November 17, 2008
Policy

How to Kick Our Oil Addiction Despite Plunging Oil Prices

Old habits die hard. So we asked six experts for their ideas on reducing energy demand.

By M. Totty and S. Swartz

The good news: Oil prices have fallen. The bad news: Oil prices have fallen.

Though the soaring cost of oil squeezed consumers' wallets and corporate balance sheets, it had one important benefit: Oil demand in the developed world is projected to decline in 2008 for the third year in a row -- something it hasn't done since the early 1980s -- as motorists kept their cars parked and shifted away from gas guzzlers, and businesses aggressively trimmed fuel costs.

Higher prices also spurred development of alternative-energy sources, like solar and biofuels, that cheap oil made uneconomical.

Now that oil prices are less than half their July peak, what's to keep consumers from returning to their profligate ways? In other words: How do we keep our oil addiction at bay?

We put that question to a group of energy experts. How do they see the problem? And what can be done to keep the conservation and efficiency momentum going, despite falling oil prices?

Their prescriptions, presented below in their own words, run the gamut from government mandates that new cars be fuel-flexible to government repeal of all subsidies aimed at fostering energy efficiency. But all agree that there's still plenty to be done to ensure that energy is used efficiently and conservatively, regardless of the price.

		Rep. Roscoe G. Bartlett (R., Maryland) Co-Founder and Co-Chairman, Defense Energy Working Group and Congressional Peak Oil Caucus

DIAGNOSIS: American transportation is more than 95% dependent upon oil, a proportion virtually unchanged since the 1973 Arab oil embargo. Americans will have spent $700 billion on oil imports in the last two years. That is more than we spend annually on defense. If that money stayed here, it would generate $7 trillion in economic activity. Clearly, lower oil prices are better for Americans and worse for the governments of OPEC countries, such as Saudi Arabia and Venezuela as well as Russia's military resurgence.

If we reduce our dependence upon oil imports, we eliminate our greatest self-imposed threat to Americans' future economic prosperity and national security. Especially in the absence of price signals, we need leadership at all levels to inspire Americans to continue conserving oil and to innovate to shift our transportation and manufacturing sectors off oil.

PRESCRIPTIONS

• Employers should adopt four-day workweeks and permit or expand telecommuting. A four-day workweek would eliminate 20% of commuting. Telecommuting could eliminate even more. Management Technology Associates studies show win-win-win benefits. Businesses reduce premises' costs, overhead and labor with gains in productivity of 10%-40%. Workers enjoy significant fuel and time savings. Society reduces fuel use, traffic congestion and pollution.
• Employers should monetarily reward employees who car-pool or move closer to work. One example: The federal HUBZone Program administered by the Small Business Administration provides federal contracting preferences to small businesses located in underutilized urban and rural communities. HUBZone businesses' principal office must be located, and at least 35% of their staff reside, within a HUBZone. Sycamore.US, in my district, provides its employees who move into their HUBZone an additional $400 a month as well as up to $666 a year to employees who car-pool, use public transportation or use people power, such as bicycling.
• Individuals and businesses should take advantage of federal tax credits for fuel-efficient cars. There are credits of up to $3,400 for a new hybrid, between $2,500 and $7,500 for a plug-in auto under 10,000 pounds, and up to $15,000 for a plug-in vehicle over 26,000 pounds.
• The federal government should require all new cars sold in the U.S. to be fuel-flexible -- capable of using gasoline, ethanol or methanol. We have no idea which liquid fuel substitutes for oil could be in use over the 15-year average life span of a vehicle. This should be adopted as a condition of additional federal assistance to shore up the auto industry, and would add only about $100 to $200 to the cost of most vehicles.
• Washington should enact new tax rebates to reward purchases of more fuel-efficient automobiles, which would be paid for with tax penalties for the purchase of less fuel-efficient cars.
• The federal government should provide incentives to states to impose higher license fees for bigger and less fuel-efficient vehicles based upon engine displacement and fuel efficiency. Washington has previously encouraged state seatbelt and other laws by withholding a portion of federal highway funds unless the states adopt the policy.

		R. James Woolsey Venture Partner with VantagePoint Venture Partners; former U.S. Director of Central Intelligence

DIAGNOSIS: Oil first skyrocketed to over $140 a barrel, and then tanked (well, relatively) to under $60. Will we now forget our earlier resolution to kick the oil habit as we have before?

No. It's true that after oil prices dipped in the mid-1980s and the late '90s, work on several alternative fuels was abandoned. But important developments in the past five to 10 years should enable us to use competition to destroy the 96% monopoly that oil enjoys over transportation. Added taxes on oil or gasoline aren't necessary -- we just need to use government's power to open up competition in the transportation fuel market.

PRESCRIPTIONS

• Congress needs to condition some part of the $25 billion for rescuing auto companies on their moving rapidly to produce vehicles that use electric power. It should also require that some significant share of cars purchased by the government use electricity. With a plug-in hybrid you will be able drive all-electric at a cost of only two to four cents a mile for the first 20-40 miles each day. For an average amount of daily driving your electricity cost will beat the pants off gasoline costing 10 cents to 20 cents a mile. OPEC can't drop oil's price enough to compete with electricity.

Mirko Ilic

• Congress should use rescue funds to mandate that new cars be fuel-flexible for a range of fuels. Several alcohol-based, low-carbon-emitting fuels produced from biomass and waste feedstocks are developing as important potential partners with electricity in breaking oil's monopoly. The transition to fuel flexibility costs under $100 per new car and should be rapid. Brazil took only three years to transition from 5% of new cars being fuel-flexible vehicles to 75%.
• We should borrow the successful German model of the "feed-in tariff" -- which requires utilities to pay customers who generate renewable energy a fixed, above-market rate for power. The dropping costs of both solar panels and electricity storage will soon let you charge your plug-in at night from new "flow" batteries in your basement, and then drive the next day powered by the sunlight that fell on your roof the day before. Let OPEC see if it can figure out how to monopolize that.
• Charging cars' batteries at night means that driving on electricity won't require new power plants. But Congress needs to improve the grid's security and resilience against thunderstorms, hackers and terrorists by giving the Federal Energy Regulatory Commission needed emergency authority.
• We need to grow and maintain substantial battery development and manufacturing technology in the U.S. Congress should establish a battery version of Sematech, the public-private partnership that was set up in the 1980s to ensure that the U.S. stayed in the business of developing and manufacturing semiconductors in the face of international competitors that were often heavily state-aided. We shouldn't replace foreign oil dependence with foreign battery dependence.

		Amy Myers Jaffe Fellow in Energy Studies, Baker Institute; Associate Director of the Energy Program, Rice University

DIAGNOSIS: For the first time in years, Americans are driving less, and U.S. oil demand is down, helping reduce not only the U.S. trade deficit but the global price for oil. But we want falling oil demand to reflect more than an economic downturn. We want it to be the result of conscious, sustainable policies. If our newfound conservation efforts and energy policies give way to old profligate energy habits when this new round of contraction ends, as happened in the 1980s, we will have lost yet another opportunity to get out of the vicious circle of repeated energy and financial crises.

PRESCRIPTIONS

• Use any Detroit bailout to increase federal fuel-efficiency standards. According to a study by the James A. Baker III Institute for Public Policy, the new 35-mile-per-gallon fuel-efficiency standard will shave 2.3 million barrels a day from U.S. oil demand by 2020. We must not undo this regulation because Detroit has fallen on hard times. If we were able to fashion a bailout plan that required our car companies to use federal bailout money to raise this target to a more ambitious 50 miles to the gallon, we could save as much as six million to seven million barrels of oil a day.
• Increase federal gasoline taxes. Sadly, the easiest way to hold the gains we have made in reducing oil demand in the U.S. would be to raise federal gasoline taxes as prices fall to lock in a floor price that will continue to stimulate conservation. Some portion of the funds could be set aside for research in alternative energy.
• Make electricity the energy of the future. Canada, France, Germany and the U.S. generate electricity generally without recourse to oil. As a substitute for gasoline, hybrid plug-in cars would give consumers the flexibility to shift fuels when oil is expensive or in short supply. The flexibility to shift among fuels to generate electricity would reduce the oil intensity of the U.S. economy and shrink the financial crises that have tended to go with oil price shocks. Over time, as carbon is restricted, we could encourage the generation of more and more electricity with cleaner fuels such as nuclear, solar and wind, or sequester the carbon from coal burned for power generation.

		Amory Lovins Chairman and Chief Scientist, Rocky Mountain Institute

DIAGNOSIS: Efficiency is one of the highest-return and lowest-risk investments in the entire economy, no matter how low energy prices might go. Concerns about national energy security and about climate persist even if fuel prices drop. Making our energy supplies affordable, secure and climate-safe all require exactly the same actions -- mainly energy efficiency -- so it doesn't matter which of them you care most about. And energy efficiency's side benefits are often more valuable than reduced energy costs: higher labor productivity in efficient offices, higher retail sales in well-daylit shops, faster learning in well-daylit schools, faster healing in green and efficient hospitals, and higher throughput, flexibility and quality in efficient factories.

PRESCRIPTIONS

• Reward electric and gas utilities for cutting our bills, not selling us more energy. Half the states have recently adopted or are considering reforms to reverse old perverse incentives by decoupling utilities' profits from their sales volumes (so they're no longer rewarded for selling more energy nor penalized for selling less), and then letting them keep, as extra profit, a small but juicy fraction, perhaps a tenth, of what they save their customers.
• Introduce "feebates" (fee + rebate) for light vehicles. In each size class, buyers of inefficient models pay a fee while those who purchase efficient models earn a rebate paid for by others' fees. This increases the price spread between less and more efficient models of each size class, so customers consider life-cycle fuel savings, not just the first year or two. Auto makers will make higher profits, because shifting their offerings from fee-paying to rebate-earning means adding technology content that has a higher margin than the rest of the vehicle.
• Use creative financing to help low-income Americans get new very efficient cars bundled with insurance and price-hedged gasoline. Scrap dirty old cars a few years early. Net result: a new million-car-a-year market for Detroit among customers who couldn't previously qualify for a new car; cleaner air; faster oil savings; and astonishing new employment opportunities for low-income citizens who couldn't previously get to work.
• Allow businesses to expense energy-saving investments that are now capitalized, so those investments compete on a level playing field with the tax-deductible energy costs they save. This policy should be broadly stimulative.
• Above all, adopt an economically conservative energy policy that allows and requires all ways to save or produce energy to compete fairly at honest prices, regardless of their type, technology, size, location, or ownership...and let's see who's not in favor of that!

		Myron Ebell Director of Energy and Global Warming Policy, Competitive Enterprise Institute

DIAGNOSIS: Conserving energy and improving energy efficiency are good things insofar as they contribute to economic efficiency. But I am concerned that much of the public-policy debate is about pursuing energy conservation and efficiency measures that go far beyond any economic benefits. In reaction to the OPEC oil embargoes of the early 1970s, Japan became the most energy-efficient economy in the world, but at much too high a cost, which contributed to Japan's economic stagnation. As for the indirect benefit of reducing greenhouse gas emissions, increasing energy efficiency almost always leads in the long term to higher energy consumption.

PRESCRIPTIONS

• Congress and state legislatures should repeal all energy-efficiency mandates and subsidies. Mandates and subsidies cause people and companies to do things that are otherwise uneconomic. This misallocation of resources in the long term leads to less economic activity, which slows down the rate of technological innovation and thereby leads to less progress in using energy more efficiently. Energy efficiency is increasing at a faster rate in the U.S. than in the European Union largely because of faster economic growth and more technological innovation.
• Government should replace the tax-depreciation schedule for investments in new capital stock with immediate expensing. New equipment is almost always more energy-efficient than old. Changing the tax structure so that new investments could be written off immediately would make it profitable to replace old with new equipment at a much quicker pace. This simple change could do more to increase energy efficiency throughout the economy than all the current mandates and subsidies.
• People and businesses should oppose all energy-rationing policies, such as cap-and-trade schemes to reduce greenhouse-gas emissions. Energy rationing forces people to pay more for energy and therefore to use less of it. Enacting cap-and-trade legislation would force some conservation and efficiency gains, but would also lower economic growth and thereby lower the rate of technological innovation.

		Phil Sharp President, Resources for the Future

DIAGNOSIS: We have security, environmental and economic stakes in advancing efficiency in the production, distribution and especially the use of energy. But uncertainty about the future direction of energy prices is compounded by the credit crisis, which threatens to undermine recent investments in efficiency or renewable fuels, and the fiscal crisis facing state and federal budgets, which raises questions about sustaining government incentives.

Given the challenge of climate change and the risks in the international oil market, we cannot leave all the decisions to an unfettered market. But government policies must avoid highly prescriptive regulation and wherever possible capitalize on the dynamism of markets and the power of price. This is no time for rigid adherence to past ideologies of the left or right.

PRESCRIPTIONS

• Implement tax incentives and standards -- including building codes, fuel-economy standards and appliance-efficiency standards -- to encourage greater efficiency. Tax incentives, however, decline in effectiveness in the face of price declines, and standards work best when reinforced by market prices.
• Adopt the long-term architecture for restraining greenhouse-gas emissions, especially carbon dioxide. The central feature would place a price on carbon in our energy system by means of a carbon tax or a cap-and-trade system -- a price that rises over time. This provides price incentives to advance a low-carbon future -- which must include major efficiency gains.
• Give serious consideration to proposals to impose a "price floor" on oil of, say, $60 or $65 a barrel, with a tax. This could reduce the variance of oil prices and provide alternative-energy and conservation ventures with a reasonable degree of confidence in their project planning. But the political calculus for this policy is obviously difficult and requires careful examination of the interrelationship with a carbon pricing scheme.

		Andrew Liveris Chairman and Chief Executive Officer, Dow Chemical Co.

DIAGNOSIS: Demand for oil is outpacing the supply of this precious resource. A new energy policy is just as important to the economy as any rescue of the financial markets. In fact, it's more important in the medium to long term. We are on a pattern to spend more than $500 billion per year to import oil -- nearly the amount authorized one time for the financial rescue package recently passed by Congress. This continued dependency on oil imports has national-security as well as economic consequences. It is also detrimental to manufacturing and energy-consuming sectors -- like the chemical industry. Unstable prices also impact household energy bills and inflation of everyday goods.

PRESCRIPTIONS

• President Obama should use his "bully pulpit" to issue a national call to action on energy efficiency. We need a national goal of 25% improvement in energy efficiency and conservation over the next 10 years to galvanize the public. If the U.S. adopted this economy-wide goal, we could effectively save the BTU energy equivalent of all the U.S. oil imports from the Arabian Gulf.
• We should seek a combination of federal financial incentives and energy-efficiency building codes for our homes and buildings to increase efficiency by 30% over 10 years. Homes and buildings account for 40% of U.S. energy demand and 50% of greenhouse-gas emissions. Solutions could include increasing federal tax credits and incentives for new and existing buildings to improve energy-efficiency performance; fully funding the Energy Policy Act of 2005, which authorized funds to help states improve compliance with stronger building codes, to finance energy-efficiency public information programs and to pay for other green building initiatives; and implementing voluntary green building programs that establish standards and targets to guide contractors and home builders.
• Extend federal energy-tax incentives. Passing long-term tax incentives would encourage the market to continue investing in and deploying energy-efficient products and technology. With the federal energy-tax incentives extended eight to 10 years, the public would have time to modify its behavior to adopt and purchase energy-efficient products.
• Adopt diplomacy on behalf of energy efficiency. The next president should make energy efficiency a central part of U.S. foreign policy and global climate change negotiating strategy. The U.S. could serve as the catalyst for encouraging world governments to embrace efficiency and conservation as their first choice of energy. If the Group of Eight industrialized countries increased their rate of energy-efficiency improvement to 2.5% a year (double the global average), our world could avoid $3 trillion worth of new power generation, eliminate the amount of energy supplied by 2,000 coal-fired power plants, and mitigate the rise of greenhouse-gas emissions by holding CO2 concentrations below 550 parts per million.