Tuesday, January 30, 2007

A Long Enough Lever

The oil price drop of the last several months has been quietly proving one of the central tenets of the "Geo-Green" or "green hawk" groups that have emerged since 9/11. They suggest that by tipping the scales of the global oil supply/demand balance in the right direction, we can cause significant problems for energy-exporting, geopolitically-challenging states such as Iran and Venezuela, while improving our domestic economy. It's ironic that the current lesson hasn't been provided by a huge bow-shock of alternative energy, but largely through the normal functioning of the market. What's the difference between $77 oil and $55 oil? Apparently, it's the million barrels per day of slack that the Saudis have been endeavoring to take out of the market gradually, since last summer--a combination of higher supply and lower demand. But although this proof of concept may come courtesy of OPEC's over-production, that doesn't mean it is the only way to achieve a similar softening of prices.

15 billion additional gallons of ethanol per year would be roughly the equivalent of that million barrels per day of excess oil. Add that to current ethanol production, and it gives us a bogey of 20 billion gallons, well within the President Bush's announced 35 billion gallon target for 2017. Unfortunately, it's probably beyond the reach of current-generation corn ethanol to deliver that quantity at an environmental or food-supply price we could tolerate. In addition, given an ethanol "fossil energy balance" of 1.3:1, we'd need the equivalent of 770,000 barrels per day of energy from coal or natural gas to produce it. If that all came from gas, it would consume an extra 4.5 billion cubic feet per day (BCFD), or about 9% of current US net dry gas production. Since we are already struggling to cover our existing demand for natural gas, coming up with this volume would drive US natural gas prices back to their historical highs of last winter.

We could also get the equivalent in reduced demand from greater energy efficiency. A million barrels per day equates to a bit more than 8% of current gasoline demand, on a yield-and-energy-adjusted basis. That would require making all the vehicles on the road 8% more efficient, driving them 8% less, or any combination of the two adding up to 8%. Since the trend on vehicle miles driven has gone steadily upward year after year, for decades, efficiency will have to carry the load. Unfortunately, it takes 15 years to turn over the car fleet, so trying to influence oil prices via this route will take a long time, certainly more than a decade.

The other way to achieve the same result is to boost domestic oil production. While we are constantly reminded that we only have 3% of the world's proved oil reserves, the government's estimates of the undiscovered resources in areas currently off-limits to drilling appear ample to crank out an extra million barrels per day for a decade or two, before the natural decline of the entire production base swamped it. In addition to the political barriers to drilling in wilderness or offshore, though, this approach would run afoul of the time lags and project delays inherent in this kind of development. As tempting as this strategy might sound to some, it's not a quick fix, either.

But what if we combined all three of these approaches, allocating a third of the target to each? An extra 5 billion gallons per year of ethanol is almost a lock at this point. A 2.7 % reduction in gasoline use is far less ambitious than the President's "20-10" target and could be rolled out as a useful milestone along the way to that. And an extra 250,000 barrels per day of oil could probably be achieved by widening the recent expansion of Gulf Coast drilling leases a bit more. And the nice thing about divvying up the larger goal is that you get there that much faster, by multi-tasking.

The point of all this is simply to demonstrate that relying on any one strategy to get our energy security under control is destined to disappoint us. A combination of complementary approaches, including the important contribution that domestic oil and gas can still make, looks much more promising. Even if the three specific examples cited above aren't the components that we'd ultimately settle on, we need to start somewhere, and we can't ignore the role of energy consumers in determining demand.

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