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Notes for the presidential candidates

The next president of the United States will have to confront the urgent problems attending rapid oil depletion in the OECD countries.

The world's liquid fuels supply can no longer meet demand and global exports levels are set to decline. Oil prices are high, volatile and rising each year, which is likely a permanent condition in the markets while demand remains strong.

Oil consumers in the developed countries are just now starting to feel pinched, but the worst is yet to come. The presidential debates have not included an honest appraisal of our precarious situation.

This column talks about our unique historical circumstances and the conventional wisdom regarding our oil dependency, concluding with a few recommendations for the next president of the United States.

Historical Perspective on the Current Oil Demand Shock

There is always some danger in writing a short "first draft" of history. Some circumstances others think important will inevitably be left out or some will think the entire enterprise is wrong-headed. However it is worth making the attempt if only to briefly explain where we stand and how we got there. Take home points for the presidential candidates are in italics.

Oil production in the United States peaked in 1970. This event was followed a short time later by the disruptions of the 1970's (the Arab embargo, the Iranian revolution). After 1970, economic growth would not be possible in the United States without an increasing oil import dependency. Growing U.S. imports now make up about 60% of the oil we consume, a trend that began after the peak. The "oil shocks" of the 1970's marked the beginning of petroleum resource nationalism, especially in the Middle East. Russia and Venezuela have taken control of their own resources in the last decade. These two historical circumstances are central issues in the presidential campaign of 2008. Alan Greenspan was "saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil." This last futile attempt to defeat oil nationalism by controlling Persian Gulf oil resources failed to solve a problem for oil consumers that began in the 1970's.

World Oil Exports In 1979, President Jimmy Carter believed it was time for belt-tightening. Helped along by the U.S. embassy hostage crisis in Iran, Ronald Reagan espoused an energy policy of "no limits to growth" and was elected by a wide margin in 1980. Reagan was lucky in so far as Prudhoe bay and the North Sea would become large new contributors to U.S. production and global oil exports, which grew rapidly after 1985 (graph left, from An Assessment of World Oil Exports by Luis de Sousa). North Sea output peaked in 1999 and Prudhoe Bay has been in decline since 1989.The candidates should note that no such new oil resources are available now to "pull [our] chestnuts out of the fire," as Sadad Al-Husseini put it in 2005 (Peter Maas' The Breaking Point, New York Times Magazine, August 21, 2005.)

Everybody is looking at the [OPEC and other] producers to pull the chestnuts out of the fire, as if it's our job to fix everybody's problems,'' [al-Husseini] told [Maas]. ''It's not our problem to tell a democratically elected government that you have to do something about your runaway consumers. If your government can't do the job, you can't expect other governments to do it for them.

World Versus OECD Oil Demand Increased oil imports in the economically advanced OECD countries after the mid-1980's created an enormous transfer of wealth to the oil producing countries. As the world entered the 1990's, Western financial interests pushed for economic globalization, which has now created another enormous transfer of wealth to developing countries like China and India. The predictable result has been the same in both cases: a global oil demand shock. Oil demand outside the OECD has grown since 1970, and especially since 2000 (graph left from the EIA demand data). In 1970, OECD consumption accounted for 74% of world oil demand, but that share had diminished to 58% in 2006.

Pressure On Exports Growing subsidized consumption in the oil producing and industrializing countries has put severe pressure on how much oil is available for export. This trend (graph, left) was analyzed in OPEC's Growing Call on Itself, a study done by Jeff Rubin and Peter Buchanan for CIBC World Markets in September, 2007. The New York Times covered the issue in Oil-Rich Nations Use More Energy, Cutting Exports (December 9, 2007).

The [export] trend, though increasingly important, does not necessarily mean there will be oil shortages. More likely, experts say, it will mean big market shifts, with the number of exporting countries shrinking and unconventional sources like Canadian tar sands becoming more important, especially for the United States. And there is likely to be more pressure to open areas now closed to oil production...

Growth in demand among oil exporters is one aspect of a larger issue, breakneck economic growth in parts of the developing world. China and India are expected to account for much of the increase in global oil demand in the next 20 years. But Fatih Birol, chief economist at the International Energy Agency in Paris, rated consumption growth among oil exporters as the second-biggest threat to meeting the world’s oil needs. [emphasis added]

Presidential candidates take note: The Times did not note that the biggest threat to meeting the world's oil needs ... is meeting the world's oil needs, although Fatih Birol no doubt thinks that insufficient investment is the most pressing problem. Despite higher levels of investment driven by high oil prices since 2003, the world's liquid fuels supply has been in a bumpy plateau since the beginning of 2005. Supply has thus failed to meet soaring demand for the last 33 months, which is the fundamental reason the oil price is rising. Production declines in the OECD nations have been a major factor contributing to slow or no growth in the oil supply. If the growth of world oil production falls below consumption growth outside the OECD, then exports become more and more precious. This is precisely what is happening.

The declining exports trend does not "necessarily" mean there will be oil shortages because "big market shifts" will mean that the exported oil will go to the highest bidders in future years. Moreover, the tar sands of Alberta are overrated— Canadian synthetic crude production will provide only marginal relief to Americans. And despite the contention of economists that the U.S. is impervious to high oil prices, there is an oil price that can bring the American economy to its knees. The next president will likely be the one called upon to manage the crisis when that magic number is reached, a crisis that will probably happen during the first term of office.

The historical events that have led to the present liquid fuels crisis are irreversible—we can not turn back the clock. Oil demand has now outstripped the world's ability to meet it. Even if there is an uptick in world liquid fuels production in 2008-2009, scheduled new oil developments can not meet rising demand thereafter, and may well signal the permanent high-water mark of global oil production. These well-established historical trends indicate that future oil export levels are guaranteed to fall. This sets the context for examining the most politically popular solutions to fixing our oil dependency.

Energy Plans of the Candidates

The conventional wisdom that solves the liquids fuel problem among the Democrats is better fuel economy standards in conventional vehicles, plug-in hybrid vehicles (PHEV) and biofuels. David Sandalow, an Energy and Environment Scholar at the Brookings Institution and author of Freedom From Oil, best exemplifies this point of view. This market-driven approach has the virtue of requiring no behavioral change on the part of the American people, who will smoothly make the gradual transition from huge gas-guzzlers to high-tech electricity and ethanol-guzzlers. The Democrats know that electability depends on maintaining the driving status quo. Hilary Clinton's energy plan, Barak Obama's energy plan and Bill Richardson's energy plan present variations on this "wise" path forward.

Our historical review reveals that the main problem with the market-driven solution emphasizing efficiency and substitutes for oil is that there is no longer enough time left to implement it. The CIBC Markets study reports that the oil exports tipping point has been reached now. We can not wait for a gradual transition that will be completed in 2020 (Richardson) or 2030 (Clinton). Worse yet, it is uncertain whether cellulosic ethanol will ever play a significant role in powering American vehicles.

The Republicans take a grab bag approach to the liquids fuels problem. They are also very short on specifics. Mitt Romney and Mike Huckabee present typical assortments—

We must become independent from foreign sources of oil. This will mean a combination of efforts related to conservation and efficiency measures, developing alternative sources of energy like biodiesel, ethanol, nuclear, and coal gasification, and finding more domestic sources of oil such as in ANWR or the Outer Continental Shelf (OCS). [Romney]

We have to explore, we have to conserve, and we have to pursue all avenues of alternative energy: nuclear, wind, solar, hydrogen, clean coal, biodiesel, and biomass. [Huckabee]

It is hard to evaluate Republican "solutions" to American oil dependency because it's all handwaving. Republicans do differ from Democrats over drilling in ANWR and on the Outer Continental Shelves, as well as using coal-to-liquids technology. These are "too little, too late" strategies.

Faith in technology1 and markets can not provide a solution to a crisis which is on our doorstep.

Some Recommendations for the Next President

An historical perspective on the looming liquid fuels crisis indicates that we are decades late in addressing our oil dependency, so we must make up for lost time. While markets will work in the background to effect change over time, government policy mandates are the only way to implement solutions in the short term. Americans need a strong executive who will level with them about the problem. Here's a sampling of initiatives that could be undertaken right away.

  1. The best way to alleviate an oil dependency is to not consume oil at all. To this end, Americans could follow a Work and Shop@Home initiative that encourages telecommuting and purchasing online. The internet provides a huge opportunity for cutting transportation oil usage.
  2. Walking, biking, carpooling, car sharing and using available public mass transit systems must encouraged through incentives.
  3. A national initiative will mandate re-building of America's train system along with other forms of mass transit in urban and suburban areas. Attractive subsidies will encourage use of these systems beyond the incentive provided by very high gasoline prices.
  4. Initiatives to build high density urban housing and industrial parks must be implemented immediately. The location of such developments will be driven by their proximity to trains and mass transit connecting homes and workplaces.
  5. Strong Incentives must be provided to purchase to PHEVs and other alternative vehicle types as these become available for those who can afford to make the switch. Lower and middle class drivers can not be expected to buy expensive new types of cars just when fuel costs are eating up more and more of their household budgets.  Biofuels can be grown and consumed on a local basis where this makes sense.

American oil production has been falling inexorably for 37 years. Imports levels will likely start declining each year from current levels in the medium-term regardless of what policy initiatives are taken. The next president can not let the market dictate the terms by permitting much higher oil prices to crush American families. The next president must tell Americans a simple truth they should have learned long ago—it's time to start living within our shrinking oil budget.

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Notes

1. There is even talk of more amazing plug-in hybrid solutions.

Organized by IEEE-USA, the “Plug-In Hybrids: Accelerating Progress” symposium was held on a beautiful day in Washington, D.C...

The keynote speaker, Senator Maria Cantwell (D-Wash.), plunged directly into the policy fray. “Many of us on Capitol Hill see the potential of plug-in hybrids,” Cantwell said, describing a bill she has introduced to encourage early production and purchase of plug-ins.

The notion is called vehicle-to-grid power, or V2G, and its workings, economics, and practicalities were the meat and potatoes of the symposium. [Jon] Wellinghoff’s [of the Federal Energy Regulatory Commission] appeared to show the energy cost of a plug-in hybrid falling toward zero over time. Much discussion, and some derision, ensued.

 

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