Wednesday, February 25, 2009

Energy Omission

When President Obama spoke about energy in last night's address to a joint session of Congress, his focus was on renewable energy. There was no mention of last year's hot-button issue of drilling for more oil off the coast of the US, and I doubt that this struck many listeners as odd. After a 72% drop from last July's peak oil price and the onset of a global recession and financial crisis, offshore drilling must seem like yesterday's news. The world is now awash in oil for which the expected demand has receded, and many Americans are convinced that the passage of an economic stimulus package that included $77 billion for energy--mostly renewables and efficiency--has put us on a path to achieving energy independence. But while the conditions that gave rise to last summer's mantra of "Drill, Baby, Drill" have altered beyond recognition, the continued development of the nation's oil endowment turns out to be as important to our economic future as the infrastructure investments that were included in the stimulus, or the wind, solar power and biofuels that the President cited in his remarks. That's because renewable electricity doesn't displace oil; our output of biofuels is still relatively small; and before the high-mileage vehicles we've been promised are on the road in large enough numbers to matter, natural decline will have pared the output of the oil fields upon which we rely today by at least a third--more than the energy contribution of all these new programs combined.

Start with non-hydroelectric renewable power--wind, solar, geothermal, and the other means of tapping natural, perpetual energy flows. They are essential contributors to the lower-emission energy economy we must have in the future, and they enhance our energy security, but aside from supplying only a small fraction of our current energy needs, they have next to no effect on oil demand, at least in the US. Last year only 1.1% of the electricity we used was generated from oil, so there's not much left to displace from the power sector. That work was done in the 1970s and '80s by nuclear power and natural gas turbines. Instead, intermittent or cyclical renewables such as wind and solar power will largely displace natural gas, while geothermal can take the place of some baseload coal power.

Biofuels are a different story. Liquid biofuels compete directly with oil, and the Congress has committed us to using an increasing volume of them every year through at least 2022. However, even ignoring the substantial quantities of fossil energy required to produce them, their contribution is still on a small scale, compared to current US petroleum consumption. For example, last year's record output of approximately 9.2 billion gallons of ethanol, the energy equivalent of 6.1 billion gallons of gasoline, made up only 4.4% of our 2008 gasoline consumption on a BTU basis. By comparison, the nation's oil wells produced roughly 76 billion gallons last year, despite significant disruptions from Hurricane Ike. And because of its lower energy content, every gallon of ethanol blended into gasoline increases our overall fuel demand. In a recent study, the Oak Ridge Laboratory of the Department of Energy found that cars running on a blend containing 20% ethanol--a level currently under consideration for reasons I could devote an entire posting to explaining--required an average of 7.7% more fuel to travel the same distance as on a gallon of petroleum gasoline.

That brings us to improved fuel economy and vehicle electrification, which together probably constitute our best hope for reducing oil consumption by large quantities in the long run. Unfortunately, the median age of US cars has been rising for the last decade, even before the car industry suffered an 18% drop in sales last year. So while the total fleet of 235 million cars and light trucks is likely to grow more slowly than in the past, it will also turn over at a lower rate than previously. Even if the fuel economy of new cars improved by 1 mpg per year--four times the recent rate--the whole fleet might still only be about 10% more efficient than today's within eight years. Do that and double ethanol output over the same interval, and we'll still need a lot of oil to fuel our transportation sector.

Where will that oil come from? Well, few Americans want to increase our reliance on the Middle East, which holds roughly 60% of the world's oil reserves. And our safe, reliable suppliers close to home are going to be challenged just to continue to supply what they already do. Canadian output depends heavily on oil sands production, which is highly capital-intensive and does not compete well at current prices. Production in Mexico is falling off a cliff, with the sharp decline of the super-giant Cantarell field. These two countries together accounted for 33% of our net oil imports in 2007. It's not all bad news; Brazil has discovered vast new oil deposits--in deep water offshore--and plans to ramp up production in the next few years. However, the global oil industry needs to bring on between 3 and 5 million barrels per day of new production every year, just to keep pace with the inexorable depletion of existing fields. When investment slows, decline wins out, and last week the CEO of Total, the French oil super-major, indicated that this effect could cap global output at 89 million barrels per day, providing scant headroom once the global recession ends.

There's no doubt that the US oil sector is the world's most mature, having produced a cumulative 200 billion barrels since Col. Drake's first well in 1859. But that doesn't mean that there aren't significant quantities of oil left to extract, both in the large untapped deposits onshore and offshore, and in oil fields abandoned under earlier extraction methods. Even if pessimistic estimates that accessing the former would only add 200,000 bbl/day of new oil are correct--defying logic, experience, and any reasonable assessment of likely reserves-to-production ratios--the increment would still contribute as much net energy as our entire recent ethanol expansion, while creating many jobs when they're most needed. And instead of requiring subsidies, tax incentives, and federal grants to get this effort going, it could begin with a signature and ultimately contribute many billions of dollars in royalties and income tax toward paying down the crippling debt we are taking on to ease the recession.

Although offshore drilling seems unlikely to become a cause célèbre again, until oil prices spike on the other side of the recession, it has an important role to play in a balanced energy strategy for the country. Domestic oil and renewable energy aren't mutually exclusive; bridging our oil supplies will be essential for a smooth transition to the cleaner and greener energy and transportation mix we all want. Nor have low gas prices sapped the public's interest in proceeding with development. A new poll indicates that 61% of those who voted in last November's election still support more drilling. The administration should take note, and clear the way for responsible access to the billions of barrels of oil that were kept off limits for decades.

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