Massachusetts Institute of
Technology Alumni Association Jan/Technology Review
January, 2002/February, 2002
SECTION: Vol. 105, No. 1; Pg. 32-38; ISSN: 1099274X
B&H-ACC-NO: 95678877
DOC-REF-NO: TCR-2045-24
Abstract:
In the midst of President Bush's claims that the nation is
facing a crisis of supply, environmentalists are predicting another kind of
energy crisis: global warming. But except for electricity prices in parts of
the US West, energy prices have recently been low in historic terms. In
consequence, most nations - and most energy companies - have few financial
incentives to pursue new technologies, even if they would produce more abundant
or cleaner energy. Indeed, some economists suggest that the best hopes of
alternative-energy proponents may come from an unexpected, even abhorrent
quarter - that the global tumult created by the terrorist attacks that began
last September will in one way or another create uncertainty about energy
supplies, perhaps opening up opportunities for new technologies.
Body:
Abundant petroleum supplies and relatively low prices are
deterring the technological experimentation needed to develop new energy
sources. Could the new tumult in the Middle East point a way out?
When President George W. Bush announced last May that
"we're running out of energy in America," students of history could
have been forgiven for thinking ruefully of George Otis Smith. Once a
formidable figure in Washington, DC, Smith led the U.S. Geological Survey from
1907 to 1930. Just after the First World War, Survey geologists assessed the
state of the world's petroleum reserves-and concluded that they would be totally
exhausted before 1940. Alarmed by the prospect of what he called a "gas
famine," Smith charged that the position of the United States "can
best be characterized as precarious."
To stave off an energy crisis, Western nations tried to
secure access to the world's remaining oil, especially the then unexploited
deposits in what are now Iran and Iraq. A frantic round of imperialistic
dickering ensued, with the United States and France convinced that the British
were stabbing them in the back. Disputes over oil spread "a film of
mistrust," historian Herbert Feis lamented, over both the establishment of
the League of Nations and the Allied powers' attempt to bring the fledgling
Soviet Union "back into the circle of friendly nations.” Only in the late
1920s did the United States, France, Britain and the Netherlands settle the
issue-as far as they were concerned, anyway-by slicing up parts of the Middle
East into national oil concessions, thus ensuring their supply of petroleum.
Almost immediately, the whole contretemps was shown to be
pointless. Technological advances had changed the oil industry. Using devices
for detecting slight variations in gravitational attraction developed by
Hungarian physicist Roland, Baron von Eotvos, petroleum prospectors looked for
the changes in density associated with oil fields-and discovered huge new
deposits in Oklahoma and Texas. Texas crude oil was offered for as much as
$1.85 a barrel in 1926; by 1931, some desperate producers were unloading it for
two cents a barrel. The United States, barely able to handle its own glutted
supply, did not actually import Middle Eastern crude for decades. Nonetheless,
its willingness to meddle in the affairs of oil-producing Middle East nations
helped to sully relations in that part of the world for the next 70 years.
History's mode of instruction is oracular, rarely providing
simple, straightforward messages. Still, certain lessons from the "oil
crisis" of the 1920s apply today. One is that even the most
authoritative-seeming predictions about energy have a way of missing the mark.
"I can't tell you how many people throughout history have said that in 20
years we'll have an energy catastrophe," says David Victor, director of
the Program on Energy and Sustainable Development at Stanford University's
Center for Environmental Science and Policy. "And they've always been
wrong-always."
The "crisis" also illustrates how the technology
and economics of the energy industry are inextricably bound. Baron von Eotvos
developed his new gravitational techniques at the turn of the century, but
oil-company geologists did not try them until fears of a shortage drove up
prices. When the baron's methods were employed, they were so successful that
the predicted energy famine became an energy flood.
Today, new energy technologies face similar obstacles. In
the midst of President Bush's claims that the nation is facing a crisis of
supply, environmentalists are predicting another kind of energy crisis: global
warming. But except for electricity prices in parts of the U.S. West, energy
prices have recently been low in historic terms. In consequence, most
nations-and most energy companies-have few financial incentives to pursue new
technologies, even if they would produce more abundant or cleaner energy.
"We're living in a super price-sensitive and competitive market,"
Victor says. "Companies are totally preoccupied with short-term survival.
With that kind of mentality, you shouldn't be surprised that energy research
budgets have been on the skids for years." Indeed, some economists suggest
that the best hopes of alternative-energy proponents may come from an
unexpected, even abhorrent quarter-that the global tumult created by the
terrorist attacks that began last September will in one way or another create
uncertainty about energy supplies, perhaps opening up opportunities for new
technologies.
Awash in Oil
Will there be an energy crisis of the sort invoked by
President Bush? One perhaps precipitated by antipathies in the Middle East?
Until September 11, it was widely believed that the likelihood of a calamitous
shortfall in supply was much lower than it had been in the past.
Consider the early 1970s, a time of heightened awareness of
geopolitical and environmental vulnerabilities. The Club of Rome, an
international group of 100 scientists, businesspeople and political figures,
asked four political scientists in 1971 to use computer models from MIT to
predict the future of the world. The Limits to Growth, in which the results
were published a year later, became an international cause celebre that sold
nine million copies in 29 languages. Among the study's major conclusions: the
world was going to run out of petroleum by 1992, creating an energy
catastrophe.
It didn't happen, not least because by 1992 the world had
already experienced an entirely different kind of energy disruption. Just as
the book appeared, several Middle Eastern nations nationalized Western oil
companies' assets. Because the value of the dollar was falling, petroleum
prices, then as now denoted in U.S. dollars, also fell. The new owners of the
Western oil assets became unhappy. United States support of Israel during the
1973 Arab-Israeli war made them unhappier still. The Organization of the
Petroleum Exporting Countries (OPEC), dominated by Muslim nations, embargoed
sales to the United States. Oil and gasoline prices shot up.
All of this was terrible for Western nations' economies.
Between the early 1970s and early 1980s, the price of oil went up by a factor
of 10. In consequence, U.S. expenditures on energy, as a fraction of gross
domestic product, almost doubled, from eight to 14 percent. (These figures,
like others in this article, come from the Energy Information Administration of
the U.S. Department of Energy.) Rising energy costs helped push unemployment
and inflation to record highs; the U.S. economy lurched like an unseaworthy
boat from recession to recession. "It was a really awful time," says
Hal Varian, an economist who is dean of the School of Information Management
and Systems at the University of California, Berkeley. "When you're doing
economic comparisons you sometimes have to throw out the statistics from those
years-the numbers were so freakishly bad, such outliers, that they're not very
useful for normal economic analysis."
Buffeted by the oil shocks, Americans profoundly-and, it
seems, permanently-changed their relationship with energy. Between 1973 and
2000, U.S. energy consumption jumped by about a quarter. But this rise came
mostly from the concurrent rise in U.S. population. In fact, U.S. per-capita energy
consumption-that is, consumption per American-actually declined slightly from
1973 to 2000. Amazingly, the drop occurred despite the seemingly unslakable
U.S. appetite for power-hogging air conditioners, electricity-drinking
computers and, more recently, gas-guzzling sport-utility vehicles.
Paradoxically, the United States imports a greater
proportion of its petroleum than ever before-but needs it less. In the 1970s,
notes Howard Gruenspecht, an economist at Resources for the Future, a Washington,
DC-based research group, "the United States used oil for all kinds of
things-home heat, electrical power, you name it. Now the great bulk of it is
used for just one purpose: transportation." Oil imports have quadrupled
since the OPEC embargo, because U.S. drivers continue to be addicted to
petroleum. But oil use has fallen in many other sectors of the economy. At the
time of the embargo, for example, almost one-fifth of U.S. electricity was
generated by petroleum; today the figure is less than one one-hundredth. In
1973, one out of every four houses in the United States was heated by crude
oil; this year it is fewer than one out of ten. With the nation no longer
completely dependent on one energy source, the U.S. economy has significantly
more resilience against energy shocks than before. "Retail gas prices came
close to doubling between the spring of '99 and the spring of 2000," says
Pietro Nivola, a senior fellow in governmental studies at the Brookings
Institution, a Washington, DC-based think tank. "Consumers screamed about
it, but overall, the impact was small, because the whole economy is less
dependent on petroleum."
To the extent that it was intended to increase the
geopolitical power of OPEC nations, in fact, the embargo of the 1970s
backfired. "The rise in prices made new investments in oil very
attractive," says Fadhil Chalabi, director of the Centre for Global Energy
Studies in London, who was the acting secretary general of OPEC for much of the
1980s. "Oil companies found huge new supplies of oil in places like west
Africa, the Caspian Sea, the North Sea and Mexico." The flood of new oil
put the traditional OPEC nations-especially Saudi Arabia, by far the cartel's
dominant producer-in an awkward position. To keep prices high, Saudi Arabia and
neighboring Persian Gulf states had to cut production. But when they cut
production, they lost the income from selling oil. They were losing money so
that others could profit. In the mid- 1980s these nations lifted the limits;
oil prices sank.
But it may have been too late, if Chalabi's perspective is
correct. Like the United States, the West as a whole had become less reliant on
petroleum in general and Middle Eastern petroleum in particular. "Even in Europe,
the dependence on gulf oil has fallen dramatically over the last 20
years," Chalabi says. "Europe has gone from importing 70 percent of
its oil from the Persian Gulf to less than 30 percent because of the increases
in North Sea oil and oil from west Africa.' Worse from the OPEC perspective,
any attempt to raise prices will accelerate the transition away from oil to
natural gas, coal and nuclear power.
Noting these factors, both the U.S. Energy Information
Administration and the International Energy Agency (a Parisbased group with
representatives from 26 nations) project that oil will flow in the future like
never before. Desperate for hard currency, new Caspian Sea oil centers like
Russia, Azerbaijan, Kazakhstan and Turkmenistan have opened the spigots wide;
unable to stop them without shutting themselves out of the market, Persian Gulf
oil states watched prices fall to a two-year low in November. Iraq, which has
been more or less at war with the United States for a decade, nonetheless sells
it 613,000 barrels of oil a day. It would like to sell more-Saddam Hussein
needs the cash. "It used to be believed that overwhelming demand will make
us run out of oil," Chalabi says. "In fact, the real question is
whether there will be enough demand for oil to use the supply."
Playing Chicken
Continued low energy costs as far as the mind can envision--
what could be wrong with that? Anti-global-warming activists know the answer:
it's hard to launch novel energy technologies when the old methods are cheap,
even if the new techniques would provide important benefits. Indeed, if history
is any guide, the biggest obstacle to a technical solution to climate change
may not be devising mechanisms to reduce carbon emissions, but making them
cheap enough to compete in the market.
According to United Nations estimates, the United States,
which has one- twentieth of the world's population, is responsible for more
than a quarter of the carbon dioxide pumped into the atmosphere every
year-about 5.6 billion metric tons in 1999, the latest year for which estimates
are available. About a quarter of that total, 1.5 billion metric tons, came
from energy. (The rest is due to a variety of sources ranging from cement
production to agriculture to termites.) The great majority of atmospheric
scientists believe that these carbon emissions will lead, sooner or later, to
climatic change. If and when the greenhouse effect substantially heats the
planet, U.S. energy consumption will bear a disproportionate share of the
blame.
The problem is that curbing these emissions would have a
disastrous impact on economic growth. When activists decry global warming, they
often single out the American love affair with driving for special opprobrium.
But the automobile is far from the only culprit. In 1999, the use of energy by
industry released almost exactly as much carbon dioxide as did the national
fleet of cars, trucks, planes and sport-utility vehicles; households emitted
almost two-thirds as much. Coal-fired electricity plants, gas grills and ranges
in the home, agricultural and timber wastes-the list of greenhouse producers is
as varied as postindustrial society itself. (Nuclear power plants are an
obvious exception, but activists view them, rightly or wrongly, as posing other
unacceptable risks [see "The Next Nuclear Plant,"p. 54];
hydroelectric dams create their own ecological problems.)
Finding ways to curb emissions in all of these areas is a
"sobering prospect" says Paul Joskow, an energy economist at MIT.
"With the best will in the world, it's difficult to see as a practical
matter how it could be done." And with oil prices falling to $17 a barrel
last fall-and billions of dollars already invested in the nation's petroleum-based
infrastructure-there are few economic motivations for adopting new
technologies. Take fuel cells, for example. Energy researchers like fuel cells
because they are silent, efficient, have no moving parts and produce no direct
carbon emissions. Unfortunately, fuel cells also have drawbacks. They typically
have to warm up, sometimes for as long as half an hour. Worse, the hydrogen in
fuel cells is usually stored under high pressure, creating the risk of a
Hindenburg-like fireball (see "Fill 'er Up with Hydrogen," TR
November/December 2000).
But even if these and other technical challenges can be
overcome, proponents of fuel cells will still have to convince ordinary
Americans to replace their internal-combustion cars. When horseless carriages
appeared on the scene, people could get around more conveniently: it was much
easier to drive into a city and park a car than to ride there and find lodging
and food for a horse. By contrast, fuel cell cars provide exactly the same
service as gasoline cars except for producing less of an invisible, odorless
gas. Moreover, they will cost more than regular cars, at least in the
beginning. Yet even if consumers take the plunge, they won't actually be able
to drive anywhere unless businesses simultaneously spend billions of dollars
establishing a network of hydrogen dealers with as wide a service area as
today's profusion of gas stations.
As fuel cells show, new energy technologies always face what
Jostrow calls "a classic chicken-and-egg problem”! To attract consumers,
fuel cell vehicles must cost the same as or less than conventional automobiles.
But that can't happen until enough hydrogen vehicles have been sold that
manufacturers can lower prices. The same is true of hydrogen filling
stations-they won't be present in sufficient abundance until a lot of fuel cell
cars are on the road, but fuel cell cars can't be on the road in numbers until
companies put up hydrogen filling stations.
Similar problems affect most new technologies, says
Stanford's Victor. "To replace coal-generated electricity with wind
farms-even if that was technically feasible-you'd still have to build the wind
farms," he says. "You have to learn how to design them, how to
operate them, how much redundancy you need in the system. That's all additional
costs. Meanwhile, you already have the coal plants."
Cost of Change
To environmentalists, the economic obstacles faced by new
energy technologies are maddeningly unfair. The reason is that the costs of
global warming-unlike costs such as labor, insurance and raw materials-are not
included in the price of energy. In other words, the price of the kilowatt--
hours that heat U.S. homes includes the power company's cost of fighting lawsuits
brought by environmental groups, but not the potentially enormous costs to
society from climatic change. Economists, for their part, readily agree that
this is a problem. Unfortunately, it is not clear what to do about it.
In economic terms, these unaccounted-for items are known as
externalities-costs or benefits that are not adequately reflected in market
prices. The problem of incorporating externalities into prices has long
bedeviled economics. (Textbooks on externalities were published as long ago as
1917.) A classic example of the awkwardness of handling externalities is the
case of the small business that releases a blast of noxious gas and damages its
neighbors' property-wrecking the paint on cars and houses, say. All 50 states
have enacted private- and public-nuisance laws that permit individuals and the
government to take the offenders to court and force them to pay for the
cleanup. If that doesn't stop further emissions, injunctions can follow.
Eventually, in theory, miscreants realize that they can't avoid legal action
and choose to stop polluting, presumably passing the costs of using cleaner
technology on to consumers. In this fashion, pollution abatement becomes
incorporated into the market price. But as almost everyone agrees, the methods
for doing it-lawyers, litigation and legislation-are halting and slow.
Global warming, alas, fits poorly even within this awkward
framework. To begin with, much of the problem is due to entire societies, not
specific corporations. And because nobody knows the rate at which global
warming will occur, or precisely what the effects will be when it takes place,
there's no simple target to shoot for. Global-warming activists often suggest a
"carbon tax" on fossil fuels to account for the future costs of
climate change. Fair enough, but how high will those costs be? If U.S.
consumers pay $1 billion a year, would that be enough to cover the problem? How
about $10 billion? $100 billion? The level of economic damage that might be
inflicted by greenhouse gas abatement is so uncertain that even the Kyoto
treaty on global warming, to date the most ambitious attempt to address climate
change, says not a word about what the "right" level of emissions
should be.
Compounding matters, the political system has shown little
inclination to wrestle with the problem of greenhouse gases. Bill Clinton,
arguably the most green-friendly president in decades, refused even to submit
the Kyoto treaty to the U.S. Senate. Notoriously, one of President George W.
Bush's first acts of office was to abandon the Kyoto treaty-without feeling it
necessary to present any alternative proposal.
Even energy research has hit hard times. According to James
J. Dooley, an energy researcher at the Pacific Northwest National Laboratory,
U.S. public and private investment in energy R&D have been declining
steadily for 20 years. Between 1979 and 1999 public energy-research spending
fell by more than two-thirds in real terms. And every other developed nation
except Japan has also cut research funding. "With few exceptions, energy
R&D simply isn't on the radar," he says.
"Look at the projections," says Dermot Gately, an
economics professor at New York University. "Cheap petroleum forever.
Cheap natural gas. Cheap coal forever-the United States is the Saudi Arabia of
coal. It's energy Nirvana. Almost every solution to climate change involves
driving up those wonderfully low prices. Where's the mandate for change in
that?"
Without dear economic benefits, technological change is most
likely in niche markets. An example is the current tests of natural gas engines
in taxi fleets in Long Beach, CA, Atlanta, New York City and other cities. New
Zealand, too, has switched most of its taxi fleet to natural gas. (Natural gas
burns more cleanly because it is chiefly composed of methane, a simple molecule
whose combustion produces carbon dioxide and water vapor but almost no soot or
sulfur dioxide [see "Hitting the Natural-Gas Jackpot," p. 68].) Why
taxis? Urban air pollution is disproportionately due to taxis, which run
constantly, under the most taxing traffic conditions. In addition, taxis, which
are confined to particular cities, don't need a nationwide network of
alternative-fuel stations.
"The idea in all of these things is to come in from the
margins to the center," says Stanford's Victor. "But it's never
easy." Once the technology has penetrated the niche, engineers can work on
bringing the costs down. For those who want clean energy fast, though, the best
hope in Victor's view "is for what people now like to call a 'disruptive'
technology-something that forces huge change. But those don't happen
often."
Curiously, Gately suggests, innovators may take some heart
from the historical record. "We've never been good at predicting energy
supplies," he points out. "Something always happens.' Although he,
like most energy economists, thinks it unlikely that an event like a terrorist
attack could have a long-term, significant impact on energy supplies, he says
it's "prima facie foolish" to discount the possibility of
catastrophes in the Middle East or the Caspian Sea. The energy industry can be
incredibly volatile-- recall that in the five years between 1926 and 1931, the
price of Texas crude fell more than 98 percent. In our own day, utilities that
spent the summer of 2001 wrestling with electricity price spikes in California
spent last fall trying to gauge the impact of war in Afghanistan on the nearby,
oil-rich nations around the Caspian Sea. If the U.S. campaign against terrorism
creates an explosive reaction, the regime of low oil prices may collapse.
Imagine, for example, the effects of terrorist attacks against key pipelines or
oilfields. "In one way or another," Gately says, "we've been
fighting [in oil country] since Desert Storm. You have to ask, would Americans
be more willing to think seriously about energy if, God forbid, something
unexpected happened over there? Would they maybe start thinking about fuel
cells and carbon taxes? It's always possible."
So the silver lining of tumult in the Arab world might be a
greater willingness to address global warming? "I wouldn't put it that
way," Gately says. "I'd say that the crystal ball is as murky as
ever. And since we don't know the future, you can't rule out the possibility of
a happy outcome."
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