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Economic Forecasts

Why the U.S. Faces Ongoing Energy Challenges

Nearly 40 years after the first energy crisis, we continue to rely heavily on oil, much of it from unstable countries.

Think of all the technical advances we've seen since 1973. First came the personal computer. Then the Internet changed every facet of our lives, and cell phones enabled most of those changes to go mobile. And, yes, we've seen the advent of large-scale wind turbines, solar-energy devices and biofuels.

So you might ask yourself, Why does the price of gasoline lurch ever higher, threatening the economy and trying our patience, just as it did in 1973, when the Arab oil embargo touched off our first energy crisis? From mid February through mid April, the price of West Texas Intermediate crude oil jumped 33%, to $112 a barrel. Gasoline prices are up an average of 65 cents a gallon. What's worse, this time around we are stressing not only about havoc in the oil market wrought by turmoil in the Middle East and North Africa but also about nuclear disaster in Japan.

There's a reason we haven't solved our energy issues, says Paul Bledsoe, an energy expert at the Bipartisan Policy Center, in Washington, D.C. "The truth is, since the 1970s we've tended to bounce between a panic when oil prices are high and apathy when they're not."

Most of our current energy policies were established in the 1970s in response to the embargo and the creation of OPEC, the oil cartel. That's when the strategic petroleum reserve was created, as well as the Department of Energy. Congress passed the first fuel-economy standards for cars in 1975. Since then, attention to energy policy has been sporadic. In 2007, as oil soared again, Congress bumped up fuel-economy standards for cars and required a sixfold increase in the use of alternative fuels, chiefly ethanol and other biofuels, by 2022.

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Ambitious goals. In a recent speech, President Obama called for reducing oil imports by one-third by 2025 and increasing production of alternative-fuel, electric and hybrid vehicles. But it will be years before we ascertain the rhetoric-to-reality quotient of the blueprint he outlined.

Our energy use extends far beyond the gas pump. Petroleum fuels 94% of U.S. transportation needs but accounts for just 35% of our energy mix. Natural gas accounts for 23%; coal, 20%; and nuclear and renewable energies, 8% each. Now, with a confluence of global crises, a growing sense of environmental urgency and the introduction of new technologies, perhaps the time has finally come to put our energy use on a sound, sustainable and affordable footing.

Long-term change will be punctuated by sporadic volatility in global energy markets. Fast-forward to 2035, and fossil fuels will still be the dominant source of energy, according to the International Energy Agency, an organization of 28 countries. Oil will still rule, but its share of the global energy mix will drop from 33% in 2008 to 28%. The IEA foresees a "golden age" for cleaner-burning natural gas, the only fossil fuel for which demand will be higher in 2035 than in 2008. Renewable-energy sources, including wind and solar, will jump from 7% of energy usage to 14%.

If we've learned anything from the mercurial energy market, it's that expectations can turn in a heartbeat. Will disaster in Japan forestall the nuclear renaissance that many had predicted? Will a golden age of gas translate into a glut that keeps gas prices down?

No matter the outcomes, consumers can conserve resources and protect their pocketbooks (see The Energy Crisis at Home: How to Save on Utility Bills and Trips to the Gas Station). And investors can find opportunities to ease the pain of this latest energy crisis. We'll point you in the right direction.