Pittsburgh Post-Gazette

Forum: Alaskan snake oil

Sunday, July 15, 2001

By Amory Lovins Hunter Lovins

Amory Lovins, a physicist, and Hunter Lovins, a lawyer and political scientist, founded and lead Rocky Mountain Institute, an independent nonprofit applied-research center that has long advised the oil and other industries and the Department of Energy and Department of Defense. This commentary is adapted from the institute's spring newsletter ( www.rmi.org ) Amory Lovins received a Heinz Award in 1997 for his work in energy efficiency and renewable energy resources.

As Congress debates whether the oil potential beneath the Arctic National Wildlife Refuge in

Alaska is worth the environmental damage caused by extracting and burning it, it's worth asking:

Is it profitable? Is it necessary? Are there alternatives?

The debate focuses on environmental costs, and the human rights of the threatened Gwich'in

people. This overlooks important reasons why drilling in the Arctic Refuge would not improve but compromise national energy security and economic vitality, especially when compared with alternatives that benefit both -- and improve the environment. In the current issue of Foreign

Affairs (www.foreignaffairs.org), we explain why bringing through the aging, vulnerable Trans-Alaska Pipeline System as much oil as America now gets through the Strait of Hormuz is risky for energy security. Here we focus instead on Arctic Refuge oil's even more immediate flaw -- dismal economics.

For the oil industry to invest, the refuge must hold a lot of oil, which must sell for enough to earn profits: at least $22 a barrel (in December 2000 dollars, delivered to Los Angeles) for decades to come, according to the U.S. Geological Survey. World oil prices have stayed above $22 only a few times in the past three decades, and tend toward the teens. Sustaining more than $22 a

barrel would contradict practically every forecast -- and they're trending downward.

The Alaska Department of Revenue wants refuge drilling so its citizens will keep getting rebates instead of paying income taxes. Yet in April 2001, the department projected a steady decline to less than $13 a barrel in 2009-10. The latest federal forecast, among the highest, stays below $22 until nearly 2020. Indeed, the USGS says that below $16 (plus any lease fee paid to the

Treasury), no economically recoverable oil is likely to be found. Alaska now forecasts prices below $16 throughout 2005-10. So why drill?

Of course, any forecast can be wrong, and most are. Oil prices fluctuate randomly, and have for at least 115 years. Oil companies routinely assess the resulting risk -- though in a public asset like the refuge, the choice isn't simply a private business decision -- emphasizing such fundamentals as technology and demand.

Astounding advances continue in the technology of finding and extracting oil -- supercomputer visualization like X-ray eyes, and precision-guided drilling to snake between pockets of oil. Could this tip the economics in favor of refuge oil? Most industry experts think not. Their proprietary refuge data suggests it's a multibillion-dollar gamble not worth taking: the closer they

look, the less interested they get. If new technologies make refuge oil worth seeking, oil practically anywhere else would be cheaper. If oil everywhere is getting cheaper to find and lift, why look in one of the most hostile and remote places on Earth?

During 1998-99, despite $25-a-barrel prices, the big U.S. energy companies slashed their exploration budgets by 38 percent worldwide, 66 percent in onshore America. They see technology becoming more powerful, oil more abundant, and long-term prices lower. If oil companies believed in high long-term oil prices, they'd be drilling everywhere. They're not.

Couldn't drilling in the refuge relieve dependence on OPEC oil? OPEC's percentage of the oil the U.S. imports has dropped by a third since the high-water-mark of imports in 1977. Only one-fourth of U.S. oil now comes from OPEC. Most imports come from more stable Western sources, and are so diversified that a full-scale war in the Persian Gulf in 1991 caused no gas

lines at home. We're not as dependent on OPEC as some imply. Nor are we short of fuels. Despite Bush administration claims that Arctic Refuge drilling is urgent because, as California's electricity crisis showed, the nation "desperately needs more fuel," only 1 percent of California's

electricity (and 2 to 3 percent of the nation's electricity) is made from oil.

If oil-import dependence or oil shortages were a serious problem, would the solution to domestic depletion be to deplete faster? Or might other solutions arrive sooner and cost less?

Better buys aren't hard to find. The past quarter-century's efficiency revolution is now "producing" over five times as much energy as all domestic oil output (and 12 times the oil the U.S. imports from the Persian Gulf) simply by using less energy to do more work in smarter ways. Two-fifths of the nation's energy services now come from more efficient use. Each barrel

of oil supports twice the GDP it did in 1975 -- and that's just for starters. Efficiency doesn't risk dry holes. It protects the climate, creates widespread and stable jobs and improves the environment. It will never suffer a terrorist attack. It creates a uniquely flexible and perennially

profitable form of all-American energy security. In fact, it cut oil imports from the

Persian Gulf by 87 percent during 1976-85 alone.

But if Arctic Refuge oil isn't the cheapest way to provide the services now provided by imported oil, then drilling in the refuge makes the oil-import problem worse, because each dollar spent on the costly option could have bought more of the cheap option instead. Choosing the costlier option therefore results in using and importing more oil than if we'd bought the best buys first. Yet efficiency is strangely invisible in today's refuge oil debate.

The energy policies of the early 1970s and the mid-1980s demonstrated how quickly energy gluts happen when customers seek efficiency. In the early 1980s, the government increased supply slowly while customers increased efficiency rapidly. Both efforts succeeded -- supply modestly, efficiency stunningly. The two collided head-on. Between 1979 and 1986, GDP rose by 20 percent while the nation's total energy use fell by 5 percent and oil use fell by 13 percent. The glut crashed energy prices in 1985-86, sticking suppliers with big investments but without the revenue to pay for them. Efficiency providers suffered too: As attention waned, many energy-saving programs, products and services faded from view for the next decade.

But unexpectedly, efficiency came roaring back. Despite record-low and falling energy prices, U.S. energy intensity in 1996-99 fell by 3.2 percent per year -- nearly matching 1979-86, when energy prices were at record highs and rising. In 2000, routine blips in oil and natural gas prices, just as California's botched restructuring sent electricity prices sky-high, further accelerated energy efficiency's sudden revival. In the first half of 2001, as Home Depot's sales of energy-saving products soared, Californians cut electric demand by as much as it had grown in the past 5-10 years.

The 1986 price crash that ruined so many energy producers had a simple recipe: Mix an underlying efficiency trend with a federal supply stimulus. Today, the first ingredient is here; the second is promised by President Bush. There's no reason to expect the same experiment to yield any different result. Such train wrecks are unhealthy for the domestic energy industries,

whose financial stability is an important element of energy security.

As in the early 1980s, supply expansions will be far less prompt and effective than energy efficiency. This is especially true for refuge oil, which can produce nothing for nearly a decade anyway, and then, briefly, about one percent of the world's oil. Efficiency, however, is such a vast resource that capturing just a few percent of it -- very likely at prices high enough to justify refuge drilling -- could crash oil prices and displace any oil that might lurk beneath the refuge.

Even optimistic projections of oil from the refuge, extracted over 30 years, would run just 2 percent of America's present fleet of cars and light trucks. That much gasoline could be saved by making the fleet a mere 0.4 mpg more efficient. During 1979-85, new light vehicles gained 0.4 mpg every five months. This trend ended when President Reagan rolled back the efficiency

standards -- thereby wasting one refuge's worth of oil, and promptly doubling oil imports from the Persian Gulf. But had the efficiency trend continued, America wouldn't have needed a drop of oil from the Gulf since 1985.

Just adopting aftermarket tires as efficient as the originals would save several refuges' worth of oil. So would equipping appropriate U.S. buildings with superefficient windows that also make buildings more comfortable and cheaper to construct. Combining all the main U.S. efficiency options available in 1989 (automobiles, buildings, industries -- everything) could save today 54 refuges' worth of oil, at one-sixth the cost.

Energy efficiency is so outpacing advances in oil technology that even cheap oil is becoming uncompetitive. This trend will intensify because the next and biggest efficiency advances are aimed at oil's biggest user -- cars. The average new American car is the highest expression of the Iron Age. Its 24-mpg efficiency rating just tied for a 20-year low. The auto industry can

do better, and is starting to. Briskly selling hybrid-electric cars now include a Toyota's Prius (a 48-mpg five-seater) and Honda's Insight (a 67-mpg two-seater). An American light vehicle fleet as efficient as those two would save gasoline equivalent to the average output of 26 or 33 refuges' worth of crude oil.

General Motors, Ford and DaimlerChrysler family sedans that achieve 72-80 mpg are already being tested. VW is selling a 78-mpg four-seat subcompact in Europe, and plans a 2003 small city car at around 235 mpg. Then come fuel-cell cars, now slated for 2003-05 production by eight mainstream automakers. The chairs of four major oil companies have already acknowledged the start of the oil endgame and the dawning of the Hydrogen Age.

Our organization, Rocky Mountain Institute, has been working since 1991 to develop ultra-efficient vehicles. This effort was spun off in 1999 as a for-profit venture, Hypercar, Inc. (RMI is a major shareholder and Amory Lovins is chairman. Its Web site is www.hypercar.com.) By combining fuel cells with carbon-fiber autobodies, Hypercar has designed a spacious, safe,

uncompromised concept car that matches or beats every attribute of a midsize sport utility vehicle, at a similar price, but gets 99 mpg -- 82 percent less fuel. A full 1999 U.S. fleet of vehicles so efficient would save 42 refuges' worth of oil. Ultimately, globally, they'd save as much oil as OPEC now sells.

Hydrogen-powered fuel-cell vehicles could also serve as portable power stations. A full fleet of them, when parked (about 96 percent of the time), would have enough generating capacity to displace the world's coal and nuclear power plants 5-10 times over. They'd help pay for themselves through electricity sales, while profitably halting up to two-thirds of climate

change. As Shell Hydrogen CEO Don Huberts, fuel-cell pioneer Geoffrey Ballard and ex-Saudi Oil Minister Sheikh Yamani have observed, the Stone Age did not end because the world ran out of stones, and the Oil Age will not end because the world runs out of oil.

Arctic Refuge oil is a risk the nation can't afford. Its benefits can be achieved by tapping just a few percent of the proven energy efficiency reserves -- the cheaper, faster alternatives now winning in the marketplace. These offer economic security and competitive advantage, immunity to price shocks and supply manipulations, the market power to beat down cartel prices,

and environmental benefits rather than costs.

If any oil exists under the Arctic National Wildlife Refuge, its best, safest and most economic use will be forever holding up the ground under America's last great wildland.