Think Again: Energy Independence

"The West Can Stop Relying on Imported Oil"

Not in this lifetime. When people call for energy independence, they usually mean ending reliance on imported oil. Energy independence, we are told, would avoid dangerous disruptions in supply, ease entanglements in the Middle East, force corrupt petrostates to reform, and dry up terrorist funds. It may be a noble statement of ultimate intentions, but as a practical matter, energy independence is absurd. The amount of petroleum imported by the United States and other countries is so enormous that operating without it over the next several decades will be impossible for any advanced industrialized economy.

The trend lines clearly indicate that Americans are becoming more energy dependent, not less so. In 1973, the United States imported 35 percent of its oil; by 2003, that proportion had jumped to 55 percent. In 2004, the United States consumed an average of 20.4 million barrels of oil per day, more than half of which was imported. Ending dependence on imported oil would mean replacing about 4 billion barrels of oil every year. To put that number in perspective, assuming no major new discovery of oil deposits, the United States would burn through its oil reserves in four to five years without imports. Worse, U.S. demand is projected to grow 37 percent in the next 20 years. At that point, oil imports will likely account for 68 percent of petroleum supply.

The picture is no different if you consider other major industrialized countries. In 2004, Japan consumed an average of 5.4 million barrels a day — almost all of which was imported. Ninety-three percent of Germany’s daily oil demand of 2.6 million barrels is imported. And France already imports nearly all of its oil. Energy independence is a distant dream for all of these countries.

"Less Foreign Oil Means Lower Prices"

Wrong. Oil is a global commodity, the price of which is based on worldwide supply and demand. Events influencing supply and demand in one country affect prices in another. In the wake of Hurricane Katrina, gasoline prices in Europe soared as a result of the damage to U.S. refineries, even though those facilities send very little to Europe. Even if the United States did not import one barrel of oil from the Middle East, the price U.S. citizens would pay at the pump would still be a function of worldwide supply and demand. Whatever one’s opinion about U.S. or European oil policy, all indications are that worldwide demand — and global prices — will climb as China and India continue to grow. China, which imports about half its oil, is expected to double its oil consumption to 14.2 million barrels a day by 2025. India’s consumption will likely jump from 1.4 to 5 million barrels a day by 2020. Global demand will cause the worldwide price of petroleum to rise nearly everywhere. No private oil company will sell oil to its domestic market for one penny less than it could realize in foreign markets, and the price that a barrel of oil commands will be based on pressures beyond any one government’s control.

"The United States Should Burn Less Coal"

No. Many analysts argue that given concerns about global warming and the environment, the United States should avoid burning so much coal. Because the United States has the most technologically advanced energy sector, the argument goes, it should lead the way in giving up its coal habit. But just as independence from foreign oil is virtually impossible in the next two decades, there is no point in pretending that the United States can cease using coal. More important, why should the United States so quickly abandon a natural resource that it has in such abundance?

More than half of the electricity produced in the United States in 2004 was generated by coal. Total U.S. electricity sales are projected to increase at an average annual rate of 1.9 percent, from 3,481 billion kilowatt hours in 2003 to 5,220 billion kilowatt hours in 2025. If you want to begin to imagine reducing U.S. coal consumption, you must first account for how these growing energy needs will be met. The truth is that no other energy source could fill this gap. Wind and solar power now account for less than 2 percent of U.S. electricity generation, and nuclear power only about 20 percent.

Limiting coal also poses a dilemma for those who favor energy independence. True, coal is one of the "dirtier" fuel sources. But, for all its shortcomings, coal is a relatively cheap source of electricity. (It costs four times more to produce a kilowatt of electricity from a solar cell than from coal.) And it is plentiful: The United States has enough domestic coal to last 250 years. If the United States were to cut back on its coal consumption, its current energy needs would require it to import even more oil, reducing the country’s energy independence even further.

"Nuclear Power Is Making a Comeback"

Yes, and it’s a good thing. Concerns about safety, waste disposal, and weapons proliferation are very real. Nevertheless, nuclear power is an important means of diversifying energy supply and reducing carbon emissions. Electricity generated from nuclear power does not produce carbon dioxide, and nuclear energy accounts for almost 70 percent of non-carbon power produced in the United States. Reducing the use of nuclear energy means identifying other clean fuels. A recent British Parliamentary report warned that the planned closure of most of the country’s nuclear plants would undermine its goal of supplying 10 percent of Britain’s electricity with renewable sources by 2010.

It is because of this calculus that the nuclear power industry is ready to boom again. Last year, 16 countries generated at least one quarter of their electricity from nuclear energy. China and Brazil have plans for the construction of as many as nine new reactors. Twenty-four new nuclear plants in nine countries are under construction, with another 40 in the works. For its part, the last U.S. nuclear plant was ordered in 1973 and completed in 1996. Nuclear energy in the United States is projected to grow over the next 20 years by 9 percent. Given the projected rise in electricity demand, the use of nuclear power, like the use of coal, simply cannot be avoided any time soon. Moreover, as with oil, even if one could somehow end its use in the United States, it would still be a growing source of energy for the rest of the world.

"Energy Conservation Is the Solution"

No chance. Faced with increasing energy demands, some argue that a better alternative is to promote energy conservation. It’s worthwhile to try to conserve any natural resource, but we cannot conserve our way out of today’s energy bind.

Today’s cars use only 60 percent of the gasoline they did in 1972, new refrigerators about one third the electricity, and it now takes 55 percent less oil and gas than in 1973 to generate the same amount of gross domestic product (GDP). Nonetheless, in the United States, national energy use has shot up 30 percent since 1973. This growth is far less than that of the economy as a whole (126 percent), but it is substantial just the same. Consumers are more interested in enjoying the goods and gadgets that require energy than in cutting energy use itself. Few people, for example, decide whether or not to buy a plasma television based on the fact that it uses as much as 10 times the electricity that a standard TV does. Nor can conservation do anything to slow demand in large, growing economies. For example, in 1973, China had an estimated GDP of $140 billion and consumed about 1 million barrels of oil a day. By 2004, China’s GDP had ballooned to roughly $7.3 trillion, with demand for oil topping out at almost 6.5 million barrels a day. Thus, in a little more than 30 years, China has become far more efficient in what it gets from the oil it burns, but the needs of its economy swamped these improvements — and the country requires still more oil.

"Customers Are Willing to Pay More for Green Energy"

Prove it. Energy is still a relatively cheap commodity in the United States, but few Americans believed even pre-Katrina energy prices were reasonable. This attitude is puzzling, given that in the early 1980s, U.S. households spent approximately 8 to 9 percent of their income on energy. Today, they spend only 5 to 6 percent. And while post-Katrina oil prices are steep, they are not even close to all-time highs. When adjusted for inflation, the price per barrel of oil in January 1981 was more than $85. Today’s prices would have to remain at this level for three years to have the same economic impact as the earlier oil shocks.

People want and expect cheap energy, and few people would actually pay more for clean power. More than 50 percent of U.S. consumers now have the option of buying electricity generated from renewable energy sources, but only 1 or 2 percent actually do. Hybrid car sales represent less than 1 percent of automobile sales; SUVs account for 25 percent. It is true that residential customers in Europe appear more willing to pay higher rates for green power. (Thirteen percent of people in the Netherlands are said to have chosen green power.) But that is largely a function of the natural resources that are present (such as huge hydroelectric dams) and aggressive government subsidies, which make such power far more affordable. Even with these measures, it’s far from clear that a significantly greater proportion of Europeans will pay more.

"The Hydrogen Economy Is Going to Change Everything"

Misleading. The so-called hydrogen economy has many people optimistic about our energy future. The idea is to provide for energy independence from fossil fuels and imported oil by developing technologies such as high-performing fuel cells that will allow clean energy to be produced from hydrogen rather than oil and natural gas. Hydrogen, of course, is plentiful — after all, every water molecule contains two hydrogen atoms. But hydrogen is a fuel that must be created. Hydrogen can be derived from water (through a process using electricity called reverse electrolysis), or directly from natural gas (using a reformer). Even if one assumes fuel cells could be manufactured at a competitive price and that a hydrogen-delivery infrastructure could be constructed (imagine the cost of replacing every gas station with a hydrogen-fueling station), natural gas or electricity produced through coal or nuclear power would still be needed to create the hydrogen. If the electricity to make hydrogen is produced from natural gas imported from Qatar, how is the United States more energy independent? If the electricity is produced by coal plants with high emissions, how is hydrogen any better for the environment? The vision of a hydrogen economy does not solve our energy dilemmas; it obfuscates them.

"New Energy Technologies Will Save Us"

In the long run. Energy independence may be hopeless in the next 20 years, but there is no doubt that emerging technologies will eventually bear the brunt of our energy burden. The cost of producing electricity from wind has fallen approximately 80 percent in the last 20 years, and the cost of solar power has fallen from almost $1 per kilowatt to less than 18 cents. These efficiencies have allowed the wind and solar markets to become multibillion-dollar global markets. The markets for solar, wind, and fuel cells are projected to grow from an estimated $16 billion in 2004 to $102 billion in 2014. For the first time, there are multiple companies selling actual products based on fuel cell technologies. Danish wind manufacturer Vestas Wind Systems had revenues of almost $1.7 billion in the first half of 2005 — up 47 percent from the same period in 2004. There are now companies that do nothing but maintain and fuel natural gas-powered vehicles or develop and install solar panels and wind turbines.

Earlier this year, Goldman Sachs bought Zilkha Renewable Energy, a Houston-based wind power developer, believing "wind and other renewable forms of energy will become an increasingly important part of the world’s energy mix." The Carlyle Group, one of the world’s most successful private equity funds, teamed up with FPL Group, a utility company, to purchase 141 megawatts of solar power in Southern California. MidAmerican Energy, majority owned by market guru Warren Buffett’s Berkshire Hathaway, is undertaking a massive wind energy project in Iowa. Goldman Sachs, the Carlyle Group, and Warren Buffett are not in the business of making the world cleaner. They are sophisticated investors who believe that these technologies will offer attractive rates of return.

New energy technologies are beginning to make a difference today, and they will make a bigger difference tomorrow. But clear thinking about changes in energy supply requires a time frame measured in decades and an understanding of the trade-offs that must be made. Jettisoning the loose language about energy independence would be a good start.