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Energy Independence: It's About Demand, Not Supply

by: Rob Day September 05, 2008 | about stocks: GEX / GRN / PBW / PZD    
Rob Day

Rob Day

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‘Tis the political season, and so we’re treated to scenes of one group happily chanting “Drill, baby, drill!” while another group pledges more support for solar and wind power, while clean coal industry lobbyists throw convention parties for delegates and an oil billionaire buys ads to promote wind and natural gas.

It’s generally great to see all of this attention on energy issues, which have been too long neglected.  But all the rhetoric about “Energy Independence” has been focused predominantly on finding new sources of supply, whether it be incumbent types (fossil fuels) or alternatives (solar, wind, etc.).

That’s the wrong way to look at it.

A focus on supply won’t get us to energy independence.  We import a significant portion of our energy supplies.  But most of that is oil.  We get 60% of our oil, only something like 15% of our natural gas, and a very small amount of other energy sources (coal, etc.) via imports.  So when people say “energy independence” they really mean oil imports.

The problem with a supply-side fix to this is that oil is fungible.  Which means that a barrel of domestically-produced oil is roughly interchangeable with a barrel of foreign-produced oil, and in fact also with a barrel of domestic or foreign-produced biofuel for many applications.  So increasing our domestic production of oil and oil subsititutes doesn’t feed directly into satisfying U.S. demand, it feeds into the larger world market and thus only has a minor and indirect impact on our dependence on oil imports.  Unless and until someone comes up with a labeling scheme so that we can expensively track “domestic” vs. “foreign” oil from the ground all the way to the pump, you’ll never know whether your car was filled up with gas derived from Saudi, Alaska, Venezuela, Louisiana, or some blend of all of the above and then some.

This is NOT true for other energy types, such as natural gas to a certain extent, and electricity to a significant extent.  When you consume these (or their derivatives), you’re largely consuming domestically-supplied energy.

There’s no argument here that we don’t need all sorts of energy supply to support future growth, as many joules as we can dig up (pun intended), done as responsibly as possible.  And I also think we should be as concerned with environmental and climate-related effects of energy consumption.  But if the goal is ONLY to pursue Energy Independence, leaving aside any other considerations (as the current overheated rhetoric would suggest), then the single most important thing would be to reduce our consumption of oil.  NOT to expand production of it, for reasons listed above.

First things first, a pursuit of energy independence needs to focus on a reduction in the types of energy consumption that tends to come from oil.  That means mostly transportation (70% of oil consumption), but also heating and industrial processes.  The single most effective way to make a dent on all this is via improved efficiency.  More efficient cars and trucks.  More efficient homes that require less energy to heat.  The single most “Energy Independent” barrel of oil is the one not consumed.

This isn’t about shivering in the dark.  McKinsey & Co. did an analysis of carbon-reducing approaches to see what would be the most cost-effective way to reduce our carbon emissions, and the results were pretty telling.  Changes made to save 0.4 gigatons of CO2e per year by 2030 in car fuel economy would actually SAVE consumers nearly $90 per ton.  With light trucks, it wasn’t quite as good — only $60 in net savings per ton of CO2e reduction!  Those are significant net savings, as compared to many energy supply options they considered which would actually entail net costs.  They also pointed to significant net savings from changes to industrial processes, and residential buildings’ insulation/ “shell improvements”.

We in the U.S. consume a lot of energy.  A lot.  Over 8 metric tons of oil-equivalent per person per year.  That’s almost double the per capita energy consumption in Europe and Japan, and of course much higher than in developing regions. That’s not by itself a bad thing, we get a lot of economic benefit from all that consumed energy.  But it implies there might be some ways to — maybe just maybe — find some areas of wasted energy consumption and make improvements.  Basically, if done correctly, efficiency improvements to the way we consume oil should make us significantly better off, not worse off.

But of course, there’s a limit to how far efficiency gains alone can take us.  So shifts in consumption are also important.  Home heat can be done via electricity, natural gas, or oil.  Transportation can be done via oil, natural gas, and soon via electricity and biofuels (really a blend of all of the above plus some photosynthesis when you look at the inputs).  As pointed out above, if as a secondary priority to efficiency gains we can shift oil consumption toward natural gas consumption, cellulosic and next generation biofuel consumption, and — especially — electricity consumption, then we’re completing the Energy Independence picture.

So to everyone arguing and fighting for Energy Independence, know that it’s not about finding new sources of oil supplies.  That’s just a typical election year useless “wedge issue”.  Instead, it’s about reducing our dependence on oil altogether.  We should be putting better incentives in place to help people drive their cars and heat their homes more efficiently.  And we should be putting much more emphasis on shifting both activities more toward electricity as a primary energy source.

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This article has 19 comments:

  •  
    Sep 05 03:55 PM
    Excellent point about energy independence referring specifically to oil, however increasing domestic supply is the only possible solution. Decreasing demand is not realistic or a solution since hydrocarbon demand will never go away despite the beloved alternatives. Oil is used for everything, not just transportation fuel.
    Reply
  •  
    Sep 05 04:22 PM
    I should repeat myself, energy independence is a political slogan, not an economic term. In reality, we can't be independent from world we are living in.
    But, author makes great points. First of all, we can't produce enough oil for all our needs in foreseeable future, although we need to increase production. Second, if we want to be less dependent on foreign oil, we need to switch to different energy sources where possible. Increased fuel efficiency is good, unless it's mandated to something like 75 miles per gallon (which is idiocy to say the least). Switching house heating from oil to natural gas is even better, because it's cheaper and cleaner. Everything else is just good wishes at current levels of technology. But government should be very careful how it's done. I'd rather see increased fuel tax than fuel economy mandate. And throwing money to wind (power) is not the best solution here. If somebody can produce wind power economically, great, but don't use taxpayers money.
    Reply
  •  
    Sep 05 05:38 PM
    Good points. Had we in the US adopted the European model for urban development and rail transportation a couple of decades ago, we wouldn't be complete economic slaves to oil like we are today - our demand would be half what it is now, and largely supplied domestically. Unfortunately, the attitude of many people in the US is that we have some sort of constitutional right to cheap oil from other countries and that we have a right to waste it by commuting 50 miles to work every day in a 6,000 lb vehicle.

    This lifestyle will change within our lifetimes. Oil is already too pricey to justify, not just per barrel, but also when you consider the costs in terms of inflation-causing deficits, arming rouge regimes, and dead soldiers from oil wars. When reality finally sets in, we will have a country full of obsolete infrastructure, obsolete housing and businesses in the exurbs and far suburbs, and an obsolete economy based on automotive spending (sales, insurance, maintenence, fuel, etc.). The staggering costs of rebuilding our country will hit us just at the point when running the construction equipment will cost the most.

    Here's a thought: Tax the hell out of gasoline and use the proceeds to cut the income tax. Then build a light rail infrastructure in any city over 100k people, and also connecting those cities. We can either do that or decide right now to be impoverished in the future.

    I have little confidence that we will figure this out in time. As the author says, we haven't even defined the problem yet.
    Reply
  •  
    Sep 05 10:05 PM
    The paragraph on the global fungible oil market is exactly wrong. As T. Boone says, we currently send $700B to foreign markets every year, and killing our balance of trade as a result.

    Even if every drop of domestic oil produced were immediately sold on a "global oil market" those dollars of revenue are generated domestically. Those dollars do not end up in some mid-east sovereign wealth fund.
    Reply
  •  
    Sep 06 12:02 AM
    A few things scare me here. Let's start with Palin saying one night that Alternative Energy is so important, then hearing the "Drill, baby, drill" chants the next generated by McCain's comments.
    I know Palin's track record when it comes to big oil, specifically her redistributing to the taxpayers some of the surplus from Alaskan oil. That move just skimmed some idle pig fat off the plates of fat and happy Alaskan oil companies/goverment--l... them wealthy still--and allowed Alaska's taxpayers to benefit from the local glut. It's harder to support such legislation on the national scale when someone in deeply deficited XYZ, New York (as synecdoche for the entire US) would benefit from surplused Alaska, Texas, and their oil companies. It's harder not only because I think a proximate Alaskan should have a claim to the local fare at the state level rather than a far-off New Yorker at the federal, but also because when you take those tax proceeds nation wide, there're more mouths to feed with the aforementioned, metaphorical "pig fat," with much less to go around. In one word: Dilution.
    Basically, Palin was sitting on a happy surplus and made the easy decision to pass it onto citizens instead of letting it idle. The one downside to surplus is that it shows a lack of commitment to growth; not that I'm advocating deep deficits.
    So, even if she's committed to Alternative Energy development, the zombie chants "Drill, baby, Drill" sound like the same old partisan Republican crud.
    That's why I don't have a candidate yet: we've heard a lot of idealistic babble from both McCain & Obama that's wonderfully pulled to the middle, but now that they've got official party support, we're already seeing more bipartisan politics. Candidates, I liked the goals you spoke of in the primaries, but how do we get there and how do we fund such ambitions? Address that, and I'll think you're legit.
    The point to my rant (or one point)? "Drill, baby, drill" has no place in an Election 08 campaign. It should be rat poison, political kryptonite. We should be publically and vocally generating a sense of urgency for the development of AltE. Behind the scenes, politicians should be discussing what to do in the interim (Obama: turn on the spickets; McCain: offshore drilling).
    I'm socially liberal, but I see the greater good NEEDS Fiscal conservatism in the maintenance of tax levels. (That's financed immediately & doubly by the shedding of the budget's dead weight, then subsequently financed long-term by withdrawal from Iraq. Best thing is, we're poised to withdraw troops from Iraq WITHOUT extracting the American contractors who send valuable revenues back home).
    Reply
  •  
    Sep 06 04:48 AM
    If we are serious about wanting to get the USA to kick its `crude (oil) habit`, we need to have Congress add on a 10% surcharge at the gas pump (bumping it up another 10% every six months) and rebate the surcharge revenue in monthly equi-dollar amounts to every registered car OWNER, regardless of how much or little they drive. That causes the biggest oil consumers to subsidize everyone else with no BOTTOMLINE cost to taxpayers or consumers. The surcharge will incentivize cheaper alternatives to rapidly become apparent and we will soon thereafter implement and use them, no government mandate required.
    Reply
  •  
    Sep 06 04:50 AM
    And if we are serious about wanting to get the USA to kick its `crude (oil) habit`, we need to have Congress add on a 10% surcharge at the gas pump (bumping it up another 10% every six months) and rebate the surcharge revenue in monthly equi-dollar amounts to every registered car OWNER, regardless of how much or little they drive. That causes the biggest oil consumers to subsidize everyone else with no BOTTOMLINE cost to taxpayers or consumers. The surcharge will incentivize cheaper alternatives to rapidly become apparent and we will soon thereafter implement and use them, no government mandate required.

    Now was that so hard?
    Reply
  •  
    Sep 06 08:22 AM
    1. population densities are higher in europe so urban public transport is encouraged, as is interurban fast rail.

    2, we has interurban light rail here (purcellville VA to arlington VA where you caught the trolley car (electric of course) but the tracks were torn up in the early 1960's & sold for scrap. the right of way still exists - it's a paved biking trail. exercise is good but not really practical for getting to the office.
    > jack
    Reply
  •  
    Sep 06 09:50 AM
    Whenever a politician talks about energy independence as something possible in the next 25 years or less, you know he/she is a liar (or hopelessly misinformed). The U.S. is the most mature petroleum province on earth (and still the 3rd biggest oil producer!), and there is just not much probability of finding huge new reserves here.

    What's wrong with being energy dependent anyway? I don't hear anyone calling for coffee independence. The whole nature of trade is that I have something that you need, and you have something that I need. This is good and healthy.

    The perception that imported oil is mostly from the Middle East is not really correct. We import 20.3% of our oil from Canada, 20.1% from the Persian Gulf countries, 12.3% from Saudi Arabia, 10.8% from Mexico, 9.4% from Nigeria, 8.2% from Venezuela, and 6.2% from Iraq.

    Even if you take the most optimistic view possible of areas in the U.S. that are currently closed to exploration, they still won't make us energy independent. Don't misunderstand me--I think we should drill in these areas. Just don't expect that we will find something so big that we won't have to import oil.

    ANWR has been evaluated over and over by oil companies and it doesn't look that good (the USGS estimate of 15 billion barrels is limited to "technically recoverable" and not commercial oil--if it is scattered in many smaller pools none of it will be commercial).

    The offshore East Coast has been drilled before it was off-limits and was considered a dog by the industry. Offshore California has some promise as does the eastern Gulf of Mexico but the probable reserves are not enough to make the U.S. energy independent.

    Conservation makes great sense but it won't make us energy independent because we use so much energy. Alternate fuels make great sense but none of them are ready commercially for at least 25 years. Building more fuel efficient cars is great (I think we already do a lot of that but people have preferred SUVs, etc.) but it takes a long time before we get all the less efficient cars off the road.

    So, let's stop this energy independence talk. We should do anything and everything to be smarter about how we get and use energy, but let's be practical and realize that energy independence is not real in the near-term, as much as we want it to be!
    Reply
  •  
    Sep 06 10:33 AM
    Given the putative belief that we are now oversupplied with natural gas, I would strongly urge our clueless Congress to pass a law allowing significant tax deductions for truck stops to install natural gas facilities. We should also offer trucking companies and truck manufacturers tax incentives to convert existing and future trucks to NG. Busses should also be included. Large vehicles, such as above, are easier to convert to NG. This should greatly aid the hurting transportation industry and lower our dependence for oil imports. I would also suggest "energy security" rather than "energy independence" since the latter is impossible. We could also levy an import tax on oil from other than Canada and Mexico. That should get the attention of Chavez-Citgo. Chavez makes less money when he ships to China. The tax should be strictly assigned to finance research on alternative transportation fuels.
    Reply
  •  
    Sep 06 12:19 PM
    Rob - here's a suggestion for a little elightenment and your next better article: "Search 'nakedjaybird'" responses here on SA; read them all; some are the same, nearly the same, expansive, and full of the right answers to your half-baked article. I really do want you to read them again and again - that's how people get taught. Don't get ticked; go read.

    Some of you other bloggers need to do the same. There old stuff is as tiring as mine - only mine is right.
    Reply
  •  
    Sep 06 12:44 PM
    Rob and all the others:

    And here it is briefly (give it to McCain and Obama: and then elect the one that really wants to do it!!). And fire all those folks in DC that do not want to get onboard.

    1. Permanenely Tax gasoline and diesel $5/gal at the pump; tax goes away as consumption goes away. Use tax for the following infrastructure.

    2. Electrify the existing rails (get the diesel out of diesel-electric).

    3. Electrify the inter/intrastate hiways with electrifed ferries hauling cargo, vehicles, and people (express and local). This is also where we beef up and expand the grid - same right-of-ways. Get the diesel and gasoline off the road.

    4. Make new hybrids with no-moving-parts biofuel injected combusters encapsulated with solid state heat recovery powerchip devices converting 80-90%the energy directly into electricity which powers a 20-40 hp ChorusMotor with the only onboard energy storage device being a GRASS TANK refilled at 1/3 of the existing service stations (because we will capture 4x the energy) using our own home grown biofuels from celulosic switchgrass, canola, cornCOBS, etc., on million of acres of land that is currently idle, because we pay farmers to do NOTHING. Instead, pay them to do this and watch it happen. NO MORE DRILL< DRILL< DRILL and oil, gas and coal subsidies or research dollars.

    These four items take care of TRANSPORTATION (no more gasoline or diesel, or even the nat gas that Boone wants to burn - all rendered unnecessary).

    UNDERSTAND???????

    5. Install as much solar and wind and geo and nuc and tidal, etc., as quickly and as possible; now, POWER GENERATION becomes no coal, no nat. gas. and the beefed us grid is everywhere the interstate hiways go, which ain't far from any solar or wind farm.

    Now, go do it.
    Reply
  •  
    Sep 06 07:42 PM
    Nakedjaybird, your plan has a lot of merit. I don't believe the 5dollar/gallon tax will necessarily be paid by those who can afford it and will be very regressive to middle class younger families who mostly live in the suburbs. Reality is that is our current state. You are right to connect our current transportation system into a comprehensive energy plan. Another blogger above made what I think is the most significant point. We can't continue to have a negative yearly current account balance that is approaching a trillion dollars and not sell our country to the very people we want to be independent of. The near term imperative is to reduce this negative balance as quickly as possible. The country's energy plan must have speific reduction of imported oil goals as a funtion of time. Here.s mine:
    1] 5 million barrels/day less in 5 years
    Accomplished by 2to3m barrels increase in domestic supply..5MB replaced by wind energy where electricity is generated by oil [Cape Cod as an example] Imb less by introduction of affordable hybrids and natural gas and trucks, buses and cars.And the rest from solar and other sources.
    2] Picking up on your transportation idea build networks of electrified monorails whose trunks go down our interstate ststems with spiders in the suburbs in ten major urban centers. Increase our nuclear power generation by 50 to 75%, Using Tax incentives for builders and buyers encourage homes in the sunbelts and other feasible locations to build- in solar panels in their developments.
    Much of the above can be accomplished with commercial investment, if Government introduces the right incentives and takes care of the transportation problem, puts in the right constraints and removes unreasonable pressure group barriers.
    I haven't talked about geo-thermal , biofuels and more comprehensive wind installations which should be encouraged and be in the pipeline for more decreases in the importation of oil. The cost to federal and stae governments could easily be 1to2 trillion dolars over the 10 years but the cost of not doing might be the disintegration of our country or a major war.
    Reply
  •  
    Sep 06 07:56 PM
    I'm sorry. I left out of the above before 2[, that the reduction would be 10million barrels in ten years. To be completely independent we need to import 12.2 million barrels of oil less and by ten years from now a reasonable number would be 15 to 16m less. In the longterm the pipeline activities should permit us to do it.
    Reply
  •  
    Sep 07 12:30 AM
    Do this and do that, regardless of who runs Congress, next year will be worse than this year and the years after next will get worse.

    You get what you pay for... We elect those who want to be re-elected. They listen only to their immediate constituents and work for them rather than the Nation as a whole. What works in California won't work in New York. What is good for Alaska and Texas isn't good for Alabama and Tennessee.

    If Canada stopped exporting Natural Gas to the US, there would be a shortage here within months. An 8% annual increase sounds great but this increase is from a very small base. Give us One cold winter and the NG everyone wants to use in cars disappears.

    Anyone Paying attention to TBoone's latested ads? They talk about a huge reduction of $50 Billion.

    How many years to build a Nuc Plant? Given current regulations which preclude starting construction, 5 years at a minimum: Local, State and then Federal Permits; local, state and federal environmental concerns; Local, State and Federal Lawsuits by "concerned" parties.

    This type of idiocy will prevail regardless of any Energy Policy endorsed. BECause any Policy is just that, it is a set of Guidelines. Each individual State has the right to act in its own self interest.

    "National Programs on drugs, poverty, education, illegals", Now another for Oil Independence.

    Individual States comprise the United States, they have to act in concert. Only a National Crisis will unite them and we are still in Denial that such a Crisis exists.

    IMHO, A Manhattan Style Project will not work in this crisis. That Project was accomplished because of the associated Secrecy. A National Emergency Act would work if it was Ratified by Congress. Unfortunately, no matter what TBoone and others say, there is no National Emergency YET.
    Reply
  •  
    Sep 07 02:01 AM
    Brian Pursley, so sad.

    We had better figure out how to live on half our current oil imports, because it's only a matter of time. 1/4 is not beyond imagination. It won't be comfortable.
    Reply
  •  
    Sep 08 05:17 PM
    I disagree, we have a national economic crises today and because we always play the cost-effective evaluation game we haven't reacted properly. Unfortunately we had several red flags in the past but did nothing. It is precisely because it will take at least 3 years to start reversing the current trend, at least 5 yrs to reduce enough oil imports from places we don't like and 10 to 12 years to get independent of foreign oil that it is the most pressing time-sensitive problem we have as a nation and we should demand that whoever wants to run this country in the future come forth with a comprehensive and executable plan.
    Reply
  •  
    Sep 18 09:37 PM
    Chris B. You've learned your empty, leftist rhetoric well, grasshopper. Your fantasies of the Utopian States of America, once your Marxist leader leads us all to the promised land, are very amusing, indeed.
    Reply
  •  
    Sep 26 11:42 AM
    nakedjaybird: your ideas make good sense, after I translated them. Suggest you learn two things: the difference between "their" and "there", and the proper usage of each. Second, on railroads: backbone routes need to be running parallel rails, eliminating sidings except for switching. The idea of electrifying railroads would require major changes to the infrastructure and the equipment.

    Put bicycle lanes along existing commuting routes, if you want to see immediate benefit. Most people are scared to death of riding in the way of commuters' cars, and many commuters are enraged when a bicycle impedes their progress. Then put a floor under gas prices, using the tax to build the infrastructure.
    Reply
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