Friday, March 09, 2007

Trade Missions

In the last week two powerful executives have taken important trips to meet with officials in nations that could supply the US with additional energy. These missions couldn't be more different in their public profile, but together they tell us a lot about the likely sources of our energy security over the next decade. President Bush is in Brazil, meeting with President Lula da Silva on the topic of ethanol production, and the CEO of ExxonMobil, Rex Tillerson, just returned from a visit to Libya, where he discussed that country's under-developed oil reserves with Muammar Qaddafi. Some might contrast these trips as the dawn of a new world of energy and a last hurrah of the old one, but I'd prefer to view them both as important aspects of the real world of energy in which we will live for the next couple of decades.

Despite problems of logistics and energy return, ethanol demand is growing, because of its environmental and energy security benefits. However, barring a prompt cost breakthrough on cellulosic ethanol technology, the US will be unable to meet the President's aggressive alternative fuel targets without help from imports. Brazil, which can produce large quantities of additional ethanol at lower costs than the US, represents the leading edge of the global trade that will be necessary to satisfy future biofuels demand in the US and other developed countries. Doing so won't be easy, because the US goal of 35 billion gallons per year by 2017 represent more than 3 times the worldwide production of fuel ethanol in 2006. That means that global ethanol output would have to sustain growth of 12% per year for 10 years, just to satisfy the US.

Creating a framework for high volumes of ethanol trade looks equally challenging, in part because of the distortions created by the US ethanol subsidy and the accompanying--and much misunderstood--tariff on imported ethanol. Today's Wall Street Journal described the lengths that producers and traders will go to, to avoid the 54 cent tariff, effectively capturing a 51 cent subsidy intended for American farmers, rather than their Latin American counterparts.

So where does Mr. Tillerson's visit fit in? Well, even at 35 billion gallons, ethanol would still only equate to a bit more than 2% of global oil production by 2017, or less than 10% of projected US oil consumption. The security of the remainder will have to be ensured in the same way that it has been for the last two-plus decades: by creating as diverse and reliable a base of suppliers as possible. Venezuela was a bulwark of that diversification throughout the 1980s and '90s, but it is now moving sharply into the "unreliable" category, with international companies of all stripes facing high political risk there. Libya can't replace Venezuela for us, even if Col. Qaddafi has turned over a new leaf, but boosting its output by a million barrels per day or more would shore up supplies to southern Europe, thus freeing up production from West Africa for Atlantic Basin customers. And for now Libya looks like a better bet than Iraq, where tens of billions of barrels of untapped oil are certain to remain in the ground until the civil war ends.

As important as President Bush's ethanol mission to Brazil is, applying the influence and leverage of the US government to opening up access to the oil reserves held by the national oil companies is even more urgent. In our understandable enthusiasm for alternative energy, we can't lose sight of the total energy mix, which will be dominated by fossil fuels for some time, yet. Balancing these complementary sources is a key element of national energy policy.

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