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Hybrid Fiction

Even $50 a barrel can't wean the world from oil. Only government can do that.

Sept. 20 issue - Is the internal-combustion engine dead? listening to all the voices calling hybrid vehicles the future of transportation, you might think so. Alternative energy is back in style among the chattering classes. But oil prices would have to go a lot higher to make so-called renewables—such as solar and wind energy—commercially viable. That means their future won't be decided by consumer tastes or market conditions, but by government policy.

These are facts. Any oil company will use whatever energy source makes economic sense, since its basic mission is not to pump oil. It's to create value from energy. We figure the cost of one kilowatt of solar photovoltaic power at a minimum of five times the cost of oil power, even when oil is hovering near $50 a barrel—a price we don't expect to hold up for long. Solar power is even less competitive against cheaper fossil fuels like coal and natural gas, and relies on mature technology. A radically new technology—perhaps replacing the silicon in photovoltaic cells with polymers—will be needed to make solar cost effective. That day is at least 20 years off. Wind and biomass are closer than solar to becoming competitive with fossil fuels, but their capacity to supply large amounts of energy is limited. And even the most modern windmills have inspired a popular backlash on esthetic grounds.

Many energy industrialists think nuclear is the answer, but they rely on a misleading analysis of its cost competitiveness. Even if you ignore the political concerns surrounding nuclear waste, producers often fail to correctly calculate the real price of electricity produced from nuclear energy. It costs about as much to close a nuclear plant as it does to build a new one, which is why nuclear power companies are now lobbying worldwide to delay planned plant closings.

There's also a lot of fuzzy talk about things like hybrid homes and cars. Many analysts note that while consumers still pay a lot more for hybrid cars than they can make back in gas savings, this gap is closing. What this line of reasoning ignores is that no technology competes only against itself, and combustion engines are rapidly evolving, too. The rush to innovate is led by the makers of diesel engines, which nearly match the gas efficiency of hybrids, but at much lower cost to consumers. Diesel also cuts greenhouse emissions by 30 to 40 percent compared with gas.

The conclusion is that even with real oil prices at their highest levels in 20 years, no alternative can compete head to head with fossil fuels on a scale broad enough to challenge their market dominance. Given this outlook, market forces won't wean society away from oil, gas and coal. Only government can do this. And since the late 1970s and early 1980s, public funding for R&D in the energy sector has been halved in the United States and Europe. Incentives and subsidies to produce alternative energy sources have fallen throughout the developed world with only a few exceptions—Japan, Germany, Denmark and a few others. This is why, for example, the bulk of U.S. solar hardware is exported to Germany and Japan.

In the United States, public policy continues to support America's love of the sport utility vehicle, which is the major factor behind the continued surge of American oil demand. An absurd loophole allows SUVs to be considered light trucks—and thereby not subject to passenger-vehicle emission requirements. The average total (federal plus local) tax on gas is 25 percent, compared with 50 percent in Japan and more than 70 percent in Western Europe, which partly explains why an American consumes twice the energy of a European. Yet any attack on this policy structure is seen as an attack on the American lifestyle, a quick form of career suicide for politicians.

Europe also faces large (but very different) obstacles to the adoption of new energy sources. For example, high gasoline taxes do encourage conservation, but they also count as the third or fourth largest source of revenue for most European governments. This gives policymakers a double-edged incentive to maintain the fossil-fuel status quo, because a transition to cleaner alternatives would cut their tax income, while raising outlays to subsidize the transition.

Yet the road to a society less dependent on oil is clear. If politicians were serious about these goals, the solution would be at hand: a mix of tax increases on oil products; more rigid mileage and emissions standards for automakers, and incentives to retire old cars and buy cleaner new ones. The transportation sector is crucial, since it will account for about 80 percent of the growth in world oil consumption over the next 25 years. These measures would motivate automakers to step up research, development and production of new cars, and consumers to buy them. But knowing the best road doesn't guarantee that society will take it.

Maugeri is group senior vice president for corporate strategies at Eni, the Italian oil and gas company.

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