In Business, Creating Sustainable Enterprises & Communities

THE BUSINESS CASE FOR REDUCED OIL DEPENDENCE

In Business, May-June, 2005, Vol. 27, No. 3, p. 30

Why we need federal policies to improve the context for entrepreneurial activity like that covered by In Business - which will be good for business, security and the environment.

Deron Lovaas

DEMAND for oil in industrialized and industrializing nations is growing steeply. According to the Department of Energy (DOE), oil consumption by the United States, China and other nations in Asia is likely to comprise 60 percent of the increase in demand. To meet projected world demand of nearly 121 million barrels a day in 2025, global oil output would have to expand by an eye-popping 44 million barrels per day or 57 percent between 2002 and 2025.
As reported by the Institute for the Analysis of Global Security (IAGS), China is moving quickly to secure exclusive access to future oil supplies by financing strategically located pipelines, expanding its oil companies, and contracting with oil producing regions across the globe. Intensifying competition for a limited supply of oil will boost prices and increase the potential for conflict between nations addicted to this limited resource.
This is a growing problem, since the United States now imports more than half of its oil supply. We can't drill our way out, since we are blessed with a mere three percent of world reserves. In fact, two-thirds of proven oil reserves are located in Middle Eastern countries, and DOE predicts that oil imports from the Middle East to the United States will increase from 25 percent to 50 percent by 2020. This is alarming because oil revenues in that region often end up in the wrong hands. As a bipartisan set of authors poignantly summed up in a recent article in Foreign Affairs magazine, “It is…increasingly clear that the riches from oil trickle down to those who would do harm to America and its friends...” Sadly, consumers are paying for both sides of the war on terrorism.
Oil reaches our shores through thousands of miles of pipelines and hundreds of facilities, which operate like a global circulatory system. But the system is vulnerable, with multiple important “chokepoints.” Every day 26 million barrels of oil flow through just two critical choke points, the Straits of Hormuz in the Persian Gulf and the Straits of Malacca in Asia. About 3,500 tankers, carrying 60 percent of the world's oil, travel through these points. If just one artery were harmed, it could cripple the world economy. Terrorists are well aware of the system's vulnerability.

OUR ECONOMY IS SHACKLED TO OIL
America's economic engine depends on oil. This is especially true for our transportation system, which takes us to our jobs and our homes and moves goods between factories, farms, and consumers - yet it is also responsible for two-thirds of our oil demand. Passenger cars and trucks alone consume nearly half of our oil and will be responsible for 80 percent of the increase in our petroleum demand over the next two decades.
The real price of oil is reflected in all sectors of our economy and is much costlier when we take into account the military, environmental, job loss, and other expenses associated with our intense dependence on oil. In 2004 alone, Americans spent roughly $270 billion to feed our oil appetite, nearly half of last year's trade deficit according to government statistics. The National Defense Council Foundation finds that the total economic penalty of our oil dependence, including loss of jobs, output, and tax revenue is estimated to be $297 to $305 billion annually.
Already, global demand is outpacing spare production capacity. In this new global market, DOE says we should expect oil prices of $40 per barrel, perhaps more (and at this time, before the summer driving season really drives up demand, oil is already above $50). In addition to sustained high prices, a tight marketplace makes for greater probability of more price spikes due to fears of supply disruptions due to terrorism or other causes.
Although our economy's per-dollar petroleum intensity is lower today than it was in the 1970s, possible oil shocks are still our Achilles heel due to the global nature of the oil market and our interdependence with the rest of the world. In addition, the trend toward saving oil has slowed down substantially, especially through the 1990s. For example, EPA finds that fuel economy of the car and light truck fleet peaked in 1987 and has essentially been declining since then due to outdated standards and increased sales of fuel-wasting SUVs. And DOE figures show that the dramatic trend in the electricity sector has cooled off as well. Basically, there's not much left to shift - as of 2003, electricity accounted for a mere three percent of U.S. oil usage.

REENERGIZING AMERICA WITH INNOVATION
Responding to these threats, IAGS and the Natural Resources Defense Council (NRDC) forged a new alliance called “Set America Free” (www.setamericafree.org) to advocate for a national commitment to oil savings. The shared values of independence, freedom from terrorism, and a healthy environment light the path to an energy-efficient economy.
Unfortunately, in Washington right now there is a sharp divide between rhetoric and policy. The White House and leaders in Congress talk about addressing our dependence on oil by adopting energy policies that they have been pushing for years. But even the Department of Energy asserted that these policies would leave us dependent on foreign oil. In order to break our oil addiction, we must start with an aggressive but achievable end in mind. NRDC proposes that we save 2.5 million barrels a day of oil by 2015 and ten million barrels a day by 2025. This gives us 20 years to cut our dependence by 40 percent.
The means to achieve this end include greater efficiency, alternative fuels and smart growth. We propose that each of these steps play a flexible role in an oil savings plan. In other words, the means to achieve our end must be adaptable since trends and technology are likely to change over the course of 20 years. But the success of the Clean Air Act and other laws provides another lesson - flexibility is all well and good, but the plan and its steps must be real and enforceable.
Here are a few specifics on each of the three steps and how they will help business:
Greater efficiency - Specifically, we call for incentives for auto manufacturers to retool factories to produce more efficient vehicles and vehicle parts, and for an increase in fuel economy standards to ensure a benefit to the public - i.e., taxpayers who will pay for these incentives. The same steps should be taken to increase efficiency of heavy trucks. Also, replacement tires should be as fuel-efficient as new tires (incredibly there are no standards or labeling requirements) and motor oil should be as frictionless as possible. The “push” effect of new carrots and sticks for the domestic auto industry may help save it from a perilous situation. While customers line up to pay premium prices for advanced technology, fuel-efficient hybrids, mostly from Japan, sales of what used to be Detroit's most profitable vehicles are slumping badly. And as the inventories grow, plants are being idled and thousands of American workers sidelined. A shift to more efficient vehicles should help our domestic auto industry to adapt and become competitive again.
Alternative fuels - Unfortunately, as the National Academy of Sciences stated in a 2004 report, hydrogen fuel cells and fuel sources face significant technology, cost, and deployment barriers, and those barriers mean it will take at least two decades before hydrogen can make a significant contribution to our energy security. Fortunately, there is another win-win alternative - cellulosic ethanol made from plant materials grown by American farmers (as long as air and water quality concerns are addressed). As Tom Potter covered in the pages of In Business in March/ April of 2003 (“Bioenergy For Rural Empowerment”), this biofuel can help to revitalize an ailing rural economy by providing a major new source of revenue for farmers. NRDC estimates that farmers could grow as much as 200 million tons of biomass in 2025, making a profit of $5.1 billion per year. We can grow enough cellulosic biomass to produce over 160 billion gallons of biofuels per year on land currently used to grow crops, while continuing to meet our current agricultural demands. And farmers can increase profitable yield from their land further by coproducing animal feed protein and cellulose for energy, making better use of tens of millions of acres currently used to grow protein.
Smart growth - Saving oil is one more reason to pursue smart growth as an alternative to suburban sprawl and to expand Americans' transportation options. Federal strategies - such as increased transit spending, commuter incentives, better travel demand models, and “location-efficient” mortgages - to support smart growth and better transportation choices can save oil by reducing the total amount we are required to drive when we commute or run errands. If all new construction were built in a similar fashion to existing smart growth developments, the nation would save over half a million barrels of oil per day after 10 years of construction. Businesses, cities and older suburbs left behind by suburban sprawl would also win with the added investment in their communities.
In short, the plan that we are working on with hawks and religious conservatives isn't just good for security and the environment - it's good for business. We urgently need new federal policies to dramatically improve the context for entrepreneurial activity like that covered by In Business and BioCycle. With better policies to support sustainable businesses, we can re-energize America.

Deron Lovaas is the Vehicles Campaign Director at the Natural Resources Defense Council (NRDC) based in Washington, D.C. He can be contacted via e-mail at dlovaas@nrdc.org. He also serves as Deputy Director for Smart Growth Policy at NRDC.