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Energy Resilience & Path Dependencies

July 6, 2006


My travel schedule is insane, but that is what it takes to get a business up and going. Much of that travel is by car so I know the pain at the pump as well as anyone. It’s not like analysts didn’t anticipate oil running out or rising prices as supplies become tight. An article in the February 1920 edition of National Geographic by George Otis Smith was presciently titled “Where The World Gets Its Oil: But Where Will Our Children Get It When American Wells Cease to Flow?” Smith was the Director of the U.S. Geological Survey from 1907 to 1930 and, therefore, had a hand in establishing U.S. energy policy. A policy that started the U.S. on a path dependency that led directly to today’s pump prices. Smith lamented that in 1920 we were using American oil to satisfy other countries’ needs for energy.

America’s experience on the world scale has been gained as an oil merchant more than an oil-producer. The illumination of the Orient with American kerosene has been followed by the lubrication of the whole world with special oils from American refineries; and now we hear of a garage in Guatemala 7,000 feet above the sea, or another in far off Australia using American gasoline and lubricants exclusively. This commercial campaign has been a worthy one, especially in its far-seeing outlook; but do we look far enough? We have been draining our own oil pools in part to supply the needs of the rest of the world, but we have made little effort to render the rest of the world self-supporting in oil production. Whether such a national policy is to be characterized as that of a spendthrift or that of an altruist, it is certainly too short-sighted.

Although Smith was concerned that American wells would run dry, he didn’t recommend looking for alternative fuel sources. Instead, he recommended a pioneering effort to find new reserves that could be controlled by America (considered a good thing):

This pioneering spirit should now lead American capital and American engineering to seek new sources of petroleum supplies in foreign fields for the benefit of the America of tomorrow. … The “open door” policy is best for America and the world; encourage American capital to enter foreign fields and protect foreign capital wherever invested in our country. However, the spirit of reciprocity does require that the United States shall always keep its own door of opportunity open to the nationals of all nations, irrespective of their attitude to Americans in the other parts of the world.

Sound familiar? Smith went on to encourage a national policy of securing and protecting oil fields for the times in which we now live.

The part our Government should take in planning to meet our future needs is to give moral support to every effort of American business to expand its circle of activity in oil production, so that it will be coextensive with the new field of American shipping. This may mean world-wide exploration, development, and producing companies, financed by United States capital, guided by American engineering, and safeguarded in policy because protected by the United States Government. Thus only can our general welfare be promoted and the future supply of oil be assured for the United States.

Smith’s blueprint was followed pretty closely. As a result, we are where we are. Exploiting oil from less developed countries meant it was cheap oil. Cheap oil meant that research and development into alternative fuel sources could be delayed without political repercussions. Smith asked, “Do we look far enough?” Sitting now on the path determined by Smith’s policy recommendations, we might once again ask that question. We might ask also ask a complementary question. Do we look broadly enough? Recent news articles make me believe the answer to both questions is, “We certainly do not.” Yesterday’s New York Times contained an article whose headline was “Search for New Oil Leads to Processed Coal,” by Matthew L. Wald. The article’s first paragraph tells the story.

The coal in the ground in Illinois alone has more energy than all the oil in Saudi Arabia. The technology to turn that coal into fuel for cars, homes and factories is proven. And at current prices, that process could be at the vanguard of a big, new industry.

Sounds like energy security to me. Of course, once you start down that course you began another path dependency. One that comes with serious environmental and health risks. The process for converting coal to liquid fuel puts about twice as much carbon dioxide into the atmosphere than current refining processes. The word you’ll hear a lot when discussing this process, however, is cheap. Coal is abundant and, therefore, cheap. Cheap sells. Although the cost of a new coal-to-refinery is nearly four times that of a crude-to-diesel plant, it is still half as much as a new bio-mass-to-diesel plant. Bio-mass is a more environmentally friendly alternative, but cheap sells.

Another carbon-based alternative that is getting a lot of attention is tar sand. Canada is loaded with the stuff and could become the next Saudi Arabia of energy. Every decision, however, to continue primarily on the path of carbon-based energy means we are looking neither far nor broadly enough. The Government, however, is schizophrenic on the subject. At the same time it is pushing the coal-to-diesel program, a Department of Energy report warns a revolutionary change is coming.

‘The world has never faced a problem like this,’ a report for the U.S. Energy Department concludes. ‘Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary. [“The Breaking Point,” by Peter Maass, The New York Times, 21 August 2005]

Oil producing countries have as much reason to be concerned about high oil prices and talk about oil independence as oil consuming countries:

Basically, any significant reduction in the demand for oil would be ruinous for OPEC members, who have little to offer the world but oil; if a substitute can be found, their future is bleak. Another Western diplomat explained the problem facing the Saudis: ”You want to have the price as high as possible without sending the consuming nations into a recession and at the same time not have the price so high that it encourages alternative technologies.”

That is exactly the point we are now at. Prices are predicted to stay high. Analysts say the days of cheap oil are gone. We need to understand there is a difference between energy security and energy resilience. Many of the large oil companies understand this.

“Climate will shape our business,” said Chris Mottershead, an adviser on climate policy to the chief executive of BP, Lord Browne. Some of the largest oil companies, including BP, Shell and Chevron, are already planning multibillion-dollar investments in energy sources that emit little or no carbon, like wind and solar power, biofuels or hydrogen from renewable sources. [“A Refinery Clears the Air to Grow Roses,” by Jad Mouawad, New York Times, 30 June 2006]

The essence of resilience is the ability to respond appropriately to a changing environment or help shape the environment in a beneficial way. This requires adaptability, flexibility, good information, and sound decision making. American energy policy has been aimed at energy security. We need to broaden our thinking and pursue a policy of energy resiliency.

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