Tuesday, May 31, 2011

US Oil Independence by 2030

Contrary to what most people might think, oil independence is possible for the United States by 2030.

The news is especially important when one considers that, between 1970 and 2000, economists estimate that the costs of American dependence on foreign supplies of oil have ranged between $5 and $13 trillion dollars. That’s more than the cost of all wars fought by the U.S. (adjusted for inflation) going all the way back to the Revolutionary War. 

The trick is to start by thinking about oil independence a little differently. Oil independence should not be viewed as eliminating all imports of oil or reducing imports from hostile or unstable oil producing states. Instead, it should entail creating a world where the costs of the country’s dependence on oil would be so small that they would have little to no effect on our economic, military, or foreign policy. It means creating a world where the estimated total economic costs of oil dependence would be less than one percent of U.S. gross domestic product by 2030.

Conceived in this way (and contrary to much political commentary these days), researchers at the Oak Ridge National Laboratory (ORNL) have calculated that if the country as a whole reduced their demand for oil by 7.22 million barrels per day (MBD) and increased supply by 3 MBD, oil independence would be achieved by 2030 with a 95 percent chance of success. By reducing demand for oil, increasing its price elasticity, and increasing the supply of conventional and unconventional petroleum products, ORNL researchers noted that the country would be virtually immune from oil price shocks and market uncertainty. If large oil producing states were to respond to the U.S. by cutting back production, their initial gains from higher prices would also reduce their market share, in turn further limiting their ability to influence the oil market in the future.

So if decreasing American demand for oil by 7.22 MBD and increasing supply by 3 MBD would enable the U.S. to achieve oil independence in 2030, which combination of policies offers an optimal strategy? Policymakers, for instance, could lower demand for oil by making automobiles more efficient (by legislating more stringent fuel economy standards for light and heavy duty vehicles or lowering the interstate speed limit), promoting alternatives in mode choice (such as mass transit, light rail, and carpooling), or establishing telecommuting centers and incentives for commuters to work from home. They could also promote rigorous standards for tire inflation and reduce oil consumption in other sectors of the economy. Alternatively, they could increase alternative domestic supplies of oil, develop better technologies for the extraction of oil shale, mandate the use of advanced oil recovery and extraction techniques, and promote alternatives to oil such as ethanol, bio-diesel, and Fischer-Tropsch fuels. 

Taken together, such policies could reduce demand for oil by 8.266 to 12.119 MBD and increase American oil supply by 8.939 and 12.119 MBD by 2030—well over the target set by the ORNL study. Thus, to insulate the American economy from the vagaries of the world oil market, policymakers need not focus only geopolitical power structures in oil producing states. Instead, attempts to change the behavior of the country’s automobile drivers, industrial leaders, and homeowners could greatly minimize reliance on foreign supplies of oil. To battle the “oil problem” policymakers need not talk only about sending more troops to Iraq or Saudi Arabia nor drafting new contracts with Nigeria and Russia. They could also focus on curbing American demand for oil and expanding domestic conventional and alternative supplies.

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