Sunday, February 19, 2006

Dogbert, Energy Analyst

Several emails called my attention to Sunday's Dilbert comic, which comments on energy security, of all things. In eight panels Dilbert's dog, Dogbert, issues a pithy and substantive critique of the Geo-Green strategy for undermining the financing of Islamic terrorism by reducing our oil consumption, partly through the use of hybrid and plug-in hybrid cars. In the process, Scott Adams takes on Tom Friedman, James Woolsey and other advocates of this approach and aquits himself pretty well.

This prompted me to dredge up two postings from early 2005, with my early reactions to Geo-Green, pro and con:

Monday, January 31, 2005
Is "Geo-Green" The Answer?

Despite my usual soft spot for Tom Friedman and his normally insightful and bold commentary on geopolitics, his editorial in Sunday's New York Times oversimplified a bit too far with its "Geo-Green" energy strategy. Although he neatly describes the paucity of options for dissuading Iran's leaders from pursuing nuclear weapons (see Friday's posting) his prescription for reforming Iran and the rest of the Middle East by driving the price of oil back down to $18 per barrel rests on a shaky foundation.

Based on past oil market behavior, getting oil prices back to this level any time soon would probably require a combination of reduced global demand or increased global production on the order of 4 million barrels per day (MBD). Half of this volume represents a return to OPEC's recent "normal" quota of 25 MBD from its current, essentially flat-out quota of 27 MBD, while the other half mirrors the magnitude of demand drop that sent oil markets into free fall in the 1997 Asian Economic Crisis.

Although some new production will come on stream this year, most of the difference would have to come from the demand side, where Mr. Friedman's "geo-green" options of conservation and substitution via renewables and nuclear power reside. Since most petroleum is used for mobility, while most electricity is used for stationary purposes, the impact of renewables and nuclear on oil demand is fairly indirect and long-term. This leaves us with conservation, which is normally spurred by high prices--at least initially--rather than the low prices Mr. Friedman hopes to achieve. This is something of a paradox, unless he is willing to consider hefty new taxes on petroleum products to raise consumer prices without changing producer prices.

Even if I've overstated what it would take to drive oil prices down, there are other factors to consider. Although a low oil price world would benefit the US economy, along with some of the poorest nations on the planet, it would reduce the incentives to find more oil and to develop the technologies that must ultimately supplant oil. Along these lines, I suspect the likeliest stimulus for another period of low oil prices will come from the market itself. Petroleum is still a volatile and somewhat cyclical commodity, with a history of confounding expectations. Unfortunately for Mr. Friedman's thesis, the last period of $18 oil prices in the late 1990s didn't exactly unleash a tide of liberalization in the Middle East.

Wednesday, February 02, 2005
More Geo-Greens

On Monday I took issue with Tom Friedman's suggestion of a "geo-green" strategy for pressuring Middle East petro-states by reducing oil demand and thus driving down oil prices. Now I find that far from being alone in his views, there's a whole geo-green clique out there, including some neo-conservative heavyweights and keen environmentalists. While I stand by my previous posting on how hard it would be to move the oil demand needle appreciably, it's worth looking at the upside potential.

Start with some history. The last time there was a big push on oil conservation, the result was pretty impressive. After World War II oil demand grew steadily--doubling during the 1960s--until the first oil shock in 1973-74 caused it to stall. It resumed its growth path in the mid-70s, but from 1979, following the Iranian Revolution, to 1989 global oil demand was essentially flat. Along the way, the energy intensity of the US economy dropped sharply, even though the economy continued to grow. Even today, we use fewer BTUs, and certainly fewer barrels of oil, for each million dollars of GDP.

Could a similar drive to efficiency motivated by politics and patriotism, rather than just high energy prices or taxes, slow down or reverse recent trends in energy demand? It's entirely possible, but if we want this to have the maximum benefit, we are looking at the wrong target audience. Although getting Americans to drive more efficient cars and use energy more sparingly would have an impact, we have not been responsible for most of the recent surge in demand. The challenge and opportunity comes from the rapidly growing economies of Asia, and from China, in particular.

Between 2000 and 2004, China's oil demand grew by 2 million barrels per day (MBD), compared to an increase of about 1.3 MBD for the whole industrialized world. As its richest provinces reach the "take-off point" at which the demand for personal mobility soars, this trend will only accelerate. The time for cooperation on conservation is ripe, since China appears at least as concerned about its energy security as we are about ours (see my posting of 1/21/05.)

Getting China and India to develop along a more efficient path is the real prize, and it ought to be a money-spinner, since putting in the best and most efficient technology at the start should be much cheaper than retrofitting them here. In the process, this would do a lot to reduce the rapid growth of greenhouse gas emissions from developing economies, and it may turn out that the Clean Development Mechanism of the Kyoto Treaty is a handy way to transfer these technologies at a profit.

In essence, being geo-green could be quite beneficial and sensible, as long as our concept of "geo" encompasses the entire globalizing world.

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