TAKING THE HIGH ROAD TO ENERGY SECURITY

In Business, May-June, 2006, Vol. 28, No. 3, p. 28

Spiky, high prices have been a hardship for consumers, but the higher prices justify investments in higher cost alternatives to conventional oil.

Deron Lovaas

AMERICA is addicted to oil,” the President said in his State of the Union address. He was right. We're hooked. Why is that the case?
Transportation drives our addiction. For starters, we're taking more trips. More Americans rode trains and buses 80 years ago, and transit use spiked during World War II. Then it plummeted, leveling off at less than half of its peak level. Meanwhile, vehicle miles traveled climbed steadily, and are at the three trillion per year mark. Walking and biking are a tiny part of the travel picture.
Increasing travel by private vehicle is exacerbated by two other trends: An increasingly wasteful fleet of cars and trucks and pitifully small use of alternatives to fuels made from oil.
Thanks largely to the proliferation of larger vehicles - particularly SUVs - improvements in fuel economy of the fleet stalled in 1988. The largest recent jump in performance happened in the late 1970s, driven by policy and consumer choices in reaction to embargoes and price runups.
After prices cooled off, the Reagan Administration actually eased “CAFE” (Corporate Average Fuel Economy) standards. They didn't budge until this Bush Administration ticked the standard for light trucks up slightly. In the interim, while energy-efficient technology has been pushed into the fleet, it has been offset by improvements in power, weight and size of vehicles.
The third factor is alternative fuel use, or rather nonuse, in transportation. We fill our tanks with fuel, and 97 percent of the time it's a petroleum-derived liquid, mostly gasoline.
Meanwhile, domestic production peaked and has been declining steadily since 1970. Currently, we produce about 8.9 million barrels a day but that's only enough to meet about 40 percent of America's daily consumption of 21 million barrels daily. Soaring demand for oil has clashed with tight production and refining capacity, driving prices up. This has several consequences.
First, we're transferring a huge amount of wealth overseas thanks to a ballooning trade deficit. The economic costs would be steeper, if not for the fact that our policy response to the energy crisis in the 1970s helped to drive the oil intensity (a measure of barrels used to produce GDP) of our economy down by about one-third, providing better insulation from today's high prices. This is why demand has barely slackened and the economy hasn't slipped into recession.
However, these gains have slowed dramatically in recent years. It's clear why this is so in transportation - stagnating fuel economy and increasing travel. For electricity, it's due to the fact that there's just not much left to shift - we have pretty much weaned that sector off oil. This means that our economic shock absorbers are wearing thin once more.
Spiky, high prices have been a hardship for U.S. consumers, but the pain is more deeply felt in the developing world. According to the World Bank, a sustained oil-price increase of $10 per barrel will reduce GDP by an average of about 1.5 percent in countries with per-capita income of less than $300, compared to a loss of less than 0.5 percent for developed countries.

“DIRTY” PATH TO ENERGY SECURITY
High prices also open two new paths to energy security, putting us at an historic crossroads. Economics explains why this is so. Higher prices, if sustained, justify investments in higher cost alternatives to conventional oil. Investors and consumers are wary, since high prices have collapsed before as OPEC flooded the market with oil. But even the conservative Energy Information Administration (EIA) in their latest Annual Energy Outlook (2006) projects prices over the next quarter-century in the $50 per barrel range as opposed to last year's outlook in the $30 range.
The first path that comes into view involves addiction to more costly, dirtier fossil fuels. “Unconventional oil,” which must be wrung from shale and sands, has been referred to by some as a “bottomless well.” The Department of Energy estimates that there's more than three-trillion-barrels worth of unconventional reserves, worldwide. However, exploiting them comes with an unacceptable price tag, not just in dollars and cents but for the environment.
Take Canada's tar sands, for example. There is a huge deposit in the province of Alberta. It comes in the form of “bitumen,” a heavy substance that clings to sand grains. In fact, only 10 percent of the sands is actually oil. This resource is very diffusely deposited, and very low quality. It is exceedingly costly to extract and refine, requiring the tearing up of boreal forest as well as huge amounts of energy and water for extraction and processing.
Nonetheless, one estimate of the recoverable amount of sands would shoot Canada up to second place in the ranking of countries with the largest proportion of world oil reserves (Saudi Arabia is first). And at more than one million barrels a day, this resource already accounts for one-third of Canada's oil production. Plans are to expand rapidly, and sustained high prices have given this environmental nightmare a huge boost.
This is already having a tremendous impact on global warming pollution levels. Canada ratified the Kyoto Protocol in 2002, committing to a 6 percent reduction in 1990 greenhouse gas emissions by 2008-2012. But emissions are 24 percent higher than 1990, due mostly to sands exploitation. Other harms include water drawdown and pollution and widespread habitat destruction and fragmentation.
Oil shale - much of which is in the western U.S. - has similar drawbacks. While theoretically reserves are quite large, exploitation of shale entails mining, great heat and vast waste and potential damage to aquifers in the most arid part of the U.S. So the environmental costs are very high.
The other alarming feature that comes into stark relief on the pollution path is the use of coal in transportation. This has never been done in the U.S., but given our large reserves it is tempting. One way to liquefy coal is a process called “Fischer-Tropsch,” after the two German scientists who invented it in the 1920s. Currently this process is used to transform coal into liquid fuel in South Africa, where it was further developed by an Apartheid regime desperate to meet its energy needs in isolation.
Domestically, the new outlook from EIA projects production of 800,000 barrels per day of coal liquids, or 1.7 million barrels per day under a higher price scenario (whereby oil price leaps to $100 per barrel by 2030, not unreasonable).

GREENER PATH
These stats should alarm anyone concerned about the environment. In addition to generating more pollution like smog, and the destruction wreaked by mining and mountaintop removal, coal is a much more carbon-intensive energy source than oil. This means that if you are concerned about climate change, substituting coal liquids for oil to run the transportation sector is like breaking a smoking habit only to take up crack cocaine.
Figure 1, recently calculated by NRDC scientists, shows heat-trapping carbon dioxide pollution from coal liquids, tar sands, gasoline, as well as greener alternatives based on various feedstocks and sources of energy for ethanol production.
As the chart implies, there's a green path, in which we would save oil instead of burning it, “getting clean” of our addiction. Thankfully, we don't need a 12-step program. We just need to take three big strides: Boosting efficient use of oil, shifting to alternatives to oil (biofuels and electricity) and reducing vehicle miles traveled by offering options besides driving such as public transit.
High prices are an ally in opening up this cleaner path to energy security. They justify increased commitment to biofuels, which In Business and BioCycle cover extensively. They also make it common sense to boost investment in oil-efficient rail transit.
Prices also have fundamentally changed the math for buying more efficient cars. In a recent report, the Consumer Federation of America calculated that $3 per gallon gasoline - driven largely by soaring oil prices - means that consumers no longer pay a premium for more efficient cars such as hybrid-electric vehicles. If a similar price is sustained, and it may well be, opting for a more efficient auto is “cash-flow neutral” as an economist would say. And if prices rise further, then efficiency becomes even more cost-effective, and it helps to reduce our dependence on foreign oil and reduce pollution to boot.
When we look up from our shackles, we see different paths opened up by the rising price of this limited resource. One path is to try to drill and mine our way out, to seek more “fixes.” Or we could take the cleaner path out by boosting efficiency, biofuels as well as public transit. The latter path leads out of addiction and into a healthier, more secure life for us and our kids.
The second, less-traveled path is the high road. We must press onward now because the transition will take time.

Deron Lovaas is Vehicles Campaign Director at the Natural Resources Defense Council (NRDC) based in Washington, D.C. He can be reached via e-mail at dlovaas@ nrdc.org.

Copyright 2007, The JG Press, Inc.