Wednesday, February 01, 2006

Finding the Right Mix

A year ago, the energy focus of President Bush's State of the Union address was on the stalled energy policy bill, which finally passed the Congress last summer. This year, energy was one of the centerpieces of the speech, with the President emphasizing the importance of reducing our dependence on imported oil, especially from the Middle East. As this morning's New York Times reminds us, we've heard this refrain before, from presidents going back to Richard Nixon. Is reducing imports really possible, or is it mere rhetoric?

The challenge looks imposing, when you consider the recent direction of the two components that together determine the need for imports: our oil demand and domestic petroleum production. These two trends have been heading in opposite directions for years. Our oil consumption has been growing at 1-1/2% since the early 1990s--but more like 3% in 2004. Meanwhile, production is declining by about 4% per year, even before last year's hurricanes, which reduced US oil output in 2005 to the lowest level since 1949. In other words, the size of our "independence gap" is increasing by about 6% every year. Any realistic program for taming the growth of that gap, let alone reversing it, will require a combination of dramatic improvements in energy efficiency, additional alternative transportation fuels, and expanded conventional oil production. Last night's speech addressed the first two components of this mix.

President Bush highlighted several specific technologies for tackling our import dependence, including biofuels and other renewables, zero-emission coal power plants, and advanced hybrid cars. Although I still believe our primary focus should be on outcomes--specifying specific targets for energy savings and emissions reductions, rather than choosing technologies-- the solutions mentioned last night at least have a high likelihood of being important elements of our future energy system, and they all bear on our oil imports, either directly or indirectly.

I was particularly pleased to hear the President highlight the potential of advanced, biotechnology-based fuels. The grain ethanol we've relied on so far is simply not the answer to our energy problems. As I've mentioned previously, its energy contribution is uncertain--either modestly positive, or actually negative--and it certainly doesn't justify the billions of dollars in subsidies it has received. Technology will change that, as new processes offer the potential of both lower cost and much higher efficiency, while consuming crop waste, rather than crops.

Unfortunately, there was no mention of how the Advanced Energy Initiative will be funded. Initial estimates suggest it represents an increase of at least $700 million over energy programs already in place. Given growing calls for higher gasoline taxes, the President should at least have indicated why he has chosen not to raise the money for his energy initiative from that source, considering that less than a penny a gallon would have done the trick.

I suspect that once all the pundits have weighed in, the energy portion of the State of the Union will have pleased few of them. Those who have been calling for drastic measures will see it as too incremental and patient. Proponents of market-based solutions will bridle at further investment in technologies that remain highly uncertain, and are not yet competitive. As for me, I think it's a step in the right direction. Although I still regard energy independence as both practically unattainable and inconsistent with our trade-based economic system, there are many good reasons for getting our oil imports under control, and all the measures President Bush cited would help do just that, though it will take years to see the results. In addition, the highlighted energy technologies would all cut greenhouse gas emissions; if our response to climate change must wear the livery of energy independence, so be it.

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