The PBS NewsHour last night had a conversation with Economist magazine writer Vijay Vaitheeswaran, author of the new book, "ZOOM: The Global Race to Fuel the Car of the Future." As a world energy/oil markets analyst for 17 years, it's probably not surprising that I was interested to hear what Vaitheeswaran had to say. In the end, I thought it was an intriguing conversation, during which Vaitheeswaran made the following important points (my comments in italics following each point:
*We are not necessarily "in a world of $100 oil forever." It is, in fact, a popular and "fundamental fallacy," as is the belief that we're imminently running out of oil ("If you look to the Middle East, the Persian Gulf countries, there are vast reserves of oil.")
I agree with this, which is why I don't believe we can count on "oil running out" to save us, but why it will take government policy action -- not oil "running out" -- to transition the United States away from a fossil-fuel, carbon-based economy.
*"The old saying in the energy game is the best cure for high prices is high prices.
That's so true. What we saw, for instance, in the late 1970s and 1980s was a huge oil price spike, followed by a just-as-huge oil price collapse. We saw a smaller price spike in the early 1990s, followed by a collapse to $10 per barrel in 1998. I'm not predicting a collapse from $110 to $10 per barrel this time around, but to simply assume that oil prices will stay high forever is a fundamental oversimplification, as it ignores the significant long-term price elasticities on oil supply and demand. (Also note that, at least for now, OPEC has essentially ZERO spare oil production capacity, which essentially means that OPEC has lost control of oil prices on the upside and is not anywhere near close to regaining that control.)
*The short-term problem with high oil prices is that the parties benefiting -- "the Saudis, and the remaining Persian Gulf countries... the petro economies of Venezuela, Nigeria and Russia" -- are not necessarily our friends. And, as Vaitheeswaran correctly points out, "Oil is actually a force that tends to stunt democratic development, [entrench] autocrats." This is all part of what is known as the "oil curse."
Very true, which is the the "geostrategic" part of the geo-green argument for getting off of oil. In short, we don't want to perpetuate the "oil curse" cycle, and we certainly don't want to continue transferring huge sums of money to autocratic regimes (and terrorists) around the world.
*So what's the answer? According to Vaitheeswaran, we're already seeing a "huge rush into alternative energy investments, the clean-tech boom, as it's called." We're also seeing a "great awakening of America to climate change on one hand, as well as the dangers of oil addiction on the other." However, OPEC has shown in the past that they are quite capable of manipulating oil prices to stunt development of alternatives to oil. That's why Vaitheeswaran strongly advocates "public policy" to "deliver a floor price for oil." "Action at home," in other words, "whether it's carbon cap-and-trade, as the different presidential candidates propose, or carbon taxes."
I couldn't agree more. Ditto, ditto, and ditto. Government: take action now, while you have a chance, to get us off of oil, not hold silly hearings that accomplish nothing or making matters worse through scams like corn-based ethanol subsidies to ADM and other agribusiness giants.
*Finally, Vaitheeswaran addresses the government's role in setting policy for carbon pollution -- an "externality, something outside the market that you don't expect the market to price in, the harm that burning oil does to human health or to global warming or the geopolitical costs, those things government policies should come and do something about." However, Vaitheeswaran also says that government should NOT be in the position of "picking specific winners," as that is a "classical cronyistic model of government that has typically led us down the wrong path."
I couldn't agree more on all of this. That, combined with my years as an economist, is why I tend to favor a carbon tax (with appropriate offsets and incentives to deal with the inherent regressivity of energy taxes on low-income people) -- get the price signals right and everything else will follow. Or, as Vaitheeswaran says, "allow a level playing field and a thousand flowers to bloom to see what should take us to life after oil."
If you look at the rocks in an old oil reservoir, there is still tons of oil trapped in the pores of the rock. But getting it out is the tough part - we have already taken most of the easy stuff. It isn't clear that any sort of technology will help with this either - if you have to expend more than a barrel's worth of energy to get a barrel of oil out, then there really isn't much point in extracting it in the first place.
Problem is, aside from a handful of hybrids, none are in production. If we could just get a kick from Uncle Sam we could be looking at significant change very quickly. But that's a big if.
We talk a lot about the car problem. But what replaces the diesel truck? What will fuel trains, planes, and ships to replace carbon-based combustion? I guess lubricants aren't so much a problem, we can still use oil for that right? It's not being combusted.
We could power all of cars with electricity. And I guess you could do the same for trucking fleets. This would just shift energy demand from oil to electricity and we would need a lot more generation to replace oil as an energy source. On top of that, the grid would need to be upgraded to handle a much higher megawatt-hour demand.
These are huge, huge capital investments. I don't know that utilities could finance that on their own especially if you are also requiring them to shutter their coal-generation facilities. This would mean the Feds and state governments would need to step in help pick up a lot of the financing burden. That means more taxation if you aren't gutting Medicare, Medicaid, OASDI, and defense spending. That means a carbon tax probably would not be revenue neutral. Alternatively, you could draw lots of private investment if state regulators guaranteed much higher rates of return for utilities, but that means higher bills for customers. How do you sell this to the populace?
1) National security
2) Global climate change
The key is getting the price signals right, then let the free market work its magic.