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THE ENERGY
CRISIS
AND THE
____PIPELINE







John J. Balles

I am very glad to be with you here today,
on my first official visit to the largest and
one of the most exciting states in the
Union. Like many others before me, I am
quite impressed with the vastness of this
region and with the vastness of its eco­
nomic potential. I can understand how
Governor Baranof must have felt when,
from his palace here in Sitka, he spear­
headed that first wave of development
which spread from Siberia as far as
Northern California.
Because of the state's potential, it has a
major role to play in solving the nation's
energy problem , which is the topic of my
talk here today. This problem has been with
us for many years, but apparently it failed to
arouse much attention until it came to be
labeled a crisis. Now, with the publication
of the President's energy report last month,
we can better understand the dimensions
of the problem and can begin to work out
some solutions.



There are many facets to this problem. It is
most visible to urban dwellers, especially in
the East, in electric power shortages. Other
important pieces of evidence include the
widespread shortages of gasoline and
heating oil, the threat of termination of
natural-gas supplies to many industrial
users, and the sharply rising costs of elec­
tric power and fuel throughout the nation.
(For instance, consum ers pay 6 percent
more today for gas and electricity and 16
percent more for fuel oil and coal than they
did just last fall, at annual rates of increase.)
Less visible to the general public is the fact
that the nation is consum ing energy re­
sources at a rate that cannot be sustained
very much longer, and the fact that it will
probably require larger and larger imports
of petroleum and liquefied natural gas over
the years ahead.
The production record of the past several
years is somewhat sobering. Domestic pro­
duction of fossil fuels— crude oil, natural
gas and coal— has peaked. Moreover, the
nation no longer maintains excess crude-oil
production capacity. Environmental con­
cerns have brought about delays in devel­
oping energy facilities, and have also
greatly increased the demand for scarce
low-sulphur fuels, displacing high-sulphur
fuels.
Rising energy usage
Behind these troublesome developments is
an interesting shift in energy usage. Be­
tween World War II and the Vietnam War,
energy usage increased about 3 percent
annually, yet lagged behind the growth of
the national economy as measured by GNP.
In a sense, energy came to be used more
efficiently over those two decades. In more
recent years, however, the trend has been
reversed; energy usage has increased al­
most 5 percent annually, and we now



encounter a rising ratio of energy to GNP.
This shift may simply reflect the accelera­
tion of certain trends already apparent over
the past several decades, largely because of
increasing electrification of energy use. The
growth of electricity consumption has con­
siderably exceeded that of aggregate energy
consumption over the past several decades.
This reflects the increasing affluence of the
nation's population, evidenced by the
heavy rate of acquisition of high-load appli­
ances and equipment, such as color T.V.
sets, air conditioning, and electric space
heating.
Paradoxically, much of the upward surge in
energy consumption has developed be­
cause of the environmental conflict. A l­
though miles-per-gallon performance of
passenger cars first declined because of the
increasing size and weight of Detroit's
products, the downward trend has acceler­
ated since 1971 with the advent of auto
emission-control devices.
Gas requirements have increased markedly
with the rise in the percentage of cars with
emission controls, and this has meant a
substantial increase in overall energy de­
mand. And lest we on the West Coast
become complacent and think that gasoline
rationing occurs only in the East, I refer you
to a front-page news story in the San Fran­
cisco Chronicle on Saturday, May 19. The
article quotes a spokesman for a major oil
company who warns of a potential gasoline
shortage during the forthcoming long
Memorial Day weekend when millions of
Californians will be taking to the freeways
to escape the congestion and frustrations of
the cities. It could be they will find even
more congestion and considerably more
frustration when they try to gas up for the
trip back home. To those who do, the



holiday mood may quickly disappear as
they encounter the energy crisis first-hand.
The recent growth in the use of energy per
unit of economic output may simply be a
deviation in the long-term trend toward
more efficient usage of energy. However,
we cannot count on this; simple prudence
demands that we plan for larger capability
to supply energy than we might have done
a decade or so ago.
Long-term solutions
The President's recent energy message
gives us a basis for planning for the nation's
long-run energy needs. To the layman,
some proposals may sound quite futuristic,
but since the 21st Century no longer is so
far away, we should consider them here.
To begin with, nuclear power already ap­
pears commonplace. It now provides about
4 percent of the nation's electricity, and it
may account for as much as 25 percent of
the total in 1985, and as much as 60 percent
of total usage by the end of the century.
Thus, nuclear capacity is expected to grow
from about 15 million kilowatts today to
1200 million kilowatts by the year 2000.
The Atomic Energy Commission has several
development programs now underway to
overcome potential shortages of fuel that
could develop with continued reliance on
current nuclear processes. One program
involves a fast-breeder reactor, which holds
the promise of making the reserves of
uranium fuel last for centuries. Another
involves a controlled thermo-nuclear fusion
which, if harnessed in a reactor, would use
as fuel the virtually limitless supplies of
deuterium found in sea water.
Bringing these programs to fruition won't
be easy. For example,the scientific feasi­




bility of producing a sustained thermo­
nuclear reaction has yet to be demon­
strated. Even if this can be achieved, there
will remain a tremendous engineering
problem of building commercial reactors
capable of withstanding the unprecedented
energy of high-speed neutrons.
Fossil fuels
In the long run, these futuristic solutions
will be supplemented with help from an old
standby, coal. At present rates of consump­
tion, known reserves of this abundant fuel
could supply the nation's energy needs for
at least 300 years. Today, however, coal
supplies less than 20 percent of our energy
demand. Production has remained rela­
tively level for the past several years, de­
spite the rapid increase in overall energy
requirements. This stagnation is attributable
in some degree to health and safety stan­
dards, environmental restrictions on sul­
phur content of coal, and possible restric­
tions on strip-mining.
Coal's potential will not be realized until
some of the present drawbacks are
overcome— in particular, until ways are
developed to remove its high sulphur con­
tent. The best way would be to convert coal
to natural gas of pipeline quality, as is now
being done in several pilot plants. This
approach is promising, and by the turn of
the decade it may contribute to overcoming
the gas shortage.
The availability of these new and old energy
sources should contribute to the long-run
solution of the energy problem. The crux of
the problem, however, is the likely shor­
tage of essential fuels in the next decade or
two. Fossil fuels (including coal) have his­
torically supplied the vast majority of the
nation's energy. Until 1947, coal supplied
more than one-half of all the fuels con


sumed, but over recent decades, petroleum
and natural gas have increased to more
than three-fourths of the total. In 1972,
petroleum accounted for 46 percent and
natural gas for 32 percent of total energy, in
BTU equivalents.
Yet the domestic production of oil and
natural gas has failed to expand adequately
to meet rising demand. For example, dis­
coveries of natural gas declined for several
years in a row, and then turned around last
year only after the Federal Power Commis­
sion provided higher producer prices and
the industry geared up in anticipation of
further regulatory changes. Even at that, the
nation is consuming about twice as much
natural gas each year as it is finding and
adding to its proven resources. A beginning
of a solution to this problem may be the
President's legislative proposal to permit
the price which interstate pipelines pay to
producers for new supplies of domestic
natural gas to be determined by the com­
petitive forces of the market, rather than by
the FPC.
Oil demand and supply
The largest and most troublesome aspect of
the energy problem is petroleum, especially
in view of our earlier underestimation of oil
requirements. Only three years ago,the
President's Task Force on O il Imports con­
cluded that the country could remain selfsufficient in that vital field. It projected
domestic requirements in 1980 of 18V2 mil­
lion barrels per day, of which 5 million
barrels would be imported, mostly from the
Western Hemisphere. On national-security
grounds, the group favored limiting imports
from the Eastern Hemisphere to no more
than 10 percent of domestic consumption —
preferably to 5 percent.
These 1970 projections have turned out to



be underestimates, to put it mildly. This
very year, 1973, total consumption may
reach 17 million barrels per day, and im­
ports could total 6 million barrels or onefifth above the original 1980 estimates.
Imports from the Middle East in 1973 are
likely to reach not 5, not 10, but 20 percent
of total U.S. consumption.
That picture is sobering enough, but even
more sobering are the figures on total
world reserves. According to fairly rough
estimates, proven reserves in the nonCommunist world approximate 500 billion
barrels today. At current consumption lev­
els, and in the unlikely event that no more
oil is found, the remaining reserves in 1980
should approximate 300 billion barrels.
That figure equals 10 years' supply at esti­
mated 1980 consumption levels, which
normally would give no cause for alarm; it
is about the same ratio of reserves to
production maintained historically by the
U.S. domestic industry.
However, there is no certainty that oil, in
adequate amounts and at reasonable prices,
will always be available to all potential
domestic buyers. The reason simply is that
three-fifths of today's proven reserves are
located in the area centering around the
Persian Gulf. The same proportion —
perhaps even higher— holds for probable
reserves, that is, those reserves that must
still be found to meet our long-term future
needs.
The effect on our balance of payments of
this situation could be considerable, partly
because of the upsurge in U.S. import
demand, and partly because of the rising
prices resulting from growing world de­
mand and from several devaluations of the
dollar. The balance-of-payments outflows
for oil imports approximated $5 billion in



1972, and the 1980 outflows could be three
times that amount, requiring ever-increasing amounts of exports to finance our
soaring fuel requirements.
Recognizing the dangers in increasing im­
port dependence, the President announced
several initiatives in his energy message— in
particular, the termination of the mandatory
oil-import program. The new program at­
tempts to stimulate future domestic explo­
ration and production, as well as the expan­
sion of refinery capacity, through the
phased imposition of license fees on petro­
leum imports above the 1973 levels. In an
effort to minimize the impact on the con­
sumer during the transition period, while
production incentives take hold, the Presi­
dent eliminated current tariffs on crude oil
and products, so that imports at the 1973
level will enter the country duty-free. How­
ever, duty-free import rights will be phased
out over seven years and increased license
fees imposed.
Unexploited North Slope oil
The nation obviously is facing a difficult
problem, given its increasing dependence
on oil imports, and given the phenomenal
world-wide demand which threatens to use
up as much oil in the next dozen years as in
all past history. In this situation, we must
put forth a strenuous effort to find and
exploit Western Hemisphere sources, and
especially domestic sources. The first place
to look is towards the North Slope of
Alaska.
As you well know, the discovery of North
Slope oil was announced over five years
ago, in February 1968, and yet the 10 billion
barrels (or more) of proven reserves in that
area still remain unexploited. Those crucial
reserves amount roughly to one-fourth of
the nation's total proven reserves. If con


struction began today on production facili­
ties and the related pipeline, it could take
three years to bring the first shipment to
market, and several more years before
production reached the targeted flow of 2
million barrels a day.
Consider the long chronology of delays that
have befallen this project over the past five
years. The year after discovery, producers
announced plans to construct the 789-mile
pipeline from Prudhoe Bay to the ice-free
port of Valdez, and at the same time,
ordered $100 million of Japanese pipe for
construction of the line. In September 1969,
the state held its $900-million lease sale of
North Slope properties, but in December,
Congress passed the National Environ­
mental Policy Act, which required the De­
partment of the Interior to consider ways to
minimize the environmental impact of the
pipelines.
In April 1970, a Federal Court upheld two
suits, filed by environmental and native
groups, enjoining Interior from issuing the
pipeline permit without a court-approved
environmental impact statement. In January
and February of 1971, Interior issued a
preliminary impact statement and held
public hearings, while in July, the pipeline
company submitted a 29-volume descrip­
tion of the project with its environmental
safeguards. In December 1971, Congress
acted to clear up one major problem af­
fecting the project by passing the Native
Claims Act, which gave the natives 40
million acres of land, $462 million in cash
over 11 years, and $500 million in mineral
royalties.
The environmental problem remains. In
March 1972, Interior published a 9-volume
environmental impact statement, and in
May Secretary Morton issued the permit for



pipeline construction. That decision was
appealed to the courts, and in February
1973 the Federal Court of Appeals in Wash­
ington ruled the Secretary could not grant
the permit unless Congress amended a 1920
law governing pipeline rights-of-way across
public lands. Finally, last month, the Su­
preme Court refused to review the lowercourt ruling. This led the President to
submit legislation to Congress which would
allow the Secretary of the Interior to
provide for adequate rights-of-way for all
pipelines over Federal lands.
Perhaps as much as $2 billion (including
lease payments) has been spent to date to
develop the North Slope field, without as
yet one drop of oil to show for it. In the
process, the estimated cost of the pipeline
has doubled to about $3 billion. It must be
said, of course, that environmental safe­
guards imposed on the project will make
the eventual pipeline a much sounder pro­
ject than originally conceived, saving the
environment and the companies from
having to deal with costly oil leaks and
spills. Under the revised plan, almost onehalf of the proposed pipeline will lie above
ground— instead of being almost com­
pletely buried— to avoid the danger of line
breaks caused by the melting of permafrost.
Part of the original route has been altered
to avoid areas susceptible to avalanches,
floods and earthquakes, and a great deal of
effort has been put into plans for quakeproofing the Valdez facilities and devel­
oping fool-proof navigational aids in the
Valdez channel.
Canadian vs. Alaskan routes
This is all to the good, but further progress
depends on a solution of the political and
economic questions surrounding the pipe­
line, including the major question of a
choice of routes. As you know, there is a



frequently-mentioned Canadian alternative,
with a pipeline proceeding East from the
North Slope across the Yukon territory of
the Mackenzie River delta, then south to
Alberta and on into the Midwestern United
States. The Canadian route would be four
times longer than the Alaska route, and
probably would cost almost twice as much
and take several more years to build.
These factors aside, the proposal has sev­
eral advantages. The pipeline would parallel
another line planned to carry more than 26
trillion cubic feet of badly needed natural
gas from the North Slope to the Midwest.
Advocates of this route point out that the
Canadian Government has approved, in
principle, a transportation corridor that
would include not only the gas line but also
a highway and space for the oil pipeline;
thus, they say, it would be unnecessarily
harmful and wasteful to build a separate
route through Alaska. They also claim that
the trans-Canadian route would be more
profitable, because of the higher levels of
prices prevailing in the Midwestern market
than on the West Coast, and because this
route would preclude the need for major
investments for port facilities and tankers.
In rebuttal, Secretary Morton points to the
greater environmental impact of a line four
times longer than the proposed Alaska line.
He admits that the Canadian route would
not cross as much seismically active terrain
or require marine transport, but argues it
would involve many more crossings of large
rivers, which from past experience can be a
major source of environmental damage
from pipeline breaks. He also claims that
the Alaska route would deliver oil to the
U.S. market sooner than the Canadian
route, because construction of a transAlaska line can start as soon as legal
questions have been resolved, whereas




construction of a Canadian line would have
to await a number of environmental impact
studies and probably legal delays. In addi­
tion, the Alaska pipeline would deliver
more U.S.-owned oil to the U .S., since the
Canadian Governm ent insists on manage­
ment and majority equity ownership of any
Canadian pipeline, and also insists on re­
serving up to 50 percent of pipeline ca­
pacity for Canadian oil in any such line.
Oil and Alaska's future
From all I have already said about the
nation's energy situation, it would seem
essential that this important source of do­
mestic oil be developed, and developed
soon— no matter what route is finally
chosen to bring the oil to market. Speaking
personally, I find the arguments in the
President's Energy Report to be persuasive
in favor of the Alaska Route. As stated by
President Nixon: "I oppose any further
delay in order to restudy the advisability of
building the pipeline through Canada. O ur
interest in rapidly increasing our supply of
oil is best served by an Alaska pipeline." In
addition, harnessing the North Slope oil
field is a necessary element in Alaska's
development plan, especially in view of the
gradual depletion of the valuable Cook
Inlet field.
The State's budget planning has depended
on the timely development of this vital
resource. The $900 million received in the
September 1969 lease sale has gone into the
general fund, to finance construction and
maintenance of public facilities of all types.
Yet if the state fails to receive severance
fees and royalty income from North Slope
oil production— budgeted eventually at
$234 million a year— the general-fund sur­
plus could be eliminated by late 1977 and
the State would "face bankruptcy," to use a
phrase heard around Juneau for the last




several years. The alternatives, both un­
pleasant, would be to cut down the rate of
growth of State spending or to search out
new revenue sources, such as the several
proposed in Governor Egan's 1974 budget—
including the 4-percent.increase in the
bank license tax and the 20-mill tax on oil
and gas transportation property. Perhaps
State planners should be grateful for any
favors, remembering that the $900-million
lease sale was originally expected to bring
in only $11 million, but this is scant consola­
tion in trying to budget ahead to meet the
State's many developmental needs.
Forward planning in the business com ­
munity also is likely to be affected by
uncertainty until the pipeline is finally built,
and then some dislocations could be ex­
pected after completion of the project,
comparable to those occurring in the abor­
tive boom of several years ago. The gener­
ally accepted view is that the construction
boom might last perhaps three years, with
employment peaking at about 24,000 in the
second year and dropping off rapidly there­
after. Moreover, most higher paid jobs are
likely to be filled by specialized workers
hired from "O u tsid e," rather than Alaska
residents. Following the construction boom
and subsequent adjustment period, how­
ever, the State's econom y should experi­
ence a lengthy period of stable but profit­
able developm ent of basic oil resources.
Economic and financial gains
I should emphasize, too, that the economy
has experienced a remarkable period of
growth in recent years despite all the delays
and uncertainties I have already listed,
because of the rapidly expanding w orld­
wide demand for Alaskan products— not
only oil, but other products as well. (For
example, I noticed recently that Alaskan
lumber exports to Japan increased 40 per­




cent last year alone.) This boom has
brought about a 50-percent gain in Alaska's
personal income between 1968 and 1972,
compared with a 36-percent gain for the
Western econom y as a whole.
Your own banking statistics have reflected
this growth in incom e, and much more
besides. For the West as a whole, commercial-bank deposits increased about in line
with the growth of personal income be­
tween 1968 and 1972— 39 percent as against
36 percent. In contrast, Alaska bank de­
posits jumped 88 percent over this period,
as against the 50-percent increase in Alaska
income, reflecting in part the rapid expan­
sion of deposit funds from "O u tsid e."
Sharp loan increases indicate the extent to
which you Alaska bankers have responded
to the com m unity's needs for financing.
Over this short four-year period, business
loans have increased 75 percent, mortgage
loans 85 percent, and consum er loans 110
percent. Your efforts have supported the
growth of a number of activities that are
ancillary to the development process— local
manufacturing, trade and service activities
of all types— along with the housing and
consum er demands that follow in the wake
of econom ic growth. (Those consumer-loan
figures seem to indicate that you have
financed quite a few snowm obile purchases
recently.) As the development process goes
on, I would expect you to continue chan­
neling the flow of deposit funds, whether
from local sources or from "O u tsid e ," in
such a way as to broaden and deepen the
foundations of the Alaska economy.
Finally, long-term development funds are a
necessary prerequisite to a strongly
growing economy, and the petroleum in­
dustry's investment has a major role to play
here, somewhat comparable to the Federal



Governm ent's role in the construction
booms of the 1940's and 1950's. The State
government, with its investment of funds
obtained from sales of oil leases, has an
important part to play also. In this connec­
tion, it is important to remember that the
State of Alaska, unlike other oil- and gasproducing states, owns its subsurface re­
sources, so that State revenues can be
derived both from the taxation of resources
and from participation in their develop­
ment. But to repeat, the crucial factor in
future decades is likely to be the invest­
ment of private funds from "O u tsid e ,”
whether these be American, Canadian or
(increasingly) Japanese investment funds.
In conclusion, I hope I have made my point
that the nation is facing a major problem in
developing adequate energy resources, and
that Alaskan North Slope oil should be a
key factor in providing a solution. The
development of that crucial resource is
likely to bring with it the infusion of outside
capital still sorely needed in this developing
economy. As in the past, sharp fluctuations
in business and financial activity will be
encountered as the development process
continues, especially with the pipeline con­
troversy remaining unsettled. The most
important point to remember, however, is
that the state's vast potential for growth is
rapidly being achieved.