Not so fast

June 1, 2006
In this year's State of the Union speech, the President said the nation was addicted to oil. The clear implication is that the country can't stop using oil and that such use is unhealthy. Let's take a closer look at both assumptions. Unlike addicts, the public has shown it can lessen its use of oil, even when it can afford to buy more. The Energy Information Administration (EIA) estimated in early

In this year's State of the Union speech, the President said the nation was “addicted to oil.” The clear implication is that the country can't stop using oil and that such use is unhealthy. Let's take a closer look at both assumptions.

Unlike addicts, the public has shown it can lessen its use of oil, even when it can afford to buy more. The Energy Information Administration (EIA) estimated in early May that total demand for petroleum actually dropped in three of the last four quarters, even though the economy expanded at a robust 3.5% rate after inflation. Average consumption in the first quarter of 2006 was 1.5% lower than in the January-March 2005 period.

Must we take desperate steps to cure ourselves of this supposed addiction? Some doomsayers believe the world is running out of oil. Amazon.com has a list of 16 “peak oil” books that spread this message. But, as Daniel Yergin documented in his exhaustive history of the oil business, predictions that the world would run out of oil have been heard since at least 1885. That's when the state geologist of Pennsylvania warned, “the amazing exhibition of oil” was only “a temporary and vanishing phenomenon.”

Yergin cites roughly a dozen such predictions. Each time, price increases encouraged new discoveries and made investments in new recovery techniques for existing oil fields feasible.

For 2006-07, the EIA projects “production increases of almost 500,000 barrels per day in Angola, almost 400,000 around the Caspian Sea, over 200,000 in Canada, and almost 200,000 in Brazil,” as well as 300,000 in the U.S. None is a member of (OPEC, and most are readily accessible to the U.S.

Far from being the last drops squeezed from the earth, these may be just the beginning of a gusher of non-OPEC oil. Several oil companies are feverishly developing the shallow oil sands and more difficult tar sands of Alberta. Those fields are estimated to contain more oil than any other country except possibly Saudi Arabia. Until recently, the oil was not considered recoverable. But rising oil prices and improving technology have made recovery feasible.

Next in line could be the oil shale of the Colorado Rockies. Again, the reserves are there, and the technology exists — Exxon spent $1 billion in the early 1980s to turn shale into oil. At a high enough price — and $70 per barrel may be close — shale oil becomes feasible.

A still bigger potential source of oil, domestically and worldwide, is coal. Processes for doing this bit of alchemy have existed since 1913, and Germany made more than half its fuel from coal in 1944. The U.S. has enough coal to supply all of its oil needs. Many other countries that have coal, but not crude oil, could eventually become oil suppliers, further diversifying world supplies and keeping prices in check.

There is no need to panic or to distort the market with subsidies and penalties. Unfortunately, those are the preferred responses of politicians. In 2005, after years of deadlock, Congress passed an energy bill. Among its hundreds of provisions is a mandate to increase ethanol production. Ethanol blenders receive a tax credit of 51¢/gal. when they mix it with gasoline to make gasohol. Yet even at current high gasoline prices, U.S.-produced ethanol, mainly from corn, is barely competitive.

The bottom line: Don't believe the scare talk. There will be oil next year, and next decade. It may even come from closer and more secure sources than at present. But do be wary of politicians who try to “cure” your “addiction” to oil. Chances are, they are only pandering to someone else's appetite for subsidies.

About the Author

KEN SIMONSON e-mail: [email protected]

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