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When In A Hole, Stop Digging

by Richard T. Stuebi

I never cease to be amazed by the frequency and vehemence of opinions expressed on energy and environmental matters by people who are spectacularly underinformed. So in this exposition about oil, let’s first begin with a Top Ten List of clear-cut facts.

1. World oil production (which is essentially equal to consumption) is at approximately 85 million barrels per day, or 31 billion barrels per year — and has essentially remained at these levels continuously since mid-2005, even though oil prices have doubled (from about $60/barrel) since then.

2. The U.S. consumes about 25% of the world’s annual oil production, implying U.S. demand levels of about 21 million barrels/day (almost 8 billion barrels per year), but holds under its territory only about 2% of the world’s proven oil reserves of 1.2 trillion barrels.

3. In contrast, the Oil Producing and Exporting Countries (OPEC) control almost 80% of the world’s oil reserves, yet produce only about 40% of annual oil supplies.

4. OPEC production was 31 million barrels/day in 1973, and 32 million barrels/day in 2007, despite the world economy having doubled in the intervening years.

5. OPEC includes among its members the following countries that are unstable, corrupt and/or unfriendly to the U.S.: Saudi Arabia, Iraq, Iran, Venezuela, Nigeria.

6. The Middle Eastern members of OPEC represent over 75% of total OPEC capacity, of which the single largest player (without which the world oil markets would collapse) is Saudi Arabia, alone accounting for 22% of the world’s remaining proven oil reserves.

7. This year, the U.S. will send an estimated $700 billion to the Middle East to purchase oil — more than the U.S. defense budget (about $600 billion).

8. An unknown portion of these proceeds, but widely-agreed to be a significant amount, funds anti-American (and anti-women, and anti-Semitic, and anti-homosexual, and so on) sentiment — including outright terrorist activities.

9. About 99% of the energy consumed by the U.S. transportation sector derives from petroleum.

10. The vast majority of American citizens live and work in a manner requires oil-fueled transportation to maintain their basic lifestyles (commuting, shopping, etc.)

So, here we are, the United States of America, utterly reliant on one strategic commodity supplied mainly by a powerful cartel that doesn’t hold American long-term interests at heart. What is our response to this predicament?

We complain. We complain about high energy prices, and ask the government to do something about it. When, in fact, there’s very little the government can do about energy prices. OPEC makes it abundantly clear that we are price-takers, not price-setters. Why else would President Bush travel to Riyadh, hat-in-hand, to effectively beg the Saudis to supply us more oil? And, how else could the Saudi’s rebuff their best customer?

This, of course, is the same President Bush that declared famously in 2006 State of the Union speech that the U.S. is “addicted to oil.” Factoring in all the negative connotations of the word “addiction”, that’s a strong statement, coming from a proud Texan.

As Thomas Friedman so aptly noted in a recent editorial, the President has revealed his implicit strategy for dealing with our addiction to oil: “Get more addicted to oil.”

You might ask what else we might do, beyond pandering to our pushers.

Cutting demand certainly helps. Unfortunately, we can’t quickly/easily/cheaply reconfigure our infrastructure of buildings and roads, so we’re stuck for a long time with the landscape we’ve created: we’ll unavoidably need to move around lots of people and goods for quite a while. (See Fact #10.) So, our need for vehicle-based ransportation will not diminish rapidly.

The recent passage of Energy Independence and Security Act of 2007 tightens fuel economy standards to improve efficiencies of new vehicles – including, for the first time, SUVs. And, higher fuel prices are clearly beginning to discourage U.S. demand.

Unfortunately, U.S. demand-reduction measures won’t help much in the grand scheme of things. First, over its 35 year history, OPEC has clearly learned an ability to withhold production to keep oil prices high: when others produce more, OPEC produces less. (See Facts #3 and #4.) Second, the incessant growth in energy demand from the developing world (most notably, China and India) will probably eat up any declines in oil demand the U.S. might be able to achieve on its own.

So, this leads us to what has become the hottest topic in the Presidential campaign: drilling for more oil in the U.S.

You’ve probably seen the bumper stickers: “Drill Here, Drill Now, Pay Less”. I recently overheard someone in a bar claim with pride that the recent modest drop in oil prices can be attributed to OPEC’s cowering in fear now that the U.S. is getting serious about drilling for more oil domestically.

Get real. As Executive Director of the Institute for the Analysis of Global Security Dr. Gal Luft, arguably one of the most knowledgeable observers of the world oil situation, said in a recent speech in the Cleveland area: “Go ahead, drill all you want, it won’t make any difference.”

This is because the U.S. only has about 3% of the world’s reserves, but demands 20% of current world production. (See Fact #2.) Bluntly, we want way more than our share of the oil allotment, but there’s no way around this inconvenient truth: we can’t change our geography or our geology. (This reminds me of another bumper sticker: “What’s Our Oil Doing Under Their Soil?”)

It is true that there are significant reserves untapped offshore in the Gulf of Mexico, in Northern Alaska (Arctic National Wildlife Refuge, ANWR), and elsewhere in the U.S.: in ANWR alone, perhaps as much as 16 billion barrels. This sounds like a lot, and at $120/barrel, it is financially worth a lot. But, even with a bonanza of 50 billion new barrels heretofore inaccessible, this only supplies current U.S. requirements for not even 7 years. It supplies global requirements for less than 2 years.

Moreover, as noted previously, OPEC is capable of reducing its supply to compensate for whatever incremental production the U.S. is able to achieve, thereby nullifying the effect of the U.S. exertions to open up these assets to extraction.

With this as backdrop, let me ask a simple question: is it worth pinning the country’s hopes on a multi-year project to drill some new holes, only to find that it doesn’t solve our underlying problem? According to analysis by the U.S. Department of Energy, opening up new areas to drilling “would not have a significant impact on domestic crude oil and natural gas production or prices before 2030. Leasing would begin no sooner than 2012, and production would not be expected to start before 2017.” This doesn’t sound to me like any significant solution for our dilemmas.

It sounds like all I’m offering is problems, not solutions. Well, what do you expect? With a long-held conviction to pursue an energy policy of “cheap oil, at all costs”, the U.S. has painted itself into a nasty corner. Everyone wants easy answers, but unfortunately there are none.

One ray of hope is offered by unconventional hydrocarbon production. The U.S. is the so-called “Saudi Arabia of coal”, with hundreds of years of reserves at current demand levels (although this “runway” would be reduced dramatically by a concerted move to coal-based fuels for transportation). In addition, the U.S. holds huge amounts of oil-equivalents in the form of shale in the Rocky Mountains, estimated to be far larger in quantity than the oil in Saudi Arabia. Both of these sources can technically be extracted and converted into transportation fuels — but possibly at significant financial and environmental costs. Hopefully, new technologies under development will eliminate (or at least significantly) reduce these costs — but if not, are we willing to pay them?

More fundamentally, I believe that Dr. Luft is onto the central problem: unless and until we sever the link between transportation and petroleum, the U.S. is doomed to declining power and ultimate subjugation.

Right now, just about every car and truck sold in the U.S. is constructed to run only on a petroleum-based fuel. Since each vehicle has about a 16 year operating life, and since over 7 million new vehicles a year are sold in the U.S., each consuming hundreds of gallons per year, every additional year that virtually all cars sold in the U.S. are oil-dependent “locks in” tens of billion barrels of U.S. aggregate demand for oil.

Dr. Luft’s solution: eliminate the strategic value of petroleum, by taking low-cost and rapid steps to make vehicles fuel-flexible. Only with competition among fuel types for the transportation market will OPEC lose its stranglehold on our economy.

As has been widely documented, it is possible to make gasoline powered vehicles able to run on a limitless variety of alcohol/petroleum blends with the addition of equipment that is about $100 per vehicle. Dr. Luft and other luminaries (e.g., James Woolsey, Robert “Bud” McFarlane) have formed the Set America Free Coalition to promote the Open Fuel Standard Act, which would require that 50% of all vehicles sold in the U.S. in 2010 must be fuel-flexible. According to Dr. Luft, the major automakers say this is doable.

(Interestingly, Dr. Luft claims that the big oil companies are discouraging their affiliated retailers from installing ethanol-capable pumps. This sounds like something worth investigating.)

In addition, Dr. Luft argues compellingly for the end of ludicrous U.S. agricultural policies that tax imported ethanol (but not, notably, imported petroleum or petroleum-based fuels) and that place quotas on sugar imports. The effect of these policies is to discourage or prevent the possibility of cost-effectively importing sugar-based ethanol from over 100 countries in the tropics around the globe where sugar (a highly efficient feedstock for ethanol production, much better than corn) can grow abundantly.

These countries tend to be poor, based on subsistence agriculture, and they are being killed by high oil prices. In Dr. Luft’s view, this represents “the worst regressive tax in history”, and he thinks we should send a few hundred billion dollars a year to those countries – “some of whom still like us” – instead of to OPEC countries. As an incidental benefit, this would increase economic aid to the developing world by about an order of magnitude.

(As an aside, Dr. Luft is convinced that the now-heated arguments against ethanol — food vs. fuel, too-lucrative incentives — are overhyped bunk, and has some interesting analyses to prove his point, but that is a subject for another day.)

So, it seems that some important answers to our energy crises may be found in skewed agricultural policies — a non-intuitive target for critical attention. If you want to take this on, contact Dr. Luft: he is looking for fellow revolutionaries to help us claw our way out of the hole we’ve dug for ourselves with our oil addiction.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.

"A Special Report on the Future of Energy" by Mother Jones

by Richard T. Stuebi

I’ve never been a fan of the periodical Mother Jones – it’s always seemed a bit too “alternative” for me. That said, I was recently given a copy of the May/June 2008 issue – a special report on the future of energy – and was surprised by the quality and balance of the articles.

I particularly found “The Seven Myths of Energy Independence” by Paul Roberts (author of The End of Oil) to be a compelling read. To him, the seven myths are:

1. Energy Independence Is Good
2. Ethanol Will Set Us Free
3. Conservation Is a “Personal Virtue”
4. We Can Go It Alone
5. Some Geek in Silicon Valley Will Fix the Problem
6. Cut Demand and the Rest Will Follow
7. Once Bush Is Gone, Change Will Come

I think many advocates are well-advised to really reflect on #7. Bush is unquestionably the bête-noire of all things environmental, but he’s only a part of the problem – and arguably not even the biggest part. Congress and the entrenched interests completely stymie good energy/environmental policy. A new President will help, but won’t be a simple cure-all, for what ails us in the energy and environmental arenas.

Which brings me to another article in the issue: “Congress’ Top 10 Fossil Fools” by Chris Mooney, profiling the “foes and thwarters of renewable energy”. In his list, they are:

1. Senator Pete Dominici (R-NM)
2. The Southern Company (NYSE: SO)
3. Senator Mary Landrieu (D-LA)
4. Representative Joe Barton (R-TX)
5. Senator Jim Bunning (R-KY) and “Coal-State Dems”
6. Representative John Dingell (D-MI)
7. Senator Lamar Alexander (R-TN)
8. Senator Ted Kennedy (D-MA)
9. Senator John Thune (R-SD)
10. Senator John McCain (R-AZ)

Probably no surprise that there are more R’s than D’s on the list, but I was really surprised at the omission of Senator James Imhofe (R-OK), and by the inclusion of McCain. Apparently, the League of Conservation Voters gave the impending Republican Presidential nominee a rating of 0 (that’s right, zero) last year “because McCain missed every single environmentally relevant vote”, including ones in which he could have been the tie-breaker to overcome a filibuster on the 2007 clean-energy bill. Alas, what could have been…

Other good articles in the issue include:

“The Greenback Effect” by Bill McKibben on why markets aren’t necessarily antithetical to the environment, but can be the driving force for environmental solutions.
“Breaking the Gridlock” by Jennifer Kahn on how the smart-grid could be the major enabler for energy efficiency.
“The Nuclear Option” by Judith Lewis – a reasonably fair and balanced view of the pros and cons of nuclear energy, without the expected hyperbole.
“Tar Wars” by Josh Harkinson, which paints a not-at-all pretty picture of what’s happening to the landscape in Northern Alberta as the tar sands are mined to make oil.
“Put a Tyrant in Your Tank” by Joshua Kurlantzick, profiling the bad guys leading many of the major oil producing nations – who are financed every time you fill up at the pump.

Lots of interesting nuggets to be found in the sidebar boxes too. For instance, did you know that 30% of the electricity supply at the infamous Guantanamo Bay Naval Base is provided by wind turbines?

Well worth spending $5.95 at the newsstand, pick up the May/June 2008 Mother Jones.

Richard T. Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.

What’s Up with ConocoPhillips?

by Richard T. Stuebi

On the clean-tech front, ConocoPhillips (NYSE: COP) seems to be striving to take the lead among U.S. oil companies. In just the last two few weeks, COP has made two announcements of significance.

ConocoPhillips is not yet in the league of Wal-Mart (NYSE: WMT) and General Electric (NYSE: GE) as major players that are driving environmental improvement on a mass-scale through the aggressive pursuit of capitalism across their core businesses.

But at least COP has gotten off the dime: they aren’t denying the existence of climate change as a real issue, and are recognizing that they need to start shifting their perspective if they want to continue to be a relevant energy company in the future.

Its peers among U.S. oil majors, ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), have also begun making strides on the green-front.

The contrast between the three of them and the major U.S. automakers — General Motors (NYSE: GM) and Ford (NYSE: F) — is stark. The auto companies are stuck with tenuous competitive positions due in large part to their strategies for focusing on high profit gas guzzlers (e.g., SUVs and performance cars), and as a result they are fighting Federal pressures to tighten auto fuel efficiency standards. In general, they don’t want to hear about climate change.

The historical solidarity between the companies involved in oil supply and in oil demand seems to be breaking down.

Presumably, it’s at least partly because the oil companies are in better shape than the auto companies: with huge profits, the oil majors have more degrees of freedom to think more proactively. However, I think it’s also because the oil companies are increasingly coming to the view that reduced oil demand is unavoidable in the future — not just for environmental reasons, but simply because supplies will be challenging to obtain. COP, XOM and CVX are probably beginning to plan what they will look like as companies in a post-oil world, and that plan is consistent anyway with carbon limitations.

Interestingly, most of the independent U.S. oil producers and refiners — many of which are enormous companies in their own right — are laggards on the environmental front, alongside the U.S. automakers. What will it take for the U.S. oil independents to begin to see the light? Do they not see a future for them beyond oil?

Richard Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.

Crude Impact

by Richard T. Stuebi

A few weeks ago at the Cleveland International Film Festival, I had the opportunity to serve on a discussion panel for a recently-released documentary entitled Crude Impact.

Crude Impact aims to portray all of the various social ills — political instability in the Middle East, corruption and poverty in the developing world, air pollution and environmental degradation, sprawl and traffic — associated with modern society’s reliance on oil. After establishing all of the disturbing challenges associated with oil, Crude Impact closes with a somewhat perversely optimistic punchline: “peak oil” — the maximum rate of extraction from our planet for the finite stock of oil that was left from pre-history — is surely coming, and no matter what economic or geopolitical crises that phenomenon will precipitate, at least the decline of oil will put an end to all of the miseries that oil underlies.

On balance, I give Crude Impact a “thumbs-up”. Without falling into despair, it clearly tells a number of stories related to petroleum through various lenses, and weaves these stories together to paint an overall damning picture of oil in a compelling manner.

I might suggest double-billing Crude Impact with An Inconvenient Truth, which focuses on the planetary impacts of global climate change without spending much time on the primary culprit: our seemingly insatiable desire to consume fossil fuels. Crude Impact seizes unflinchingly on this root cause, and is effective in reinforcing a sense of urgency to further commit to reducing our use of energy generally, and oil in particular.

The one criticism I have of the film is that it places a lot of blame for propagating oil demand on a variety of social segments — governments in the U.S. and worldwide, oil companies, auto manufacturers, the media — without fingering the ultimate precipitator: the consumers who have been completely complicit all along the way in creating our energy and environmental crises. The makers of Crude Impact tend to shun ascribing responsibility to the viewer, the average citizen, for any of the planetary woes we face due to society’s oil addiction.

If we are to have impact in changing the world for the better, we can’t fall prey to the passive negativity of laying all of the fault on other bigger parties that are supposedly more powerful than the individual. We have to own up to our role in causing our current problems, by being undemanding and unquestioning consumers. Once we see vividly our integral part in the drama, we lose the sense of being hopeless victims, and can act with much deeper resolve towards changing our path forward to a more hopeful future.

Richard Stuebi is the BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc.