The Energy Crisis: Two letters to the President-Elect

November 6, 2008

The Energy Crisis: Two letters to the President-Elect

The Peak Oil Crisis: Memorandum for the President-Elect

by Tom Whipple, retired CIA analyst, columnist for the Falls Church (VA) News-Press, and editor of Peak Oil Review. Published November 6, 2008

The way things are shaping up, in less than three months you will be in charge of solving the direst set of crises since the ones faced by Lincoln back in 1861.

In every corner of the world economies are coming unglued. Our major financial institutions are approaching insolvency; unemployment is rising; public confidence in nearly every institution is collapsing; investments and savings are tanking; and to make matters worse, these forces seem to be simultaneously engulfing all the other nations of the world. There clearly are big changes just ahead and probably not for the better - at least not right away.

In sorting through the morass you soon will confront the old conundrum of the urgent vs. the important. From all directions crises are going to come at you. There are wars to settle; frozen finances and plunging markets; shortages and world adversaries seeking advantages. The list of the extremely urgent can only grow and grow for the world has become a populous, complex and interconnected place.

Beyond the obviously urgent, however, come the truly important - the problems that cannot be muddled through or solved quickly with borrowed money. Global warming and methane burps, the social security/Medicare shortfall, evaporation of retirement savings, depletion of easy-to-exploit oil deposits and perhaps a life threatening pandemic or two are examples of the truly important.

Right at the top of the truly important list, and more urgent than you probably realize, is to start the transition of the U.S. economy from fossil fuels - oil, coal, and natural gas - to renewable forms of energy as quickly as possible. If this does not start happening soon, then much of the U.S. and world economy is likely to start grinding to a halt well within the eight years you would like to remain in office. Moreover, if we rush to burn off all the remaining fossil fuel, primarily coal, in the name of economic recovery and growth, the world is likely to end up in a couple of centuries - and here opinions differ - anywhere from an unpleasant place to live to being nearly devoid of the higher forms of life.

We have heard all sorts of talk about energy independence in recent months usually coupled with calls for more domestic drilling, “clean-coal” or more ethanol. Such talk is meaningless since we are almost certain to become energy independent in the next decade or so simply because we won’t be receiving most of the 12 million barrels of crude and oil products a day we are currently importing. They just won’t be for sale, at least not to us.

There clearly has to be some sort of powerful incentive to get your administration, the Congress and the rest of the world’s governments moving more quickly on the transition to a post fossil fuels world. At the minute, the only incentive on the horizon that seems able to get everybody’s attention is high gasoline prices and actual shortages. Earlier this year we were getting close to taking action when oil was pushing $150 a barrel and the campaigns could talk of little else. However the perturbations of the financial crisis intervened and gasoline went back down to last year’s prices.

Nothing stands still these days so by the time you are inaugurated it is a good bet that the OPEC cartel will have managed to cut production enough to start driving prices upwards again, perhaps not to $150, but perhaps enough to get people’s attention and raise fears of inflationary pressures .

Sometime during your first year in office, your new Secretary of Energy is likely to come by and lay out the problem for you - world oil production is going down - perhaps faster than imagined; world oil exports are dropping even faster; prices are rising; and new domestic supplies will never make up the difference. The bottom line will be that the country is going to have to get along with steadily decreasing amounts of oil each year for the foreseeable future and that much will have to change if the economy is to continue to function.

It may take some time before you appreciate all the consequences of oil depletion. They will be everywhere. Transportation costs will go much higher. The GDP will slide. Jobs will disappear, and shortages will develop. At some point there will be a general agreement that looking for more fossil fuels or that a large scale effort to convert coal to liquid fuel is hopeless. A massive overhaul of the U.S. economy including transportation, lifestyles, jobs, agriculture, and industrial production will be necessary if we are going to continue running a civilization with declining quantities of fossil fuel.

This national epiphany will be the beginning of the great transition that will dominate the U.S. government and the world for many decades. New governmental organizations, policies, and procedures will be necessary to effect the transition for it will involve nearly every aspect of modern life. Do not be tempted by the notion that the markets alone can deal with this transition. A few minutes’ reflection on what will be involved in forced reductions in the use of fossil fuels while still maintaining social order and some semblance of 20th century lifestyles will lead to the realization that this can only be accomplished by government coordination. We are no longer in the 19th century living on scattered self-sufficient farms. There are 300 million of us in the United States today, and we are totally, utterly, completely dependent on fossil fuels for our being.

The challenge just ahead is going to be the greatest since the Republic was founded. It will dwarf the challenges of the War Between the States, the Great Depression and World War II and will test your leadership to the utmost.

An opportunity in energy policy - a letter to the President-elect
by John Langhus and Steve Andrews

Dear President-elect Obama,

We believe that no other challenge we currently face will be adequately addressed unless we are successful in tackling our energy challenges. Based on recognition of the fundamental change that has taken place in global energy markets, critical elements of a new approach to energy policy are set out below.

1. Smart Energy Management is the Real Policy Challenge. American policy makers have long assumed unimpeded access to ever greater supplies of inexpensive energy. Energy policy has thus rarely played a prominent part in electoral politics (except temporarily, during transient shocks). The energy challenge we now face will change that. A tripling of energy prices since 2002 has not stemmed the decline rate in existing fields, nor brought on appreciable new supply. Worse, the recent tumbling of oil and gas prices means that many planned energy expansion projects will be mothballed or delayed, leading to higher prices and supply vulnerability down the road.

In painful fits and starts, the American public is becoming aware of the role of energy cost and availability in their daily lives. Leaders and policymakers must demonstrate an awareness of our new energy reality. From today forward, every policy maker should consider the availability and cost of energy in nearly every policy calculation. They must propose sensible changes that our government can make now, even as traditional forms of energy gradually become less accessible and dramatically more expensive.

A powerful start would feature an announcement that recognizes this fundamental shift, and proposes the following in response: In the newly elected administration, every political department and regulatory agency will assign a senior deputy to consider the energy implications of all policy decisions. The model would be budget accounting, but in energy terms. That is, government would be required to assume that energy will eventually be increasingly scarce, increasingly expensive, or both, and to plan accordingly. The approach offers the benefit of being proactive while easily unwound if and when our national energy situation improves. If we have any hope of effectively managing the energy paradigm shift, it must be coordinated wisely and comprehensively.

2. Government must lead the Energy Transition. Over the coming years we must prepare for the declining availability of refined liquid petroleum fuels such as gasoline, diesel, and fuel oil in three general ways. First, we can reduce our total energy consumption through conservation and efficiency, beginning with a federal gasoline tax that incentivizes carpooling, highly fuel-efficient vehicles and all low or no carbon alternatives. Second, we can facilitate the development and adoption of renewable energy sources that provide more usable energy than is required to produce that energy in the first place. Third, we can ensure that we make responsible and effective use of domestic U.S. energy resources.

All three of these paths will require major investments in technology and infrastructure. Only the Federal Government can provide the leadership, R&D funding, and targeted incentives to private industry and individuals necessary to deliver us a responsible sustainable energy future.

3. Offshore Drilling - Move to the Real Debate. We do not know whether there are sufficient recoverable resources in “new” offshore locations on the Outer Continental Shelf (OCS) to make the environmental and other trade-offs worth the incremental amount of available energy. The US Minerals and Management Service estimates that total “technically recoverable” yet-to-be-discovered oil throughout the OCS may be as much as 85 billion barrels of oil. Of that amount, less than 20 billion barrels is estimated to be in areas covered by the former drilling moratorium.

In truth, no one has any reliable data. A wise and bold response to this fact would be for the federal government to sponsor a massive seismic data acquisition project for the OCS. Seismic data holds the promise of providing real information upon which informed decisions may be made. In any event, seismic data acquisition will take place before any exploration drilling occurs - modern exploration rarely occurs without the benefit of seismic data acquisition beforehand. The government would fund and manage the program via contractors, and it would focus on the most promising areas for potential hydrocarbon exploration. The government would thus also own the resulting data exclusively, allowing it later to recoup the cost of the acquisition by selling the data to interested companies if and when drilling commences. It would be a significant research project of obvious utility.

4. Windfall Profit Taxes/Energy Rebates send the wrong economic signals. These may be the most self-defeating policy proposals available to address our energy challenges. Taxes on “windfall” profits would reduce domestic production, while a credit (or rebate) to consumers would stimulate consumption.

Much wiser would be to place an effective floor on oil prices to protect investments in alternative energy. The value of past investments by the energy industry in very promising technologies has been decimated when the price of petroleum has fallen and rendered the alternatives uneconomical. This has been the single greatest barrier to the development of a viable alternative energy industry. Likewise, the domestic US oil industry was ravaged in the 1980s, and again in the 1990s, when increased foreign production reduced the price of oil to single digits per-barrel, with the related consequences of the SUV boom and the nearly complete abandonment of conservation and efficiency efforts. Many investors fear a similar outcome when the recent oil price boom finally hits bottom. An oil price floor could be enforced through a tariff on imported oil that falls to zero when the market price of oil is at or above $100. Tariff receipts could fund basic research into alternative energy technologies. The result would be predictability for domestic energy industry investments in new oil production, and for private capital investments in alternative technologies.

5. Revitalize US Rail Networks. In the decades before car ownership became widespread, US cities and towns had extensive rail, streetcar and trolley networks. Sensible energy policy will recognize that the unrestrained use of millions of barrels of oil per day in the U.S. for personal transportation, while worldwide demand grows and supply remains flat, is coming to an end. The technology exists to recreate these former local and regional rail networks to relieve pressure on the oil supply created by personal transportation. A similar effort with respect to heavy rail will likewise ease the burden created by the current movement of goods by truck. The best available evidence is that sustained oil prices beyond the $150/barrel level could render regional air travel forever unprofitable. In such case, regional rail networks will be essential to maintain the economic viability of thousands of small communities throughout the country. In order to enhance our rail system in spite of reduced liquid fuel availability, we should promote the development of electrified rail systems.

6. Reduce Subsidies for Biofuels and Ethanol. The declining availability of oil will create a critical need for alternative liquid fuels to power our road and airborne fleets. U.S. oil production provides roughly 15 calories of useful energy for every calorie spent on production. Corn ethanol production only supplies 1.3 calories of energy for every calorie invested. Corn ethanol’s enormous comparative disadvantage hasn’t changed substantially despite decades of development and subsidies. It isn’t up to the task at hand.

Biofuels - and corn ethanol specifically - currently contribute more to our energy and other problems than they solve. While the lobbies in favor of ethanol and related subsidies are strong and entrenched, government must gradually abandon these subsidies. A far better policy would be a massive increase in public investment in basic science research.

Government is notoriously poor at “picking winners” - requiring the adoption of certain energy technologies over others, for example. What government has consistently done very well over many decades is to support basic research into new technologies, then allow the marketplace to choose the favorites.

7. Energy is Economic and National Security. Political leaders of every party do increasingly understand the clear relationship between energy and national security. The best evidence suggests that access to foreign sources of oil is already coming under strain and that competition among oil importers will only grow more intense as time goes on. In this respect, the US finds itself far behind China in particular in terms of securing long-term access to the next generation of fossil fuel resources. To take an example close to home, the production of oil by Mexico is falling at an alarming pace. Mexico is our third or fourth (depending on the month) largest source of imported oil. Oil exports contribute more than a third of the Mexican federal government’s revenues. On current trends, Mexico will cease to export any oil at all by 2012. Such an event poses a risk to our energy security, to Mexico’s economic security, and poses stark national security challenges to both countries. The American people will enjoy neither economic nor national security until we have adopted a comprehensively new approach to our public and private use of energy.

We offer this policy brief in the hopes of initiating a true national conversation about energy.
John Langhus works in the oil industry and is the lead author of this policy paper. Steve Andrews is a co-founder of ASPO-USA.