Monday, August 04, 2008

Rate of Change

For how much longer will the US depend on petroleum as our primary source of the energy we use for transportation? Conflicting beliefs about the answer to that question lie at the heart of the current debates about offshore drilling and additional support for alternative energy programs. If it is only a few more years, as some assert, then indeed, the production from oil fields in tracts currently off-limits would likely arrive after the greatest need for them has passed. If, on the other hand, we will still be importing oil 20 years from now, then we need to keep our oil project pipeline full, to ensure that we don’t open an even larger window of import vulnerability, on our way to greater energy self-reliance.

Answering this question involves a number of large uncertainties, including the persistence of Americans’ current conservation efforts, particularly if energy prices stabilize or fall farther; whether and how soon non-food-based biofuels can be produced on an industrial, rather than boutique scale; how rapidly plug-in hybrids and other electric vehicles can capture significant market share; and how our response to climate change will re-prioritize our use of other energy resources, and in particular whether we preferentially back out oil or coal first. The future availability of oil itself will also play a role, depending on how close we really are to a permanent peak in global production.

It’s good to have a vision of the end result we desire, presumably a world that is much less reliant on fossil fuels and in which renewable energy sources power electrified cars via a modernized power grid, augmented by nuclear power and liquid biofuels. But planning our journey to that outcome requires a clear understanding of the incremental changes that must occur along the way. In order to make progress toward such a goal, every year the output of that year’s additions to our renewable energy sources must exceed the net result of the growth of demand, moderated by efficiency and conservation, and any changes in the output of other energy sources. If, for example, domestic oil production declines by more than the net new contribution from biofuels, conservation and vehicle electrification, we will lose ground and import more foreign oil.

Last year we did pretty well on the liquid fuels front. In 2007, US ethanol production increased by 1.65 billion gallons per year, the energy equivalent of 71,000 bbl/day of gasoline, about 0.8% of demand, while gasoline consumption grew by less than 0.4%. This year, with gasoline consumption down and ethanol likely to add over 2 billion gallons of additional production, ethanol should capture more market share from petroleum-based gasoline. But in light of concerns about competition between food and fuel, and new questions about the environmental benefits of grain ethanol, that kind of growth cannot be sustained for much longer, without a large contribution from cellulosic biofuels that are still in the demonstration phase.

Progress was less impressive last year with regard to electricity, despite sustained high growth rates for both wind and solar power. The US added a record 5,244 MW of wind capacity, contributing approximately 14 billion kWh of generation, or 0.3% of electricity demand. That backed out the equivalent of 100 billion cubic feet of natural gas, equating to about 50,000 bbl/day of oil. Solar power grew by approximately 270 MW, covering another 0.01% or so of demand, or the equivalent of an extra 2,000 bbl/day of oil. However, US electricity demand grew by 2.3%, while hydropower, our largest renewable energy source, declined in output. As a result, the market shares of coal and nuclear power were stable, while natural gas actually gained ground at the expense of all renewables.

Based on these figures, renewable energy must expand by about a factor of ten before its annual growth will be large enough to make a significant dent in our reliance on fossil fuels in the electricity sector, even without considering the growth in electricity demand that would follow from the addition of millions of plug-in hybrids and EVs to our car fleet. Nor are biofuels likely to eliminate our oil imports in the meantime. At the Congressionally-mandated rate of 36 billion gallons per year in 2022, they will displace the equivalent of 1.5 million bbl/day of gasoline, while the US today imports between 11 and 12 million bbl/day of crude oil and petroleum products, net of exports.

The bottom line is that renewable energy is not yet in a position to make fossil fuels obsolete, and anyone suggesting otherwise is engaging in as much wishful thinking as someone who asserts we can “drill our way to energy independence”—a proposition I have only ever heard as a straw man offered up by opponents of drilling. Renewables have ample scope for further growth, but they also face important obstacles. Even with an increased focus on conservation and efficiency, the chances that we will not still need to import significant quantities of oil ten years from now look very slim, particularly if US oil production continues to decline at the 2-3% per year rate we have experienced over the last decade. Against that backdrop, the current energy compromise suggested by the “Gang of 10” senators looks pragmatic and prudent.

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