Wednesday, June 28, 2006

Breaking the Trends

Senator Kerry's recent proposal on energy independence got me thinking about how we could make a truly meaningful dent in our oil balance over the next decade. At the moment, everyone seems focused on variations of essentially the same tools, aimed either at reducing demand or increasing supply, including supplies of alternative fuels. But this is like encircling the enemy, while leaving a gaping hole through which he can retreat. What's needed is a pincer movement: one jaw focused on cutting the growth of petroleum product demand, the other on stemming the decline in domestic oil production. Neither side alone will do, because either, unchecked, will overwhelm the other over time.

Consider demand management. Over the last year or so, I've commented on endless proposals for gasoline taxes, taxes on engine displacement, taxes on road usage, and tax incentives for efficient cars. The huge size and low turnover rate of the fleet limit the impact of efficiency, and new net taxes would be extremely difficult to pass in a Congress of either party. Nevertheless, only higher fuel prices have been proved to restrain demand, and it's clear from the experience of this year that $3.00/gallon, however painful for many, isn't high enough to reverse our growth trend.

I've really struggled with the idea of higher gas taxes, as regular readers may recall, but I'm not sure there's a better option than to impose a gas tax that is roughly neutral for the average driver, and skip everything else, including all the expensive incentives. $1.50 per gallon, offset by a rebate of $700 per licensed driver/vehicle combination, ought to be enough to do the trick. Under this scheme, someone driving a Chevy Impala 12,000 miles per year would roughly break even. A Hummer owner with the same usage would be out about $900 per year, while a Prius owner would net $375, on top of the inherent economic benefit of driving a 55 mpg vehicle, which already amounts to roughly $800 vs. the average car at $3.00/gallon. If we wanted to make the net impact more positive or more negative, we need only tweak size of the gallon tax and rebate.

But slowing the growth of demand isn't enough; without some prudent deregulation, US oil production will continue to slide, and imports will grow inexorably. In the past, I've characterized the US as the most heavily explored and exploited petroleum province in the world, and that's certainly true, but it applies primarily to the lower 48 states and the near offshore waters. Alaska and the protected segments of the outer continental shelf offer the prospect of another Texas, in aggregate. We can't afford to pass up on that, because almost everything else we have is either in deep decline or headed there. We are simply not going to reduce our imports if we allow domestic production to decline from 6 million barrels per day to 3 or 4 in 20 years' time.

As to funding more energy R&D, I'm all for it, but we need to understand technology development cycles and fleet-turnover and infrastructure-replacement dynamics. Technology alone can't solve this problem--by which I mean deliver actual reduction in consumption in the millions of barrels per day--within this decade, and will just begin to contribute in the next. That means the near-term solutions must come largely from within our current energy suite. So, like it or not, we're stuck with producing more oil where we can, and providing strong encouragement to use less of it. That's not the popular answer, but it's the one with the best chance of making progress towards an independence goal that is roughly 30 years old at this point.

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