Where the Lunch Bill Gets Paid

One of the repeated themes of this blog is the tradeoffs inherent in our decisions about energy consumption and supply policies--tradeoffs we have all too often ignored, until events such as the recent hurricanes bring these truths home. The global energy system is extraordinarily complex, with direct and indirect inter-connections that are often subtle enough to elude the most experienced analysts. Another article from Sunday's New York Times nicely illustrates the "no free lunch" aspect of these connections, in this case with regard to the environmental impact of oil sands production in Canada.

In the years ahead, resources such as these unconventional oil deposits in northern Alberta Province will become increasingly important in meeting North American and global oil demand. It's worth spending a few moments considering how oil sands recovery, which had previously been regarded as a marginal or uneconomical proposition, moved up the ladder of the energy industry's corporate capital allocation processes. This story has deep connections in US environmental and land use policy, in energy efficiency policy, and in the personal responsibility of individual consumers of energy.

When you look at where oil companies are currently producing oil, and where they expect to produce it in the future, some trends are clear. There has been a marked shift away from drilling in the US--other than the deepwater Gulf of Mexico--and toward opening up "frontier" areas such as the Caspian Sea region and parts of West Africa. At the same time, companies have had to go after more technically challenging opportunities such as deposits in ever deeper ocean depths, and oils that require significant processing and upgrading before they can be marketed. These include Venezuela's Orinoco Belt and Canada's oil sands, a.k.a. "tar sands."

Much of this shift would have happened in any case, because some of these opportunities were highly attractive, but part of the shift has occurred because domestic opportunities with lower technical and political risks (at least in the sense that one thinks of that term in the developing world) were foreclosed. I believe it is valid to draw a direct linkage between our decision to sequester vast oil and gas resources in Alaska and the offshore lower-48 and the increased attractiveness of mining oil sands in Canada, with everything that entails for the environment there. We have, in fact, made a value judgment trading the Canadian wilderness for our own, and for our coastal viewscapes and property values.

At the same time, consumer preferences for larger vehicles--facilitated by the well-known "SUV Loophole" in the federal Corporate Average Fuel Economy standards--have increased global demand for oil at a higher rate than would have otherwise been the case, accelerating the industry's push into the frontiers described above. Again, we've made an implicit tradeoff between our own personal consumption habits and the environmental and developmental impacts of drilling in more remote, less developed places.

All of these tradeoffs might be defensible, but they've been made blindly, without the debate that should have accompanied them. My purpose in bringing this up isn't to assess blame. Rather, as we consider the legislation that is bound to come up as a result of high energy prices and the deficiencies highlighted by the recent hurricanes, these tradeoffs should be explicitly considered. If we choose to continue the offshore drilling bans in Florida, California and elsewhere without taking concrete steps to reduce demand--by an amount proportional to the production these areas could contribute--then we must ask from where the difference will be made up. Alaska? Saudi Arabia? The North Pole? Or will we just continue to shrug our shoulders and assume that the fuel we need will materialize from somewhere far away, out of sight and out of mind?

This isn't just about responsibility, either. If you believe, as I do, that we are at the beginning of a lengthy transition to an energy world that is much less dependent on fossil fuels, then there are real decisions to be made about which areas should and should not be drilled--ever. But those choices need to made in a way that recognizes the vast quantities of hydrocarbons that will be consumed before we reach that destination, and our own role in determining the magnitude of that demand.