Monday, November 26, 2007

Lessons from the First Energy Crisis

Periodically, it's good to reflect on what we learned from the energy crisis of the 1970s and assess the continued relevance of these lessons for our current situation. While some of the insights gained during that turbulent decade have held up well, the world has also changed in important ways, and hanging onto outdated assumptions and solutions won't help us cope with the steady rise of energy prices. Because high oil prices have come on more gradually than in the dual supply shocks of three decades ago, there's not even a consensus on whether today's conditions qualify as an energy crisis. If not, it wouldn't take much to propel us into one.

The energy problems that began with the Arab Oil Embargo in October 1973 and peaked after the Iranian Revolution in 1979 were resolved through a combination of responses, including energy efficiency improvements, fuel switching, diversification of suppliers, and a wave of non-OPEC oil production from places like the North Slope and North Sea. However, despite large public and private investments at the time, the contribution of alternative energy sources to bringing oil prices back to earth was essentially nil.

Some of these strategies look as useful today as they did then, while others are either unavailable or were essentially one-time plays. For example, in 1973 US refineries produced 2.8 million barrels per day (bpd) of residual fuel, much of which was consumed in power plants. Since then, refinery upgrades have turned most of that output into additional gasoline and diesel fuel, while a combination of coal, natural gas and nuclear power assumed oil's place in electricity generation. With current resid production running below 700,000 bpd, and most of that used as marine fuel or road asphalt, that trick can't easily be repeated. Nor is there a groundswell of new crude oil production waiting in the wings. As a result of federal and state drilling bans and limits on access to foreign reserves, combined with rising drilling costs and shortages of key personnel, it's unlikely that we could swamp today's high prices with higher volumes.

The good news lies elsewhere. Efficiency and conservation still offer tremendous scope opportunities, and diversification of supply looks as useful now as it did then, though we need to update our definition of supply to encompass a wider array of liquid fuels and sources. Efficient, low-cost ethanol from Brazil and the Caribbean looks like a helpful counterweight to obstreperous or unreliable oil suppliers. In fact, the current geographical distribution of our energy imports is in need of rebalancing, as political risk in Venezuela--one of our supply anchors for two decades--increases, and production from Mexico's largest oil field, Cantarell, falters. Brazil may be able to help there, too, as its output expands.

That brings us to alternative energy, a.k.a. "cleantech." Despite skepticism about how rapidly it can scale up to displace meaningful quantities of traditional energy--an issue I think has been under-appreciated within the growing cleantech community--alternatives are in a much better position to contribute now than they were in the '70s. What we really need is clear policy guidance on where these alternatives would best fit in a shifting energy diet: covering incremental energy demand, displacing coal and its high greenhouse gas emissions, backing out imported oil, or substituting for nuclear power that might otherwise be expanding at the same time. Whether this is done explicitly, or implicitly through an emissions cap & trade mechanism or "renewable energy standards" that allocate a share of a specific market to renewables, we should understand that alternatives are decades away from being able to substitute for all of these other energy sources at once. Setting priorities will help us maximize the benefits from renewable energy and other alternatives.

Because the roots of our current energy circumstances are different from those of the 1970s' energy crisis, we shouldn't expect the solutions to be identical. Some of the old winning strategies still work, while others face new constraints, the largest of these being the need to reduce greenhouse gas emissions. As daunting as all this sounds, I'm optimistic about the end result, given adequate supplies of stamina, focus and innovation.

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