The Energy Policy Morass

‘Think, Baby, Think’

April 26, 2010, Vol. 15, No. 30

If you think the health care debate is a tangled mess, try wading into the thickets of the energy sector, which is high on the Obama administration’s list of targets to subjugate. Few areas of national policy offer as bad a ratio of blather to substance as energy. It is a field where cliché, wishful thinking, and wince-inducing ignorance dominate the discourse. No matter how patiently or repeatedly the myths and realities of energy are explained, a large portion of the public, along with giddy pundits like Tom Friedman, persist in thinking an energy revolution is one government-sponsored gadget away from being willed into existence. Liberals are the worst offenders, but conservatives have their own energy shibboleths that deserve to be candidly recognized as such. The energy industry itself, meanwhile—including old-line fossil fuel companies, but also rent-seeking manufacturers such as GE and Siemens—contributes to public ignorance and confusion by jumping on the “green energy” bandwagon for mostly bad reasons. Everyone from T. Boone Pickens to Ralph Nader has a plan to “solve” America’s energy crisis, while Obama is practicing Clintonian triangulation to see whether Republicans will be cheap dates on an energy bill.

For more than three decades American energy policy has mostly been a muddle, and often a farce. But the time for muddling through is over. As the global economy recovers, oil prices will likely head back over $100 a barrel, with $4 gasoline returning to the United States. American oil production continues its needless long-term decline. Our electricity grid is antiquated and vulnerable to disruptions. As the economy recovers, electricity shortages may begin to appear, even in (or especially in) anemic California. New discoveries of domestic natural gas, however, are revolutionizing our energy outlook, but also complicating ambitions to develop more costly non-fossil fuel energy. Polls reveal significant shifts in long-term public opinion about energy, with majorities now expressing support for more domestic fossil fuel exploration and expanded nuclear power. This is no doubt a large part of the reason for Obama’s insincere recent initiatives on oil drilling and nuclear power. But it may be possible to press for more serious steps over the next few years.

The chief reason for the lack of a coherent or serious energy policy is that we’ve never been able to decide exactly what problem we are trying to solve. At the time of the first “energy crisis” in the early 1970s, the chief concern was the purported scarcity of oil along with worry about securing an adequate supply of electricity for future population and economic growth. The Arab oil embargo of 1973-74 that helped plunge Western economies into recession highlighted the geopolitical risk of dependence on the Persian Gulf for oil. But there was another new force that arose coincident with the awareness of geo-political risk: environmentalism. In the early 1970s we were getting serious about reducing air pollution, predominantly the byproduct of fossil fuels, although the harmful effects of mining and oil exploration on land and oceans were also prominently on the mind of environmentalists and added to their animus against fossil fuels. So from that very early moment the energy debate has broken down along the familiar fault line of whether to emphasize production (more supply) or conservation (less use), with a dollop of “alternative” or “renewable” energy romanticism thrown in.

The first innings of energy policy in the 1970s saw an old-fashioned compromise. We adopted fuel economy mandates for the auto fleet and several other conservation measures (most notably the 55 mile per hour speed limit), but also okayed the Alaska pipeline, enabling the development of the huge North Slope oil field, which went from producing almost nothing in 1973 to nearly 2 million barrels of oil a day by 1988 and accounted for much of the increase in domestic oil production in the late 1970s and early 1980s—the last time American domestic oil production increased. Since then environmentalists have successfully lobbied Congress and several presidents of both parties to bottle up development of major new fields in Alaska or offshore, putting off limits nearly three-quarters of an estimated 112 billion barrels of oil recoverable with existing technology. Obama’s recent announcement of expanded offshore oil drilling is largely a sham, despite the howls of protest from environmentalists. Obama’s policy involves a very slow rollout for new leases and locks up many areas that were in play with the Bush administration’s lifting of the offshore moratorium in 2008.

Here emerges one of the most glaring insincerities of the energy debate: While it is neither realistic nor sensible to attempt to produce all of the oil we need from domestic sources (more on this in a moment), we could easily produce enough additional domestic oil to replace all of our current imports from the Persian Gulf, i.e., the “people who hate us,” probably from new fields in Alaska alone. Expand production from the outer continental shelf, and we could nix imports from Venezuela (currently about 10 percent of our oil), too. Drilling opponents often argue that oil from Alaska’s Arctic National Wildlife Refuge (ANWR) would amount to only six months’ worth of U.S. oil consumption. This is superficial logic, akin to arguing that the farms of Iowa only produce six weeks’ worth of food for American consumers, so why bother planting. While no one knows how much oil may be located in ANWR until serious exploration is undertaken, even a “six-month” field would be substantial. The average oil field may represent only a few weeks worth of total oil consumption, but oil fields aren’t produced all at once. Rather, they are pumped out over several decades.

We’ve done it before. The surge in North Slope oil in the early 1980s enabled us to reduce oil imports by 2 million barrels a day. Oil imports from the Persian Gulf plummeted from 2.2 million barrels a day in 1978 to a low of 311,000 barrels a day in 1985. North Slope production has been steadily dwindling since its 1988 peak; today North Slope production has fallen to about 650,000 barrels a day. Since the 1980s oil imports from the Persian Gulf have risen in almost exact proportion as North Slope production has fallen. Today we are back to importing about 2.3 million barrels a day from Persian Gulf nations, about 13 percent of our consumption.

One remarkable fact is that American oil consumption has remained virtually flat over the last 30 years. Today, we use only slightly more oil than we did in 1978, even though the economy has more than doubled in real terms. This is testimony to the steady improvement in energy efficiency over the last generation, including—yes—our cars and trucks. Since 1975, energy consumption per dollar of economic output has fallen 50 percent. Though efficiency and conservation measures are beloved of environmentalists, it is doubtful any of the government’s manifold mandates, tax incentives, or direct subsidies have made a significant difference in the overall trend of energy efficiency in the United States. The basic market drivers—higher energy prices and expanding profits through resource efficiency—account for most of the improvement. So when we hear the handwringing about our growing dependence on foreign oil, now over 60 percent of our total oil consumption, we should be clear that this trend is entirely the result of declining domestic production and not any soaring demand for oil. Domestic oil production has fallen by more than 1 million barrels a day over the last 10 years. The United States now produces less oil than it did in 1947. This is pathetic. And unnecessary.

The two main reasons oil and other fossil fuels became environmentally incorrect in the 1970s—air pollution and risk of oil spills—are largely obsolete. Improvements in drilling technology have greatly reduced the risk of the kind of offshore spill that occurred off Santa Barbara in 1969. There hasn’t been a major drilling related spill since then, though shipping oil by tanker continues to be risky, as the Exxon Valdez taught us. To fear oil spills from offshore rigs today is analogous to fearing air travel now because of prop plane crashes in the 1950s. Technology has similarly put us on the path to virtually eliminating air pollution from fossil fuel use. Since 1980 we’ve reduced tailpipe emissions from cars by 98 percent, with corresponding nationwide reductions in ambient ozone (–22 percent), carbon monoxide (–77 percent), and lead (–92 percent). The same is true for coal: Since 1970 we’ve doubled the amount of coal burned to generate electricity (a consequence of the successful environmental campaign to shut down nuclear power development in the 1970s), but sulfur dioxide emissions have been cut in half, with more improvements to come.

Of course, global warming came along as a handy new reason for opposing fossil fuel use. Although the Supreme Court doesn’t get it, carbon dioxide is not analogous to conventional air pollutants that are byproducts of fuel combustion, and it can’t be reduced through similar technological means. Confusion about this basic point lies at the heart of the enthusiasm for cap and trade legislation soon to be introduced in the Senate. A favorite cliché of the cap and trade boosters is that because cap and trade worked well to reduce sulfur dioxide (this is actually overstated, but never mind), it will work the same way for carbon dioxide. It was possible to reduce SO2 emissions without reducing fuel use, through scrubbers or the switch to low-sulfur coal. But CO2 is the product of complete fuel combustion. There is no such thing as “low-carbon coal,” and there is no economically available CO2 “scrubbing” technology, though the coal industry is happy to try to come up with it as long as the government will provide subsidies. It would surely be cheaper to switch from coal to natural gas or nuclear power than to carbon capture from coal.

The point is, unlike conventional air pollution, which was reduced without any constraint on fuel use, the CO2 in the atmosphere can be reduced only by the use of massively less coal, oil, and natural gas. But even if the case for catastrophic global warming weren’t in free fall, the energy ambitions of the climate campaign remain so extreme as to make King Canute blush. The target the climate campaigners have set for the United States—an 80 percent reduction in CO2 emissions by the year 2050—would require replacing virtually our entire fossil fuel energy infrastructure. Substituting natural gas for coal would deliver only about a 15 percent reduction in CO2 emissions, and even if we replaced every coal plant with a carbon-free nuclear plant, we’d still be less than halfway to the policy target. For the United States, the 80 percent reduction target means reducing our fossil fuel use to a level the nation last experienced in 1910. But since our population in 2050 will be nearly five times larger than the population of 1910, on a per capita basis we’re talking about going back to the fossil fuel use of about 1875. This is patently absurd.

Fossil fuels will remain preeminent for a simple reason: They are abundant and offer energy superior to so-called renewables or other alternative sources. One pound of gasoline, for example, has 100 times more energy than a one pound lithium ion battery, which is the main reason why electric cars still aren’t very practical and aren’t likely to be for some time. Renewables—solar, wind, and biomass—are vastly more expensive, often five to ten times more expensive than fossil fuels, and their costs are not coming down very fast. Nuclear power is cheaper than renewables, but still pricier than fossil fuels. And even if renewables fell in price, they couldn’t be deployed on a large enough scale to replace fossil fuels completely, which is the professed goal of environmentalists and the Waxman-Markey “cap and trade” bill that passed the House last June. Even if all the mandates and subsidies of Waxman-Markey worked as designed, renewable sources would provide only about 20 percent of our energy needs a generation from now.

For all of the bipartisan talk of developing new energy sources, we’re going to exploit most of our available hydrocarbons sooner or later. And one reason this is likely to happen is the nation’s fiscal catastrophe. Some estimates of potential government royalties from opening up more fossil fuel production top a trillion dollars. At some point in the future, even liberals will be forced to decide whether they really want to back environmentalists on locking up domestic fossil fuel production and forgo this revenue while finding other means of propping up the welfare state.

Before conservatives and Republicans revive their “drill, baby, drill” chant, however, there needs to be some clarity about the goals of sensible energy policy. Conservatives are not alone in advocating “energy independence”—a phrase that polls well and hence has been invoked by every president since Richard Nixon. But meant literally as energy self-sufficiency—supplying 100 percent of our energy needs from sources within the four corners of U.S. territory—it makes no more sense than total self-sufficiency in textiles, food, autos, or timber. The United States has in recent years imported as much as one-fifth of its wood product, yet there are no calls for “ending our dangerous dependence on foreign timber.” The merits of free trade and globalization are just as strong for energy as for any other commodity or economic activity. Energy independence as self-sufficiency is tantamount to energy protectionism and, like all kinds of protectionism, would make us poorer in the end, in part because our costs of production are higher than those of producers in the Middle East and Latin America. (Ironically, one of the many paranoias in the Arab world is that environmentalist opposition to domestic production is actually a cover for the U.S. strategy of using up Arab oil first while it is relatively cheap, while saving our own resources for the time when oil gets more expensive. There is just enough superficial rationality to this to make it plausible.) Dump our Arab suppliers by all means (though it won’t hit their pocketbooks at all), but there is nothing economically wrong or strategically dangerous about continuing to import oil from our largest foreign suppliers, Canada and Mexico.

The phrase “energy independence” ought to be retired along with its cousin, “energy security.” What we should be talking about is energy resilience, that is, a diversified portfolio of energy technologies and global supplies that minimizes the economic and political risk of disruptions from any particular region or energy source. To a degree little understood by the public or the political class, the United States is actually less vulnerable to oil price or supply shocks than it was in the 1970s, even though we import much more of our oil. The main reason is that oil accounts for a much smaller share of our energy use than it did in the 1970s, and we have developed backstops to short-term supply disruptions such as the Strategic Petroleum Reserve and the International Energy Agency. In fact, it was IEA actions, through its standby Coordinated Emergency Response Measures (CERM), to supply the United States with gasoline after hurricanes Katrina and Rita disrupted Gulf Coast refineries that prevented serious gasoline shortages and severe price increases in the fall of 2005.

Another reason not to overemphasize the potential for increased domestic oil production is that it will not have a significant impact on world oil prices, chiefly because of surging demand from China and other developing nations. Although the “peak oil” panic is probably overestimated, the era of cheap oil is over. Between rising global demand and higher production costs, a diversification of primary energy sources makes sense. Of course, higher global prices will make possible the economic development of America’s vast oil shale deposits—as much as 800 billion barrels worth.

And one area where diversification of supply is already happening—where, ironically, we’ve been “drilling, baby, drilling”—is natural gas. As recently as five years ago, long-range projections from every public and private forecaster expected that the United States would have to import as much as 20 percent of its natural gas by the year 2025. Price volatility and supply worries led some American companies (Dow Chemical in one spectacular case) to locate new plants in the Persian Gulf rather than in the United States. But in the last five years a revolution in directional drilling technology has unlocked huge new natural gas supplies in the United States, chiefly in old coal beds on private land in the east. (This latter point is crucial: The new gas has been developed largely on private land, immune to the political obstacles of drilling on public land. Environmentalists are doing their best to slow this up anyway, with worries about the effects of the “hydraulic fracturing” that is essential to new production techniques.) It is now conceivable that the United States could become an exporter of natural gas over the next few decades. In any event, abundant supply will diminish the severe price volatility that has roiled the natural gas market over the last two decades.

Natural gas may be a serious alternative to gasoline as a transportation fuel, as T. Boone Pickens and others are recommending, but there are some difficulties. To use gas as a transportation fuel requires it to be compressed, which presents safety risks that gasoline and diesel fuel do not have. Some major fleet operators such as Federal Express have already considered and rejected for the time being converting their fleets to natural gas, chiefly because of the safety risk of having to operate large on-site systems for compressing natural gas. A deliberate government policy or mandate to switch to gas might forestall development of hybrid-electric cars or new biofuels. Gas is also a plausible alternative to coal if we are serious about reducing greenhouse gas emissions, yet all of the proposals on Capitol Hill ironically set about to preserve coal-fired power indefinitely.

The resiliency and adaptability of the American energy sector over the last generation, along with the protection of existing energy interests such as coal, raises a fundamental question: Do we need a national energy policy? Yes, but it shouldn’t simply double-down on what we’ve been doing for the last generation—subsidizing severely limited renewable technologies such as solar and wind power and corn-based ethanol, mandating new energy efficiency standards, or trying to force a new technology that can’t hope to make it on its own, such as Jimmy Carter’s Synfuels Corporation or more recently various hydrogen schemes. (Hey Governator—how’s that “hydrogen highway” working out for you in California?) Unfortunately this is what most proposals on Capitol Hill—Republican and Democratic alike—would do.

There are some areas where national policy is essential. In addition to removing barriers to oil and gas production, there is the electricity grid, which the private sector cannot renovate alone, and next-generation nuclear power. Once again, Obama has played bait-and-switch on nuclear power, promising support for new designs of small, safe, proliferation-proof reactors, but with such a tiny commitment of funding that the program could barely get off the ground even if the morass of the Nuclear Regulatory Commission were reformed. There is an easy way around this: Have the Defense Department, which is exempt from the maw of the Nuclear Regulatory Commission when it designs and deploys its own reactors, order up a bunch of small modular plants for use on military bases. If the technology proves itself, it can be scaled up quickly for civilian use.

But the chief obstacle to most sensible changes remains the obstructionist NIMBY mentality of environmentalists, which extends even to modernizing the electricity grid. (Their talk about a “smart grid” is mostly deceptive: Environmentalists have in mind not the expansion of capacity that would aid the efficiency of the overall system, but big-brotherish mechanisms that would allow a central authority to turn off your air conditioner at peak periods in the summer.) Two years ago, $4 gasoline proved to be the threshold at which opposition to more domestic oil production eroded. The prospect of $4 gasoline returning soon is probably why Obama decided to try to get out ahead of the game with an offshore drilling announcement. It may require more blackouts such as the Northeast experienced in 2003 or California in 2000 before lawmakers get serious about upgrading the grid.

Above all what needs to be understood is that energy transitions take a long time. As OPEC’s Sheik Yamani once remarked, the Stone Age didn’t end because we ran out of stones. Moving beyond fossil fuels will happen eventually for the same reason we moved into fossil fuels in the first place—when a superior and cleaner form of energy is developed and scaled for mass use. Lots of entrepreneurs are working on it—my favorite is Craig Venter’s algae biofuels project. But a full-fledged transition to a post-fossil fuel world is still a long way off, and we should stop kidding ourselves that all we need is another bill-signing ceremony at the White House to make it happen.

Steven F. Hayward is the F.K. Weyerhaeuser fellow at the American Enterprise Institute, and the author of the forthcoming Almanac of Environmental Trends.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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