Oil's Place in a Kerry-Lieberman-Graham Climate Bill

The inclusion of support for expanded US oil and gas drilling in a Senate climate proposal issued yesterday is bound to puzzle many readers. If the emissions from oil are responsible for a major portion of human-induced global warming, how can increasing our production of it contribute to reducing US emissions, as the three Senators involved suggest? The answer requires a clear understanding of where most of the emissions in the oil value chain take place. It also invokes a broader view of climate and energy security that recognizes that oil is not as close to being replaced by renewables as we'd like to think, and that in the absence of higher domestic output, our oil imports could continue to increase, with consequences--and emissions--beyond our control.

The proposed framework from Senators John Kerry (D-MA), Joe Lieberman (ID-CT), and Lindsey Graham (R-SC) was released in the form of a letter to President Obama, outlining the parameters of a climate bill that would include emissions caps and market mechanisms--presumably cap & trade--plus support for nuclear power, clean coal, and oil and gas drilling, along with other provisions to protect consumers and promote job creation by helping manufacturers become more energy-efficient. In the absence of its details, the proposal looks broadly similar to other climate measures, including Waxman-Markey and Kerry-Boxer, but without treating domestic producers of conventional energy as undesirable elements. The trio behind this initiative is also interesting, adding Sen. Lieberman's long-standing credibility on cap & trade (3 previous Senate bills) and the bi-partisan participation of Sen. Graham.

To understand what support for domestic oil drilling is doing in a climate bill, however, you have to look at oil's continuing role in our primary energy mix and the distribution of emissions associated with its production, refining and use. Start with primary energy, with oil accounting for 37% of last year's total US energy consumption, in the form of 19.5 million barrels per day (mbd) of crude oil and refined products. Biofuels can't replace oil anytime soon, and even at its maximum extent in 2022, the entire Renewable Fuels Standard would only displace the energy equivalent of about 1.4 mbd of oil, or roughly 7% of current consumption. Nor can wind and solar power do the job; they will be fully engaged in reducing the average emissions of the US electricity mix, only about 1% of which is generated from oil. Some of that green power will eventually find its way into electric vehicles, which do displace oil, though these aren't likely to make up more than a small fraction of the US car fleet for decades. In any case, the emissions from biofuels and electric vehicles may not be that much less than from oil use.

The inescapable conclusion is that the US will continue to burn oil for a long time. The quantities will decrease as efficiency and substitutes ramp up, but not fast enough to back out all of the oil we import for a very long time, let alone all petroleum from all sources. And that's where the energy security aspects emphasized by the three Senators come in; if we're going to need oil for years to come, as much of it as possible should be produced here.

Then there are the emissions from that oil. When assessed on a full lifecyle basis, most of the emissions from petroleum occur when it is used, not when it is produced. That's even true for oil derived from oil sands, which entails significantly higher upstream emissions than for the conventional oil output this framework would promote. Depending on the crude oil source and the products involved, well-to-wheels analysis suggests that 80-90% of emissions occur at the point of use, with production, transportation and refining accounting for the much smaller remainder. As a result, the point of maximum leverage on the emissions from the oil value chain is not exploration & production, which accounts for only a few percent of emissions, or refineries that are already 90% efficient, on average, but the cars and other vehicles and devices in which we consume it. The most effective strategies for reducing oil-based emissions thus involve vehicle dieselization, hybridization, downsizing, and other efficiency measures, along with non-efficiency conservation, including carpooling, telecommuting, virtual meetings, etc.

Moreover, since climate change is inherently global in nature, it doesn't matter whether the upstream emissions associated with oil occur in the Gulf of Mexico, the Persian Gulf, or anywhere else, except to the degree that domestic conventional oil might displace oil from higher-emitting unconventional sources elsewhere. But while the sources of the oil and refined products we use are largely irrelevant from a climate change perspective, they are most certainly relevant to our energy security. Increasing domestic oil production would pay big dividends in tax revenue, job creation, and the reduction of both our trade and fiscal deficits. (Disclosure: My personal investment portfolio includes oil stocks.)

The Houston Chronicle quoted Senator Graham as saying, "There will be no bill with Lindsey Graham's vote if it doesn't have meaningful offshore and onshore exploration." If he represented Alaska, Louisiana or Texas, you might attribute that sentiment to a desire to protect his home state's energy interests. Instead, it reflects a practical reality that seems to have escaped many in the administration, who appear to equate all oil from all sources with environmental and economic ills, rather than realizing that while we all know we need to use less oil for many reasons, that doesn't preclude us from using more of the enormous oil endowment with which the US has been blessed. If we use it wisely, domestic oil can provide a necessary bridge to the clean energy future we all want, and in a manner that is consistent with reducing global greenhouse gas emissions. I don't know whether these three Senators have found the recipe for breaking the Senate impasse over climate change, but this proposal could represent just the kind of grand compromise on energy and the environment that we have needed for a long time.