Our Shifting Energy Diet

It's fairly easy to agree on the desirability of shifting our energy diet away from fossil fuels and toward more renewable or sustainable sources, but it's much harder to agree on the time scale involved. While recognizing the great potential of renewable energy technologies such as wind, solar and geothermal power, along with advanced, non-food-based biofuels, I am convinced that the transition will take much longer than many hope--longer than many will have patience for, in light of pressing concerns about energy security and the environment. When considering future shifts in our energy diet, it's instructive to review some of the changes we've already experienced, and how long they took. The graph below displays the relative contribution of America's main energy sources since 1949, based on data from the Energy Information Agency of the US Department of Energy.

This chart, which compares the proportional, rather than absolute contribution of each source as a percent of the total, shows that the US energy diet has experienced constant change over the last seven decades. Some of these changes have been dramatic, such as the erosion of coal's market share in the 1950s and '60s by oil and natural gas, while others, such as the resurgence of biomass-based energy since the 1970s are less dramatic but still noticeable. On the scale of this graph the non-biomass renewables that I've lumped together appear relatively steady, because the recent rapid growth of wind and solar energy has so far only compensated for a contemporaneous decline in hydropower output. I'd expect the growth of that green segment to be more obvious in a few years, though still not on the scale of nuclear power.

The chart also reminds us that however prominent a given energy source might have become during this period, none overwhelmed the others. We talk a great deal about oil's dominance, yet it never exceeded a 48% share of our energy diet, and it has recently fallen below 37%. In fact, you'd have to go all the way back to the 1920s to find an energy source with a market share above 60%, which coal still enjoyed during the early years of oil's rise as the combination of mass-produced cars and the big oil finds in East Texas and Oklahoma upended the US energy landscape. That's one reason I generally find forecasts of renewables capturing 80% of the energy market within a few decades to be improbable.

Perhaps the most relevant example for renewables of a disruptive energy technology capturing a significant share of the market is commercial nuclear power, which contributed just 0.1% of US energy in 1962. That's about what solar provides today. Yet even with a major push by utilities and government and broadly favorable market acceptance until after the Three Mile Island accident, it still took nuclear power 25 years to reach a 6% share of total US primary energy, and nearly 40 years to reach its current 8% or so. Today's renewables also face similar limits on their potential market penetration, albeit due to very different factors relating to intermittency and the high cost of energy storage.

What would it take for renewables to repeat the model of oil's success against coal? In the absence of a high carbon price or incentives on a level unlikely to be either politically feasible or affordable in the current environment, I believe it would require technologies that don't just reduce greenhouse gas emissions or local pollutants, but actually enable something new and very attractive to consumers and businesses, along the lines of the quantum leaps in mobility and other economic activity that oil made possible. Otherwise, their promoters should be prepared to play a long game, in much the same way that the conventional energy industry did when it was building its market post World War II. Do investors and policy makers have the patience that requires?

By the way The Energy Collective is offering a free virtual conference on November 30 on the subject of "How to Save A Planet on A Budget." The conference includes panel discussions and case studies moderated by Marc Gunther of Fortune magazine, Jesse Jenkins of the Breakthrough Institute, and Gernot Wagner, economist at the Environmental Defense Fund. To register click here.

I'd also like to wish my US readers a pleasant Thanksgiving weekend.

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Turning to Energy for Jobs

Yesterday's Energy Jobs Summit at the US Capitol, hosted by The Hill and API, focused on the potential of the energy sector to add large numbers of new jobs to help alleviate the national jobs crisis that President Obama will discuss in tonight's speech. The figures presented by API and others were impressive, with the oil and gas sector alone capable of creating over a million jobs if provided increased access to US resources. Panelists also discussed "green jobs", including those from energy efficiency projects. Yet I was struck by the inherent tension between today's job-creation imperative and our long-term need for an energy sector that is as productive and cost-effective as possible, in order to support economic growth and reemployment in the roughly 92% of the economy beyond energy. That makes highly productive private-sector energy jobs requiring little or no public investment especially valuable.

In a new study released at the summit, Wood Mackenzie estimates that the US oil and gas industry could increase its employment by 1.4 million by 2030, with a million of those jobs attainable by 2018--more than half in the next two years--under new policies that would lift the current bans on offshore drilling outside the established areas of the Gulf of Mexico and on shale drilling in New York, speed up permit issuance in the Gulf, open up new onshore acreage for leasing, and approve the Keystone XL pipeline. In the process, domestic production of oil and gas liquids could eventually nearly double, while natural gas output would grow by over 60%. Even better, from a deficit-and-debt reduction perspective, this effort would require no new government expenditures and stands to contribute a cumulative $800 billion in additional federal and state royalties and tax receipts.

The potential jobs impact is extraordinary, when you think about it. Oil and gas is an incredibly capital-intensive industry with very high worker productivity--one reason that salaries in the industry tend to be much higher than average. An industry like that is hardly the first place one might think to look when seeking massive job growth. The fact that such growth is even possible is both a validation of the tremendous untapped resource potential we still possess, and an indictment of decades of bipartisan energy policy mismanagement that has preferentially outsourced US energy production, rather than exploiting our own resources.

What about the contribution of "green jobs"? The growth of cleantech--renewable energy and energy efficiency--can certainly contribute to US job growth, yet we should understand clearly that such jobs won't spring forth spontaneously from the private sector without substantial continued government incentives and subsidies. Nor are those a guarantee of success. The US wind industry installed just 2,151 MW of new capacity in the first half of 2011. While that was considerably better than last year's pace of 1,250 MW, it's still 47% below installations in the first half of 2009, despite last December's against-the-odds extension of the Treasury renewable energy grants, which paid out $2.2 billion to wind projects this year. And the recent solar bankruptcies and the aggressive offshoring by solar manufacturers fighting to stay competitive with Asian suppliers also demonstrate that green jobs, other than those in installation and construction, are just as vulnerable to global competition as in any other US manufacturing industry.

Conventional energy jobs aren't immune from competition, either. I was startled to read yesterday that regional refiner Sunoco plans to exit the refining business after more than 100 years. Its two Philadelphia-area refineries will either be sold or shut down by mid-2012, with 1,500 jobs at stake. Prospects for a quick sale of these facilities look poor, because these plants are among the most exposed to global oil prices that have been running more than $20 per barrel higher than for crudes produced in Canada and the US mid-continent. Idling these plants would take a big bite out of east coast gasoline supplies and inevitably lead to both higher product imports and higher gasoline prices in the northeast and mid-Atlantic regions. As someone pointed out at yesterday's session, it's a sad commentary that Sunoco can make more money selling sodas and snacks at its retail facilities than it can refining crude oil.

That dynamic makes the production-related jobs in the Wood Mac study even more attractive: Despite being tied to a depleting resource, US oil & gas exploration and production enjoys a greater sustainable competitive advantage in the global marketplace than either refining or cleantech manufacturing, at least when it has sufficient access to domestic resources.

However, these opportunities also pose a test of our seriousness on the jobs issue. Opening up the Virginia and California coastlines, for starters, along with the coastal plain of the Arctic National Wildlife Refuge to exploration raises a host of NIMBY and environmental concerns. I don't want to trivialize them, but I would suggest that the time when we could afford such sensibilities may have passed, heralded by our continued descent in the rankings of national global competitiveness and the rapid growth of our indebtedness. Creating a number of "green jobs" comparable to Wood Mac's estimate of 1.4 million from oil and gas would require the expenditure of tens to hundreds of billions of dollars the federal government doesn't have, and that the current Congress seems unlikely to be willing to appropriate. It would also risk embedding expensive energy at the core of the US economy, hobbling our non-energy economy, where most Americans are employed.

Yesterday's energy jobs summit was held in the new Capitol Visitor Center, which I hadn't seen before. It's a gorgeous facility and a suitable addition to the paramount edifice of our democracy. However, I was also struck by the contrast it provided with the meeting's subject matter. Recall that the Visitor's Center ended up costing over $600 million, well over twice its original plan. I hope that when the President presents his jobs program tonight, it will be grounded in the crucial distinction between that kind of government-funded, "shovel-ready" project that might put some of our fellow citizens back to work for a few years and an energy-and-jobs resurgence funded entirely by companies and their investors.

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Assessing Trade-Offs

Today's posting serves in lieu of a letter to the editors of the New York Times, in response to the misleading comparisons drawn in today's editorial concerning the "Lessons of the Exxon Valdez." The editorial characterizes oil development as "an inherently risky, dirty business — especially so in the forbidding waters of the Arctic." It goes on to draw a comparison between the $2 billion per year Alaskan fishing business in Bristol Bay and the presumed value of future oil and gas production from this area, concluding that the trade-off is not worth the risk. It suggests that the new Secretary of the Interior focus on promoting wind and tidal energy, instead. Unfortunately, their assessment of the trade-offs involved is undermined by the use of a resource estimate that appears to have been misinterpreted from its original source.

Whether the Times drew its estimate of $8 billion of potential hydrocarbon revenue for Bristol Bay from a 2008 World Wildlife Fund report citing a US Minerals Management Service (MMS) estimate of 230 million barrels of oil and 6.79 trillion cubic feet (TCF) of natural gas, or merely draws on the same ultimate source, I found a rather different estimate in the official report of the MMS to the Congress, as mandated under the Energy Policy Act of 2005 . It reflected a range for the North Aleutian Basin, encompassing Bristol Bay, of 20 million to 2.5 billion barrels of oil and 0.04-23.3 TCF of gas, with a mean estimate of 750 million barrels and 8.62 TCF. At $70/bbl for oil and $6/MCF for natural gas, reflecting current long-dated futures prices, the mean expected value of the "undiscovered, technically recoverable resources" around Bristol Bay would be on the order of $100 billion, rather than $8 billion.

But even that assessment provides a poor basis for comparison, because of the economic criteria that would be applied to any oil or gas discoveries in Bristol Bay. No one can know how much oil and gas is actually under the waters of the North Aleutian Basin, without at least performing a seismic survey and interpreting the results, which would then have to be confirmed with the drill bit. Nor would a positive result from such tests guarantee development, even at the prices cited above. As the Times notes, Alaska is a hostile environment. That raises the costs of exploration and extraction. The minimum resource size required to justify building a production platform would generally be higher than in the Gulf Coast. Oil finds much below that 750 million barrel mean estimate would be unlikely to be pursued, and the outlook is even tougher for gas, for which there is insufficient local demand.

In light of these facts, the balance of risks from allowing lease sales in Bristol Bay looks quite different from the one indicated by the Times, in which we might jeopardize a world-class fishery resource for an inconsequential amount of oil and gas. In reality, whatever risks hydrocarbon development entails would only arise in the eventuality that a world-class oil or gas resource were found there. Otherwise, the government would pocket the bid premiums and rental fees, the local economy would get some welcome revenue during the assessment process, and that would probably be the end of it. It's also high time for the editors of a paper that likes to be thought of as the nation's newspaper of record to recognize that renewable electricity does not function as an oil substitute and won't be in a position to do so until there are millions of electric vehicles on the road. We're going to need billions of barrels of new oil discoveries as we make the long transition to greener energy sources.

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