Tuesday, May 8, 2007
Breaking the Oil Habit
Breaking the Oil Habit
By Steve Stein
Setting a direction for energy independence
When he told Congress last winter that the the United States is “addicted to oil,” George W. Bush joined every president since Richard Nixon in calling for some measure of energy independence. But Bush’s goals were more modest than his predecessors’. The centerpiece of his energy statement was a proposal to eliminate 75 percent of our Middle East oil imports by 2020. Since even today our imports from that region are less than a fifth of the total — our three largest suppliers are Canada, Mexico, and Venezuela — that would require minor adjustments. However, Bush’s modesty may be warranted. In 1973, when Richard Nixon first called for energy independence, the United States imported about 25 percent of its annual oil needs; now it imports over 60 percent. Oil and gas imports now account for over $200 billion of the current trade deficit.
Nevertheless, it’s questionable whether energy independence has ever really been a national goal; it isn’t even clear what the term is supposed to mean. Former cia director James Woolsey, whose work with organizations like the Energy Future Coalition places him among the staunchest advocates of reducing our reliance on foreign oil, prefers to avoid the term “energy independence” altogether. If the phrase is meant to suggest that the United States can somehow isolate its energy future from everyone else’s, then of course Woolsey is right — it is a fatuous notion. It counters the entire trend of globalization and suggests that vital parts of the nation’s economy can be segregated from the rest of its trade patterns. But energy independence need not imply energy isolation. In fact, the United States had almost complete control of its own energy destiny until the 1960s even as its energy trade with the rest of the world was growing. America’s excess capacity could be tapped when the country chose to alleviate oil shortages elsewhere in the world, and its enormous domestic market assured that periodic oil gluts were no menace either.
The stubborn facts of geology and economics rule out the possibility of the United States’ achieving energy independence based upon oil — or upon natural gas, since gas deposits are mainly found in the same areas. But can other energy sources replace oil in key economic sectors just as oil, in the past century, frequently replaced coal? The iron age didn’t end because the world stopped using iron, but because iron lost its relative importance. If the “oil age” can be brought to a similar conclusion, the country’s economic power might again achieve parity with its geopolitical power. Of course, the reverse would also be true: If we don’t find oil substitutes, a growing thirst for petroleum may sap our military, economic, and diplomatic strength. Energy-independence hawks claim that this is already happening.
The vision of energy abundance is appealing, but scenarios for achieving that goal haven’t captured the popular imagination. Since few Americans want to contemplate the opposite future — gasoline lines, brownouts, and reduced living standards — the politics of energy remain in a chronic a state of denial. The ceremonial exhortations found in State of the Union speeches and election campaigns have lost their credibility as statements of policy. The past 35 years have made the public skeptical that government will ever address energy problems successfully — or will work effectively with markets toward that end. When President Jimmy Carter said, in 1977, that energy independence was “the moral equivalent of war,” he had broad support for programs that both spurred an increase in fuel efficiency and jump-started research into alternative fuels. But he also confounded markets. Stuart Eizenstat, Carter’s chief domestic policy advisor, later told an energy seminar that “one of the worst things I ever recommended to the president was in the midst of the Iranian crisis suggesting that we maintain price controls on gasoline at the pump. It was an absolute disaster.” Even before that fiasco, other price controls on domestic crude kept local supplies off the market, thus increasing dependence on foreign sources. Carter finally changed that policy, but it wasn’t until his successor, Ronald Reagan, pursued even more robust deregulation that domestic oil production helped to reduce the opec cartel’s power.
Markets can be chaotic, and government policy can be incoherent. But markets contain built-in corrective mechanisms, whereas governments can deny reality for a long time. Events can occasionally shock governments out of denial, but rhetoric can’t. Calling for a “Manhattan Project” to wean the country from oil won’t work; the original Manhattan Project occurred during a life-and-death struggle, and the singular objective was clear from the outset. A return to energy abundance needs no such crash program, nor — given the enormous range of policy choices and technical alternatives — could one be devised. A dramatic government policy is much less important than a clear and consistent one. To give market forces a chance to redirect the energy industry, entrepreneurs need some assurance that risks won’t be enhanced by a government that cannot set or maintain priorities. What should take oil’s place? Upon that subject, today’s markets are utterly confused.
The politics of avoidance
The energy policy act of 2005 has few admirers. Senator John McCain suggested, as he had of an earlier version, that the bill should have been subtitled “No Lobbyist Left Behind.” Other lawmakers criticized the bill for what had been omitted. It contained neither new corporate average fuel efficiency (cafe) standards nor a decision to allow for oil drilling in the Alaska Wildlife Refuge. Few legislators thought both provisions should have been in the bill, but having both made more sense than having neither. The July 28, 2005, New York Times said “this is a bill that leaves most of the hard questions for later.” The Wall Street Journal wryly noted the next day that “It doesn’t pick energy winners or losers. Everyone who produces so much as a kilowatt hour is a winner.” The act contains generous subsidies and incentives for oil and gas, coal, nuclear energy, and hydrogen. It contains lesser, but still considerable, bounty for renewables — including corn-based ethanol, of course — and some money for improving efficiency and promoting conservation. The bill’s “something for everyone” approach not only enlarges the government’s role throughout the economy, but also has the general effect of discouraging conservation. Subsidizing every form of energy encourages a collective increase of consumption rather than a decrease.
Defenders argue that it’s necessary to pursue many avenues simultaneously because it isn’t clear which will lead to success. But seeking energy “diversity” can be an excuse for ducking hard choices. Of $14.5 billion of incentives in the act, $2.7 billion goes to oil and gas, $2.9 billion to coal, and $3.1 billion to electrical transmission companies (including nuclear decommissioning). These incentives are generally in the form of accelerated tax write-offs with little explanation why it was necessary to prompt companies to reinvest in endeavors that were earning record profits. The catch-all rationale was that “we need more of everything.” So, even though the bill contains considerable incentives for clean energy (broadly defined, including, for instance, coal production on Indian lands) and for efficiency and conservation measures, over two-thirds of the total resources committed in the bill goes to fossil fuel and to nuclear energy.
The 2005 act certainly hasn’t made energy policy more coherent. Consider, for example, the structure of incentives for purchasing vehicles. A small-business owner, like anyone else, can obtain up to a $3,150 credit for buying a hybrid car. But if that same business owner buys a Hummer or other large suv instead, he’s eligible for tax deductions that are potentially several times that amount. Since these large suvs qualify as “trucks,” the purchaser obtains an immediate deduction of up to $25,000 by showing that the vehicle is used entirely for work and receives an accelerated depreciation allowance on the balance. The liberal depreciation of suvs and their exemption from fuel efficiency standards were enacted to help the domestic car industry, but “oil addiction” can’t be ended by subsidizing its use.
In fact, addictions don’t often end without withdrawal pain. If an easy technological transition — like “the hydrogen economy” — had been available, the market would probably have found it. Undergoing withdrawal requires agreement across a broad political spectrum. Why has no administration been able to create or sustain that degree of consensus?
Partly because it isn’t intuitive that energy should be treated differently from every other commodity. As the Cold War ended, the era of globalization was in full bloom. Trade was finally to be set free, and each nation’s pursuit of its comparative advantage was supposed to be the direct road to prosperity. Why should this not include petroleum? If Californians wanted pristine seashores rather than offshore oil wells and could generate enough wealth from high-tech industries to pay for someone else’s oil, why shouldn’t they have that choice?
Most of the time, the tensions between globalization and energy independence remain under the political radar. The New York Times’s Tom Friedman, for example, can write alternate columns on the utmost importance of each without hinting an awareness of the need to reconcile his positions. Ironically, one who does appreciate the tension is Russian President Vladimir Putin, as well he might in view of Russia’s status as a major oil-exporting nation. Putin says that energy security is “indivisible” and can only be achieved collectively. For all other approaches, he’s coined the interesting phrase “energy egotism.” Of course, Putin might have had some difficulty selling his role as an energy globalist to the Ukrainians after he cut off their gas supplies.
Unreliable suppliers, unsure responses
During crisis-induced shortages, the country is quickly reminded that oil is not just another commodity. The original call for energy self-sufficiency occurred during the Israel-Egypt war of 1973 when Saudi Arabia led opec to embargo the United States and the Netherlands for coming to Israel’s aid. The Saudis even tried to stop the flow of oil to U.S. Navy ships that were supposedly protecting, among other things, the Saudi kingdom. Some thought the U.S. government would see this as a casus belli against the royal family, and in other circumstances it might have done so. But Richard Nixon’s presidency was already weakened by Watergate, and the country’s confidence was weakened by Vietnam; the administration walked softly, but its big stick was nowhere in sight. Only after months of painfully brokering a deal between Egypt and Israel did the United States government finally, and rather meekly, tell the Saudis that it couldn’t go any further with that effort unless they ended the embargo. It was not the United States’ finest hour.
Nor, throughout that odd decade, was it the United States’ worst hour. That would have been when the Iranians took the entire U.S. embassy staff hostage, and Jimmy Carter sent Ramsey Clark to negotiate. At any rate, it isn’t surprising that both Carter and Nixon — and Gerald Ford, whose short term stood between the two — all understood how dangerous an “addiction to oil” could really be. Carter — not generally thought of as a hawk — also understood how vital the oil reserves of the Persian Gulf were. Other presidents might have believed that defending the region was a vital interest of the United States, but it was Carter who formalized it as a doctrine in 1980, after the Soviets invaded Afghanistan. However, Carter’s actual response to the invasion consisted mainly of a boycott of the Olympic Games held that year in Moscow.
A great deal has changed since the 1970s. This country imports a smaller percentage of its oil from the Gulf and has, on several occasions, projected enormous military power into regional conflicts there. But much remains the same. Iran is as bitter an enemy as ever, and now it’s a stronger one. The alliance with the Saudis is as uneasy now as it was then, and Islamist terrorism — evidenced then by the “Black December” hijackings of 1970 and the Munich massacre of 1972 — has become even uglier. The conspicuous constant is the power that the Middle East derives from oil. opec and the Saudis can’t control the price of oil now as they could then, but they don’t have to. At the time, the cartel was necessary because oil seemed so plentiful. opec fulfilled a role that had been filled intermittently by the major oil companies — the “seven sisters”— and before that by an obscure body whose bland-sounding name, The Texas Railroad Commission, belied its power. (Throughout oil’s history, the threat of gluts always produced a “price policeman.” The first one was John D. Rockefeller’s Standard Oil.) But opec’s pricing power was never the main concern; rather, it was opec’s political blackmail power, and that may not have decreased at all. That America itself doesn’t import a large percentage of its oil from the Persian Gulf is not the point; America’s allies do. One of the Saudis’ earlier attempts to use the oil weapon occurred during the 1967 Israeli-Egyptian war. That attempt fizzled when it became apparent that the U.S. not only received little oil from the Gulf, but also was able to supply the Europeans from American wells.
Today, America has no oil to send to anyone or to satisfy even half of its own needs. Of the United States’ four largest suppliers — Canada, Mexico, Venezuela, and Saudi Arabia — only Canada is entirely reliable. Venezuela’s dictator, Hugo Chavez, competes with Fidel Castro for the role of chief antagonist in this hemisphere. Saudi Arabia’s relations with this country are as problematic as its relations with its own disaffected extremists. Mexico (which was, incidentally, the first country to nationalize oil concessions that had been held by American companies) shares a border with the United States that is strung with barbed wire and guarded by immigration vigilantes.
Other major exporters of oil — mostly to Eastern Asia and Western Europe, but in some cases to America as well — include Russia, Indonesia, Kazakhstan, Nigeria, Kuwait, Iran, Norway, the uk and, soon, Angola. With the exception of Norway and the uk, none is high on the list of countries with which the U.S. has comfortable long-term relations. Even in the case of Canada and the uk, each of which has a “special relationship” with the U.S., the international situation can, at almost any time, become irritated by the possibility of competition with third parties for their oil supplies. The Chinese, for example, are an increasing presence in Canada’s petroleum markets, and friction between Chinese national companies and large American interests has already caused economic issues to shade into geopolitical ones.
For all these reasons — the hostility of many major suppliers, the instability of others, and the spillover effects of competition from other users — U.S. security would be enhanced by developing greater internal sources of energy. When another country plays power politics through economic means, the most adroit responses are those that remain solidly within the economic sphere. When trading partners threaten to apply the kind of leverage that amounts to blackmail, the ability to merely walk away is invaluable.
Too many cooks
By now, security demands might have driven the nation toward an effective energy policy, but there have been some additional obstacles that were quite unexpected. Specifically, there are two widely used arguments for energy self-sufficiency that may actually be causing more confusion than clarity and doing more harm than good:
Supplies are running out. Production of oil peaked in the United States in the early 1970s right on the schedule forecast almost two decades earlier by the now-famous geologist, M. King Hubbert. In a matter of a few years or a few decades, worldwide production may also peak. Demand, meanwhile, continues to rise, driving up prices, sending an increasing share of gdp to oil-producing countries, and making supply shocks inevitable.
Burning oil causes harm to the planet. Oil, natural gas, and coal emit enough carbon dioxide into the air to affect climate, which for a variety of reasons — some better understood than others — appears to be warming at an accelerating pace. These hydrocarbon products have other detrimental effects on the environment, as well.
Peak oil — a distraction? The term “peak oil” refers to the point at which fewer reserves are discovered than are extracted. When Richard Nixon first called for energy independence in 1973, suggestions of a global peak were belied by the recent discovery of an enormous new oil field in the North Sea. Historians noted that the end of plentiful oil has been predicted ever since the nineteenth century. But today, sophisticated predictions of an imminent worldwide peak are made by people who are well aware of that history. Matthew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (Wiley, 2005) and a prominent oil industry expert, has pored over enough data to conclude that the peak production is only a few years away.
Daniel Yergin, author of The Prize (Simon and Schuster, 1991) and an equally prominent industry expert, reaches quite a different conclusion. Yergin’s organization, Cambridge Energy Research Associates, publishes an annual country-by-country update, and the current survey states: “cera’s belief is that the world is not running out of oil imminently or in the near to medium term. . . . Our outlook contradicts those who believe that peak oil is imminent.” Simmons is more skeptical than Yergin of Saudi Arabia’s estimates of its own reserves. Both Simmons and Yergin admit that getting hard data from foreign governments is nearly impossible, and both agree that there haven’t been any recent giant discoveries, like the East Texas Permian Basin in the 1930s or the Saudi Arabian Ghawar field in 1948. However, the optimistic cera estimate points to additional factors that buttress the case that oil will remain plentiful for a long time. First, producers can now recover much more oil from existing fields through advanced drilling technology. Second, sources of oil that, in a practical sense, were formerly unusable can now be considered proven reserves. The best example lies in Alberta, Canada, where that province’s “tar sands” — or bitumen — are producing a large part of the United States’ daily consumption.
In the oil business, there is an old saying: Whether we’re running out of oil depends upon whether you’re asking a geologist or an economist. Alberta’s tar sands provide a good explanation for this difference of expert opinion. A few years ago, the sands were thought to contain less than 25 billion barrels of proven reserves. Today, the estimate is about 175 billion, which would make Canada’s reserves second only to Saudi Arabia’s. The change is not the result of new discoveries, but because — after crude started selling for over $30 per barrel — it became profitable to recover this oil. In fact, there are an estimated 2 trillion more barrels of the stuff deep under Alberta’s surface, which, given the right price, might also achieve the status of “proven reserves.” Venezuela also sits atop vast reserves of heavy oil or “oremulsion,” which, like the tar sands, are capable of yielding vast quantities of formerly unrecoverable petroleum. Examples like this persuade some economists that a few layers of the earth’s crust contain, in one form or another, enough petro-material to keep the planet supplied with crude oil for as long as the need will last.
And economists have other reasons to minimize concern about peak oil. When Simmons predicts, as he did in a January 2006 interview in Barron’s, that oil is likely to reach $200 a barrel within four years, the question arises: Why isn’t the price there now? If producers were so certain that the price of oil would rise soon, why wouldn’t they just withhold it from the market until that happens? After all, oil isn’t a perishable commodity. Predictions of $200 or even $300 per barrel oil are not likely to create major change in energy policy, and that’s what the theory of peak oil boils down to — a prediction about price.
Finally, the uncertainties surrounding peak oil production favor policies that spur further discovery efforts — whether in Alaska, offshore, or the Western states’ shale deposits — over policies geared toward finding a substitute. In fact, rapidly rising oil prices even create political pressure to assist the major multinational oil companies in finding new sources outside the United States. The argument is familiar: A greater number of suppliers reduces the chance that a minority cartel can again obtain the kind of power that opec had in the 1970s.
Climate change — a bigger distraction? The notion that industrial activity, by increasing the volume of greenhouse gases, traps heat within the atmosphere and causes the planet to warm was first put forward by a Swedish scientist, Svante Arrhenius, in 1896. This hypothesis is now so broadly supported within the scientific community that its adherents generally describe their position as a consensus. Scientists on the other side of the debate seldom dispute that point, but they do remind their colleagues that consensus positions aren’t always right. The skeptics point out the enormous complexities of global climate analysis and note that just 30 years ago a quite different consensus seemed to be emerging: The fear was that the planet would begin to cool too rapidly. In the climate-skeptics’ analysis, the computer models that “prove” greenhouse gases are warming the planet are constantly being tweaked and adjusted, and the data being collected are too wide-ranging to give any assurance that the results aren’t being manipulated, at least unconsciously.
Nevertheless, the power of the consensus has been impressive. It led to a protocol, laboriously hammered out ten years ago in Kyoto, Japan, that requires significant cutbacks in the amounts of carbon emissions allowed — and therefore commands a reduced use of coal, oil, and gas — or the payment of large fees instead. The United States, along with Australia and a few other countries, has refused to sign on to the Kyoto agreement. The United States Senate preemptively rejected the treaty by a vote of 95–0, and President Clinton never submitted it for ratification. Calling the treaty inequitable, impractical, and unenforceable, President Bush rejected U.S. participation outright very soon after taking office. Given the controversy surrounding both Kyoto and various alternative plans to reduce emissions, it is extremely unlikely that curbing greenhouse gases will be the basis of national energy policy any time soon.
And even if the staunchest advocates of reducing greenhouse emissions were to make much deeper political inroads, acceptance of their core positions on global warming would give little assistance to market-based policies for achieving energy self-sufficiency. The most readily available substitute for foreign oil and gas is domestic coal, but coal’s carbon emissions are considerably higher than those of the other two. True, there are processes whereby the carbon dioxide produced by coal can be “sequestered.” The best known of these is part of the Integrated Gasification Combined Cycle (igcc) process, but enormous capital would be required to make igcc plants a significant part of the energy picture. The strongest efforts of global warming opponents are directed toward getting energy producers out of the coal business rather than into it. The Kyoto principle — which is to cap emissions at certain historical levels and require large payments for any excess — doesn’t give much scope to energy policies that don’t share its precise priorities.
There is an even stronger reason why the anti-carbon lobby is more likely to cloud the energy self-sufficiency debate than to clarify it: nuclear power. Many global warming opponents have become convinced of the extreme urgency of reducing greenhouse emissions, lest the Earth soon reach a “tipping point” beyond which warming may be irreversible. A chief spokesman for this view is James Lovelock, a former nasa scientist. One of Lovelock’s primary solutions is the vastly enhanced use of nuclear power. High-profile environmentalists like Stewart Brand, founder of the Whole Earth Catalogue, and Patrick Moore, co-founder of Greenpeace, have joined this movement, thus becoming advocates of a pact with the devil — at least as many of their environmental colleagues see it.
This “neo-environmental” nuclear controversy is fascinating, but it raises issues that may take a decade to sort out. Meanwhile, nuclear energy — whatever significance it may ultimately assume in a transition from a fossil fuel economy — will almost certainly remain so thoroughly regulated that it has limited relevance in assessing market-based solutions.
Since oil accounts for only about 40 percent of our total energy consumption but 90 percent of the energy we use each year for transportation, ending an addiction to oil means reducing the consumption of gasoline. Gasoline allocation schemes of the 1970s were a disaster, but imposing fuel-efficiency standards was more successful. When standards were first proposed, automobile executives predicted that they would be impossible to reach and the attempt would prove disastrous for the industry. Things didn’t turn out that way. Average fuel efficiency rose from 18 mpg in 1978 to 27.5 mpg in 1985. Since then, however, average fuel efficiency has declined as sport utility vehicles, which were exempted from the standard, rose in popularity. (One argument against strengthening cafe standards again is that they do create economic distortions; for example, they raise the price of a manufacturer’s entire fleet of new cars, which may cause people to keep their older, less efficient cars even longer.)
But throughout the quest for energy independence, the strongest club in the government’s golf bag is the one that has been least used — a tax on gasoline that’s high enough to influence consumers’ behavior. Combined federal and state gas taxes average less than 50 cents per gallon, whereas in the uk — and, on average, throughout Western Europe — they’re the equivalent of about three dollars a gallon. For American politicians, attempting to enact a tax even half that size appears to be like touching the third rail. In 1993, Bill Clinton’s proposed increase of only 4.3 cents per gallon was controversial even within his own party, which at the time controlled both the Senate and the House. The arguments against a gasoline tax are well known: It falls disproportionately on those with low incomes, it penalizes people who need their cars for work, it discriminates against those who live in sparsely populated areas, energy is already highly taxed, and taxes are too high in general.
A heavy gasoline tax could become politically practical, however, if it were coupled with an income tax reduction that applied equally across income categories. If a driver understood that $1,500 in additional annual gas taxes was offset by a $1,500 income tax reduction, he might be far more amenable to the tax, particularly since he could reduce his total taxes even further by driving less — and that, of course, would be the primary purpose of the levy. A February 2006 New York Times poll found that 85 percent of respondents opposed a gasoline tax, but that figure changed to 55 percent in favor if such a tax would reduce dependence on foreign oil. Fifty-nine percent agreed if the tax encouraged conservation and also reduced greenhouse emissions. This poll didn’t even raise the issue of offsetting gasoline taxes with income tax reductions, which logically would have reduced opposition still further.
Since a high gasoline tax would be intended more to change behavior than to raise revenue, does that mean the offsetting tax cuts would eventually have to be rescinded? No. This is where the hidden “security surcharge” for our present oil consumption comes into play. Estimates of defense costs that the nation incurs to help insure a steady flow of petroleum vary tremendously. Even without including any of the costs of the Iraq war, such costs range from under 50 cents to over two dollars a gallon. Precise calculations are impossible, but as the reliance on imported oil diminishes, security costs would likely decline as well.
It’s impossible to find a way of pairing increased gasoline taxes with offsetting reductions that would be absolutely fair. Taxpayers who have to drive long distances and cannot form carpools would get the short end of this arrangement, but it’s hard to imagine any solution that would be more equitable. Martin Feldstein, when he was director of the National Bureau of Economic Research, did suggest an interesting alternative: oil conservation vouchers. Feldstein’s idea was to distribute to every household, each year, vouchers that would entitle the holder to purchase a gallon of gasoline at the market price. (The total number of vouchers distributed would be substantially less than the gallons consumed before the system took effect, thus assuring a sizable overall reduction in consumption.) Since the vouchers could be traded on an open market, people who chose to drive less than their allotment would incur a monetary benefit. Those who drove more than their allotment would have to pay more — how much more would be determined by the market. But Feldstein glossed over the difficulties of establishing a fair initial allocation. His basic unit of distribution — the “household” — doesn’t seem practical, nor does his approach solve the problem of varying population density.
The most immediate effect of a heavy gasoline tax would probably be a reduction of total miles driven. But over time, the tax would have a major impact on the use of alternative fuels. Enacting a gasoline tax would give additional political cover for those who would like to end the subsidy on corn-based ethanol. Consumers could choose any fuel that works best for them. Consumers would also have a new set of incentives when they made their choice of car purchases. Besides the current crop of gas-electric hybrids, a strong market for flex-fuel cars that run on ethanol or gasoline might develop. The biggest change would probably be the creation of a strong market for plug-in hybrids. Since batteries alone can handle the needs of most city driving, plug-in cars could achieve an annual average of over 100 miles per gallon. If the car’s battery were charged with electricity from renewable sources rather than coal or natural gas, so much the better.
The dawn of a market
Renewable energy sources currently supply about 9 percent of the nation’s total energy needs, more than half of which comes from hydroelectric power. Entrepreneurs can look at such figures in two ways: First, if renewable energy hasn’t made greater inroads in all this time, it probably won’t happen; or second, if the market is so large and renewables’ share is so small, the growth potential is enormous. Environmental groups routinely promote the success stories of solar or wind installations, but more than environmentalists now take alternative energy seriously. Venture capitalists have invested more than $4.4 billion in renewables in the past five years, over ten times the amount invested in the preceding five-year period. The Economist noted (December 8, 2005): “Renewable energy has regulatory, commercial and technological trends on its side. . . . [T]hey promise a far more sustainable, market-driven basis for investment in renewables than yesterday’s faith in high oil prices.” That article reported recent efforts, all still embryonic, of ge, bp, and Shell, to develop solar or windpower technologies that show promise of competing effectively.
Are the major oil companies’ efforts to develop renewable energy and greater energy efficiency just public relations gimmicks? The small amounts the companies invest in these fields, compared to the capital they devote to oil exploration, might induce cynicism. But after all, these are oil companies. Whether government incentives could transform them is an intriguing question, but not one likely to be answered any time soon. With oil company profits and gasoline prices both at record highs, the chief focus of recent Senate hearings — a rare joint session of the Commerce and Energy Committees — was on withdrawing incentives enacted in the 2005 Energy Act, not on adding to or replacing them. Focusing on the companies’ extraordinary profits, both Republican and Democratic senators tried to conjure ways to get some of that money rebated to make oil gas prices cheaper. And with no recognition of the inconsistency, several senators also wanted the companies to spend some of the money to “educate” consumers on the importance of conservation.
The atmosphere in the hearing room was decidedly unfriendly. Oregon Senator Ron Wyden, for example, repeatedly insisted upon a “yes or no” answer to highly nuanced questions. At one point the chairman, Alaska’s Ted Stevens, had to intervene to soften Wyden’s aggressiveness just to maintain an air of civility. Why were the chairmen of five major oil companies brought into that hearing room to answer questions that were often put to them in the manner of a prosecutor to a hostile witness? Because the oil companies were making too much money. Oil executives are used to parrying senatorial charges of profiteering when profits rise. Such hearings have occurred repeatedly over the past 50 years. But what, really, do senators want? Would they prefer that America’s oil companies were in the same shape as America’s automobile companies or airlines? The oil companies are so profitable because they’ve made themselves into highly successful middlemen. The best chance that the country will have to revitalize America’s energy supply, surely, is to work with these profitable companies to devise sensible reinvestment options. The recently enacted drilling incentives probably were misguided. But demanding a “yes or no” on whether those incentives should just be removed because profits are so high isn’t policymaking at all; it’s demagoguery.
Meanwhile, Shell, Chevron, and the American division of British Petroleum aren’t the only energy companies developing alternative energy industries. A few major electric utilities are building wind farms and geothermal systems, power companies are investing in solar collectors, agribusiness is distilling ethanol, and both large and small companies are selling solar panels to homeowners and family-run businesses.
Through a variety of federal and state incentives, renewable power is sometimes competitive with that generated by fossil fuel, but not often. One success story is Florida Power and Light’s windpower project, at least with the help of a 1.8 cent per kilowatt-hour credit. In fact, windpower has shown promise in many locations. The price has fallen steadily since it was first put into extensive commercial use in the 1970s. However, for most of that period, the price of power generated by oil, gas, and coal has fallen even farther. Only in the past few years has any real chance of parity appeared on the horizon.
Wind is an intermittent source of power in any case and is available in large quantities only in certain parts of the country, although fans of the windmill claim that in those areas — the Dakotas, parts of California, and some northwest and northeast coastal regions — the potential is enormous. Wind, though, has its own environmental constraints. Blades have killed migrating birds, and large concentrations of windmills can be unsightly. A less environmentally problematic renewable is solar power. Like wind, solar energy is abundant only in certain areas of the nation — fortunately, not generally the same areas with big potential wind resources. Also, like wind, solar power is intermittent — necessitating both a storage medium and fossil-fuel backup systems. Nevertheless, there are responsible estimates that less than 1 percent of the land area of four southwestern states — California, Arizona, New Mexico, and Nevada — could theoretically satisfy those states’ entire electrical needs.
In fact, of all the renewable energy sources, solar power is the one for which technology may hold the greatest developmental promise. The trick is to concentrate a greater amount of the sun’s power in a small area at a cheaper price. Toward that end, there is an encouraging history of breakthroughs. New materials are increasing the efficiency of photovoltaic panels, whereby the sun’s heat is converted to electricity. The pace of rooftop installations is accelerating in some parts of the country, although solar panels are still seldom competitive with fossil fuel energy even after some generous subsidies. The Energy Department’s endorsement of this trend has been named “One Million Solar Roofs.” California and other states have added their own incentives and in some cases have adopted the same name.
But in the near term, the future of solar power may lie elsewhere. These individual installations, while offering the security advantages of a distributed power system, remain costly. Economies of scale still apply to power generation, and so far, solar is no exception. The most economically feasible installations seem to be those that employ enormous mirrored troughs that are laid out side by side in desert locations. These half tubes receive and concentrate the sun’s energy and use a heat transfer fluid to generate steam. Nine installations have been running in the Mojave Desert for many years, and a newer one with more advanced technology has just been opened near Las Vegas. Other kinds of large-scale solar installations have been set up elsewhere in the world, some as commercial operations and some as demonstration projects.
If historic trends persist, the costs of solar power will continue to diminish as its technology improves and its installed capacity increases. By no means does this suggest that the progress will ever be comparable to that of the computer industry — where Gordon Moore’s famous law (that computing power doubles every eighteen months while the cost diminishes commensurately) has held more or less true for a remarkably long time. On the other hand, solar power doesn’t have to become dirt cheap to be practical; it merely has to become oil-and-gas cheap. Achieving that remains a challenge for two reasons. The first is obvious: Except for those very expensive small rooftop installations, enormous capital outlay is required. The second reason is equally important from a policy standpoint: Once renewables do find large-scale application, they may have the benign effect of once again driving down the price of fossil fuels. If that happens, will needed protections for renewables still be available, or will the country return to its familiar on-again-off-again energy policies?
Both matters need to be addressed in Washington and by the states. As with so much else that continues to delay the formation of an effective energy policy, a lack of economic realism still infects the process. Greater emphasis is given to “a million solar roofs” than to large-scale installations. There is a certain political appeal to assisting small companies that are in the business of installing the panels and helping homeowners who want to do something environmentally correct. There’s less appeal to working closely with giant oil and gas companies that aren’t necessarily predisposed to competing against their core businesses anyway, and even less appeal in working with power companies whose names have been linked with manipulations such as those that occurred during California’s summer blackouts in 2000. (It is now forgotten in most quarters that two huge windfarms — Storm Lake, Iowa, and Lake Benton, Minnesota — were planned to be built by Enron. However, energy insiders and policymakers who would review today’s similar plans have long memories for such things.)
Probably the one area where large renewable energy projects can still get the benefit of the doubt is the one where there is the least economic justification — corn-based ethanol. The effect of the Iowa caucus on energy policy would be something of a national joke if not for the skepticism that ethanol subsidy engenders toward every other renewable project, especially those that also involve biomass. However, the larger problem with biomass is best illustrated with an agricultural homily of a much earlier era. Abraham Lincoln liked to tell a story of a jackass that, standing between two bales of hay, ended up starving to death because he couldn’t decide which one to eat.
America’s energy policy bears some uncomfortable resemblances. Reading a list of Energy Department projects, one must consider that the multiplicity of alternatives goes beyond just trying to maintain diversity. It suggests that there is no will to set priorities. Besides an enormous array of renewables — some credible, others entirely unproven, visionary, and exotic — there’s an array of gas and oil incentives, plans for clean (carbon-sequestered) coal, nuclear, and even a slight feint toward something called “the hydrogen economy.” (Hydrogen is not a naturally occurring fuel, and, except for very few applications, creating it from renewables makes less sense than just using the renewable energy more directly.) If energy policy led to a clear emphasis on renewables, especially solar, and it turned out not to work, there would still be time to re-emphasize coal and nuclear. But if government aimlessly oscillates among every conceivable approach, emphasizing nothing, then the nation really could find itself running out of gas with no filling station in sight.
If this country wants to end its “addiction to oil” in partnership with the private sector (and there really is no other way to do it), then the public sector must give the market clearer direction. From a technical standpoint, the largest capital project of the nineteenth century — the transcontinental railroad — could have gotten underway ten years earlier than it did. But Congress couldn’t agree on a northern route or a southern one. Only after the South quit the Union was Congress able to act. In 1862, in the midst of a civil war and with only half a country from which to draw resources, work began. The railroad could not have been built until the route was known. The next energy economy can’t either.
Steve Stein is in the portfolio management business in Marin County, California, and writes financial columns for several Northern California newspapers.
Copyright © 2007 by the Board of Trustees of Leland Stanford Junior University
Posted by lmurx at 3:08 PM