The Fuse

Energy Policy Act of 2005, Ten Years On

by Matt Piotrowski | August 04, 2015

In 2005, the U.S.’ energy security situation was dire, to say the least. The U.S. was bogged down in a war in an oil-producing country and sustaining heavy casualties; imports covered some two-thirds of the country’s petroleum needs; domestic crude was on a steady decline; consumption of refined products continued to rise; and major hurricanes had knocked out large amounts of refining capacity.

Ten years later, the situation has turned. The Middle East continues to boil, but the U.S. is not involved in a ground war, it has struck a nuclear deal with Iran and OPEC is pumping at very high levels; crude imports have plunged by some 30 percent; U.S. production has rebounded with a vengeance under the shale boom and has almost doubled since 2008; domestic oil consumption has largely stabilized; and U.S. refiners are net exporters of products.

Why such a dramatic turnaround? Some has occurred because of dumb luck, some from structural economic shifts in the country, and some from changes in U.S. energy policy. In 2005, President George W. Bush signed the Energy Policy Act of 2005—a watershed piece of legislation, in retrospect. This August marks the 10-year anniversary of its passage. The bill held a number of provisions that have led to changes on both the demand and supply sides of the energy equation, but more importantly it put energy security again as one of the country’s top priorities and laid the groundwork for the seminal 2007 energy security and independence act.

The loophole

The biggest provision was the so-called “Halliburton loophole,” which kept the Environmental Protection Agency (EPA) from regulating hydraulic fracturing, or “fracking.”

The 2005 act held a number of authorizations and incentives for conservation, efficiency, and alternative fuels that have been key in reducing demand for fossil fuels, but the biggest provision was the so-called “Halliburton loophole,” which kept the Environmental Protection Agency (EPA) from regulating hydraulic fracturing, or “fracking.” The item in the legislation did not register on anyone’s radar at the time, neither environmentalists nor producers, but it turned out to be a key factor in allowing the country’s shale oil and gas boom to occur.

This loophole allowed producers of shale gas and shale oil frack wells without red tape, helping domestic production soar well beyond anyone’s expectations. While conventional crude had peaked, as many had predicted, shale took off with new technology, boosting U.S crude oil output from a low of 5 mbd in 2008 to current levels of around 9.6 mbd, helping to dramatically slice imports and make true energy security a realistic goal.

Shifting the debate

In President Bush’s State of the Union speech in January of 2006, he said the country was “addicted” to oil. Here was a former oil man hailing from a state where petroleum is an integral part of its economy in front of more than 40 million viewers saying that the country had to break its dependence on petroleum—a reflection of how sharply the debate was shifting. He said: “And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world.”

Bush said: “And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world.”

He was stating the obvious—nearly two decades of low pump prices, increased imports, and rising consumption from driving gas-guzzling vehicles had put the country in a precarious predicament. Bush’s speech went on to highlight initiatives for alternative energy sources, but he also noted important changes that needed to occur in the transportation sector, which relies on petroleum products for more than 90 percent of its fuel. “We must also change how we power our automobiles,” he said. “We will increase our research in better batteries for hybrid and electric cars, and in pollution-free cars that run on hydrogen.”

Bush singled out eliminating dependence on Middle Eastern oil. “By applying the talent and technology of America, this country can dramatically improve our environment, move beyond a petroleum-based economy, and make our dependence on Middle Eastern oil a thing of the past,” he said to great applause.

Ironically, the president who pulled the U.S. deep into the region with the war in Iraq helped initiate the trend to get off of oil from the unstable region. Many rolled their eyes at Bush’s ambition laid out in the 2006 speech, but almost a decade later, the vision—which goes all the way back to every president since Richard Nixon—could become realized.

Energy Act of 2007

The 2005 act, Bush’s address to the nation in 2006, and continued setbacks in Iraq all paved the way for the Energy Independence and Security Act of 2007, which was more aggressive and ambitious than the legislation two years before. The biofuel mandate, while still controversial, diversified supply in the transportation sector, although not as radically as originally envisaged.

It was, however, the mandate for improved fuel economy that bolstered the act’s goal of significantly reducing gasoline demand. The act required automakers to increase gasoline mileage for the country’s passenger vehicles to 35 miles per gallon by 2020, from the previous average of 27.5 mpg authorized in the mid-1970s after the OPEC Oil Embargo. Heavy-duty trucks and medium-sized vehicles were also required by the 2007 act to have new fuel economy standards.

The new mandate, along with demand being crushed during the Great Recession of 2008-09, has helped reduce demand for gasoline, which peaked annually at just under 9.3 mbd in 2007 and fell 6.5 percent by 2012.

The Obama administration picked up where Bush left off, further tightening fuel economy standards, requiring the vehicle fleet to average 54.5 mpg by 2025, another big step in reducing demand longer term and ultimately strengthening energy security.

More to do

Although there has been significant progress in the past 10 years, the fundamental issue that Bush strove to correct—oil’s monopoly in the transportation sector—remains unresolved.

Although there has been significant progress in the past 10 years, the fundamental issue that Bush strove to correct—oil’s monopoly in the transportation sector—remains unresolved. Gasoline consumption is back on the rise as prices have collapsed in the past year. There’s also the danger that cost savings from greater fuel economy will simply lead to increased driving. Meanwhile, the shale boom will not last indefinitely. Growth has stalled as of late because of low prices, while some forecasts, including the Energy Information Administration’s, say shale production will peak early next decade. Even with higher domestic output and lower imports, U.S. consumers are still highly vulnerable to fluctuations in global oil prices, whether the reason is the Islamic State, Yemen, OPEC policy, Greece, or Russia. There is also the realization that second-generation biofuels will not be the remedy in the transportation sector that they were expected to be.

What is there to do? Given the fact that oil still fuels over 90 percent of the transportation sector, much has to be done on the demand side. The country needs an overhaul of its rail system in order to transport more goods and travelers on trains. There should also be further incentives to purchase natural gas and electric vehicles alongside pushes to revamp infrastructure to support a radically different car fleet. Lastly, the U.S. needs to be active in motivating countries in emerging markets to scrap their subsidies for petroleum products to eliminate consumption waste.

Ten years ago it was almost unfathomable that the U.S. would find itself in such a better position regarding energy security, but it’s vital the country doesn’t become complacent as it did from the mid-1980s to the early 2000s, or it could find itself back where it was during the turbulent times of 2005.