How to prevent future oil shocks

Mark Maddox Contributor
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It was no surprise when a network news anchor ended a story on the Middle East turmoil recently and began the next segment on record February gasoline prices. For most Americans it was Groundhog Day all over again.

As we have learned to expect since 1973, turmoil in the world’s oil-producing region causes economic pain in the industrialized world. Yet in four decades, the United States and other industrialized nations have done little to insulate themselves from these periodic shocks. Unfortunately, there is plenty of blame to spread around.

First, all of us need to take responsibility for being nearsighted. The world consumes a huge amount of energy, and to make a fundamental shift in the equation takes a long time. Traditional offshore oil and gas projects can take as long as 10 years to produce. On-again, off-again production policies have significant long-term effects. One of the underlying reasons why once a decade or so we see a run-up in prices is that someone, somewhere, called a halt to new production five or more years earlier.

Technology is part of the solution. It is critical to tapping non-traditional oil fields and it is the centerpiece of the critical path to relieving our dependence on fossil fuels. Effective technology is never perfect the first time, and its perfection takes several generations and years of refinement. Very few governments have demonstrated the political will and attention span to stay the course for the decade or more necessary for their plans and the innovation process to bear fruit. A notable exception to this rule is Canada, which successfully developed its tar sands over the course of two decades.

Like governments, consumers move slowly and have short-term investment horizons. For most American families, a $40,000 bet on a car with a new electric drive train is beyond their comfort zone; better for them to gamble on falling pump prices and spend $22,000 on a traditional vehicle. And if a discomfort exists among consumers, imagine the anxiety among auto executives. They are being asked to wage their careers and billions of their investors’ dollars on the belief that this time prices will really stay high enough to drive consumers to buy fuel-efficient vehicles.

Second, accepting the reality of our energy mix is critical. While the overwhelming majority of men and women in the oil industry realize there are limits to the amount of oil that can be produced, there are those who want to ignore the fact that our natural resources are limited and there is a need to conserve. Similarly, those who call for the end of all drilling are out of touch with the transportation and energy needs of our industrial society.

So where do we go from here? First, we need to accept that our oil addiction is not going to be broken by going cold turkey. We need to understand and embrace our nation’s global role in oil and gas production. Houston is the world’s energy capital because the United States is a global energy leader as well as the world’s third-largest oil producer. With a growing thirst for oil in developing nations, failing to maintain America’s contribution will drive prices higher, fuel inflation, weaken fragile economies, and create even more unrest. In terms of global security and stability, we need to reaffirm our commitment to being a leading global oil producer now more than ever.

To sustain our position, we need to maintain the incentives that lure the large internationals to invest in U.S. production instead of investing in cheaper but politically risky frontier oil fields. We also need to have an oil production permitting process that is predictable, stable and transparent. Finally, we need to remove exploration moratoriums that are driven by politics instead of legitimate public interest concerns.

This does not mean we should ignore the urgent need to move toward alternative sources of energy. Technology can ease our transition by adding incremental sources of supply.

Forgotten in the debate is this simple fact: one out of every six barrels produced here in the U.S. is from a stripper well that pumps less then 10 barrels a day. This incremental production is critical to maintaining supplies and underscores the need to find energy wherever we can find it. A case in point is the emergence of biofuels, which hold the promise of being a critical piece of the nation’s incremental supply equation.

Biofuels, which are produced through a series of catalytic or algae processes that use a variety of organic feed stock, are both sustainable and have a lower carbon footprint than corn-based ethanol. Biofuel refineries have the potential of adding 20 million gallons per day, each, to our domestic supply. And unlike ethanol, which needs to be shipped by truck or rail, biofuels are pipeline and vehicle ready when they leave the refinery. The widespread deployment of this technology can be expedited through predictable research grants and deployment programs.

The nation and the world have the tools and know-how to soften the impacts of oil shocks. But it will take using all of the tools in the policy toolbox, including preserving our current supply, investing in technology to dilute our dependence on a single source of energy, vision, and most importantly, patience.

Mark R. Maddox is an energy expert with the American Action Forum.