In Business, Creating Sustainable Enterprises & Communities

MY YEAR ADVISING THE NATIONAL PETROLEUM COUNCIL

In Business, September-October, Vol. 29, No. 5, p. 18

A staff member of the Natural Resources Defense Council is invited to tell the petroleum industry about what the future holds for global oil and natural gas supply.

Deron Lovaas

LAST SUMMER, I was invited to advise the National Petroleum Council on energy supply. Established in 1946 by President Harry Truman as an oil and gas industry advisory body, it was tasked by Energy Secretary Bodman to study oil supply and demand. The National Petroleum Council is chartered under the Federal Advisory Committee Act and funded by industry.
The Energy Secretary asked three big questions about our energy future:
o What does the future hold for global oil and natural gas supply?
o Can incremental oil and natural gas supply be brought on-line, on-time, and at a reasonable price to meet future demand without jeopardizing economic growth?
o What oil and gas supply strategies and/or demand-side strategies does the Council recommend the U.S. pursue to ensure greater economic stability and prosperity?
The study was dubbed the “peak oil” report in the press. But I am less concerned with possible geological limits and much more concerned with what happens above ground, especially with national security which is compromised by our oil addiction and with a climate system that's threatened by increasing concentrations of greenhouse gases due to combustion of fossil fuels such as oil.

THE PLAYERS AND THE PROCESS
The Council staff launched a good faith effort to reach out beyond industry to a wide array of participants, including to advocates like yours truly. The study had four big task groups, and two other teams, focusing on specific issues. The four groups studied demand, supply, technology, and geopolitics and policy.
I served on the Demand Task Group, and I confess I was uncomfortable when I sat down for my first meeting a year ago. As I looked around the room, I discovered that I was the only representative of an environmental group in the room, and one of a handful who were explicitly interested in reducing demand. Among others in the group were employees of Chevron, ConocoPhillips, Dow Chemical, ExxonMobil, General Motors and Toyota.
Most participants were profoundly suspicious of government. This is not unreasonable given many cases of unintended consequences of government programs. Just to pick one example, the 1963 law which pressed forward with deinstitutionalization of mental health facilities, dropping the resident population by 70 percent over 20 years, had disastrous consequences for the chronically ill. (Steven Gillon, “That's Not What We Meant To Do”: Reform and Its Unintended Consequences in Twentieth-Century America 2000) They also wanted to continue doing what the industry does best, as one participant summed up: “We're providing energy cheaply and reliably, as best we know how, to our customers.”
Unfortunately, it was clear that some fit into a camp that my NRDC friend and colleague Dr. David Goldstein, refers to as “economic fundamentalism,” which hews to a basic assumption about the world: “Free markets without government interference produce the best possible results for everyone.” (Goldstein, Saving Energy, Growing Jobs 2007). A well-known joke about the supposed perfection of free markets goes: A child sees a $20 bill on the ground and reaches for it, but his grandfather chastises him saying that it couldn't be there because someone else would already have picked it up. In the case of energy, many participants were skeptical about waste because if there were marketplace inefficiencies, odds are that someone would already have dealt with it.
However, this assumes that the ground rules for communications and transactions - which are established in part by government - are sound. As another author notes:
The market system is not an end in itself but an imperfect means to raise living standards. Markets are not magic, nor are they immoral. They have impressive achievements; they can also work badly. Whether any particular market works well or not depends on its design. (McMillan, Reinventing the Bazaar: a natural history of markets 2002).
Nonetheless, I sympathized with some of the viewpoints expressed in the meetings, having a basic understanding of and respect for economics (especially what author Paul Hawken has termed “natural capitalism”). And having spent two years working for a state bureaucracy, I also harbor a healthy awareness of the drawbacks of government.
Once we looked at one another and realized “hey, you don't have horns” as a friend of mine puts it, conversations compared different policy tools for moderating demand. On the one hand, we discussed economic incentives such as gasoline taxes and “feebates” (charging a fee for the purchase of a wasteful auto and offering a rebate for the purchaser of an efficient auto). Some argued that these were less intrusive than performance standards for vehicles such as the Corporate Average Fuel Economy program, or CAFE. Indeed, the theory behind a tax or fee which internalizes costs of transactions (in this case, costs associated with global warming pollution and national security risks) is well-respected since being first proposed in 1920 by English economist A.C. Pigou.
Performance standards have a proven track record. For example, the federal and California governments have raised the bar consistently over the years on refrigerator efficiency, yielding that result as well as cheaper and larger units.
After much debate, we agreed to measures that would save a substantial amount of energy, including an increase in the CAFE standard. To judge the final product for yourself, go to www.npc.org to review the report, called Facing the Hard Truths About Energy. As I told a Houston Chronicle reporter, it has “some portions containing 'impressive ways to break our carbon and oil addiction,' while others recommended 'the same old, same old ... a search for more drilling and higher pollution alternatives.'”

THE PRODUCT: FACING NEED TO REDUCE OIL DEMAND
The first recommendation is to double new vehicle fuel economy, specifically:
Based on a detailed review of technological potential, a doubling of fuel economy of new cars and light-trucks by 2030 is possible through the use of existing and anticipated technologies, assuming vehicle performance and other attributes remain the same as today. This economy improvement will entail higher vehicle cost. The 4 percent annual gain in CAFE standards starting in 2010 that President George W. Bush suggested in his 2007 State of the Union speech is not inconsistent with a potential doubling of fuel economy for new light duty vehicles by 2030. Depending upon how quickly new vehicle improvements become incorporated in the full fleet average, it should be possible to lower U.S. oil demand by about 3-5 million barrels per day by 2030…
The recommendations could cut demand as illustrated in Figure 1 from the report.
While impressive, many of the supply-related recommendations summed up by the words “expand & diversify” in Figure 1, especially those that would increase the use of carbon-intensive alternatives such as liquid coal are alarming for anyone concerned about the environment. (See my In Business article in the May/June 2006 issue.)
On balance, the participation of a handful of advocates such as myself clearly “actually moved some minds and made progress,” as an ally in another of the study's groups summed up. Hopefully, policymakers will heed this surprising endorsement of higher fuel economy standards from the oil industry.

Deron Lovaas is the Vehicles Campaign Director for the Natural Resources Defense Council based in Washington, D.c. He can be contacted at dlovaas@nrdc.org.