September 07, 2011

The Future…It’s Not.

I have to admit that I was disappointed with this Foreign Policy “The Future is Now”
report predicting a
global oil production shift back to the Americas
. The author, Amy Myers
Jaffe, is not wrong about the technological trends around oil exploration and
extraction. She writes that the reason for this shift is in part due to technology:
“Geologists have long known that the Americas are home to plentiful
hydrocarbons trapped in hard-to-reach offshore deposits, on-land shale rock,
oil sands, and heavy oil formations…The problem was always how to unlock them
economically…But since the early 2000s, the energy industry has largely solved
that problem.” She goes on to discuss horizontal drilling, onshore oil
production from shale rock and tar sands, among other innovations.

But what
Jaffe fails to mention is the costs associated with these more advanced exploration
and extraction methods. A March 2011 HSBC report, Energy in 2050, found that unconventional oil production methods
that enable energy companies to extract hard to reach energy resources
(including deep water, heavy oil – such as tar sands, and shale) will have much
greater costs (see page 15 here).
So while the United States and others in the Americas do have fossil fuel resources
that could be extracted, we shouldn’t believe for a second that that means the
price we’ll be paying for a barrel of oil will be lower, or static, compared to
today’s prices. In fact, quite the opposite is likely to prove true. It’s
simple supply and demand. Lower supply and rising demand pushes the price point
up to an economically viable production point.

worth mentioning, too, that the HSBC report cautions that, “Even
if demand doesn’t increase, there could be as little as 49 years of oil left.

That is why we’re seeing huge investments from the federal government in
alternative fuels, such as algae fuel, investments Jaffe seems to ignore in
predicting what the future energy market looks like. And for me, that’s where
Jaffe’s analysis really falls short.

U.S. government seems to be preparing for a future where access to conventional
fossil fuels will no longer be assured. The U.S. Navy’s efforts to acquire
algae biofuels for testing in its aircraft is just one example of the growing
demand for biofuels. The Obama administration’s recent announcement that the
Departments of Agriculture, Energy and the Navy will invest $510 million over
three years to stimulate the biofuel industry
is yet another. This “announcement not
only leverages our home-grown fuel sources to support our national security,
but it also helps advance the biofuels market, which ultimately brings down the
cost of biofuels for everyone
,” Secretary of the Navy Ray Mabus said at the
August 16 press conference.

Indeed, the HSBC report noted in particular that as prices
for conventional fossil fuel climb past $150 per barrel, “biofuels
come into their own
.” And as the federal government and private sector
continue their investments in biofuels in an effort to scale up commercial
viability, biofuels are likely to reach price parity with conventional fossil
fuels much faster.  Secretary Mabus
discussed the price of biofuels at a DOD bloggers roundtable on August 22:

And the price of biofuels -- one of
the reasons that the president charged the three agencies -- Navy, Agriculture
and Energy -- to establish a nationwide biofuels industry was to be at a price
point that is competitive with petroleum, and not so that we have to pay a lot
of additional money for these biofuels. And
we've seen even in the small amounts we're buying for testing that last year,
for example, the cost -- it was cut in half. It's on track to be cut in half
again this year

It bears mentioning too that government regulations are
likely to help incentivize biofuels production. Examples include President
Obama’s recent
executive order that requires federal agencies to reduce their greenhouse gas
, as well as the European Union’s carbon cap for airlines that
could drive demand for greener, alternative fuels.

Given the growing trend around biofuels production, it seems
strange that Jaffe would ignore alternative fuels in her analysis. Oil and
other fossil fuels are sure to be a part of the U.S. energy portfolio in the
future. After all, it’s diversification and not reliance on one source that
should be the goal of an U.S. energy security strategy. But biofuels should offset
our reliance on conventional fossil fuels if the investments in and demand for
them continue to grow. 

Perhaps then Jaffe is partially correct. Perhaps the Americas
will be the world capital of energy. But I disagree with her that it will be
(or should be) because of conventional fossil fuels. “This
is our generation’s Sputnik moment
,” President Obama said in his State of
the Union Address earlier this year, referring to the U.S. opportunity to
develop a competitive edge in the energy innovation sector. “If
we don’t develop renewable energy, we will make the biggest mistake in this
nation’s history
,” Vice President Biden said last week at the National
Clean Energy Summit in Las Vegas. The United States should strive to be the
world capital of energy –clean energy.