It would be easy to blame it on Richard Nixon. He started blathering about "energy independence" shortly after the Arab oil producers raised prices and launched an embargo against the U.S. in October of 1973. Within weeks, oil prices quintupled and the American economy went into seizures.
The crusade for energy independence reached another crescendo last week, when the House voted to approve some $8.1 billion in tax breaks for the mightily struggling energy industry. Let's see, during the first quarter of this year, Exxon Mobil's profits jumped 44 percent. Royal Dutch/Shell's profits were up 42 percent while Marathon Oil's profits were up a measly 26 percent. And there's this news: According to John S. Herold Inc., a research-only firm, five of the country's biggest oil and gas companies had a total of some $51.4 billion in cash on hand at the end of 2004.
Never mind the absurdity of tax breaks for a sector that's printing money. The main problem with the energy bill is that it's being sold as a magic potion that will help America wean itself from foreign sources of energy. When that "energy independence" moment occurs, goes the reasoning, America will be a self-sufficient Valhalla with lots of good-paying manufacturing jobs. Farmers will make big profits by growing acre upon acre of corn and other plants that will be turned into oil-replacing, clean-burning ethanol. And American GIs will never again need to visit the Persian Gulf, except, perhaps, on vacation.
If you believe in that vision, stop reading here. That vision will not happen. America will never -- repeat, never -- be energy independent. America is such a major energy user and the energy market is so complex that we can never be independent. America simply sucks up too much oil (25 percent of world production), too much natural gas, and too much coal to ever cut itself off from the global market. The price for these commodities is set by global market forces like booming economies in China and India, and by the ever-increasing energy needs of citizens everywhere to power their cars, fax machines, computers and air conditioners.
In short, there's no silver bullet when it comes to energy. Pretending that there is only obscures the magnitude of the problem. And that problem is enormous. Hydrocarbons of all types are becoming harder to find and more expensive to produce. And more people are vying for the resources that remain. Domestic oil production has been falling since the early 1970s and no matter how large the subsidy or tax break to domestic drillers, that trend cannot be reversed. Given our current energy consumption, the idea that we can mine enough domestic crude to meet our demand is simply fallacious. You'd be hard-pressed to find any diner at the Houston Petroleum Club to say otherwise.
If we continue pretending that we can somehow be independent of these hard truths, it will be that much harder to make the difficult changes that must be made: a strong embrace of efficiency and conservation (particularly in the transportation sector) and a bolder, more comprehensive program to develop renewable and alternative sources of energy.
I'll explain more in a moment why we can't be independent. But first, a short review of recent comments from the right, the left and the center that use the "I" word:
Then there's New York Times columnist Thomas Friedman, who has begun calling himself a "geo-green." Last December, he called for a Manhattan Projectlike "initiative for alternative energy and conservation to make America energy-independent in 10 years." On Jan. 30, Friedman repeated his battle cry, proclaiming that if only Americans were more energy efficient, the Arab OPEC members' oil revenues will shrink and "they will have to open up their economies and their schools and liberate their women ... It is that simple."
Oh, Tom, if only it were.
Numerous factors keep America from ever becoming energy independent. First is our enormous auto fleet. Amory Lovins and the other energy efficiency gurus keep saying that we can quit buying foreign crude oil if only we all drove more fuel-efficient cars. Their argument goes like this: Two-thirds of the oil the U.S. consumes is used for transportation. In fact, our transportation consumption nearly equals our oil imports. Thus, if we make transportation more efficient, then the need for that imported oil goes away.
Alas, even dramatic increases in America's automobile fuel efficiency will only slow the growth rate of our oil imports. According to the National Commission on Energy Policy, if automakers increased the efficiency of their fleets from the current 24 miles per gallon to 44 mpg, America's motor fuel consumption will still increase by 3.7 million barrels per day by 2025. That trend reflects two facts: Americans are driving more miles each year, and Americans own more than 200 million vehicles, each of which has a life span of about 15 years. Converting that gigantic fleet to one that is more fuel efficient will take decades and cost tens of billions, perhaps even hundreds of billion of dollars. In the meantime, people still need to commute to work. And they are not going to spend $25,000 on a Prius just to save $25 every time they fill up their gas tanks.
Second, even if the U.S. did manage to reduce its overall oil consumption, it is unlikely to have a major effect on oil prices or oil supply. Oil is so fungible and demand so high that crude being loaded at Yanbu, Saudia Arabia, that isn't bought by a refiner in Texas, will be shipped instead to Singapore or Shanghai.
The booming economies of China and India are creating enormous demand for petroleum. The Chinese economy grew by almost 10 percent during the first quarter of 2005. Decreasing consumption in America "won't have a global impact on major oil exporters," says Scott Tinker, the director of the University of Texas Bureau of Economic Geology. "In fact, quite the opposite. The big oil-exporting countries are recognizing that the future market for them is in the mid- and Far East, in countries like India and China. Increased demand in those regions will overshadow decreased consumption in the U.S., keeping global demand above global supply." That's bad news for all those Hummer drivers who will be paying yet higher prices at the pump.
Tinker raises a key point: Global demand is reaching parity with global supply. The Organization of the Petroleum Exporting Countries has, for three decades, controlled global oil prices. But OPEC has no spare capacity. Thus, the price of oil has become more volatile, and every barrel that comes onto the market is quickly sold. That means that oil buyers cannot deny their currency to one supplier in favor of another. In short, oil prices are determined on a global market in which every player is subject to fluctuations in price and supply. This point was summarized in a 2002 report by the Congressional Research Service. It determined that "energy independence will not free the United States from oil price shocks."
Oil is only part of the imported energy question. Over the next five years, America is going to become a major natural gas importer. By 2010, according to the Federal Energy Regulatory Commission, the U.S. will be importing about 10 percent of its daily gas needs in the form of liquefied natural gas (LNG). That gas will come from places like Qatar, Trinidad and Nigeria. By 2025, the FERC expects LNG to account for 20 percent of America's daily gas consumption. And there is no alternative. The U.S. -- which has built dozens of new gas-fired electric power plants over the past few years -- cannot meet its gas demand any other way. No amount of tax subsidies or drilling programs will allow the U.S. to escape the ongoing decline in domestic gas production.
Furthermore, over the next decade or so, the natural gas market will increasingly mimic the oil market -- with price being determined on a global basis. That trend will accelerate in the coming decades as natural gas grabs a larger percentage of overall global energy consumption. Gas is an excellent fuel source. It contains no sulphur. It burns cleanly, is easily shipped via pipeline and there is a lot of it. But there's a problem. According to the Energy Information Administration, nearly half of all proven global gas reserves are in the Persian Gulf. So even if the U.S. does everything right and in the coming two or three decades we all start driving efficient cars that use less oil, and using waffle irons that use less electricity (and less imported natural gas), we are still going to be tied to the Persian Gulf.
One final factor to keep in mind when thinking about energy independence is peak oil, the concept that the world is reaching, or has already reached, its capacity to produce ever-increasing amounts of petroleum. Peak oil is fundamentally changing the global balance of power. It is giving the big oil-exporting nations a lot more power and we had better get used to it.
If oil producers cannot meet surging global demand, energy prices, and gasoline prices in particular, will likely continue upward. Which means that the Arab OPEC countries -- which are already swimming in cash -- will become even richer. According to a recent report from the World Bank, the Arab oil-producing countries will take in nearly $300 billion from their oil exports this year. That's nearly double the amount they garnered in 2002. By the end of this year, the World Bank predicts that Iran will have $18.5 billion in cash on hand -- more than four times the surplus the country had in 2002. Kuwait will have $13.9 billion, more than three times its 2002 surplus. The Saudis will have a staggering $60.6 billion surplus, five times the amount they had in 2002.
These countries are using that cash to strengthen their own economies. And well they should. Saudi Arabia, Iran, Iraq and Nigeria all have rapidly growing populations. According to the U.N., Saudi Arabia's population will increase by more than 41 percent over the next 15 years. All of those new citizens will need education, housing and medical care. These population surges could cause major instability in all of these countries. And as we are seeing in Iraq, insurrections are bad for exports. The Bush administration originally claimed that Iraq's oil revenues would pay for all of the rebuilding efforts. But the country is struggling to maintain export rates of 1.5 million barrels per day due to the constant attacks on the country's oil infrastructure.
More important, these countries may view the idea of energy independence as an opportunity to move out of America's orbit. So even though the U.S. is a popular market for the OPEC countries, George W. Bush and his policies are not. A year ago, the Pew Center for People and the Press found that in predominantly Muslim countries, "anger toward the United States remains pervasive." It remains to be seen if the major oil-producing countries will refuse to do business with the U.S.
Bush has sought to isolate the Venezuelan and Iranian oil markets but his efforts aren't working. Venezuelan President Hugo Chavez has already struck major oil contracts with Cuba and China. Over the last few months, the Iranians have signed a $40 billion energy deal with India and a $70 billion deal with the Chinese. The Iranians are also negotiating a huge deal with Pakistan and India that would carry natural gas to India. Dubbed the "peace pipeline," the Bush administration is actively trying to stop the project. But in March, India's oil minister, Mani Shankar Aiyar, told reporters that the project "can't be compromised for any third-party concern." Then, speaking more directly to the Bush administration, he said that "friendly countries in the world must recognize that even if they have national concerns, we have a very important requirement of energy without which we cannot hope to sustain priorities."
As for the Saudis, they remain one of America's closest allies. But two weeks before Saudi Crown Prince Abdullah went to Crawford, Texas, to hold hands with George W. Bush, he was in Paris, signing a $26 billion defense deal with Jacques Chirac. The deal calls for the Saudis to buy 96 Rafale fighters from France. Meanwhile, our dear friends, the Kuwaitis, are demanding that the U.S. pay them $500 million for the fuel they have been supplying (at no cost) to American troops involved in the second Iraq war.
The point is this: Globalization is a fact of life in the energy business. It has been for a long time. And the global interconnectedness of the energy trade is accelerating. That trend is accelerating even as oil-rich countries like Russia, Venezuela, Kuwait and others are taking more control over their domestic energy resources. That means that the major oil companies, long accustomed to getting major concessions in these countries, may not have as much access to big oil fields as they once did -- another reason why the major oil companies (Exxon Mobil, BP, Shell) will soon reach peak production.
All of these factors should be forcing the U.S. toward more energy efficiency and huge investments in renewable energy. Instead, President Bush is talking about building refineries on old military bases. But he is not telling us exactly where he's going to get the crude oil to feed those refineries. He wants to drill in the Arctic National Wildlife Refuge. But the U.S. Geological Survey estimates that only about 6 billion barrels of oil could be recovered from the refuge, a billion less than Americans consume a year. What's more, there's no guarantee that oil companies that set up shop on the Alaskan refuge will hawk their oil only to the United States.
Although America will always be part of the global oil market, we must still aggressively pursue conservation, efficiency and renewable energy at home. Conservation in the automotive sector can help us reduce oil consumption. That's good for America because it reduces air pollution and cuts greenhouse emissions. It may also reduce the amount of oil we need to import. The U.S. now spends about $12 billion per month on imported oil. Cutting those energy imports will be good for our balance of trade. Biofuels, like ethanol made from domestically grown plants, can make a significant contribution toward offsetting imported oil. Rethinking our transportation system, and diverting some of our transportation dollars away from cars and roads and toward mass transit, will help reduce urban sprawl and conserve open space.
We need renewable sources of energy like wind and solar for many reasons. First, they are environmentally friendly: no greenhouse gases or pollutants. Second, the cost of these technologies is falling, and they may soon become competitive with fossil fuels (coal and natural gas). Third, they can reduce the amount of fossil fuels needed to produce electricity and reduce the need for building expensive new power plants.
Unfortunately, George W. Bush has shown no leadership on energy issues, even as big strides are being made in developing alternative sources. One new technology turns infrared light into electricity, dramatically improving the efficiency of existing photovoltaic cells. Wind power continues to grow rapidly, while getting only minor federal subsidies. Other more capital-intensive processes like coal gasification and gas-to-liquids are showing promise. If environmentalists are going to be realistic about America's energy future, they are going to have to get over their long-standing aversion to nuclear power. The Japanese conglomerate, Toshiba, has just introduced a prototype of a micro-nuclear power plant that produces 25 megawatts of power and does so at fairly low cost.
All of these technologies could have roles in America's energy future. But reducing America's energy consumption -- or at the very least, slowing the rate of growth of our fossil fuel consumption -- will take years, barrels of cash, and more than a little bravery in Congress and the White House.
It's time to get started.
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