Tuesday, December 12, 2006

From Supply to Demand

In one of its last acts the 109th Congress approved a modest expansion of the portion of the Gulf of Mexico available for offshore oil and gas drilling. The bill that finally passed was based on the earlier Senate version, rather than the much more ambitious House design, which would have lifted the broad federal offshore drilling ban. Although new supplies from the eastern Gulf will be welcome, as they come onstream over the next 7-15 years, the result falls well short of the kind of offshore drilling reform we really need. That's not necessarily a bad thing, given the desirability of avoiding haste in such an important matter. However, with the expected shift in focus from energy supply to demand with the incoming Democratic Congress, the deeper conversation on this is unlikely to be a priority.

In order to understand why more offshore drilling shouldn't be off the table permanently, as many environmentalists hope and expect, we must examine our entire energy supply, which can be reduced to a fairly simple picture. Although alternative energy is growing rapidly from its small base, our current energy supply derives overwhelmingly (94%) from four sources, in declining order of importance: oil, coal, natural gas, and nuclear power, with renewables (mostly hydroelectric power and biomass, including ethanol) bringing up the tail. Oil typically gets the most attention, because it's both our largest source and the key to transportation. It also accounts for most of our energy imports.

With US oil demand continuing to grow, while our domestic supply shrinks due to the depletion of mature oil fields, the import gap widens with each passing year. The essential first step towards greater energy security, and ultimately the energy independence we hear about so often, is to halt the increase in US oil demand and simultaneously stem the decline in US oil production. That would allow us to freeze oil imports--not as a strategy in itself, as some suggest, but as a consequence of more basic strategies.

The Democrats will arrive in January with renewed enthusiasm for attacking demand, including ideas such as higher automobile efficiency standards, expanded supplies of oil substitutes, and possibly some form of gasoline or carbon taxation. Even with dedication and creativity, getting demand growth under control will be a monumental task, since all the trends are working against it. If the new Congress and the administration work together to achieve this difficult goal, but don't also act to maintain oil production at at least today's level, then we will continue to lose ground.

After six years of focusing heavily on measures to increase oil production, helped along by high oil prices, it's natural and even urgent that we give the demand side of the equation at least as much attention. But if in the process we lose sight of the necessary contribution of sustained oil drilling, these efforts will ultimately fail, as natural depletion and the growing vulnerability of our remaining supplies to Gulf Coast hurricanes erode our existing supply base. If it takes a bi-partisan commission on energy to remind us of that basic truth, then perhaps that's in order.

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