As the Bush administration confronts the economy’s growing need for affordable and reliable energy, the critics of the hydrocarbon-based energy economy are back to the drawing board. The “soft” energy path of subsidies and mandates for conservation and nonhydro renewable energy—hatched during the 1970s energy crisis and popularized during the eight years of Clinton/Gore—was not supposed to end in price spikes and shortages in the California laboratory.
Energy demand has rapidly grown even as the economy has become one-third less energy intensive. Nonhydro renewable energies constitute less than 2 percent of the supply mix after a quarter century of private and public effort. And hydrogen fuel-cell vehicles remain decades away from mass penetration at best. Meanwhile, a plethora of technological advances promise to increase the global market share of oil, natural gas, orimulsion, and coal beyond today’s 85 percent and extend the hydrocarbon era well beyond the 21st century.
Central economic planning may be intellectually dead, but planning for “energy sustainability” remains an environmentalist mantra. The theme of Earth Day last year, “New Energy for a New Era,” set forth the goals to reduce total energy usage, phase out nuclear power, and substitute renewable energy for fossil fuels.
This prescription is at odds with market and political realities.
Electricity generation has grown at twice the rate predicted by the Department of Energy in the last five years because of new uses of electricity in the digital age. Environmentalists, who talk a big game about renewable energy, oppose most renewable capacity on close inspection. They have turned against the kingpin of renewable energy, hydropower, in favor of fish migration and returning rivers to their natural state. Environmentalists have blocked wind and geothermal projects in “sensitive” areas—where they are commonly located. Solar farms and some biomass projects have been questioned by environmentalists as too land-intensive for the (limited) energy that is produced. Their professed concern about the role of carbon dioxide (CO2) emissions on global climate fails to square with the fact that carbon-free hydropower and nuclear power, also vehemently opposed, produced 90 times more electricity in the United States last year than wind and solar combined.
Hydrocarbons are an expanding energy resource, not a depleting one as doomsayers have long alleged. The world’s proved reserves of crude oil are 21 times greater today than they were when such record-keeping began over a half century ago. Reserves of orimulsion, a recently commercialized tar-like oil, are greater than the global supply of crude oil. World natural-gas reserves are five times greater than they were in the mid-1960s. Coal reserves are four times greater than originally estimated a half-century ago and twice as great as all of the known oil and gas reserves combined on an energy-equivalent basis. Energy economists are still looking for a “depletion signal” nearly two centuries into the hydrocarbon age, increasing interest in the Thomas Gold hypothesis that superabundant hydrocarbons deep in the earth are slowly seeping toward the drill bit. Another explanation is that human ingenuity and financial capital are not depletable but expanding resources, explaining why hydrocarbon supplies are increasing even after consumption increases.
Increasing affordability has resulted from the increasing abundance of hydrocarbons, whether measured in terms of inflation-adjusted prices or work-time pricing (the amount of time it takes the average laborer to purchase a unit of energy). The average laborer today can purchase a tank of gasoline and several days’ worth of residential electricity in about two hours of work time. In 1940 the same purchase of 15 gallons of gasoline and 100 kilowatt hours of electricity required most of the workday. To use a more recent example, substantially higher natural-gas prices paid by consumers this year are about the same as the prices consumers paid in the mid-1980s, adjusted for inflation. Gasoline prices are substantially lower than in the same period when adjusted for inflation. Still, consumers have reason to desire and expect lower prices for the record quantities of energy they are now purchasing.
Hydrocarbon energies are rapidly improving in terms of product quality. Risks associated with supply and price can be managed for days, weeks, months, or years on central futures markets and with over-the-counter (company-specific) products. Fuel diversity for its own sake, government oil stockpiles such as the Strategic Petroleum Reserve, and emerging grants under low-income energy assistance programs are unnecessary in the financial-energy age where certainty can be secured with the click of a button. Commercial and industrial firms can optimize their energy usage by outsourcing their energy function to highly specialized energy service companies. Online “click” trading with hundreds of customized energy products has made the energy market more transparent for the entire supply chain and final users. Mega-retailers are entering the market to allow customers to buy their natural gas and electricity competitively rather than from utility monopolists. These quality improvements have all occurred in the last five, ten, or 15 years.
The increasing sustainability of conventional energy applies equally well to water and air pollution associated with hydrocarbon transportation and combustion. Large oil spills in U.S. waters have become rare because of reforms undertaken in the wake of the Exxon Valdez accident in 1989. Urban air quality in the United States is one-third better today than in 1970 despite an increase in total energy usage of more than 40 percent. Ozone violation days in Los Angeles have dropped by two-thirds since the early 1980s because of technological advancements, not lifestyle changes. The recent-year smog leader, Houston, has reduced its ozone violation days by one-fourth in the same period, and plans are being completed for the region to implement control measures even stricter than southern California’s to totally eliminate ozone episode days by 2007. This would be a great achievement given that the rest of the country benefits from the output of Houston-area refiners and petrochemical plants.
New drilling technologies allow precise extraction from remote locations to minimize the disturbance to ecologically sensitive areas. This is a major argument in favor of drilling in the Arctic National Wildlife Refuge (ANWR) in Alaska and on other public lands. At the other end of the energy chain, new power plants produce more power with less natural gas, oil, or coal, and emit far fewer pollutants than ever before. The “hydrocarbon footprint” is becoming fainter with the march of time in market economies around the world and particularly in the United States.
The increasing economic and environmental sustainability of hydrocarbon energies has forced hydrocarbon critics to sound a new alarm—climate change from hydrocarbon-based greenhouse gas emissions. Yet there are significant benefits in addition to potential damages from the human influence on climate. Furthermore, societal wealth created from hydrocarbon energy abundance creates the resiliency to cope with weather and climate extremes that occur from any source.
Climate economists are impressed by the ecological and social benefits of a moderately warmer and wetter world, coupled with longer growing seasons and the CO2 fertilization effect on plants and agriculture. Economists also factor in the scientific evidence that weather extremes are not increasing, and the greenhouse warming is favorably distributed as predominantly higher minimum temperatures. A disproportionate amount of the warming is also “dead warming,” where higher below-freezing temperatures are occurring. Greenhouse physics, as well as the statistical record, points toward man-made warming occurring in the coldest and driest air masses, predominantly during winter Siberian and Alaskan nights.
The global-warming scare has led two oil majors, BP and Royal Dutch Shell, to trumpet their diversification into renewable energy and solar in particular. Meanwhile, both companies’ aggressive hunt for oil around the world and investments in cleaner gasoline are making the petroleum age more sustainable, not less. BP, having dropped its “Beyond Petroleum” moniker, is poised to take the lead in developing ANWR. Shell has offered an alternative scenario where the market share of renewable energies catches up to hydrocarbons and nuclear by mid-century, but reality suggests otherwise. Shell’s own highly publicized multiyear global budget for renewable energy—$500 million—is a fraction of its budget to develop oil and gas fields in the Gulf of Mexico alone.
There are real energy problems, but most of these problems stem from acts of government, not acts of the market or of God. The electricity shortage that California has experienced has the same cause as gasoline lines during World War II and the 1970s—price controls. California’s “deregulation” effort capped retail electricity rates, while letting wholesale power prices move with market demand. Wholesale prices could only rise with rapidly increasing demand from 24-7 uses of information power and changed supply conditions from a bad hydro year. Retail prices could not clear—hence the political-allocation problem of rolling blackouts—and utility buyers could not pay wholesale suppliers. Rather than deregulate prices to solve the shortage in a rational manner, California authorities expanded government actions on the supply and demand sides in the quest to impose economic order. Ludwig von Mises’s writings on the futility of the “middle way” between free markets and planning apply presciently to California.
Energy policy is becoming more focused on expanding energy reserves and infrastructure to keep up with demand growth. Gone is the assumption that supply would be there, despite a variety of government disincentives, until politically favored energy alternatives could emerge. The hyperbole about a post-hydrocarbon “new energy future” is being exposed as little more than a recipe to return to a bygone era of energy scarcity; note the primary energy role of solar, wood, waste, water, and wind in centuries past, the invention of the fuel cell in 1839, and the dominance of the electric car before Henry Ford’s internal combustion engine entered mass production after the turn of the last century.
Good News, Bad News
Hydrocarbon energies are at the center of today’s consumer-driven technology revolution. Wealthy societies may be able to afford esoteric energy forays in the government sector, but energy consumers around the world desire their political leaders to lessen the hand of government so that energy will be more plentiful and affordable and their lives improved. The good news is that the needed hydrocarbons are abundant and growing cleaner and more “sustainable” over time. The bad news is that the soft energy mirage of the last two decades succeeded in getting “hard energy” partially off track. With free-market public-policy reform, hydrocarbon energies can overcome artificially imposed constraints and meet rising expectations for an open-ended future.
The threat to “energy sustainability” is not depletion, pollution, global cooling, or global warming. Activist government policies that increase prices and reduce reliability are the real threat for the 1.6 billion people still awaiting modern energy and the other 4.5 billion who are more reliant on energy than ever before. Policymakers should respect energy reality, heed consumer expectations, and let free markets reign with the “master resource.”
Source: Intergovernmental Panel on Climate Change, Climate Change 2001: Mitigation (Cambridge, UK: Cambridge University Press, 2001), p. 236.
Hydrocarbons—oil, natural gas, orimulsion, and coal—are intensive energy carriers. Despite concern that such supplies are running out, official estimates of remaining supply are bullish. On a total energy equivalent basis, 99 percent of total supply is still left after almost 140 years of consumption. With increasing estimates of remaining hydrocarbons, “1% down, 99% to go” may also be the statistic well into the future.