Law in Contemporary Society

Oil Dependence: Why it must end, and why the Federal Government Must end it

-- ShayBanerjee - 24 May 2015

Introduction

Oil accounts for more than 95 percent of energy used in the U.S. transportation sector. That is a problem, and the federal government must solve it.

The Long Term Problem: Oil prices are killing us

The long-term price of oil is rising, and that fact detracts from America’s economic strength. Between March 1974 and March 1979, the average first purchase price of oil on the global market was $8.17. Between March 2010 and March 2015, that number was $88.01, reflecting an increase almost triple what would be reflected by the corresponding rate of inflation. Since gasoline prices closely track oil prices, the secular trend is driving up the cost of transporting consumer goods, raw materials, and labor. Since every $20 increase in the price of oil reduces annual GDP growth by over half a percentage point, America’s continued dependence on oil has likely cost us trillions over the last several decades.

The price will continue rising in the long term because the world is running out of reasonably extractable oil. There are fewer than 1.3 trillion barrels of proven and probable oil left in the world’s major fields, which at present rates of consumption will last 40 years. World discovery of new oil has been declining for decades and—contrary to reports of politically motivated institutions (e.g. OPEC)—new discovery is no longer replacing existing reserve depletion. The majority of oil-producing countries have seen production declines since 2005, and the handful that did not are now struggling to maintain existing quotas. Simply put, inflation-adjusted prices do not rise in the long term where resources are abundant. This is why computers, for example, have experienced a real price decline over the last several decades, even while global demand has skyrocketed. The world is not running out of silicon, but the world is running out of oil.

The Short Term Problem: Shale has made things worse

In recent months, oil prices have crashed, but this phenomenon is temporary and will only exacerbate long-term cost pressures. The undeserved hype surrounding shale led industry actors to over-invest in the product, creating a speculative bubble that has now burst. The fact is that shale cannot be produced sustainably except at inflated three-figure prices because tight production depletes wells far too rapidly, offers few returns, and requires extreme levels of capital investment. Shale plays are therefore seeing dramatic cutbacks in the midst of the supply glut, as drillers are instead reaching deep into their most productive regions or relying on inventory draws. Even though such tactics are not sound business strategy, companies are pursuing them to pay off the over $200 billion in accumulated debt from the shale bubble. When the drillers run out of low-hanging fruits to pick, prices will boomerang in the other direction, and economies reliant on oil will be caught bill-in-hand.

Make no mistake: the “American Shale Revolution” was a blundering commercial failure that has humiliated the U.S. in the eyes of the world. American energy companies have lost hundreds of billions of dollars in the last several months, and many are operating in the red. U.S. rig counts have plummeted for 27 straight weeks, and even the EIA is predicting domestic production declines for the foreseeable future. Exxon has slashed 2015 capital expenditures by 12%, while BP, Shell, and Chevron are pursuing deeper cuts. The same investors who once predicted “100 years of American shale” are now crawling back into their holes, to the tune of a $672 million aggregate divestment from oil ETFs as of April 29. Meanwhile our international competitors swarm like vultures, eager to prey on American consumers when prices recover. OPEC predicts oil prices will rise to $200 per barrel after the dust settles, and they are right.

A National Solution

The simple reality is that oil-powered vehicles must be replaced by electric vehicles as soon as possible. Since electric vehicles rely on grid-based power generation, their total penetration of the transportation sector would virtually eliminate America’s dependence on oil and make a substantial dent in overall fossil fuel dependence. Oil is responsible for only 1% of grid-based power generation, and that number is falling. Alternative energy sources comprise 32% of grid-based power generation, and that number is rising. Failure to convert to electric vehicles will bind us to a prolonged future of oil dependence because alternatives such as hydrogen fuel have not developed quickly enough.

The free market will not do it alone. Despite their commercial viability, higher efficiency, and competitive prices, electric vehicle penetration still remains at under 1% after decades of oil price increases. The truth is that infrastructural path dependency imposes insurmountable hurdles to the construction of a national electric charging network, despite the efficiency gains available. Charging 1100 electric cars in a single area at peak hours – as the average gas station does – would require around 12-15 MW to cross into residential and commercial areas. Whether electric vehicles are charged in homes or stations is irrelevant, since the physical requirement will be the same.That sort of power would unduly strain residential and commercial distribution lines, so either those lines must be replaced with higher-voltage transmission lines or electric refueling structures must be centralized and operated in proximity to power plants. The private sector lacks the legal authority, capital, and capacity for collective action to make it happen. A project of this scale requires a coordinated national effort akin to the New Deal or Reconstruction.

Transformational political change is hard. Pursuing it requires convincing voters to prioritize, politicians to act, and adverse interest groups to back down. Yet paying $200 a barrel to power 250 million vehicles traveling an average 15000 miles a year will be harder. If something fundamental does not change, America will lose tens of trillions of dollars while forward-looking nations push ahead. The continuation of America’s global economic leadership is not inevitable, and the time to make choices is upon us.History teaches us that when the predominant energy flow powering an economy becomes too costly, growth stagnates, civilizations become poorer, and societies collapse. Oil is going away. Either we develop a thirst for something better, or we go with it.


 

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r3 - 15 Jun 2015 - 20:32:13 - ShayBanerjee
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