il-per-barrel
price, imports could be reduced from a current
level of around 6 million bid to 3.3 million bid
by 1985. This decline would result from a reduced demand for energy and increased production from sources that are economically feasible

Sources of U.S. Energy Supply
(Business-As-Usual Assumptions)

Quadrillion BTU.

$7 Oil
1985

1973
Actual

$11 Oil
1985

at higher prices. However, maintenance of an
$11 price would require extremely large production cutbacks by OPEC nations. Thus, the
world price might be pushed down to about $7
per barrel-a price which could lead to imports
of over 12 million bid by 1985.
Consequently, for the nation to reduce its imports to a target level of 3-to-5 million bid by
1985, it would have to adopt a policy of accelerated development. This would include increased offshore leasing off the Atlantic and
Pacific coasts, development of Naval Petroleum
Reserves, and increased Federal support for
nuclear-plant construction, shale oil and synthetic-fuel production. Under this strategy, domestic oil production could rise almost to 13
million bid at a $7 price and to 17 million bid
at an $11 price.
Technological and resource barriers
The ability to attain these levels of production
will depend not only upon price but upon a wide
range of other considerations as well. Indeed,
recent estimates of the nation's resource base by

Mop 1

the U.S. Geological Survey' indicate that undiscovered recoverable resources of oil and gas
may be much smaller than the USGS had earlier
suggested in its contribution to the Project Independence Report. (The adoption of more
conservative estimating techniques accounts for
the downward revision.) According to current
estimates, undiscovered recoverable resources of
oil and natural-gas liquids range between 61
billion and 149 billion barrels, and undiscovered
recoverable natural-gas supplies range between
322 trillion and 655 trillion cubic feet. In both
cases, the latest estimates are far below even the
minimum levels estimated just a year ago. However, another 30 billion barrels of oil and 180
trillion cubic feet of gas may be recoverable
from unexplored parts of known fields through
the use of advanced - recovery technologies
(Map 1).
Aside from the question of how much is actually recoverable, the production and processing of energy materials could be constrained by
inadequate manpower, materials, water and
high-technology equipment - not to mention
financial resources. For example, water is essential to almost every energy process. It is required
to extract raw materials from the earth, process
the materials into useful fuels, generate electricity from those fuels, and dispose of waste
products in an environmentally acceptable manner. Yet in the rural regions of the West, where
a substantial portion of the nation's total energy
resources are located, there is not only a relative
scarcity of water but also a prior call on roughly
90 percent of the available supply for agricul-

Undiscovered Recoverable
Resources of Oil and Gas*
2-19

.... ""'...~
Undiscovered Recoverable Oil 12-49 Billion Barrels

Undiscovered Recoverable Oil 36-81 Billion Barrels

,;, Estimated range at 95-5 percent probability levels. For
example, in the case of the Pacific Coast region, the chance
of having undiscovered recoverable resources of crude oil
of at least 4 billion barrels is 95 out of 100; however, the
chance of having 11 or more billion barrels is only 5 out
of 100.

tural purposes. Meanwhile, recent shortages
have dramatized the potential problems that
could be faced in obtaining the drilling rigs, platforms, pipe and tubing, steam-turbine generators
and other equipment required to meet targeted
production levels.

Alaskan Oil and Gas
lion bid-and with full development of that and
neighboring fields, the pipeline should be operating at its full capacity of 2.0 million bid by
the year 1980.
The pipeline project includes the 789-mile
pipeline from Prudhoe Bay on the Arctic to
Valdez on the Gulf of Alaska, and in addition,
a road from the Yukon River to Prudhoe Bay,
seven air fields, twelve pump stations, an ocean
terminal and a number of offices and related

Alaska is certain to play the largest role in
the current effort to increase domestic oil and
gas production. Actually, the state has been an
important factor in the industry for some years;
in 1974 it produced 193,000 bid of oil and
383,000 million did of natural gas, with most
of the output coming from the Kenai Peninsulal
Cook Inlet area in the southern part of the state.
By mid-1977, however, the Prudhoe Bay field
on the North Slope should be producing 1.2 mil-

service buildings. At this summer's peak, about
20,000 people were employed on the project.
The overall cost, not including the costof financing, is expected to top $6 billion-more than
eight times the original estimate.

of this fuel is contained in the Prudhoe Bay field,
by far the largest hydrocarbon deposit in the
Western hemisphere. But the state may also
contain undiscovered oil resources of 12 to 49
billion barrels-roughly one-quarter of the U.S.
total-and undiscovered natural gas resources
of 29 to 132 trillion cubic feet-roughly onetenth to one-quarter of the U.S. total.
On the basis of its earlier (and higher) estimates, the FEA's Project Independence Report
suggested that Alaskan oil production could
reach as much as 4.6 million bid by 1985 at a
$7 price, and as much as 5.3 million bid at an
$11 price. To develop that level of resources,
massive new investment would be requiredanother 48-inch oil pipeline, both the transAlaska and Mackenzie Valley gas pipelines,
processing facilities for both the North Slope
and Outer Continental Shelf, and transportation
and other facilities to support these basic systems. The required investments would be substantial even if the conservative USGS estimates
of resources turn out to be correct.

Tapping Prudhoe's resources
The Federal Power Commission is currently
studying two pipeline proposals to transport
North Slope gas to the lower 48 states. One
company proposes a $6.7-billion project to deliver the gas to the U.S. West Coast via a combination pipeline and tanker system. An 809mile underground pipeline would be built from
Prudhoe Bay to Gravina Point, Alaska, where
the gas would be liquefied for shipment by
tanker to Point Conception, California. Alaskan
gas would permit some West Texas supplies that
are ordinarily piped to California to be shipped
instead to Eastern and Midwestern markets. A
second company proposes an $8.0-billion project that would deliver gas through a 2,600-mile
pipeline from Alaska and Canadian Arctic areas
down the Mackenzie River Valley of Canada to
Idaho and Montana. Related lines would then
carry the gas to California, the Midwest, the
East Coast and Eastern Canada.
Midwestern Congressmen vigorously support
the Mackenzie Valley project on the grounds
that it would bring more gas to their energydeficient region. Supporters of the trans-Alaska
route argue, on the other hand, that the transCanada route would leave the U.S. vulnerable
to a potential cutoff of gas supplied by Canada.
They argue further that the trans-Canadian
pipeline would adversely affect the U.S. balance
of payments, by causing billions of U.S. dollars
to be spent in Canada to hire Canadian workers
and pay Canadian taxes. The trans-Canada
route appears to have the most support at the
present time; however, if Petroleum Reserve No.
4 and additional reserves are developed, both
transmission systems eventually may be required to handle the increased supply.
Alaska presently has proven oil reserves of
10.1 billion barrels and gas reserves of 31.1
trillion cubic feet, or about 33 and 13 percent,
respectively, of the nation's total reserves. Most

Other onshore resources
Exploration and drilling activity already has
accelerated on the North Slope, upper Cook
Inlet basin and the little-explored Susitna basin.
But if Alaska's onshore resources are to be fully
exploited, a larger'proportion of Federal and
state lands will have to be opened for development. Only about 5 percent of the 231,887
square miles of onshore land with resource potential has been offered for lease to date. Alaska's Department of Natural Resources last November announced a schedule of oil-and-gas
lease sales for the 1975-78 period. But there
are some complicating factors; the Federal government recentiy contested state - ownership
rights to the Lower Cook Inlet, ~ and other offshore areas near the coastline could also be embroiled in jurisdictional disputes.
The Alaska state government is anxious to
hold more lease sales to ease its financial problems. With the state budget running at $500
million or more each year, and state revenues at
only about $300 million, the government is fearful it will run out of funds before North Slope

oil royalty money begins to flow into the state
treasury in late 1977 or 1978. The $900 million
which the state collected in bonus money for the
1969 lease of North Slope oil fields is now twothirds spent.
As for Federal land, Congress is still debating
whether Naval Petroleum Reserve No.4 (North
Slope) should be opened to oil drilling by private companies. The Navy is currently drilling
several test wells and has retained a contractor
to do some exploratory work, but some experts
argue that the best way to develop the reserve
would be to lease tracts within the reserve to
private industry. It could take at least ten years
to explore, develop and construct delivery systems from NPR-4, and the cost could be well
over the $15 to $20 billion required for Prudhoe
Bay. However, the 3,500-square-mile reserve is
geologically similar to Prudhoe Bay, and similar
economic benefits could flow from its development in coming decades.
Meanwhile, Congress recently passed legislation authorizing large-scale civilian oil production from the Elk Hills Naval Petroleum Reserve
near Taft, California, for the creation of a national strategic stockpile. Only jurisdictional
problems remain to be resolved before exploitation of this field is begun.
Offshore resources
Offshore drilling for oil and gas in the Federally owned Outer Continental Shelf offers the
greatest potential for significantly increasing
U.S. oil and gas production by 1985. But exploitation of these areas, including not only the
already lucrative Gulf of Mexico but also the
untapped waters off the Gulf of Alaska and the
Atlantic Coast, will be circumscribed by environmental and other difficulties. Development
of the Outer Continental Shelf was made possible by 1953 legislation authorizing the Federal
Government to lease tracts lying more than
three miles off the coast. Production in 1974,

although below the 1971 peak, comprised 11
and 14 percent respectively of the nation's total
output of oil and gas. This was in addition to
the production from state-owned land within the
three-mile limit.
Nonetheless, only about 10 million of the 80
million acres in the Outer Continental Shelf
have been offered for lease since 1953. To help
meet its Project Independence goals, the Administration in late 1974 announced an accelerated schedule of lease sales for the 1975-78
period. Sales in 1975 alone may not reach the
total 10 million acres scheduled, but will be considerably higher than in prior years and will
include frontier areas in the Gulf of Alaska and
possibly the Atlantic. According to USGS estimates, the Gulf of Alaska may contain 1 to 6
billion barrels of oil and 2 to 17 trillion cubic
feet of natural gas, and other promising areas
include the Beaufort, Bering and Chukchi Seas
and the Outer Bristol Basin.
The planned leasing of new offshore areas has
generated heavy criticism from environmentalists. Indeed, the President's Council on Environmental Quality this spring warned of grave
problems from drilling, especially in the Gulf of
Alaska. The Council foresaw a high probability
of oil spills and wrecked drilling operations because of severe storms, earthquakes and tidal
waves, in an area where conditions are "more
severe than the industry has yet experienced
anywhere in the world." Many conservationists
also forecast heavy damage to animal life, since
the Gulf is rich in fish, birds and marine animals.
Despite these objections, a sale of Gulf of Alaska
leases may occur in December of this year. Action is even more likely here than off the Atlantic
Coast, where intense concern about drilling has
risen because of the highly populated nature of
the region, and where the states and the Federal
government are locked in a jurisdictional struggle over title to the continental shelf.

California Oil and Gas
Onshore, the most prolific oil-producing province in the state-and in relation to size, probably in the world-is the relatively small, semi-

In California, hopes for reversing a four-year
decline in oil and gas production also rest upon
the development of the Outer Continental Shelf.

on a lease-for-Iease basis.
The U.S. Department of the Interior plans a
lease auction this October of about 1.6 million
acres on California's Outer Continental Shelf.
This area, extending from three to sixty miles
off the Southern California coast, is believed to
contain as much as 5 billion barrels of crude oil
and more than 6 trillion cubic feet of natural gas
in formations extending as much as 5,000 feet
beneath the sea. Oil industry officials claim that
these riches can safely be tapped, since advanced
offshore technology could minimize the danger
of oil spills and other disasters. But environmentalists argue that the drilling will entail increased risk because of the depth of the formations, and will also lead to other environmentally
harmful consequences, such as the construction
of extensive transportation, refining and distribution facilities. The Department of Transportation apparently agrees that there are environmental dangers, as it recently announced that
probably only half of the 1.6 million acres
scheduled for leasing in October would actually
be offered. State officials are critical of the present system of leases and royalties, which would
return to the Federal government only about 15
percent of the oil's present value-about $21.6
billion over the 50 to 60 year life of the California fields. In their view, the Federal government should retain title to the oil and permit the
companies to extract it for a fee, instead of selling leases and receiving production royalties.

arid Los Angeles basin. But since this is a
densely populated area with very high land
values, the area available for oil development is
greatly restricted.
The productivity of existing wells may be increased, however, through the use of advancedrecovery techniques that boost the amount that
can be produced from each reservoir above what
could be obtained by the use of natural forces
alone. California firms have had some success
with a technique known as water flooding, and
spurred on by the high price of oil, they are now
utilizing a tertiary-recovery process called steam
flooding. With the help of these and even more
advanced techniques, U.S. (and California) reserves might possibly double in size.
California's offshore areas have long been an
important source of energy for the nation and
of revenues for the state. The first offshore wells
in the world were drilled in 1896 as an extension
to Santa Barbara's Summerland oil field. By
1974, there were 23 oil or gas fields off California's coast, and their production accounted
for 27 percent of California's total output.
Drilling for new oil and gas wells on stateowned tidelands virtually ceased after the 1969
blow-out in the (Federal) Don Cuadros field
in the Santa Barbara Channel. That action
caused the State Lands Commission to place a
moratorium on drilling in state tidelands, and
the ban remained in place for almost five years.
Even n"ow, approval for drilling is granted only

Western Coal
The u.S. is the Persian Gulf of coal with more
than one-fifth of the world's reserves locked up
in its crust, and coal accordingly is counted on
to playa major role in reducing the nation's
dependence on uncertain Middle Eastern
sources of oil. According to FEA estimates,
coal production could reach 1.1 billion tons per
year by I985-almost double the present level
-even without any help from higher coal
prices. Nearly all of the industry's production
will be consumed in the generation of electricity
and in steel making. The West is expected to
supply most of the increase because Western

coal is a clean low-sulphur product which is
capable of being mined by low-cost surfacemining techniques (Map 2).
The nation's total coal resources have been
conservatively estimated at about 3.2 trillion
tons, about half of which has been mapped."
These resources, measured in terms of heat content, amount to about three-quarters of the nation's ultimately recoverable fossil fuels. Only
about 150 billion tons are recoverable under
current technological and .economic conditions
-but even this amount would provide over two
centuries' supply at current consumption rates.

The Western states contain one-fifth of these
enormous recoverable reserves of coal. Utah
has almost 7 billion tons of reserves, mineable
through underground techniques, while the
states of Montana, Wyoming, New Mexico and
North Dakota contain about 26 billion tons of
strippable reserves. These Western reserves
comprise four-fifths of the nation’s low-sulphur
deposits and more than one-half of the total re
serves mineable through surface methods. Until

recent years, the West’s subbituminous deposits
occasioned little interest, because they have a
lower BTU content than Eastern coal and are
expensively far from Eastern markets. But utili
ties, faced with new clear-air legislation, are now
buying substantial amounts of this coal because
of its very low sulphur content. Western coal
production thus has grown phenomenally in the
last few years, although the region still accounts
for only 10 percent of total U.S. production.
M ap 2

Western Coal Fields

C o a l reserves

M ajor u n d ergro u n d m ining regions

M ajo r surface m ining regions

Problems of surface mining
Surface mining-the dominant mode of production in the West-has a number of advantages over underground mining. Productivity in
underground mines dropped 29 percent between
1969 and 1973, under the impact of labor
troubles and (particularly) new safety legislation, and output and costs were affected commensurately. In this situation, the industry has
turned increasingly to surface mining, which
now accounts for one-half of the nation's total
output, compared with less than one-third in
1960. Strip mining requires less manpower and
capital than underground mining, and is also
safer and more productive-but it can also be
environmentally disastrous.
Strip mining involves removing the earth
cover, or "overburden" from a seam of coal lying
relatively near the surface, then scooping up the
fuel and carrying it away. In the process, streams
can be diverted or fouled with poisonous minerals, drainage patterns upset and huge mountains of rubble created. In the arid West, where
strip mining is in its infancy, surface vegetation
may not grow back for years or even decades.
In the meantime the land is vulnerable to constant erosion by wind and water, and becomes
unsightly and worthless for agriculture or recreational purposes.
Congress recently sustained a Presidential
veto on a bill that would have established stringent Federal controls on strip mining, far more
restrictive than state standards presently in
effect. In a sense, the legislators were expressing
a preference for energy independence over the
goal of environmental protection. The legislation would have required all companies engaged
in strip mining to protect water sources from
pollution and to return strip-mined lands to
whatever condition they were in prior to mining.
To pay for land reclamation, a tax would have
been imposed on each ton of coal mined.
The bill's supporters argued that coal-company profits would be more than sufficient to
cover reclamation costs, in view of the sharp
upsurge in coal prices generated by the oil crisis.
Their arguments failed, however, in the face of

industry claims that reclamation requirements
would not only reduce output severely but
would also raise costs as much as $5 to $6 a ton,
giving consumers much higher electricity bills.
Another major consideration in the veto was the
argument that urgently needed coal development could be stymied by certain provisions of
the bill, permitting ordinary citizens as well as
surface owners to file suit against mining firms.
Despite this defeat, environmentalists are
continuing to press for restrictions on strip mining. In Wyoming, environmental groups have
won a temporary injunction against further strip
mining in the Powder River Basin. The state of
Montana has joined a farmers' and ranchers'
lawsuit against the U.S. Bureau of Reclamation
for giving away valuable water rights to coal
developers.
Problems of water availability

Indeed, problems of water availability-particularly in the Missouri and Upper Colorado
River Basins-are likely to pose even more of
a stumbling block to coal development than environmental pressures.'" Water requirements
are especially heavy for the reclamation of land,
the transportation of coal through slurry Jines,
the conversion of coal to synthetic gas, and the
cooling of thermal-electric plants. Even now,
water demands for revegetation pose serious
problems, particularly in the Four Corners area
of Arizona, New Mexico, Utah and Colorado.
Most of the coal produced at Western mines
moves by train, or train-barge-train combinations to major consumers. However, these systems may not be able to handle the greatly increased coal flows expected in the future. Industry planners thus are proposing slurry pipelines,
a low-cost subsurface system for transporting
pulverized coal with water to power-plant sites.
Slurry pipelines have been used for many years
in the East, and a 273-mile line also extends
from the Black Mesa coal mine in northeastern
Arizona to the Mohave power plant in southern
Nevada." One proposed 1,OOO-mile pipeline
would carry 25 million tons of coal a year from
a site near Gillette, Wyoming to White Bluffs,

in this area claim that the water requirements
of this plant would place an extra burden on
Colorado River supplies which have already
been overallocated by the state of New Mexico.
Coal liquefaction, which is at an earlier stage of
development; promises to be an even heavier
user of water than coal gasification. A typical
plant producing 100,000 bid of oil could require 20,000 acre-feet of water a year.
Many Rocky Mountain officials and private
citizens are also adverse to large-scale coal development because it could change the essentially rural character of their communities. Unbridled growth could occur as thousands of new
residents stream into the area to enter the surface-mining and gasification industries, and the
result could be the usual urban problems of
pollution, congestion and higher taxes. Achieving the right balance between economic growth
and environmental quality will require careful
planning in regard to land use and water use.

Arkansas. At $750 million, this line would be
both the longest and the most expensive slurry
line ever constructed. But environmentalists
claim that the project would require 15,000
acre-feet of water a year-enough to supply a
city of 10,000 people. Indeed, it would deplete
much of the large underground reservoir that
lies beneath the near-barren plains of Montana,
Wyoming and the Dakotas.
Water availability could also prove to be a
stumbling block in the construction of the coalgasification and coal-liquefaction plants which
are expected to help expand the nation's energy
supply in the 1980's.]" The first plant to be constructed in the U.S. using the new Lurgi gasification process-a plant located near Farmington,
New Mexico-already is running behind schedule because of a conflict over water. This plant
would require more than 10,000 acre-feet per
year for providing the necessary hydrogen for
the gasification process. But the Navajo Indians

Western Shale Oil
Map3

The large oil-bearing shale deposits in the
Green River Formation of Colorado, Wyoming
and Utah could produce as much as one million
bid of oil by 1985 if oil prices remain close to
$11 per barrel and if water and environmental
constraints can be overcome. On the other
hand, if the world oil price drops to $7 per barrel
and if water remains a problem, production
could be limited to 250,000 bid (Map 3).1:;
Oil shale is a laminated marlstone rock which
contains a solid tarlike organic material called
kerogen, formed fiom the remains of animals
and plants which settled as deposits on the floors
of freshwater lakes millions of years ago. The
Green River deposits may contain some 1,800
billion barrels of oil-more than four times the
amount of crude oil discovered to date in the
United States. However, only about 130 billion
barrels-6 percent of the total-are worthwhile
exploiting at the $7 to $11 price of oil. These
are the deposits which are found in seams 30
or more feet thick and which contain more than

Western Oil Shale Deposits

~~!:l~
:

WYOMING

./0

W~~A:KiE;B~$IN

L- -~""""""""~:J:::':::" - ft-I::lt~~~;! -

• Salt Lake City

UTAH'::"'SAND WASH
~J BASIN

COLORADO
River

25 Mi.

'-'--'-'-'-J

Area of oil shale deposits

III

Area of 25 gallton or richer oil shale
10 ft. or more thick

30 gallons of oil per ton of rockY Pilot-plant
studies have shown the feasibility of recovering
shale oil (kerogen) from the mined rock and
converting it to a synthetic crude low in nitrogen.
With the technology established, a full-scale
production plant is scheduled to be in operation
in the late 1970's.
However, the availability of water could be a
severely limiting factor to oil-shale development.
Water is needed to cool the hot kerogen vapors
from the retort or kiln, and even more to dispose
of the dry spent shale after it has been crushed
and roasted, especially when compacting and
stabilizing the disposal pile. By some estimates,
shale mining and processing would require almost three barrels of water for each barrel of oil
produced. (For two shale tracts in Utah and
two in Colorado already leased by the Federal
government, 111,000 acre-feet of water may be
required annually for shale production.) Upper
Colorado River water supplies may be able to
support production of one million bid at the
maximum, but a larger industry would require
transfer of water rights from agriculture and
other users.

disposal problem is complicated by the fact that
heated shale expands to as much as half again
its original volume. The spent shale and its
highly alkaline runoff require special disposal
arrangements that boost costs substantially. In
addition, special air-pollution control equipment
is needed to control the emissions created in the
production of synthetic crude from kerogen.
The same criticisms that apply to the surface
mining of coal are equally applicable to the mining of oil shale. Also, underground mining
would be more feasible than surface mining in
Colorado's Piceance Basin, where a substantial
rock cover overlays the shale. But this method
would present the usual disposal problem and
would also result in the loss of 50 to 60 percent
of the resource because of the shale pillars left
inside the mine for roof support.
Because of the limitations of surface processing, considerable research is underway to develop methods for extracting the kerogen in situ,
that is, underground. Cavities would be mined
inside the shale layers by traditional mining techniques; the shale would be crushed by explosives
and heated to product oil, which would then be
pumped above ground. In-situ extraction would
require much less water than surface extraction,
would create fewer environmental problems,
and would cost less than other methods because
of the reduced need for mining and aboveground equipment. Following a 1973 pilot test,
experimentation is continuing on this promising
approach.

Disposal problems
Disposal of spent shale poses an immense
problem. Producing one million bid of synthetic
crude oil, while not large in terms of the nation's
overall energy needs, would require the mining
of over 500 million tons of rock per year. This
amount is almost equal to the entire 1974 production of the U.S. coal-mining industry. The

Uranium
household and transportation fuels. Growth of
any significance for nuclear power would require
an enormous increase in uranium mine and milling capacity, as well as an accelerated program
of exploration to add to present reserves in New
Mexico, Wyoming, Colorado and Utah.

Up until recently, Federal government
sources had estimated that U.S. nuclear-generating capacity would grow from 7 to 30 percent
of the nation's total electrical-generating capacity by 1985. In view of the industry's many
difficulties, this estimate appears to be high but
still attainable. The industry's strong prospects
are based upon its ability to replace oil and gas
in electrical generation, freeing those scarce
fuels for other uses to which they are uniquely
suited, i.e., as petrochemical feedstocks and

Nuclear growth

After thirty years of checkered history, nuclear powerplants are finally becoming a major
factor in the nation's power picture. By the end

of this year, about 60 thermal (fission) reactors
will be in operation with an electrical generating
capacity of 43,000 megawatts-and a decade
from now, the number may grow to 213 reactors
with a rated capacity of 208,000 megawatts. 1 -'
These 213 plants will need more than 30,000
tons of uranium oxide (U::O~) annually-more
than double the present capacity of the U.S.
uranium mining industry. In addition, each new
plant will require about 500 tons of Up, for its
initial fuelload. '6
The industry's planned growth actually has
been scaled down considerably in recent years.
In the last half of 1974 alone, construction was
deferred on 94 plants and 14 plants were cancelled completely. These cutbacks were caused
in part by the utilities' present financial difficulties and their anticipation of a slowdown in the
growth of future electrical demand.
The slowdown in nuclear growth may also
reflect the lengthy delays encountered in licensing and construction of nuclear plants,
which may take as much as eight years' time.
Each construction application must include a
safety-analysis report and an environmental-impact statement, and these reports must be reviewed by authorities such as the Energy Research and Development Administration and
publicized at open hearings. Moreover, construction is often delayed by necessary design
changes and adherence to strict quality control.

erate the supply necessary to meet that demand.
Another essential factor in nuclear - power
growth will be the development of adequate enrichment capacity, capable of separating the
fissionable UC35 isotope from nonfissionable material to provide a more potent mixture of the
element. Present enrichment services, which
supply all of the foreign and domestic commercial demand, are provided by the Governmentowned, privately operated plants at Oak Ridge,
Tennessee; Portsmouth, Ohio and Paducah,
Kentucky. The capacity of these plants is now
being expanded by 60 percent to meet the needs
of the generating plants already in operation or
in the planning stage, but 8 to 10 additional enrichment plants may be required to meet nuclear
generating needs by the turn of the century. In
this situation, the Administration has recently
proposed legislation to support the creation of a
private-sector uranium enrichment industry.
Environmental and other problems

The exploitation of uranium resources creates
the same type of problems associated with other
Rocky Mountain energy resources, plus some
unique problems of its own. Mine production
is split about evenly between underground and
open-pit mines. The latter involves the removal
of vegetative cover and the creation of overburden and waste rock, which reduces the suitability of the area for wildlife, grazing and
outdoor recreation. Underground mining meanwhile involves substantial accumulation of waste
rock in dump areas. In addition, milling produces considerable amounts of low-level radioactive tailing, which are unsuitable for use as fill
material where human exposure might result.
Nuclear - power plants, unlike fossil - fuel
plants, do not produce particulates and sulphur
oxides, and hence do not generate severe airpollution problems. However, they do generate
waste heat and radioactive emissions and
wastes, and thus must be strictly controlled to
protect against disastrous health consequences.
Because of these dangers and the potential for
nuclear accidents and theft, the Federal government has tightened standards guiding the con-

Resources and enrichment capacity
According to ERDA estimates, proven reserves of uranium oxide range between 200,000
tons at a cost of $8 per pound to 420,000 tons
at $15 per pound-and at the latter price, another 1.5 billion tons of undiscovered resources
may also become availableY The vast bulk of
the reserves are found in New Mexico and
Wyoming.
On the basis of presently scheduled growth in
nuclear generating capacity, the nation may
need a cumulative total of 325,000 tons of
uranium oxide by 1985." Prices have re<;:ently
risen sharply above the prior level of $6.50 per
pound, an increase which should help to gen-

struction and operation of nuclear plants, but
many doubts still persist about the adequacy of
these safeguards.
The proposed breeder reactor would create
less thermal pollution and would be a more
efficient user of uranium than the conventional
light-water nuclear power plant. Its greater
efficiency is based on its projected ability to
utilize more than 50 percent of the uranium
input in the production process, in contrast to
the 0.3 percent utilized in the present light-water

reactor technology. But it would also produce
more plutonium-a poisonous and explosive
material-and thus would present even greater
safety hazards than the present type of reactor.
The Federal government has been financing the
operation of a 450-megawatt demonstration reactor in Tennessee, but spending on this project
has recently been curtailed because of cost and
safety factors, eliminating the possibility of
bringing the breeder into commercial operation
within the next decade.

Hydro, Geothermal and Solar Energy
Hydro, geothermal and solar resources may
contribute very little to the nation's energy requirements by 1985, although geothermal and
solar could become important energy sources by
the year 2000, now that the Federal government
is directing a large-scale research-and-development effort towards their development. Hydroelectric power production has almost doubled
since 1950. But despite the huge dams built on
the Columbia and the Colorado, and despite the
utilization of the Niagara River and the far-flung
Tennessee Valley system, hydro now supplies
less than 4 percent of the nation's total energy
requirements.
Moreover, hydropower's market share could
slip still further by 1985. Only about one-third
of the nation's hydroelectric potential has been
harnessed, but most of the good sites for dam
construction have already been developed. As
a result, most of the growth in capacity will
come from the expansion of existing installations, for the purpose of supplementing the output of large fossil-fueled and nuclear-steamelectric generating units. The Pacific Northwest, for example, is beginning to shift from
almost complete reliance on hydroelectric generation to a mixed system of both hydroelectric
and thermal-electric generation. Under present
plans, more than 10,000 megawatts of new
capacity will come on line in the Pacific Northwest between 1978 and 1985. But only about
3,700 mw of that total will be hydroelectric generating capacity; the rest will be made up of

3,700 mw of nuclear capacity and 1,700 mw of
coal-fired poweL]!I
Geothermal potential

The West has vast potential geothermal resources, consisting of a whole spectrum of heat
sources stored within the earth. The West contains about 1.83 million acres of land with
known geothermal resources, and another 99
million acres with "prospective value" for geothermal steam .~I)
Yet, despite this vast potential, there is only
one commercial geothermal powerplant in the
nation, at The Geysers, California. Completed
in 1960, the plant has an annual generating
capacity of 502,000 kilowatts, with capacity
scheduled to reach 900,000 kilowatts by 1978
and an ultimate level of 2 million kilowatts by
around 1990. The fields at The Geysers are dry
steam, the easiest type of geothermal energy to
develop-but unfortunately also the rarest.
Other more abundant and widely distributed
forms, such as hot brines and dry rocks, present
difficult problems. Power generation from hot
brines creates serious pollution and environmental problems, and in addition requires a
great technological effort. For example, the
briny water (and steam) produced by exploratory wells in California's Imperial Valley is
highly corrosive, containing as much as 25-percent dissolved minerals compared to 3-percent
in seawater. Continuous removal of water from
reservoirs also can lead to subsidence, as has

occurred at some Mexican sites. Also, the technology for extracting heat from dry rocks is even
less advanced than for other sources. Finally,
the large-scale use of geothermal energy would
require increased leasing of Federal lands, which
make up more than one-half of the West's total
geothermal resource acreage.

Heating and cooling of buildings with solar
energy is now possible on a small scale. There
are now about 175 solar-heated homes in the
United States, completed or under construction.
The typical system uses rooftop collectors to
gather the sun's energy. The heat from the collector is transferred to a liquid-often waterthat is circulated through the building or else
stored in some fashion.
Harnessing solar heat to generate electricity
is a more difficult challenge. Some engineers believe that small generating units located near
the point of consumption provide the best way
of utilizing such an inherently diffuse resource;
others propose the use of large, centralized
solar-thermal plants with present-day turbines;
still others favor photovoltaic conversion, the
solar-cell system which powered this nation's
space probes. But even with lavish Governmental subsidies, it may be decades before solar
energy accounts for any appreciable portion of
the nation's energy needs.

Solar energy potential

Solar radiation is the world's most abundant
renewable energy resource. Its practical application is obstructed, however, by numerous engineering and economic roadblocks. The general trend in energy engineering is toward ever
higher temperatures and energy densities, limited only by the capabilities of the confining materials. But solar is a diffuse and intermittent
form of energy that must be collected over large
areas with bulky and complicated equipment.
Fortunately for the West, some of the highest
intensity solar regions are located in New Mexico, Arizona, Nevada and California.

Chart 5

Western Energy Patterns
Trillion BTUs

5000

4000

~~~~ Hydropower
3000

Coal

Gas

Oil

2000

1000

oLJtl:t

Production Consumption

PACIFIC NORTHWEST

CALIFORNIA

ALASKA

MOUNTAIN

The West-Producer and Consumer
The nation is becoming increasingly reliant
on Western coal resources. Western production
of coal more than doubled between 1970 and
1974, rising from 5 to 10 percent of the national
total. This shift reflects the stringent pollution
controls imposed on electric utilities and their
growing preference for low-sulphur Western
coal, produced especially in the Mountain states.
Crude-oil production in the West has trended
downward during the past four years, dropping
to slightly less than one-quarter of the national
total. California, the nation's third largest producer, experienced a greater-than-national 13percent decline. Oil-and-gas drilling activity
practically ceased on state-owned offshore lands
after the 1969 Santa Barbara blowout, first because of a state ban and later (after the moratorium was lifted) by environmentalists' protests. Leasing of Outer Continenal Shelf acreage
by the Federal government has been affected by
similar problems; for instance, a scheduled 1.6million acre sale off the Southern California
coast has recently met with strong opposition.
California's difficulties with offshore drilling are
only part of the problem, however, since production has fallen in other states as well.
Natural-gas production in the West has followed a roughly similar pattern, since it is often
found in association with petroleum. Between
1970 and 1974, gas production dropped from
2.4 to 2.3 trillion cubic feet, or from 11 to 10
percent of total U.S. production. The West has

come to depend heavily on imports from other
states and nations, because it produces far less
gas than it consumes.
California presently depends on out-of-state
sources for more than 57 percent of its energy
requirements. It gets about 78 percent of its
natural gas from the Southwestern states and
Canada, plus about 18 percent of its oil from the
Mountain states, Alaska and foreign sources.
In addition, it imports some of its electricity
from coal-fired plants in the Southwest and
hydroelectric plants in the Pacific Northwest.
Altogether, more than 24 percent of its total
energy needs are supplied by uncertain foreign
sources, and Canadian natural-gas supplies may
become even more uncertain as that nation acts
to meet its own internal requirements.
The Pacific Northwest contains hydroelectric
and coal resources, but it is in a precarious position with regard to its future supplies of oil and
natural gas. Its oil supplies are imported from
Canada, Alaska, California and various other
foreign countries, while its natural-gas supplies
come principally from Canada and to a lesser
extent from the Mountain states. With 40 percent of the nation's total developed hydroelectric capacity, the Northwest is now able to satisfy all of its own electrical requirements from
hydro-power and to have some left over for export. But in the future, it will become increasingly dependent on coal and nuclear power for
its electricity (Chart 5).

FOOTNOTES
fueled generating stations at prevailing rates of efficiency.
In practice, about 95 percent of energy resource inputs go
to fuels and power use. A Btu-the common standard of
measurement to which all forms of fuels and power sources
can be converted-is the amount of heat required to raise
the temperature of one pound of water one degree Fahrenheit. The approximate Btu equivalents of common fuels
and power sources are as follows:
Btu
Crude oil. I barrel
5,800,000
Natural gas, 1 cubic foot
1,032
25,000,000
Coal, 1 ton
Nuclear power, I kilowatt-hour
10,660
Hydropower, 1 kilowatt-hour
10,389
Energy production and consumption statistics for the

1. Federal Energy Administration, Project Independence
Report (Washington, D.C.: U.S. Government Printing
Office, November 1974). The background material utilized
in the preparation of the final report appears in thirty-one
Task Force Reports and Transcripts of Public Hearings,
published by FEA and listed in Appendix AVIII of the
Project Independence Report, page 335.
2. By "energy" consumption or use, we refer to combined
resource inputs (coal, oil, natural gas, hydro and nuclear
electricity) expressed in a common calorific measure
(Btu's), irrespective of whether such resources are ultimately utilized in the forms of fuels and power or as raw
materials (e.g. in the chemical industry). For hydro and
nuclear, the Btu equivalent of the electricity generated is
computed on the basis of primary energy inputs at fossil-

years 1950 to 1974 in original units of measurement and
Btu equivalents are from the following publications: Walter
G. Dupree, Jr. and James A. West, United States Energy
Through the Year 2000 (Washington, D.C.: U.S. Department of the Interior, December 1972), Appendix B. U. S.
Department of the Interior, Bureau of Mines, "Energy Use
in 1974" (and in 1975), Nell'S Release, March 13, 1974 and
April 3, 1975. These data, as well as state production figures
for individual fossil fuels, are also published on an annual
basis by the Bureau of Mines in its ~l\1inerals Yearbook.
3. For a detailed discussion of historical energy consumption and supply patterns see, Hans H. Landsberg and Sam
H. Schurr, Energy in The United States, Sources, Uses and
Policy Issues, A Resources for The Future Study (New
York: Random House, 1968), pp. 9-63. Joel Darmstadter,
"Energy Consumption: Trends and Patterns," Energy,
Economic Growth, and The Environment, ed. by Sam H.
Schurr (Baltimore: The Johns Hopkins University Press),
pp. 155-189. Ford Foundation Energy Policy Project,
Exploring Energy Choices, A Preliminary Report (Washington, D.C.: The Ford Foundation, 1974), pp. 1-9.

States, GC:Jlogical Survey Circular 725 (Washington, D.C.:
U.S. Department of the Interior, Geological Survey, 1975).
All oil and natural gas resource estimates used in this
article were taken from this Circular. Contrary to previous
estimates which utilized prior data on hand, these estimates
were made by carefully evaluating a large amount of new
geological and geophysical information gathered on more
than 100 different provinces by over 70 specialists within
the Survey and by applying a variety of resource appraisal
techniques to each potential petroleun-l province. Due to
the thoroughness of this process and the elimination of
highly speculative resources lying outside the 5 percent
probability range, these figures are much smaller than
earlier estimates by the Survey.
8. The Supreme Court upheld the Federal Government
claims to leasing rights to lands beneath lower Cook Inlet
on the basis that the property in question is part of the
"high seas" and not the kind of "inland waters" over which
states were granted title under the 1953 Submerged Lands
Act. See, "Land Off Alaska Belongs to U.S., Top Court
Rules," Wall Street Journal, June 24, 1975, page 2.

4. Reserves of crude oil and natural gas are from: American Gas Assoeiation, American Petroleum Institute, Canadian Petroleum Association. Reserves of Crude Oil, Natural
Gas Liquids, and Natural Gas in the United States and
Canada and United States Productive Capacity as of December 31, 1974. Detailed statistics on the physical and
financial operations of the natural gas and petroleum industries, including exploration and drilling, may be found in
the following: American Gas Association, Gas Facts, A
Statistical Record of the Gas Utility Industry, published
annually; American Petroleum Institute, Petroleum Facts
and Figures, published biennially.
5. The shortage of that fuel in turn, led the Federal Energy
Administration, in late June of 1975, to order 25 utilities to
switeh back to coal at 74 power plants throughout the
nation. At the same time, the FEA directed 41 companies
building new fossil-fuel power plants to make certain that
the plants have coal-burning capacity. Plants receiving the
orders were required to submit plans to the Environmental
Protection Agency which could then order the installation
of additional pollution control equipment if necessary.

9. Paul Averitt, Coal Resources of the United States, January 1, 1967, Geological Survey Bulletin 1275 (Washington,
D.C.: U.S. Department of the Interior, Geological Survey,
1969). Also, National Petroleum Council, Committee on
U.S. Energy Outlook, U.S. Energy Outlook: Coal Availability (Washington, D.C.: National Petroleum Council,
1973 ).
10. George H. Davis and Leonard A. Wood, Water Demands For Expanding Energy Development, Geological
Survey Circular 703 (Washington, D.C.: U.S. Department
of the Interior, Geological Survey, 1974). National Petroleum Council, U.S. Energy Outlook: Water Availability
(Washington, D.C.: National Petroleum Council, 1973).
11. For a discussion of coal transportation problems and
synthetic fuel technologies see, National Academy of Engineering, Task Force on Energy, U.S. Energy Prospects:
An Engineering Viewpoint (Washington, D.C.: National
Academy of Engineering, 1974), pp. 36-48.
12. K. C. Vyas and W. W. Bodle, "Coal and Oil-Shale
Conversion Looks Better," Oil and Gas Journal, Vol. 73,
Number 12 (March 24, 1975), pp. 45-54.

6. The $7 and $11 world oil prices refer to prices in constant 1973 dollars. The supply response at $7 and $11 world
oil prices presumably also assumes that both "old" and
"new" oil produced in the United States sells at that price.
A number of national energy forecasts have been published
in recent years. Most of these relied on extrapolations of
past behavior of energy markets or judgmental factors,
however, and did not take explicit account of the response
of energy demand and supply to price changes. For two
of the most notable of these "judgmental" forecasts see:
National Petroleum Council, U.S. Energy Outlook, A Report of the National Petroleum Council's Committee on
U.S. Energy Outlook (Washington, D.C.: National Petroleum Council, December 1972). Ford Foundation Energy
Policy Project, A Time To Choose America's Energy Future
(Cambridge: Ballinger Publishing Company, 1974). For
the most notable econometric forecast aside from the
Project Independence Report see: M. 1. T. Energy Laboratory Policy Study Group, Energy Self-Sufficiency, An
Economic Evaluation (Washington, D.C.: American Enterprise Institute for Public Policy Research, November
1974). M. I. T. researchers, in forecasting to the year 1980,
found domestic supplies to be generally more responsive to
higher prices than the FEA.
7. Betty M. Miller, et. a!., Geological Estimates of Undiscovered Recoverable Oil and Gas Resources of the United

13. Federal Energy Administration, Project Independence
Report, page 132.
l4. National Petroleum Council, U.S. Energy Outlook,
page 208.
15. Federal Energy Administration, National Energy Information Center, "Nuclear Power," Monthly Energy Review (April, 1975), page 5.
16. Douglas M. Johnson, "Uranium Fuel Prices," The Conference Board Record, Xll, Number 1 (January, 1976),
page 52.
17. Energy Research and Development Administration,
Statistical Data of the Uraniwn Industrv (Grand Junction:
Grand Junction Office, January 1, 1975).
18. Federal Energy Administration, Project Independence
Report, page 113. Data adjusted for changes in scheduled
capacity.
19. Pacific Northwest River Basins Commission, Power
Planning Committee, Review of Power Planning in the
Pacific Northwest, Calendar Year 1973 (Vancouver: Pacific
Northwest River Basins Commission, 1974), page 3.
20~ 1.. H. Godwin, et. aI., Classification of Public Lands
Valuable for Geothermal Resources, Geological Survey
Circular 647 (Washington, D.C.: U.S. Department of the
Interior, Geological Survey, 1971).

Joan Walsh
As an aid to regional economic analysis, this
bank's research staff has developed in recent
years a manufacturing-production index for the
nine-state San Francisco Federal Reserve District. (The district is composed of Alaska, most
of Arizona, California, Hawaii, Idaho, Nevada,
Oregon, Utah and Washington.) This article
summarizes the broad trends revealed by the
index, as revised recently to incorporate 1972
Census data.
The foundation of this regional-manufacturing series is provided by Census Bureau data on
value added by manufactures. By 1972, the
West had grown to account for 12.6 percent of
all manufacturing value added. Eight industries-centered around aerospace, food processing, forest products and metals-accounted for
72 percent of the West's value added in 1972.
(The same industries accounted for 60 percent
of the national total.) Because of the relatively
strong performance of these key industriesexcept food processing-manufacturing production in the West increased at a 5A-percent annual rate between 1964 and 1974, compared
with a 4.3-percent rate of gain nationwide (see
table and charts).

struction is available on request from the bank's
Research and Public Information Department.
The indexes shown here differ in several important respects from those previously published
in Western Economic Indicators. The methodology has been simplified and value-added data
from the 1972 Census of Manufacturers have
been incorporated. Comparisons with U.S. production series are shown, but they are somewhat
imprecise because 1972 Census data are not
yet included in the national series; judging from
the effect of revision on the regional series, the
national series might show a significant increase
in the early 1970's.
Other changes have been caused by the 1972
revision of the SIC manual. In most cases, the
reclassification did not alter coverage at the
two-digit industry level, except for the elimination of SIC 19 (ordnance and accessories) and
its redistribution among SIC codes 34, 37 and
38. That shift caused value added in SIC 38
Chart 1

Manufacturing Production Index
1967=100

140

Series revision

Monthly indexes have been calculated for
total manufacturing and 19 two-digit Standard
Industrial Classification (SIC) codes, and are
available in seasonally adjusted form with 1967
as the base year. The series cover the period
June 1963 to date, and are published in the bimonthly Western Economic Indicators. A technical paper presenting details of the index con-

130

120

no
100

1E.----lL...----lL...---l_--L_--L_--L_-I.._...I

1967

1969

1971

1973

1975

(instruments and related products) to double
between 1971 and 1972, but other industries
were relatively unaffected.

in defense spending and reductions in commercial-aircraft orders showed up in a precipitate
drop in Western production. The oil embargo
and ensuing recession showed up in both the
regional and national statistics, with especially
sharp declines in early 1974 and early 1975in both autos and aircraft-being followed by a
more recent upturn.
Food and kindred products (SIC 20)-This
industry accounts for 13.4 percent of the region's value added, compared with a 10.2 percent share nationwide. Production increased at
a moderate pace between 1964 and 1974. Movements in the index reflect the regional importance of canned, cured and frozen food products, which account for almost one-third of the
Western total-twice their national share. West-

Industry highlights

Transportation equipment (SIC 37 )-This
industry accounts for 18.8 percent of the region's value added, compared with an 11.2-percent share nationwide. Growth was much
stronger in the West than elsewhere in the nation over the past decade. Aircraft production
has dominated the regional industry, accounting
for more than four-fifths of the total, or twice
its relative share in the national industry. The
auto strikes of 1964 and 1970 thus did not
affect the regional series as much as the national
series. On the other hand, post-1969 cutbacks

MANUFACTURING VALUE ADDED AND PRODUCTION INDEX
Annual Growth
(1964-74)

Value Added (1972)
SIC
Code

19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39

Industry

West
Percent
$ Millions
Distrib.

13.4
0.6
2.5
8.9
1.7
3.6
5.2
5.1
2.1
2.4
0.1
3.6
4.6
6.3
8.0
8.7
18.8
2.8
1.6
100.0

Ordnance and accessories .....
Food and kindred products ... 5,863
Tobacco products ...........
265
Textiles ..... " ...........
Apparel .... ' " ........... 1,106
Lumber and wood products ... 3,970
732
Furniture and fixtures ........
Paper and allied products ..... 1,587
Printing and publishing ....... 2,273
Chemicals and allied products . 2,238
915
Petroleum and coal products ..
Rubber and plastic products ... 1,049
Leather and products .....
54
1,572
Stone, clay and glass products ..
Primary metals products ..... 2,009
Fabricated metal products .... 2,754
Nonelectrical machinery ...... 3,495
Electrical machinery ......... 3,818
Transportation equipment .... 8,280
1,238
Instruments and products .....
Miscellaneous manufacturing ..
688
Manufacturing total ......... 43,906
-

U.S.
$ Millions

Percent
Distrib.

4,858
35,399
2,704
11,366
13,197
7,861
6,012
13,181
19,250
33,081
5,841
11 ,013
2,971
12,092
23,405
24,047
36,114
30,455
39,131
9,510
6,558
348,048

1.4
10.2
0.8
3.2
3.8
2.3
1.7
3.8
5.5
9.5
1.7
3.2
0.8
3.5
6.7
6.9
10.4
8.8
11.2
2.7
1.9
100.0

West

U.S.

Percent

3.1

3.5
3.4
1.1
2.8
4.0
4.5
2.9
7.6
3.2
8.2
-2.6
2.7
2.5
4.6
5.8
5.6
2.0
7.3
5.6
4.3

9.7
6.3
4.5
5.6
4.6
5.2
6.5
2.2
13.2
-4.0
3.3
2.8
5.6
6.8
4.6
6.5
15.9
7.4
5.4

Note: Growth trends not strictly comparable because U.S. index has not yet been updated to include 1972 Census data.

ern output rose along with the national industry
over most of the past decade, but the different
structure of the regional industry has strongly
affected the series in certain periods, such as
1970-72. In that period Western fruit and vegetable processors suffered supply losses because
of poor weather, while producers elsewhere in
the nation benefited from very heavy demand
for their most important commodities (grains
and meat products). More recently, Western
food-processing output has outpaced the nation
because of the strong increase in Northwest
grain production and the heavy liquidation of
cattle supplies. Incidentally, erratic movements
in the index sometimes have arisen because of
strikes but also because of changes in the timing
of the harvest.

and was somewhat stronger in the West than
elsewhere, at least in the lumber industry. The
lumber series has been affected by erratic movements attributable to labor disputes and weather
problems, but above all by periodic booms and
slumps in national housing demand, most notably in the past two years. (In early 1975, however, the regional series showed a healthy rebound which was not reflected in the national
figures.) The paper series has been affected by
similar erratic movements and also by national
business-cycle fluctuations. Western production
fell steeply in late 1974 and early 1975-although not so steeply as elsewhere-and in recent months an upturn has occurred in corrugated-box production, a useful leading indicator
of general business activity.

Lumber and wood products (SIC 24),. paper
and products (SIC 26)-These two forestproduct industries together account for 12.5
percent of the region's value added, compared
;"ith a 6.1-percent share nationwide. Production increased moderately over the past decade,

Primary metals (SIC 33),. fabricated metal
products (SIC 34)-These two industries together account for 10.9 percent of the region's
value added, compared with a 13.6-percent
share nationwide. Primary-metal output grew
slowly everywhere over the past decade, while

Chart 2

Western Manufacturing Production Index
1967=100

1967=100

160

DURABlES

NONDURABLES

150

140

130

120

110

100

I"
/f APP;~I

Vi
I
"I

1967

1969

1967

1973

1969

1971

1973

1975

fabricated-metals production rose strongly,
especially in the West. Western primary production has been concentrated in the smelting and
refining of nonferrous metals, with the region accounting for almost two-thirds of the nation's
copper output and about one-fourth of total aluminum output. Steel production has been much
less important here than elsewhere, and steelstrike activity has failed to affect the regional index as much as the national series. But both the
regional and national indexes have been strongly
affected over the past year by the severe cyclical
declines in auto and construction demand. The
substantial long-term growth in the regional segment of the fabricated-metals industry meanwhile has stemmed from the West's concentration in markets with strong long-term growth
records, such as structural products and metal
cans, and its relative unimportance in one severely depressed market, metal stampings for
the auto industry.

share nationwide. The industry grew moderately in the West over the past decade, but at a
more rapid pace elsewhere, with a prolonged
decline in the Western-oriented space program
helping to account for the differential. The regional industry is concentrated in communications equipment, electronic components and
electrical-testing equipment, while the industry
elsewhere is centered around production of
household appliances and radio and TV sets.
The recession decline has been severe both regionally and nationally.
Nonelectrical industry (SIC 35)-This industry accounts for 8.0 percent of the region's
value added, compared with a lOA-percent
share nationally. The industry grew vigorously
over the past decade, especially in the West.
Much of this performance was due to a substantial rise in regional production of office machines and electronic computing equipment,
which compared with the more diverse product
mix of the national industry. Output has shown
wide cyclical fluctuations, most notably in the
still continuing business downturn.

Electrical machinery (SIC 36)-This industry accounts for 8.7 percent of the region's value
added, compared with a comparable 8.8-percent

Erratum

In the article "International Money and
International Inflation: 1958-1973" by
Edward S. Shaw in the Spring 1975 issue
equation 7 should read:

(7)

t
ttl=

Stl

Also, the third sentence in the last full
paragraph on page 7 should read: Given
(t) and the international pattern of demand for real money, (m ~) is determined
partly by the portfolio choices of foreign
monetary authorities.

William Burke
California is the nation's trend-setter, and its
shift to a pattern of slower growth in recent
years thus has important implications for the
broader national economy as well as for its own
future. True enough, the state's economy generated $125 billion in personal income in 1974,
or about one-ninth of the national total. (In
terms of income, California by itself would easily
rank among the world's ten largest nationstates.) But the growth which brought California to its present eminence has created a treadmill effect, which results in serious adjustment
problems whenever the treadmill slows down.
In even the mildest business recession, unemployment soars and other signs of stress appear.
In 1971, for example, the jobless rate averaged
8.8 percent-greater by half than the national
rate-and in the first half of 1975 it reached a
record 9.7 percent.
For more than a century, rapid economic
growth has been the hallmark of the California
experience, and the economy frequently appears
rudderless in periods such as the present, when
there is no new growth sector on the horizon.
The state's history has usually been written in
terms of successive boom periods, based upon
such leading sectors as gold, wheat, food processing, oil, the military, and (perennially) land
development. The rapid expansion of the aerospace-electronics industry in the past quartercentury has been only the latest in a long series
of booms transforming the California landscape.
However, busts have been just 'as much a part of
California history as booms, and the major question of the 1970's concerns the state's ability to
weather both a cyclical recession and the maturing of the key aerospace-electronics sector.

Any economy of California's present size,
with its heavy consumer, business, and pub1icworks demand, is better able to sustain 10ngrange economic growth in the face of cyclical
downturns than a smaller area would be. But
the state's economy has diversity as well as size
in its favor. California's aerospace-related activities account for 19 percent of the nation's
income from that source, but at the same time
they account for only about 5 1/2 percent of the
state's total income. California's farmers lead
the nation with 10 1/2 percent of U.S. farm income, but they account directly for less than 3
percent of the state's total income. Similarly,
California's builders lead the nation with 9 percent of U.S. construction income, but they account for only 4 percent of the state's total income. California thus boasts a welcome diversity
that normally cushions downturns occurring in
anyone sector and thereby provides a strong
underpinning for well-balanced growth.
As a reflection of its earlier troubles, California entered the recent recession with a much
higher jobless rate than the rest of the nation.
However, the recession itself was not so steep in
California, largely because it is less dependent
than the nation on autos and other cyclical industries. Civilian employment elsewhere in the
nation dropped at a 6.2-percent annual rate between the September 1974 high and the March
1975 low, while California employment dropped
at a 2.6-percent rate during this period. Thus,
the margin between California's jobless rate and
the fast-rising national rate narrowed to one percentage point in the first half of 1975, compared
to a spread of I V2 to 2 percentage points dLiring
the several preceding years.

Chart 1

relative decline was less noticeable in real terms,
because consumer prices rose more slowly in
California than in the nation over this past decade. However, the contrast was quite striking in
relation to what went before. Real personal income increased nationwide by 48.6 percent between 1954 and 1964, and by almost the same
amount (46.0 percent) between 1964 and
1974, but California's real growth declined from
70.4 percent in 1954-64 to 44.4 percent in the
1964-74 period.
California's relative performance over the
past decade can be measured by analyzing, for
each income category, three separate sources of
growth-national growth, industry mix, and regional share (see table).' The "national growth"
effect can be calculated by assuming that California had precisely the same structural mix of
income sources as the nation possessed at the
outset of the period, and that each of those sectors then grew at the same rate in California as
in the nation. The "industry mix" effect reflects
the relative importance in the West of national
fast-growing (or slow-growing) income sources.

California Share of U.S. Personal Income

Percent

12
10

8
6

1955

1960

1965

1970

1974

Nonetheless, this recession period aside, California has declined in importance relative to the
rest of the nation over the past decade. In the
preceding decade (1954-64), California's share
of the nation's personal income jumped from
9.5 percent to 11.4 percent, but then the state
began to lag, so that its share of total income
then fell to 10.9 percent in ] 974 (Chart 1). The

CALIFORNIA REAL PERSONAL INCOMEEFFECT OF GROWTH FACTORS (1964-74)
(Billions of 1974 dollars)
Growth Factors
Personal
Income
1964

Source of Income

Agriculture
Aerospace manufacturing
Other manufacturing
Mining............
.
Construction
Trade
."
Finance
Transportation and utilities
"
Professional and social services
Other services
Federal government
State-local government
Property income
Transfer payments
Total personal income

.
.
.
.
.
.
.
.
.
.
.
.
.
.
.

2.43
6.57
10.61
0.42
4.91
12.44
3.95
4.60
5.41
5.79
5.04
7.48
12.48
6.76
86.84

National
Growth

Industry
Mix

Regional
Share

1.12
3.02
4.88
0.19
2.26
5.72
1.82
2.12
2.49
2.66
2.32
3.44
5.74
3.11

-0.26
-1.78
-1.76
-0.09
-0.07
-1.63
-0.02
-0.29
2.05
-1.16
-0.55
2.51
-0.11
5.92

0.04
-0.97
0.80
-0.05
-2.01
-0.35
-0.40
0.62
0.05
-0.30
0.30
-0.72
0.57
0.57

Note: Total includes items not shown separately. Rows do not necessarily add across because of rounding.

Personal
Income
1974

3.32
6.86
14.54
0.47
5.09
16.18
5.36
7.04
10.00
7.00
7.10
12.72
18.68
16.36
125.38

The "regional share" effect retlects the growth
of individual California income sources in relation to their national counterparts.
California's 1964-74 increase in real income
was based almost entirely upon its similarity to
national income patterns (national-growth effect). In contrast to earlier periods of rapid
growth, its income structure was weighted
more toward slow-growing than fast-growing
sources of national income growth (indus trymix effect). Indeed, only 3 of its 14 income categories recorded positive growth from this source
-professional and social services, state-local
government, and (above all) transfer payments,
such as social-security benefits and unemployment insurance. Much of the weakness in this
respect stemmed from the importance in the
California economy of such national slow-growers as aerospace manufacturing, other manufac-

turing and trade. More particularly, and in even
greater contrast to earlier periods of rapid
growth, most of California's individual industries lagged behind their national counterparts
(regional-share effect). The slowdown was
especially noticeable for such traditional fast
growers as construction, aerospace manufacturing, and state-local government.
As these income shifts indicate, the state faces
serious problems, not least of them being the
continuous reshaping of earlier growth sectors
along more modest lines. Another basic problem concerns the ability of the state and its people to adjust their planning to a state of affairs
where the possibility-or even the desirabilityof rapid growth can no longer go unquestioned.
After a century of equating rapid growth with
virtue, Californians may find it difficult to make
the necessary adjustments.

Crucial Role of Aerospace
Chart 2

The state's problems are exemplified by the
bellwether aerospace-electronics industry. At
its peak in 1967-68, the industry employed more
than 600,000 workers, under the stimulus of the
Vietnam war, the space race, the commercialaircraft boom, and the consumer-electronics
boom. Then each of these sources of demand
weakened, throwing 180,000 people out of work
and leading to a state-wide slump even before
the onset of the 1970 national recession. Recovery from the slump began around mid-1971,
helped along by the Congressional rescue of
Lockheed and its L-l 0 11 transport project with
a $250-million loan. (At the same time, Congress let Boeing's supersonic transport project
die, and for a prolonged period Seattle became
even more depressed than Southern California.)
The strengthening of military and (later) commercial business provided support for a rebound, but by the onset of the next recession
only about one-third of the lost jobs had been
recovered (Chart 2).
California's aerospace industry has been
based from the very beginning upon heavy injections of federal money. In 1974, defense and

Aerospace: Employment & California
Contract Share
Employment (000)

1200
1000
800
600

400
300
Perc.ent

25
20
15
10

5
0
1950

1955

1960

1965

1970

1974

space-agency contract awards reached a ncw
peak of $8.9 billion-23 percent of the national
total-and thereby helped offset the developing
weakness in commercial-aircraft and civilianelectronics business. Only one major new project has gotten underway in recent years-the
space-shuttle project-but awards for ongoing
aircraft and missile contracts have risen sharply
since 1971, and thereby have contributed to the
industry recovery. The state's economy thus
relies heavily upon political decisions made in
Washington about the product-mix of the national aerospace industry. Aerospace systems in
the 1960's and 1970's have been grouped in six
major functional categories-bombers, fighters,
transports (and associated commercial products), missile systems, anti-missile systems and
space systems. The 24 major aerospace systems
which have been developed in this period have
come from one or another of the industry's nine
major production lines, three of which are in
California. 2
In the past, each phasing-out of a major government contract generally has coincided with
the phasing-in of a new one, with the contract
for the new system being awarded two to three
years before the scheduled termination of the
old system. But since the national industry markets only a half-dozen major products, logic
might dictate that only a half-dozen production
lines be kept in operation, especially since most
of the major systems are due to come to the end
of their production runs within the next several
years. On the other hand, past experience suggests that government contracts will be found
to keep most if not all of the present production
lines in continued operation. Despite the recent
upturn in military and space spending, individual firms could remain on rather skimpy rations, at least by past standards, as the available

federal funds are distributed on a fairly even
basis among all present producers.
One alternative would be to concentrate more
attention on the commercial-aircraft business,
especially in view of the worldwide popularity
of American jets, which have become even more
popular in recent years because of the bargainbasement prices caused by the several devaluations of the dollar. However, the commercial
market has long been dominated by a few
Douglas and (especially) Boeing models, and
new entrants into the market have had relatively
little success. Moreover, a general slowdown in
commercial orders now seems inevitable, partly
because of the recession-affected traffic and
earnings reports of the major airlines, and also
because of the cutbacks in scheduled flights
necessitated by the soaring price of jet fuel.
Another alternative for the industry would be
to diversify into non-aerospace business, a solution which has led to many troubles in the past.
In the severe postwar slump of the late-1940's,
many producers turned to making such products
as aluminum canoes, but these products sank
without a trace in the vast and unfamiliar consumer marketplace. In more recent times, the
electronics segment of the industry has developed a number of successful new products for
the business and consumer markets, but this sector is today engaged in one of its periodic shakeouts. Several aerospace firms have attempted to
break into the surface-transportation field by
providing equipment for the Bay Area Rapid
Transit system, but their work on that project
has been marred by prolonged scheduling delays, substantial cost overruns and other features
typical of aerospace production at its worst. This
experience led David Packard, former Deputy
Secretary of Defense, to conclude, "The industry does not yet know how to build complex reliable equipment at reasonable COSt."3

Contribution of the Knowledge Industry
The problems of California's aerospace industry will be solved not just by the infusion of
more federal money, but also by the continued
health of the "knowledge" industry, with which

it has long maintained a symbiotic relationship.
The fortunes of the highly technical aerospace
sector, with its reliance on the continued development of advanced and sophisticated products,

funding of projects which had expanded rapidly
during the Great Society and the Vietnam war.
Other factors have included public dissatisfaction with both the war and the antiwar movement-especially in Berkeley, the cradle of the
college revolution-and the reaction against the
post-Sputnik glorification of science. In addition, many California voters tend to believe that
the state's higher-education system involves a
redistribution of income from poorer families to
higher-income families, as a result of the state's
somewhat regressive tax structure as well as the
substantial state support of prestigious institutions where higher-income students are mostly
concentrated.
Federal support for the nation's higher-education establishment, after increasing five-fold in
the 1960's, began to slow down even before the
end of the decade. For example, the number of
federally-supported first-year graduate fellowships dropped 62 percent nationwide between
j 968 and 1972. In California, despite continued increases in dollars spent on education,
the university system's instructional budget per
full-time student dropped 20 percent in real
terms between 1967 and 1972. The University
of California has sharply trimmed its expansion
plans, partly because of funding problems, but
also because of enrollment problems caused by
the rapid rise in instructional fees, the cresting
of the college-age population, and the post-Vietnam disinterest in college life. The optimistic
plans of the 1960's, which envisioned a number
of major teaching and research facilities scattered around the state, have now been shelved.

have been closely tied for decades to the breakthroughs achieved in university laboratories and
research centers. The industry has found an
especially fertile field in California, which advertises four of the top dozen or so graduate schools
in the nation. These schools attract large numbers of top-flight students, and thus a disproportionately large share of the nation's new scientists and engineers.
California's dominance in aerospace has
come about because of the continued excellence
of these educational and research facilitiesfacilities which have originated a circular development process whereby research contracts generate production contracts, which make possible
stronger research staffs, which generate new
research contracts, and so on. (The key resource, skilled scientific manpower, also has
been attracted by the state's highly touted sun,
sea and sky, despite all the deterioration in this
respect in recent decades.) In the last analysis,
California's economic growth depends heavily
on investment in education, or human capital.
This type of investment helps explain the observed discrepancy between the nation's rate of
economic output and the much smaller rate of
increase in measurable inputs of labor, capital
and resources. Indeed, many economists argue
generally that the greatest contribution to
growth is made by increased education and related advancements in knowledge"
Yet, California and the nation have recently
shown that they are no longer willing to invest
ever-increasing sums in the knowledge industry.
One major cause has been the decline in federal

Other Symptoms of Deceleration
1974 totalled only 117,OOO-less than in 1950,
when the state's population was only about half
as large as today's 20.7 million total. Young
California families, like their counterparts elsewhere, thus appear to have voted for zero population growth, by reducing average family size
below the 2.1-child level necessary to sustain
long-term population growth.
The cause is difficult to pinpoint, but it may

The scaling-down of the aerospace-knowledge industry complex is only one symptom of
the deceleration in California's characteristic
pattern of rapid growth. More basically, the rate
of population growth has sharply declined, in
terms of both births and in-migration. (Nonetheless, California has added more people than
any other state except Florida since the beginning of this decade.) The natural increase in

have something to do with relative feelings of
affluence among young families. The postwar
baby boom can be explained by the ability of
young adults in that time period to achieve incomes quite high in relation to their Depressionera expectations. But today, the large numbers
of young adults scrambling for jobs in the marketplace have had great trouble meeting the
economic goals they formed in the affluent postwar period. They are less willing to have children, and with the universal spread of effective
means of birth control, they are more successful
than their predecessors in actually limiting family size. Whatever the cause, the phenomenon
means a sharp compression of those California
markets specializing in children's goods and
services, including elementary education, and it
also means the growing presence in the labor
market of large numbers of young women who
formerly would have been involved in child-care
rather than job-seeking.
Even more strikingly, migration-based growth
practically disappeared in the early 1970's. For
decades, migrants had accounted for about
three-fifths of the state's population growth,
with the net inflow rising at times to as much as
1,000 a day. The migrant flow has always included a disproportionate number of productive
adults, whose home states (and nations) have

borne the burden of raising and educating them.
This growth factor in particular is now missing
(Chart 3).
To a certain extent, the recent decline should
have been expected because of the close relationship between migration and job opportunities in
the aerospace-knowledge industry complex. Migration has always declined during recession
periods, but not nearly so much as in the 1970's.
Even during the sharp 1958 recession, net migration reached 325,000 for the year. In contrast, the net increase was only 16,000 in the
much shallower 1970 recession, and it averaged
only 71,000 annually during the 1971-73 recovery. Part of the explanation lies in the abortive nature of the recovery, which was considerably weaker in California than elsewhere
because of the continued weakness of the aerospace industry; thus, the unemployment rate in
] 973 averaged 7.0 percent in California as
against 4.7 percent in the rest of the nation. But
there are other explanatory factors as well. A
California Poll taken in ]971 indicated that almost one-third of the population would leave the
state if given the chance, not simply because of
the lack of job opportunities but also because of
problems of pollution and overpopulation.
After a century of obsession with economic
growth, many Californians have become disenchanted with the pace and nature of their earlier
growth. For example, in 1972 California's
electorate-over the opposition of major business and labor groups-imposed a moratorium
on all building along the coastline from Oregon
to the Mexican border. The measure was designed to protect the entire 1,200-mile coastline
from uncontrolled development by setting up
regulatory commissions to grant or withhold
building permits for any projects planned within
1,000 yards of the ocean. This vote followed
hard on the heels of a California Supreme Court
decision requiring environmental-impact statements to be filed with building-permit requests
on all private construction projects involving
a "significant" environmental impact. Another
political factor to be faced in June 1976 is the
"nuclear safeguards" initiative. By voting af-

Chart 3

Sources of Population Change
Thousands

1955

1960

1965

1970

1974

firmatively, California's electorate could empower the legislature to impose extremely rigid
safety and insurance requirements over all commercial-power reactors, and thus could heavily
influence the future of the nation's utility
industry.
For that matter, California is peculiarly disadvantaged by the energy crisis, because it obtains 89 percent of its energy needs from the
scarcest fuels, petroleum and natural gas, compared with a 78-percent dependence for the nation as a whole. (Of course, it has large oil
resources offshore, but those reserves remain
unexploited because of public fears of another
Santa Barbara oil spill.) 3 In addition, California's consumption is concentrated in the least
essential uses, such as private auto transportation, which accounts for almost one-fourth of all
energy consumed in the state. California's heavy
dependence on the automobile, and the long
distances traveled within the state, thus make
her especially vulnerable to the energy crisis.
Suburban home construction, suburban commercial development, auto retailing, resort activities, and many other elements of the life-style
which Californians have built around the private
auto thus would be seriously affected in the
event of a deepening crisis.
California's economic salvation depends upon

the problem-solving capabilities of the state's
justly famed, albeit recently besieged, knowledge industry. University training in the sciences, and especially the application of scientific
advances to the development of new industries
and the solution of old problems, should play
an important role in the strengthening of the
state's economy. In the case of the aerospace
industry, California's universities trained large
numbers of highly-skilled scientists and technicians; the research centers concentrated around
those universities attracted other highly-trained
workers; and the foundation was laid for the
state's dominance of this crucial new industry.
The impetus from the aerospace sector of course
has weakened in recent years, but the prime
mover-education and research-stands ready
to provide the spark of life to new industries as
yet unborn.
FOOTNOTES
I. Edgar S. Dunn, "A Statistical and Analytical Technique
for Regional Analysis," 1960 Papers and Proceedings of
the Regional Science Association.
2. James R. Kurth, "Why We Buy the Weapons We Do,"
Foreign Policy, Summer 1973.
3. David Packard, "Should the Aerospace Industry Reorient to Changing Priorities?" Business Economics, May
1973, p. 48.
4. Edward F. Denison, The Sources of Economic Growth
in the United States. New York: Committee for Economic
Development, 1962.
5. See Yvonne Levy's article in this issue of the Review.

Full text of Economic Review (Federal Reserve Bank of San Francisco) : Summer 1975

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