Saturday, October 25, 2003

The End of the Oil Age?

The Economist reports on the future of energy...

"'The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.' This intriguing prediction is often heard in energy circles these days. If greens were the only people to be expressing such thoughts, the notion might be dismissed as Utopian. However, the quotation is from Sheikh Zaki Yamani, a Saudi Arabian who served as his country's oil minister three decades ago. His words are rich in irony. Sheikh Yamani first came to the world's attention during the Arab oil embargo of the United States, which began three decades ago this week and whose effects altered the course of modern economic and political history. Coming from such a source, the prediction, one assumes, can hardly be a case of wishful thinking.

Yet a generation after the embargo began, the facts seem plain: the world remains addicted to Middle Eastern oil. So why is Sheikh Yamani predicting the end of the Oil Age? Because he believes that something fundamental has shifted since that first oil shock and, sadly for countries like Saudi Arabia, he is quite right. Finally, advances in technology are beginning to offer a way for economies, especially those of the developed world, to diversify their supplies of energy and reduce their demand for petroleum, thus loosening the grip of oil and the countries that produce it.

Hydrogen fuel cells and other ways of storing and distributing energy are no longer a distant dream but a foreseeable reality. Switching to these new methods will not be easy, or all that cheap, especially in transport, but with the right policies it can be made both possible and economically advantageous. Unfortunately, many of the rich world's governments and above all the government of America, the world's biggest oil consumer are reluctant to adopt the measures that would speed the day when the Saudis' worst fears come true.

The $7 trillion heist

If treating the West's addiction to oil will be costly, is it really worth doing? To be sure. Petro-addiction imposes mighty costs of its own. First, there is the political risk of relying on the Organisation of Petroleum Exporting Countries (OPEC). Oil still has a near-monopoly hold on transport. If the supply is cut off even for a few days, modern economies come to a halt, as Britain discovered when tax protestors blockaded some domestic oil depots two years ago. And despite what sound like large investments in new oil fields in Russia and elsewhere, Saudi Arabia's share of the world oil market will actually grow over the next two decades simply because it has such huge reserves of cheap oil. Geology has granted two-thirds of the world's proven oil reserves to Saudi Arabia and four of its neighbours. Because of this continuing concentration of supply, the risk of a disruption to oil flows will continue to be a threat, and may even rise.

That points to a second sort of cost. According to one American government estimate, OPEC has managed to transfer a staggering $7 trillion in wealth from American consumers to producers over the past three decades by keeping the oil price above its true market-clearing level. That estimate does not include all manner of subsidies doled out to the fossil-fuel industry, ranging from cheap access to oil on government land to the ongoing American military presence in the Middle East.

The final disguised cost of oil is the damage it does to the environment and human health. Unlike power plants, which are few in number and so easier to regulate, cars are ubiquitous and much more difficult to control. The transport sector is a principal source of global emissions of greenhouse gases.

The only long-term solution to this connected set of problems is to reduce the world's reliance on oil. Achieving this once seemed pie-in-the-sky. No longer. Hydrogen fuel cells are at last becoming a viable alternative. These are big batteries that run cleanly for as long as hydrogen is supplied, and which might power anything in or around your home notably, your car. Hydrogen is a fuel that, like electricity, can be made from a variety of sources: fossil fuels such as coal and natural gas, renewables, even nuclear power. Every big car maker now has a fuel-cell programme, and every big oil firm is busy investigating how best to feed these new cars their hydrogen.

Another alternative likely to become available in a few years is bioethanol. Many cars (quite a few of them in America) already run on a mixture of petrol and ethanol. The problem here is cost. At the moment, the ethanol has to be heavily subsidised. But that might alter when biotechnology delivers new enzymes that can make ethanol efficiently from just about any sort of plant material. Then, the only limit will be how much plant material is available.

All in good time

Such changes will not occur overnight. It will take a decade or two before either fuel
cells or bioethanol make a significant dent in the oil economy. Still, they represent the first serious challenges to petrol in a century. If hydrogen were made from renewable energy (or if the carbon dioxide generated by making it from fossil fuels were sequestered underground), then the cars and power plants of the future would release no local pollution or greenhouse gases. Because bioethanol is made from plants, it merely borrows its carbon from the atmosphere, so cannot add to global warming. What is more, because hydrogen can be made in a geographically distributed fashion, by any producer anywhere, no OPEC cartel or would-be successor to it could ever manipulate the supplies or the price. There need never be another war over energy.

It all sounds very fine. What then is the best way to speed things up? Unfortunately, not through the approach currently advocated by President George Bush and America's Congress, which this week has been haggling over a new energy bill. America's leaders are still concerning themselves almost exclusively with increasing the supply of oil, rather than with curbing the demand for it while increasing the supply of alternatives. Some encouragement for new technologies is proposed, but it will have little effect: bigger subsidies for research are unlikely to spur innovation in industries with hundreds of billions of dollars in fossil-fuel assets. The best way to curb the demand for oil and promote innovation in oil alternatives is to tell the world's energy markets that the externalities of oil consumption, security considerations and environmental issues alike, really will influence policy from now on. And the way to do that is to impose a gradually rising gasoline tax.

By introducing a small but steadily rising tax on petrol, America would do far more to encourage innovation and improve energy security than all the drilling in Alaska's wilderness. Crucially, this need not be, and should not be, a matter of raising taxes in the aggregate. The proceeds from a gasoline tax ought to be used to finance cuts in other taxes, this, surely, is the way to present them to a sceptical electorate.

Judging by the debate going on in Washington, a policy of this kind is a distant prospect. That is a great shame. Still, the pace of innovation already under way means that Sheikh Yamani's erstwhile colleagues in the oil cartel might themselves be wise to invest some of their money in the alternatives. One day, these new energy technologies will toss the OPEC cartel in the dustbin of history. It cannot happen soon enough."

i will not accept taxation as the answer to our energy problem. however, I am confident we can come up with new alterntives. How about the reserves in this country? Alaskans already get a thousand dollars a year from their oil revenue.

  • The End of the Oil Age
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