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Context for Recommendations
- In 2007, the US used about 101 quadrillion BTUs (“quads”) of primary energy. Quads are a measure that puts all sources on the same basis.
- Of this 101 quads, a) 40% was liquids—mostly oil, used to make transportation fuels like gasoline, jet, and diesel, and a small volume of distillate for heating; b) 23% was natural gas, used in heating and to generate electricity; c) 22% was coal, used only for generating electricity, d) 8% was nuclear, used only for generating electricity, e) 3% was hydropower for generating electricity, and 4% was other renewable fuels excluding hydropower.
What’s important about this? Although we have a diversity of supplies for generating electricity—primarily coal (51%), nuclear (21%), and natural gas (18%), along with declining oil (1%) and increasing hydro and renewables (9%)—we do not have the same diversity of supply for transportation fuels. This means we are more subject to oil price shocks.
The US imports two-thirds of its crude oil, about ten million barrels a day. It imports another 3.4 millions barrels a day in petroleum products. This, too, is a national security and economic risk. Dependence complicates our foreign policy with oil suppliers such as Venezuela, Saudi Arabia, Iran, Iraq, Russia, and Nigeria. It also complicates policy with our economic competitors/partners who import oil and gas, notably the countries of the European Union, China, Japan, and India.
The country from which we import the most oil is Canada, nearly two million barrels a day.
U.S. and international oil companies (IOCs) compete for reserves with national oil companies of foreign countries which hold more than two-thirds of the world’s reserves. Access by IOCs to the world’s oil reserves through production-sharing contracts is increasingly limited or non-existent in Venezuela, Ecuador, Russia, and Mexico.
Most oil-rich countries do not have a political incentive to develop and export their reserves quickly or efficiently. Quite the opposite: oil is (reasonably) considered a significant resource to be held for future generations. It is also an important foreign policy tool.
Non-OPEC sources account for 60% of the world’s oil supply. Many of these—the North Sea, Russia, Mexico—are experiencing declining production. The marginal producers are OPEC countries, particularly Saudi Arabia. With current high demand and short supply they have the market power to set the base price.
Economics professor Mark Perry of the University of Michigan (Flint) quoted March 18, 2008 in The Detroit News: “The (Alaskan) North Slope alone could provide 36 billion barrels of oil and 137 trillion cubic feet of natural gas, which could help meet U.S. energy needs beyond 2050, according to the Department of Energy. That would require opening the National Petroleum Reserve and a small part of the Arctic National Wildlife Reserve to oil production. The drilling ‘footprint’ would be less than the size of Detroit Metro Airport.” Another estimate of US oil off-limits to drilling is 40 billion barrels. By contrast, the Strategic Petroleum Reserve contains about 700 million barrels, less than two percent of the off-limits reserves.
Other countries are drilling for oil in places the US has put under moratoria. Consider Cuba. It recently gave a Chinese oil company permission to look for oil within fifty miles of the Florida coast. The USGS estimates that the North Cuban basin, which can also be accessed from US waters, may hold 4.6 billion barrels of oil.
Per the EIA, in 2007, US oil consumption was 21 million barrels per day (MMBPD), 24% of the world’s total of 85 MMBPD. China’s consumption was 7.5 MMBPD, or 9%.
In 2004, we used 22% of the world’s energy; in 2010, the Energy Information Administration (EIA) estimates we will use 20%. This is not because our energy use is expected to decrease—it’s expected to increase— but because energy use in other countries is increasing faster.
The lowest recent nominal price for marker crude West Texas Intermediate (WTI) was $11.35/bbl in December, 1998. The March 2008 average price for WTI was $105.45/bbl. The average regular gasoline price in December 1998 was 94.5 cents/gallon; in March 2008 it was 324.4 cents/gallon. Even allowing for the fact that pre-March 2008 (lower-priced) crude oil was used to make gasoline sold in March, the difference in multiples between the prices of crude and the prices of gasoline, almost ten vs. less than four, is astonishing.
Fuel costs have first- and second-level effects. The first-level effect is what we pay at the gasoline pump. It costs more to move us around.
The second-level effect is higher transport costs—on airlines, at the store for groceries, medicines, appliances, etc.—which often get embedded as higher product costs. Diesel is similarly important because it’s used to transport goods by truck, rail, and boat.
Although poor economics and regulatory constraints have dictated no new US refineries, expansion and debottlenecking of existing refineries continues. The Motiva refinery in Port Arthur, Texas, owned by Shell and Saudi Aramco, has underway one of the largest expansions in recent years, from 275,000 barrels per day of crude input to 600,000 barrels per day. Total US refining capacity is 17.4 million barrels per day.
Gasoline use is growing in other countries as they adopt Western standards of consumption. The announced Tata, a $2500 Indian car, is one such example. Thus, conservation by the US alone will not have as large an effect as it has had in the past.
In countries like China and Saudi Arabia, governments provide gasoline subsidies. So consumers in those countries do not face the same incentive to conserve.
Ethanol—the Law of Unintended Consequences Riots in poor countries due to the much higher cost of food compel us to understand that making fuel from food (corn-derived and palm-oil-derived ethanol) is not the best long-term gasoline substitute for us or the world.
Large-scale indigenous US sources of primary energy are coal and natural gas.
The Sierra Club endorses natural gas as its large-scale clean energy source of choice.
The fastest-growing energy alternative is wind power in Texas.
Energy Policy Recommendations—Oil and Gasoline
The dollar’s extreme weakness is a key factor in the all-time high price of oil. Higher energy costs, particularly as they flow through transportation, hobble growth in the world. *Strengthening the dollar will help bring down the price of oil.
Oil’s primary use is for transportation fuels. *Broaden transport fuel options beyond gasoline, diesel, and corn-based ethanol. *Encourage conservation, carpooling, walking, bicycling, and mass transit. *Evaluate and, where appropriate, develop alternate transport fuels in addition to corn-derived ethanol such as hybrids, plug-in electric, fuel cells, CNG, hydrogen, and propane.
*Evaluate alternatives carefully. For example, corn-derived ethanol requires considerable land and water.
*Open high-potential areas such as Alaska’s North Slope and the Outer Continental Shelf now off-limits to drilling for oil and gas.
Current unavailability of credit resulting from subprime loans and other poor financial risk decisions affects all Americans at home and at work. *Resolving the crunch will, for example, allow energy companies to better fund exploration and production.
*Implement an oil price cutoff for buying oil to fill the Strategic Petroleum Reserve.
*Expedite refinery regulatory processes and approvals.
The change in consumer preference toward higher-MPG vehicles will reduce growth in gasoline demand in the US. *Enforce the increase in CAFÉ requirements. *Evaluate safety issues as lighter, more fuel-efficient cars increasingly share the road with older, heavy-duty SUVs.
Brazil efficiently produces ethanol from sugar at prices competitive with those in the United States. *Lift the 54-cent/gallon secondary duty on imported ethanol.
Energy Policy Recommendations—Electricity Production
*Encourage increased investment in clean coal technology to limit CO2 emissions and enhance the use of coal.
*Encourage, develop, and continue to expedite approvals for building new nuclear plants.
*Continue to encourage the use of clean-burning natural gas for heat and for electricity generation.
Recognize that since wind, solar and hydro are diffuse energy sources, they require considerable capital and land to gather, concentrate, and use. *Evaluate and develop alternatives such as wind, solar, and hydro where economic.
Greenhouse Gas Recommendations
*Support cap-and-trade as do the president and the presidential candidates. This market-based alternative will allow Adam Smith’s invisible hand—or rather, the millions of hands at thousands of companies—to develop incentives to reduce greenhouse gases.
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