With oil averaging nearly $100 per barrel in 2008, why don’t we have a meaningful supply of alternative transportation fuels coming on-line for the American/world consumer? What role does oil price volatility play? How about energy security and climate change?
In 2007, the United States consumed an average of 20.7 million barrels of oil each day – 13.8 million of those barrels were consumed by the transportation sector. That year less than 4% of the transportation fuel stock came from other sources than oil, corn-based ethanol and compressed natural gas. Conventional wisdom suggests that the higher the price of oil the greater likelihood that alternative transportation fuels will be developed. But, how high does the price of oil need to be for conventional wisdom to hold? In the 1980s people thought $30 would be the catalyst for alternative fuels, in the 90s it was $40, now it is over $100. If history is our guide, the recent run-up in oil prices may not be a catalyst for meaningful development of alternative transportation fuels. During the supply shocks of the early 70s, when oil prices saw similar price fluctuations, the U.S. Government initiated a synthetic fuels program through the Department of Energy. That initiative ended when oil prices lowered in the mid 1980s. Is there reason to believe that this time will be different?
At the heart of decision making about alternative fuel development is the issue of risk. The risk of a fully developed alternative fuels industry that reduces the demand for oil is potentially damaging to oil producing countries and companies. But, the risk of not having an alternative fuels program during times of high oil prices is a risk to oil consuming countries, industries and individuals. Collectively, these risks and their mitigations create a complex set of actions and reactions. As such, research is necessary to understand the role that differences in beliefs and norms by National Oil Companies, International Oil Companies, Investment Banks and governments have on the development of alternative transportation fuels.
In 1913 Winston Churchill stated that, “safety and certainty in oil, lie in variety and variety alone.” His pursuit was energy security through a diversity of supply – meaning oil from different parts of the world. Today, the world and the United States are dependent upon only one source for transportation fuel, oil. But, calls for “energy diversification” and “energy independence” to enhance economic, energy, and national security grow louder when the price of oil increases to new highs. Americans expect that progress is being made in developing alternative fuels, which includes underutilized fossil fuels from domestic sources, which strengthen the country’s economic and national security. ARTIS is committed to studying these issues.