The Libyan Oil Crisis Argues for Developing Renewable Energy

Summary.  The present political crisis in Libya, which produces 2% of the world’s oil, has resulted in a sharp spike in the price of oil.   The U. S. is projected to need a slightly higher amount of oil in future decades, of which an increasing amount will be imported from foreign sources.  Because of a) a projected increase in production of oil world-wide from reserves that to date are undeveloped or unidentified, b) an increase in the number of cars world-wide, and c) a consequent strong increase in the price of oil, the U. S. will be sending large and increasing amounts of funds abroad to buy the needed oil.  In view of this situation, the U. S. should wean itself from its dependence on imported oil.  Burning fossil fuels contributes to global warming by emitting greenhouse gases (mainly carbon dioxide, CO2), which have recently been shown to contribute directly to weather extremes.  Forest fires, droughts and floods resulting as effects of global warming have enormous economic costs associated with them.  It would be beneficial instead to invest expenditures now to limit greenhouse gas emissions by imposing economic penalties for use of oil and other fossil fuels.  This could be achieved by a cap-and-trade mechanism, or through a carbon tax.  The revenues from these policies could be distributed to the treasury or the public, or be applied to support innovative research and development of renewable energy sources.  As many have said, “If not now, when?”

A Sharp Spike in the Price of Oil.  The United States, as well as other countries of the world, is addicted to fossil fuels for their energy needs.  The present political crisis in Libya, which produces 2% of the world’s oil, has led to a shock-provoked spike in the price of oil in the last few days (see the 1-year price chart in the graphic below).  On this day, February 23, the price peaked at $100/barrel; according to Barron’s.  As may be seen, the price increased sharply from about $88/barrel on February 16 to its present price in 1 week.

Crude Oil Price, US$/barrel

Source: http://online.barrons.com/data

This week’s events show that the threat of instability in a very small fraction of the world’s oil supply has a dramatic effect on its price.  This effect, on a percentage basis, is much more profound than the amount of oil potentially lost if Libya were to cease production. 

Increased Demand for Oil Predicted for the U. S. The consumption of oil in the U. S., and the amount projected to be needed in future decades, is shown by the dark red band in the following graphic.

Actual fuel usage up to 2009 and modeled projections after that date.

Source: U. S. Energy Information Agency Annual Energy Outlook 2011 – Early Release Overview.  http://www.eia.gov/forecasts/aeo/

The amount of oil that will need to be imported increases slightly over the period 2009 to 2035.

The world-wide production of oil, projected to 2035 by the International Energy Agency (IEA), is shown in the following graphic.  The dark blue band shows projected delivery from sources known today, and the light blue triangle shows expected but unproven delivery from oil reserves that remain to be identified or developed.  The gold band shows projected oil production from unconventional sources such as tar sands and shale oil.



Reproduced from World Energy Outlook 2010 © OECD/IEA.  http://www.worldenergyoutlook.org/docs/weo2010/weo2010_london_nov9.pdf



Increased Demand Due to Higher Numbers of Cars. Oil is used world-wide to refine gasoline for use as a vehicle fuel.  The IEA projects total vehicle counts in the world through 2035 in the following graphic, broken down by region.  (The OECD is the Organization for Economic Co-operation and Development, consisting of economically developed countries including the U. S., Europe, Japan and Australia.)  Non-OECD countries include India and Brazil, for example.

Reproduced from World Energy Outlook 2010 © OECD/IEA.  http://www.worldenergyoutlook.org/docs/weo2010/weo2010_london_nov9.pdf

It is seen that the projected number of vehicles almost doubles from 2008 to 2035, with significant increases coming from developing countries (orange and red bands).  They will require ever-increasing amounts of gasoline to fuel them.

Higher Prices Predicted for Oil As Demand Grows. As oil demand throughout the world increases in the next decades, the price can be expected to continue increasing.   Some predictions prepared by the U. S. Energy Information Agency are shown in the following graphic.  The various scenarios are to be discussed in the full version of the Annual Energy Outlook 2011.  The Reference scenario traces the projected price if minimum efforts are made to limit consumption.

Source: U. S. Energy Information Agency Annual Energy Outlook 2011 – Early Release Overview.  http://www.eia.gov/forecasts/aeo/pdf/0383er(2011).pdf

The increasing share of American need for oil coming from abroad, coupled with the anticipated increase in price as shown in the graphic above and the growth in the number of cars on the road, mean that over the coming decades, Americans will be sending many billions of dollars abroad to buy oil, in ever-increasing amounts,. 

Why Not Reduce Dependence on Oil? It is fair to ask, given these predictions of expanding demand and increasing cost, “Wouldn’t it make sense to adopt policies that wean the U. S. from its dependence on oil imported from abroad?” 

Global Warming from Man-Made Greenhouse Gases Is Already With Us. This blog has treated the effects of burning increasing amounts of fossil fuels on global warming in several earlier posts (see, for example,

http://warmgloblog.blogspot.com/2010/10/we-need-to-achieve-alternativesustainab.html ;

http://warmgloblog.blogspot.com/2010/11/steven-chu-u-s-energy-secretary.html ; http://warmgloblog.blogspot.com/2010/10/co2-bathtub.html ).   These offerings point out that it is crucial to abate greenhouse gas emissions as soon as possible, because the level of greenhouse gases that lead to global warming in the earth’s atmosphere continues to grow.  

Greenhouse Gases Are Directly Related to Extremes of Weather.  Reducing emissions is necessary because the atmosphere already has a high enough greenhouse gas content to cause severe climatic effects on the planet.   Indeed, two recent papers published in Nature show, for the first time, that greenhouse gases originating from human burning of fossil fuels has directly contributed to extreme weather events such as heavy rain and flooding in recent years (see Note 1).

Economic Basis for Addressing Global Warming Now.

Economic Damage Wrought by Extremes of Weather.  Forest Fires.  Droughts and floods have been predicted for the last two decades as part of the weather disruptions brought about by global warming.  Regions of drought make more likely the occurrence of severe forest fires, such as those in the western U. S. in recent years.  These destroy valuable commercial timber lands and private homes, and have required intensive fire-fighting activities.  Forest fires consumed almost 7 times more federal land during the 1987-2003 period than during the preceding 17 years, and has been attributed to global warming. Such events potentially have losses in the billions of dollars.

Agriculture.  Drought in the U. S. affects water resources that nourish urban areas and irrigate farms.  Limitations on drinking water, and restricted irrigation, lead to potentially large economic losses in water supply activities and lost agricultural yield.  Abroad, in 2010 severe droughts in Russia and Australia severely reduced wheat harvests, adversely affecting world-wide availability of food.  Wheat prices around the world have risen considerably as a result, including in the U. S.

Floods. Major floods in the U. S. (“100-year floods”) have occurred repeatedly in recent years.  Examples include Hurricane Katrina in 2005 and several floods in the Mississippi-Missouri river basin.  Hurricane Katrina was the costliest natural disaster in the U. S., and produced tragic loss of life.   Human suffering leads to economic loss, and the adverse economic impact on the New Orleans area has been huge.

Elsewhere in the world, the tremendous flooding of the Indus river basin in Pakistan may be at least partly correlated with global warming.  20% of the population of the country has been directly affected, and one estimate of overall long-term economic impact may be more than US$40 billion.  Although this occurred abroad, the U. S. is likely expected to contribute to major relief and recovery efforts, incurring unforeseen budgetary expenses.

By this selection of potential economic effects that may be attributed to global warming, it is seen that enormous economic expenses and losses have already occurred, and are likely to increase in amount and severity in coming decades, as a result of global warming.

Economic Incentive Policies to Limit Greenhouse Gas Emissions.  Unexpected economic burdens such as those sampled above may be considered to be one arm of a zero-sum scenario.  The other arm would involve undertaking planned investment expenditures to prevent global warming from occurring.  Policies to combat the emission of greenhouse gases include imposing negative incentives on burning fossil fuels and emissions of all greenhouse gases that add to the direct cost of using them.  This added cost, much of which would probably be passed along to the consuming public, has been a major negative political factor that has impeded enactment of policies at the U. S. federal level that would reduce greenhouse gas emissions.  (Other factors include the argument that developing countries like China and India, whose emissions have grown dramatically in the past decade, were excluded from coverage under the Kyoto Protocol.)   It would be more cost-effective, over the long term, to spend funds on these long-term preventive measures than to wait until we have to react on an emergency basis to climate-induced disasters.

Cap-and-Trade.  In the face of inaction at the federal level in the U. S., three regional agreements have been put in place in recent years: the Western Climate Initiative, the Midwestern Greenhouse Gas Reduction Accord, and the Regional Greenhouse Gas Initiative of the New England and Mid-Atlantic States.  All three of these accords rely on a cap-and-trade (market-based) mechanism to limit the emission of greenhouse gases.  Generally, the cap-and-trade mechanism works by issuing “emission allowances” to each industrial and commercial source.  The number of allowances establishes the cap, or upper limit, of greenhouse gas emissions across the program.  The cap is reduced each year.  The allowances can be bought or sold (traded) in a regional market, which establishes a price for emitting greenhouse gases and in essence creates a penalty for emitting.  This provides an incentive for each source to innovate in order to reduce emissions, thus lowering its expenses toward purchasing allowances each year.  Proceeds from the trades are delivered to the participating states, and are used at least partly to promote research and development of renewable energy enterprises.

Carbon Tax.  An alternative mechanism for limiting greenhouse gas emissions would be to impose a direct carbon excise tax on fossil fuels.  The tax rate is based on the amount of greenhouse gas emitted by the respective fuels.  The New York Times columnist Thomas Friedman has been advocating a carbon tax for several years, most recently on February 22, 2011.  Professor Daniel Esty of Yale University has also proposed a charge on burning fossil fuels that he calls a carbon charge, or a “harm charge”, on April 13, 2010. 

In each case, the authors propose imposing a low tax at the outset, then raising the tax according to a pre-established schedule, until it reaches a high enough level to have an effect on consumers’ energy habits.  Mr. Friedman suggests using the proceeds to reduce the U. S. national debt.  Prof. Esty, in contrast, suggests returning the proceeds to taxpayers by lowering the payroll tax (contribution to Social Security).  Overall, according to Prof. Esty, the higher cost associated with use of fossil fuels will lead businesses to change to measures and investments that increase conservation of fossil fuel use and produce a shift to renewable energy sources.

The Current U. S. Carbon Tax on Gasoline.  The United States imposes a modest tax on gasoline and diesel fuel at the federal level.  For gasoline currently it is US$ 0.184/gallon (US$ 0.049/liter).  (In contrast, as a result of high taxation, the representative price of gasoline in Europe in 2008 is about US$ 7.83/gallon, whereas in the U. S. it is about US$ 3.25-US$ 3.40/gallon.) As of April 2006 the federal tax is scheduled to fall to US$ 0.043/gallon on October 1, 2011.  This tax has been apportioned partly to the federal Highway Trust Fund, which is used mostly to support maintenance and expansion of the federal vehicle highway system, as shown in the graphic below:  

Collection and Distribution of Federal Gasoline Taxes, FY2001

It is to be noted that although the rectangles for the Highway Account and the Mass Transit Account appear the same size to the eye, the Highway Account is actually more than 5 times as large as the Mass Transit Account.

Source: U.S. Department of the Treasury, Internal Revenue Service, compilation of trust fund certifications dated June 18, 2001, Sept. 18, 2001, Dec. 28, 2001, and March 19, 2002; http://ncseonline.org/NLE/CRSreports/06May/RL30304.pdf.

The costs of cap-and-trade or a carbon tax would be higher than the current federal tax.

Opposition to the Present Carbon Tax.  Interest groups express differing opinions about the federal gasoline excise tax.  RedState.com feels that even the low present level of taxation on gasoline is too high. The group notes that combined federal and state gasoline taxes average about US$ 0.272/gallon.  It feels that with fuel prices rising, the taxes should be eliminated so that drivers don’t have to pay as much.  It also advocates eliminating federal support for highway construction projects.  On the other hand, the Public Policy & Sustainability Blog, which appears to be affiliated with Con-way freight, notes that the Highway Trust Fund is underfunded, requiring infusions from the Treasury to maintain its expenditures.  The blog suggests that the portion of the gasoline tax directed toward mass transit, such as high-speed passenger rail, be transferred into the Highway Account.

Conclusion.  The Libyan revolution in progress as this post is being written has critically affected its oil exports.  Even though only a small fraction of the world’s supply  is in question, the crisis has had a disproportionately large effect on the near-term price for oil, which results in higher prices of fuels for cars and trucks.  This has an adverse effect on our economic growth, and carries the disadvantage of transferring excessive wealth from the U. S. to the overseas producers of the oil.  Clearly, the instability and uncertainty of oil supplies from abroad should be a matter of serious concern to the American public, and to its government.

This occasion highlights the need for the U. S. to move away from its addictive dependence on fossil fuels for its transportation needs as soon as possible.  Renewable energy should be developed on an urgent basis to substitute for oil in our transportation.  Imposing a financial penalty on gasoline and diesel fuel, graduated over time, would help constrain our demand for these fuels, and would provide significant revenue for the federal treasury.  The penalty could come from a cap-and-trade system, or from a direct fuel tax, or from other mechanisms not yet identified.  The revenues could either be distributed as tax rebates to the driving public, or could contribute to paying down the national debt, or could be used to support research and development of alternative fuels and transportation modes as is currently done by the ARPA-E and other programs of the Department of Energy.  As many have said, “If not now, when?”

Note 1. Abstract available online free, or the full article for a fee or through personal or institutional subscription.  Many public libraries, and university libraries open to the public, receive the journal.

© 2011 Henry Auer