Hello and welcome to Grist Talks. I’m your host Mary Bruno, and I’m joined today by my guests:
Lisa Margonelli, author of the 2007 book Oil on the Brain and currently the director of Energy Policy Initiative at the New America Foundation where she explores the promise and possibility of a post-oil world.
Severin Bornstein, an economist and professor of Business Administration and Public Policy at the University of California, Berkeley, who studies renewable energy, economic policies around reducing greenhouse gases, and equity in the pricing of electricity.
And Geoffery Styles, a chemical engineer, MBA, and former longtime Texaco executive, who is now the Managing Director of his own consulting firm — GSW Strategy Group – which specializes in energy and environmental strategy.
Welcome to all of you and thank you for joining us.
We’re going to be talking today about — you guessed it — oil. Specifically, about the status of our transition away from this powerful, efficient, valuable and, let’s face it, addictive source of energy. The world has been running on oil for about 150 years now. It’s the source for nearly 40 percent of America’s power. But oil is also a finite resource and it comes with some pretty sobering downsides: environmentally devastating leaks in the Gulf of Mexico and in Michigan’s Kalamazoo River, greenhouse gas emissions that are altering the Earth’s climate and, now and again, wars fought to secure oil fields around the world. So, let’s start with Lisa Margonelli.
Mary Bruno: Lisa, fossil fuel critics talk about oil as a dwindling resource found only in ever harder to get at places, hence deepwater drilling rigs and tar sands. But where are we really in the lifespan, if you will, of oil? Is it a middle-aged resource, or a doddering senior resource?
Lisa Margonelli: We’re probably in the late middle age of oil, but that doesn’t mean that we don’t have a very extended senior moment coming. I’m just going to back up and say where I think we are.
For many years, the oil price was very predictable. Up through the early ’70s, gas prices were literally rusted to the signs at gas stations in the U.S. That’s how rarely the price changed.
Then we went through a period — during the 1980s, ’90s, and early 2000s — where the oil market basically fluctuated in long waves over a long period of time. In the early ’80s, we paid around $70 a barrel, in the equivalent of today’s dollars. By 1998-99, it went all the way down to $9 a barrel. Then it slowly crawled back up.
Now, prices are a lot more volatile. Price can go very high very quickly, because a Nigerian warlord made a phone call.
We’re also in a time of political volatility. Reserves in non-OPEC countries — countries that have not nationalized their oil resources — have peaked, which means the balance of power has shifted to countries that have oil resources which they control. You have more countries thinking in terms of maximizing revenue for themselves. And this behavior is not particularly predictable.
So we are in a time where oil is going to cost us more environmentally, politically, strategically and, of course, economically.
As the price gets higher, or fluctuates more frequently and wildly, we will start to feel that we are going through a transition to less predictable oil, regardless of how much actual oil there is on earth. And I think we are in the midst of that transition now.
MB: Severin, where are we in oil’s lifespan?
Severin Bornstein: I am an economist. I don’t do geology. I’m not a supporter or proponent of the peak oil folks. I do know history. There’s been lots of discussion over the years about running out of oil, and it hasn’t born out. Yes, we’re running out of conventional oil. But the technology is getting better at reaching oil. When people ask me [whether we’re running out of oil], I look at history and at the oil futures market, and they both say “no.”
MB: But we take more risks to get that oil, don’t we?
SB: We are tilting more and more towards the Middle East and towards unstable governments for oil supplies. That creates real geo-political and macro-economic problems for the United States, because we’re producing less and less of our own oil. Realistically, we’ll never be able to produce enough oil to come close to the level of demand we’re at right now.
As long as we’re using oil as a primary transportation resource, we’re going to have to rely on imports from economies that are quite separate from ours. So when the price of oil goes up, a lot of wealth flows out of our economy. And then of course, there is an environmental impact.
I don’t think finding oil is going to be the constraint that moves us away from oil; I think it’s going to be all of these other factors that are going to make us face up to the fact that we need to find a different resource to power our economy. That’s not going to happen overnight. It’s going to happen over many decades. We’re starting to move in that direction. But it’s going to be a very long change.
MB: So, Geoff, it seems we’re not in imminent danger of running out of oil. But Lisa and Severin both mentioned some powerful incentives to convert to a different source of energy, including environmental risks and economic security issues. You worked in the oil industry for many years. Does the industry feel the need to diversify into other sources of energy? If so, what are they doing?
Geoffery Styles: It’s important to note that production rates are actually much more important than the amount of oil that’s physically in the ground. If you subscribe to the analysis of the Hubbert Curve, we have about as much oil left as we’ve used to date over the last 150 years. So there’s still decades worth of resource there. The question is: Can we produce it rapidly enough to meet the world’s growing needs at an acceptable price? That’s where you get into difficulties.
There’s really no clear consensus. [The answer] really goes to the heart of how an oil company looks at that world and decides where to invest its money. Oil is still an attractive resource, as long as you have access to it. From that standpoint, I would say the transition is already underway.
U.S. companies are already well on their way towards natural gas, a fuel that’s abundant and, most importantly, a fuel to which they have greater access. You also see a lot of companies investing in R&D for renewable energy. But renewables are still nowhere close to the scale of the oil and gas industries. A typical ethanol plant in the U.S. is 30 times smaller than a typical oil refinery. In addition, many of the most promising [renewable] technologies are still in their R&D stage.
Ultimately, it comes down to returns. Returns [for renewables] are really not comparable yet. And it’s not just whether oil company shareholders — of which I am one — are going to get an attractive financial return. It really goes to whether energy consumers are going to get the energy they need. You could invest Exxon’s entire capital budget — I think it was $27 billion in 2009
— in alternative energy. Not only would you make a lot less money than Exxon made in oil and gas, you would also get a fraction of the useful energy.
MB: Severin, how have other industries facing similar situations taken action? Are there any lessons we can learn by studying those examples?
SB: I will redirect the question a bit, because the idea that the oil industry will or should be expected to bail us out of this is really misguided. The oil industry is an industry that takes oil out of the ground and makes it into transportation and other fuels. So the idea that the oil companies should be expected to change their stripes and to do something to get us out of our oil dependence isn’t realistic.
Oil companies do have some important infrastructure, and probably will get involved in distribution and possibly refining. But they are going to work as oil companies, and what they’re going to do for many decades to come is to produce and refine oil. While oil is going to decline, it’s going to happen very slowly.
LM: The oil industry has already made all sorts of investments that reach back a very long way. All this infrastructure that we have in place for oil — some of it goes back many, many generations. If you go to the Carson refinery in Los Angeles, it was built in the 1920s by my great-grandparents’ generation. When they dug underneath it they found mule bones, because mules were used to construct this thing.
One of the issues for anybody trying to break into the energy sphere is how do you develop this infrastructure when it’s such a long-ago, written-off cost for much of the [fossil fuel] industry. We have real competitive issues facing us if we want other fuels to come into the arena and compete, both in the market and in physical terms. I agree with Severin: it’s silly to think that the oil industry is going to develop the means to compete with itself. It’s already paid off all these investments.
MB: So, we can’t and shouldn’t expect the oil industry to bail us out of the problem. What about government? The U.S. isn’t the only country grappling with this issue. Are there other countries — China, for example, or the European Union — that we can look to as models for transitioning from oil?
SB: They’re doing things that we can look at as a starting point. But frankly no one’s really making a good effort in getting off of oil. It is true that gasoline costs three times as much in Europe as it does in the United States, but that’s not because Europeans are greener than we are, it’s because after World War II they adopted gasoline taxes as a major funding source, and they continue to use them that way.
They do have a carbon market in Europe, but the price in that market is so low it’s really not changing behavior.
China has two sides to it. On the one hand, they say they’re going to get greener. They mean that they’re going to get greener in the sense of using less energy per dollar of GDP. But their GDP is growing so rapidly that they’re going to continue to increase their emissions of carbon. Likewise, they continue to build traditional coal-fired power plants, and those are putting out a huge amount of pollution.
I’m actually not optimistic that we’re going to see a model that really can be carried to the United States.
At the same time, we have to recognize the biggest barrier in the United States is not the politicians, it’s not the oil companies — it’s the electorate. You get elected by telling people things like we want to give you a gas tax holiday, not we need much higher gas prices. Bill Clinton tried that in 1993, and it was a political disaster. Obama has not really tried that; even the [failed] cap-and-trade program would have raised gas prices by somewhere around 12 or 15 cents a gallon, an amount that most of us wouldn’t notice.
GS: There’s another aspect to this that we haven’t really talked about. The current issue of Science has a whole special section on the transition to alternatives. One of the issues it addresses head-on is that at their current level of development, alternatives still are simply not as good as what we have.
When you think about transitions that have taken off rapidly — the transitions from whale oil to kerosene, from wood to coal, and from coal to oil — they’ve really presented the market with something that was truly better, faster, cheaper, something that had superior attributes at a lower cost, did things that the old technology simply couldn’t do. If we’re really looking for a rapid transition, the technology needs to improve to the point where it is actually better than what we have now. That doesn’t mean that you can’t have any kind of a transition until you have [reached that point]. It just means the transition ends up being pushed rather than pulled.
SB: I agree with Geoff entirely, and I find that very depressing, because the reason we need to get off oil is not because it’s too expensive. It’s because of all these other externalities that oil creates. The way you solve those externalities is through public policy. Unfortunately, public policy isn’t going to be effective, because people aren’t going to be willing to stand for much higher prices or more inconvenience in order to get off oil. That may mean we won’t get off oil until oil actually gets extremely expensive, or until we run into some extreme environmental or international crisis. Which is definitely not the path I’d like to see.
MB: Lisa, you’ve talked about how the price of oil is sort of a shell game. That it’s kept artificially low, and as a result we’ve created a non-responsive consumer market, which makes it difficult to develop the political willpower necessary to make change. If that’s the case, then how can this transition from oil happen?
LM: We really need the political will to make the change. We already have this preponderance of information about greenhouse gas emissions and climate change. And we had this very weird, disastrous summer — this enormous oil spill at one of just 50,000 wells that are in the Gulf of Mexico, which is just one of many, many regions of the world that supplies oil to the United States. We’re going to need to think out the implications of where we’re going, and really make the decision that we’re going to change policy. Waiting for the oil to run out, or for some sort of signal to arrive, saying “the oil is running out” is a) not going to happen, and b) not going to give us the time to change in the way that we need to.
The E.U. does have some interesting greenhouse gas policies in place. I believe that by 2030 many of their vehicles are going to need to have zero emissions. That, combined with the high gas prices there, is ultimately creating pressure to supply vehicles that can meet those needs. In the U.S. we don’t have similar pressures. A sort of high-efficiency vehicle here is basically a vanity project — a Tesla for the high rollers, and a Prius for the medium-rollers. So we’re actually going to have to decide that we have to do this. The idea of waiting for another huge disaster [to motivate change] is rather scary given that we got almost nothing done policy-wise out of the massive [Gulf oil] disaster this summer.
MB: So we have to make major political decisions in the absence of normal market pressures, such as soaring oil prices?
MB: You’ve all talked about how any transition from oil — whenever it begins — will be long and gradual. If you had the power to make that transition happen, what would you do? And what would your solution mean to the average American consumer?
GS: I tend to shy away from grand plans, but if you made me king for a day, I would set goals but not be prescriptive. I think we focus far too much on pathways, and not nearly as much as we should on outcome. We need to reward people for achieving what we want to achieve, not for achieving it the way we want them to achieve it.
We need to recognize where current technology is good enough — and there’s a number of areas where that’s already happening — and where we just need to wait for a big improvement. I want to see fewer handout grants to unproven companies and technologies. It’s very much up in the air whether electric vehicles are at the point where they’re good enough. We’re going to find out shortly whether people will be satisfied with a vehicle that can only go 100 miles before you have to recharge it for many minutes, or more likely, many hours. The market is going to have to render judgment on that, rather than experts and lawmakers. I would focus on the goals, on the outcomes, and worry much less about telling people how to get there.
MB: How about you, Severin? How would you make the transition happen?
SB: It has to be based on government policy. You need to recognize the real cost of using oil in the price, which would mean a much higher price for oil and gasoline. Politically I don’t think it’s feasible, but I would increase gas taxes by 50 cents every year until they’re about $3 or $4 higher than they are right now — at least. And looking at Europe, even that isn’t really going to make the change we need.
At the same time, we need to invest in the basic science. Not the roll-out of one technology over another, but the basic scientific research we need to bring biofuels to market, to bring batteries to market, to bring all of these alternatives to market. We haven’t been doing that for the last decade. We’re starting to now, but of course, that’s basic science so it’s a long process.
Putting those together would move us naturally off of oil over the course of decades. Would it be electric cars? Would it be biofuels? I don’t know. It would be important to do careful analyses of their impact on geopolitics, on the environment, and on macroeconomics. For instance, we may run into a lithium constraint if we start relying on lithium-ion batteries. So thinking carefully about those is going to be very important. But we’ve got to get started. We are starting to see greater investment in R&D. The public seems willing to tolerate that up to a certain point. But we certainly aren’t seeing accurate pricing of conventional energy. And I’m not sure how to make that start.
MB: Lisa? Thoughts on how to speed the transition from oil?
LM: We need to raise the gas tax. At the same time, we can’t do it too quickly, because it’s really going to clobber the lower-middle class people who are commuting to three jobs in an old car. So there’s a couple of things we need to do. One would be to raise that gas tax very slowly and incrementally every year. Also, do some sort of advertisement on the pump or on the receipt that talks about the external costs of gas and why we need to cut back. So you’re raising consciousness at the same time you’re raising the price.
At the same time, we have a lot of perverse policies in place. We have air traffic control policies that waste hundreds of millions of gallons of fuel a year. We have a one-size-fits-all insurance policy so that a person who drives 15,000 miles a year pays the same as someone who drives 2,000 miles a year. We have, as they say in the mortgage business, “drive until you qualify,” meaning that you drive farther and farther out into the suburbs until you find a house where you can qualify for the mortgage. All of these policies incentivize the extra burning of gasoline. And the National Academy of Sciences estimates that every gallon of gas you burn in a passenger car creates 28 cents in pollution and medical care costs.
We also need new ways of getting people to work. Whether that means giving large tax breaks to employers for vanpools and carpools and incentives for working from home, I don’t know. But all of that needs to be incentivized and encouraged because it’s not about just changing the vehicles and changing the technologies, it’s about changing the modes we use.
MB: Whatever happens vis a vis our energy transition, it will involve a long time and lots of moving parts. But what about the near-term? Can we expect to see any changes, energy-wise, in say the next two years? The next ten? Severin?
SB: I don’t think we’ll see an increase in energy prices from taxes by any substantial amount. Natural gas and coal prices are unlikely to rise very much. Oil prices might rise again for the same reason they rose in 2008, which was a short-run production constraint. Geoff made this distinction, quite rightly, between the ability to produce oil and the amount in the ground. And if we see a vast [economic] recovery worldwide, we might see oil prices go back up again. Futures prices tell us that they are going to drift up and that’s probably the best guess. Which means gasoline prices will probably go up a bit from where they are right now, but won’t skyrocket. And we’ll probably continue what we’re doing.
GS: In the short term, we’re not going to see very much different. Certainly continued volatility. If you look 10 years out, people are going to be noticing renewable energy cropping up all around them. If it hasn’t already come to your neighborhood, it’s going to. At the same time, people are going to be frustrated and disappointed at how reliant we still are on fossil fuels.
MB: Lisa, anything to add?
LM: There is a lot of unpredictability. We haven’t decided what sort of climate change regime we are going to use and that keeps the industry in the U.S. trying to second-guess, especially in the refining industries. We have the whole issue of storms coming in and hitting the part of the country where we produce a third of our oil, refine half of it, and keep all of our strategic petroleum reserves. We have had the experience of Katrina hitting and prices going up. We have this political insecurity in the Middle East. There are a lot of things that could actually give us another Black Swan event. We just had one with the [Gulf] spill.
It’s very difficult to predict what’s going to happen, except that the American population does seem to be a bit numb to this. The predictability of that numbness, and the fact that there are actually m
any and increasing risks in the supply chain is what bothers me. Those two things are kind of out of sync.
MB: Speaking of risks, while we’re trying to set a safer, more logical course for our long-term energy future, what do you think about the short-term issue of offshore drilling: necessary and safe? Yes or no. Geoff?
GS: Absolutely necessary unless we just want to continue importing more and more oil from OPEC.
MB: What about safe?
GS: If you look at what happened in the Gulf as a statistical event, with a very low probability, and if you look at the response that the industry is putting together — a billion dollars to create these marine well containment systems and things like that — then [offshore drilling] is prospectively much safer than it has been in the past. At the same time, if we end up with something that looks like a moratorium, a lot of that R&D won’t happen.
MB: Lisa, offshore drilling necessary and safe?
LM: All oil is risky. You bring it in on a tanker, there’s a chance something happens with the tanker. Offshore drilling is necessary if we are going to continue to use the amount of oil we use, which is enormous. Is it safe? It’s as safe as we are willing to regulate it to be. There are obviously problems in the safety arena, but everything I’ve read about the Deepwater Horizon disaster suggests that there were a cascade of bad decisions.
MB: Severin, what do you think?
SB: I can’t really comment on safety. But [offshore drilling] is not at all necessary. In fact, it [doesn’t produce] enough oil to substantially change either the world price of oil or our trade balance. The reason you should allow drilling for offshore oil is because you think the value it creates is greater than the environmental risk. And I don’t know if that’s true or not. But the idea that drilling in the Gulf is going to substantially change our oil position when we are talking about a drop in the bucket in terms of the world market, and even a pretty small share of U.S. consumption, is just getting the economics wrong. We have to recognize that offshore oil drilling should be regulated and determined by the economic value it creates.
GS: I would disagree with that for equally sound economic reasons, having traded this stuff for many years. Basically the price is set at the margin. You’re dealing with OPEC, which basically controls the global price. But the price tends to go up when non-OPEC production doesn’t keep up with demand. The price goes down when non-OPEC production exceeds demand. Take a million barrels a day out of U.S. production and you’ve significantly shifted the market power towards OPEC. So, big impact on prices.
SB: If you took a million barrels a day off the market over 15-20 years, it will have no noticeable effect.
GS: Not over 15-20 years. But if you’re looking at three, four, five years, the depletion rates are pretty high.
LM: From a moral perspective, I don’t believe it is right for the U.S. to simply import oil when we’ve decided that it’s too risky to drill off our own coast. To be importing from countries like Nigeria and Angola, and even countries in the Middle East where there are not the same sort of environmental standards or where there is simply not the same accountability, I don’t think that’s right. The moratorium on drilling is in many ways an easy way out for Americans — we don’t want the environmental effects on our own shores, and we’re going to let it go to somebody else’s. And it’s a relatively easy political victory, when in fact what we really need to do is work on reducing our demand dramatically.
MB: We’ll have to end it there. I’d like to thank my guests, Lisa Margonelli, Severin Bornstein, and Geoffrey Styles. It’s been a pleasure speaking with you. This is Mary Bruno for Grist Talks. Thanks for listening and please tune in next time.