Parallels: What do energy transitions and public policy have in common? Do you notice any issues raised in the CRS report that remain persistent today, almost a full decade later? Any which have been resolved?
Energy Transitions and public policy:
Historically, energy transitions occur because man finds a new energy source that is either cheaper or provides a better benefit. Man is usually rather short sighted and looks for ease of use and profits. A look back at the industrial revolution clearly shows effects of our energy usage that was not seen at the time. The heavy use of coal created air pollution and acid rain. Oil became a cheap alternative to replace coal for many energy applications. We are starting to realize our global impacts from the use of fossil fuels. Carbon is released into the atmosphere and is assumed to be partly responsible for global warming. While the transition away from oil to another energy form will likely happen on its own in a market economy as oil becomes more difficult to recover from the earth, in order to stem the tide of carbon release, public policy is needed to create the incentive to move to other energy sources at this point in time. Additionally, with the industrialized nations consuming about half of the world’s energy and comprising about 15% of the world’s population, we face a bigger global challenge. The developing nations (85% of the world’s population) are predicted to have a population increase of 45% by 2050 compared to a 4% population increase for industrialized nations. This population increase combined with an easier diffusion (rapid development) of current oil based technologies into the developing world will create an enormous demand on fossil fuels by the developing world. The difficulties in establishing effective energy policy at the national level will only be further complicated at the global level.
Persistent issues today:
Most of the issues raised by Bamberger in the CRS report still remain. It would appear that little progress has been made to completely resolve the complex issues facing our energy systems and oil demands. While new oil sources such as shale oil recovered by fracking are being pursued, that does not solve the oil dependency problem. It just brings another source on line to offset the eventual conclusion. There has been progress in automobile efficiency standards but the problem is not solved.
The crude oil markets show price instability based on production changes in the Middle East. There are many historical examples of Middle East events impacting the price of oil. In 1973, the OPEC oil embargo caused oil prices to rise from $4/bbl to $12.50/bbl. In 1979, the fall of the Shah of Iran caused oil priced to rise from $15.85/bbl to $39.5/bbl. In 1990, Iraq invaded Kuwait and oil price increases from $16/bbl to $36/bbl. Even today, this problem persists. Beginning in December 2010, the Middle East was faced with a series of riots, demonstrations, protests, revolutions, and civil wars known as the Arab Spring. According to BP records, the Middle East accounts for about 32.6% of the world’s oil production. Additionally, Africa accounts for about 10.4% of the world’s oil production. The Arab Spring unrest put at risk Middle Eastern and North African oil production. According to the US Energy Information Administration (EIA) data, the West Texas Intermediate (WTI) oil marker increased from $89.15/bbl to $109.53/bbl and North Sea oil tracked by the BRENT marker increased from $91.45/bbl to $123.26/bbl. It is clear that disruptions in oil production and unrest in the Middle East still impact the price of oil.
We operate in a free market economy. As a result, supply and demand largely drive the price of oil. Energy policy will influence the price of oil but is not the main driver. In times of generally lower oil prices, the incentive for incorporating newer and more efficient technologies does not exist because of the high energy return on investment (EROI) for fossil fuels such as oil. Oil price spikes drive efficiency and investment in other technologies as they become temporarily more cost effective. As noted in the CRS report, cost has been a better driver for innovation than regulations which have shown mixed results. This principle has remained persistent over the last decade and I expect it will remain persistent well into the future. Man shows a tendency to do what is best at the current moment (i.e. will make the most money). As a result, it takes government regulations to shift the incentives and build the infrastructure for the future to prepare us to move away from oil as the easily accessible oil reserves are depleted and the cost of oil continues to rise in the future and reduces the EROI making other technologies more competitive.
Bamberger, R., 2004. Energy Policy: Historical Overview, Conceptual Framework, and Continuing Issues. Congressional Research Service, the Library of Congress.