Renewable energy technologies, such as advanced biofuels for transportation, are key for U.S. efforts to mitigate climate change

Climate change is bringing about rising temperatures, which have significant negative impacts on humans and the environment, and transitioning to renewable energy sources, such as biofuels, can help meet this challenge. One consequence of higher global temperatures is the increasing frequency of extreme weather events that cause massive amounts of harm and damage. As depicted in Figure 1, six of the 10 costliest extreme weather events in the U.S. have occurred in the last 10 years, amounting to over $411 billion in damages (in 2020 dollars and adjusted for inflation). The other four occurred between 2004 and 2008, and the costs of future extreme weather events are expected to keep climbing.

Figure 1

U.S. extreme weather events from 2000 to 2020 resulting in at least $1 billion in damages. Figure adapted from an interactive Center for Climate and Energy Solutions tool.

Moreover, the World Health Organization estimates that, globally, climate change is responsible for over 150,000 deaths per year. This is because in addition to extreme weather events, climate change contributes to the spread of diseases, reduced food production, and many other problems.

Transitioning to renewable energy, and reducing reliance on fossil fuels, is one way to help slow down the effects of climate change. While renewables used to be a more expensive option, new clean energy technologies are lowering costs and helping to move economies away from fossil fuels. For example, solar panel prices decreased 75 to 80 percent between 2009 and 2015. Due to similar trends in other renewables like wind and hydropower, renewable energy generation technology accounts for over half of all new power generation capacity brought online worldwide every year since 2011.

More must be done to ensure that renewable energy technologies are key contributors to the mitigation of climate change. As of 2018, solar and wind accounted for less than 4% of all the energy used in the U.S. (Figure 2). The amount of energy generated by solar panels has increased almost 46-fold since 2008, but still only amounts to about 1% of the total energy generated in the country. Unfortunately, renewables currently provide only a small fraction of the total energy produced, and to counter climate change, this contribution must drastically increase.

Figure 2

Sources of energy used in the U.S. during the year 2000 and the year 2018. Figure reproduced from DeSilver 2020, Pew Research Center.

Nonrenewable sources are still frequently used because they are very dense in energy. In the transportation sector, for example, gas or diesel fuels have about 40 times more energy, pound for pound, than the leading electric battery technologies. In order for an electric car to travel 360 miles, which is the average distance traveled on a full 12.4 gallon tank of gas, the car would need a battery weighing over 1,300 pounds.

To reduce reliance on petroleum-based fuels, particularly for heavy-duty vehicles and airplanes, one potential solution is biofuels. Biofuels are produced by breaking down plant material and converting it into usable fuels, such as ethanol or biodiesel. Corn ethanol is already added to gas to cut down on greenhouse gas emissions. However, creating ethanol is not a zero-carbon process, and supplementing with corn ethanol averages just under 40 percent lower carbon emissions than using only gasoline. Corn ethanol also relies on land which could be used for growing other food crops. Researchers are currently studying how to use invasive plants, as well as plants that require little water, fertilizer, or land to grow, to create the next generation of biofuels. Some promising plant feedstock options include hemp, switchgrass, carrizo cane, jatropha shrubs, and algae. New biotechnologies are also being studied to develop more efficient ways to break down biomass into sugars, which microbes then convert into biofuels. There is also ongoing research to create microbes that can directly convert plants to biofuels, and to enable microbes to produce long-chain, energy-dense hydrocarbons that could be used to fuel heavy-duty vehicles and airplanes.

The Information Technology and Innovation Foundation developed several recommendations which could bolster the implementation of biofuels. These recommendations include:

• Increasing investments in bioenergy and biomanufacturing research and development by 150 percent by the next five years;
• Engaging the Department of Energy and the Department of Agriculture to support the development of biofuels for aviation, shipping, and “other hard-to-electrify transportation sectors;” and
• Expanding research into gene-editing tools that can be used to improve biomass processing, increasing the diversity of plant feedstocks that could be leveraged for lower-cost biofuel production.

By improving the efficiency of renewable energy technologies like biofuels, wind, and solar, and further innovating in the renewables space, the U.S. science and technology community can help ensure that renewables are leveraged in the effort to counter the climate crisis.

This CSPI Science and Technology Policy Deep Dive expands upon a scientific exchange between Congressman Bill Foster (D, IL-11) and his new FAS-organized Science Council.

Grid modernization should be a major part of a national infrastructure-investment initiative. Effectively and efficiently modernizing the U.S. electric grid requires rapid deployment of innovative grid technologies. The next administration should establish a Grid Resilience Innovation Demonstration (GRID) Network, run in partnership between the Department of Energy (DOE) and the Department of Defense (DoD), to test and accelerate deployment of such technologies. The GRID Network would integrate and build on existing microgrids on federal installations and other relevant facilities, resulting in a group of geographically distributed test beds that can be managed and operated as a national user facility. The distributed nature of the network would allow test beds to ensure that solutions are compatible with a variety of grid technologies and operational structures and would also insulate the network from security threats, and other risks. Prioritizing establishment of the GRID Network early in the next administration will enable our nation to quickly realize the benefits of a modern electric grid, including enhanced resilience to natural disasters, entrepreneurship opportunities, and job growth. Failure to act will leave our national grid vulnerable to hostile actors, rob the country of needed shovel-ready construction projects and manufacturing jobs, and undermine U.S. leadership in electric sector innovation and the resulting impacts to our economy.

Challenge and Opportunity

The U.S. electric grid is a critical backbone of our nation’s economy, national security, health, and social interactions. Yet the current grid is ill-suited to modern demands. Our nation’s grid contains many critical components that were originally constructed in the early 20th century. The grid as a whole is based on an outdated structure that was not designed for today’s varying power demand requirements, such as for the internet data centers, or for the widescale integration of intermittent sources of electricity such as wind turbines and solar panels. The grid is also poorly equipped to withstand the many cyber, physical, and electromagnetic threats that exist today. 

These problems can cause extensive and expensive blackouts, such as the widespread outages across the Northeast in 2003 that cost $6 billion in damages. The possibility of foreign interference presents a threat multiplier. In 2015, a Russian assault on the Ukrainian grid cut power for six hours in the dead of winter. A similar attack on the U.S. grid is possible. In fact, the same malware the triggered the Ukraine attack has been found in US-based critical infrastructure facilities. 

There is a clear need to make the U.S. electric grid much more secure to thwart attacks, robust to withstand physical threats, resilient to ensure rapid and full recovery from adverse impacts, stronger to accommodate greater demands, and flexible to enable a broader deployment of clean-energy technologies.

Yet grid modernization is easier said than done. The U.S. electric grid is a massive, complex system that comprises various technologies for electricity generation, transmission, and distribution as well as multiple operators, regulators, and markets to ensure the continual flow of electricity. Few incentives or financially-attractive opportunities exist for grid stakeholders to demonstrate and deploy innovative models and technologies. And finally, the national-security benefits of a secure, robust, and resilient grid do not deliver direct, sufficient financial gains, creating a market failure that leaves the grid vulnerable to interference.

Plan of Action

The next administration should establish the Grid Resilience Innovation Demonstration (GRID) Network, a national-scale test facility designed to propel the nation toward a more secure, robust, and resilient grid that can strengthen economic and national security while enabling a clean-energy future. The GRID Network should comprise multiple, geographically distributed test beds that are widely accessible to institutions and researchers seeking to demonstrate technologies in prototypical environments. These test beds would be user facilities similar to those owned by the National Science Foundation (NSF) and the Department of Energy (DOE).

The overall goal of the GRID Network would be to support development, demonstration, and deployment of innovations in grid operation and technology, which are needed to address the evolving energy needs and expanding risks. The types of innovations could run from small to large scale, and from technical to operations, for example, components for high-voltage transmission or distribution, smart meters and associated cyber controls, direct current connects and disconnects, and microgrid operations with a variety of sources, loads and sizes.

The GRID Network would focus on innovations at mid- to high technology-readiness levels, i.e., innovations that have already been demonstrated successful at a limited level and seem like promising candidates for scale-up and commercialization. GRID Network test beds would provide the capacity to test at all scales from individual components in situ up to full end-to-end tests from the electricity generator to the final use. As modernization of the grid continues to occur, the anticipated outcomes will continue to evolve, and this facility will enable more innovations to be developed rapidly and tested such that the decision and risk of implementation can be reduced, which in turn should facilitate deployment. After all, utilities and investors want proven technologies, not science projects. As a result, we will see a more resilient grid that is both more secure and more robust (i.e., less blackouts, more value, savings and/or avoided costs).

GRID Network test beds could serve as official sites for the government to validate and certify any concept or technology intended for use in national-security applications. Through partnerships with community colleges, test beds could also offer workforce-development opportunities and vocational training to prepare technicians to install and operate next-generation grid technologies.

Implicit in the proposed action is that there are innovative technologies and strategies for operation that could be tested and rapidly deployed. While this has not been demonstrated through a survey or collection of data, it is a reasonable assumption based on our knowledge of the research and development (R&D) that is being done in this area as well as some general issues that impact the rapid, successful advancement from R&D to demonstration and deployment (i.e., crossing the so-called “Valley of Death”). Having a user facility aimed at helping bridge that gap that is available to companies and researchers widely would encourage innovators and innovations to surface, as has been demonstrated to work well in the past in the DoD and DOE. A minimally viable prototype will be needed for testing, which focuses the role of the facility between “development” and “deployment.” The costs for testing would be covered by the government, and like the existing user facilities, access to apply for time on GRID would be open to all ideas through a merit-review process. As a result, innovators should be motivated to develop their ideas to a product or operations model that can be tested given the low or zero cost of testing because the value of a having a government-tested and demonstrated device or operating model will be very high.

As is typical for federally-funded user facilities, the GRID Network would be run by a private entity (e.g., an objective management organization) through a public-private partnership with government agencies: in this case, likely DoD and DOE. The partnership could be managed by either agency or by an external entity, such as the National Resilient Grid Authority (NRGA) conceptualized in a 2020 report from the National Commission on Grid Resilience. Existing microgrids and other assets at DoD and DOE sites could provide the foundation for the GRID Network. The GRID Network will also build on and enhance the grid-resilience and modernization efforts that were established and have been pursued at both agencies.

Establishing and managing the GRID Network would cost the Federal Government an estimated $25–50 million per year at the low end to $200–300 million per year at the high end. This funding range is consistent with the funding levels for similar research and development facilities that DOE and DoD have supported over the last 15 years. Funding at the high end would support more sophisticated, comprehensive testing equipment, would permit users to take more time to test ideas, and would permit testing of more high-risk, high-reward ideas. Funding at the high end would also support efforts beyond just testing, such as development of national standards and protocols for grid operations, pursuit of collaborative technologies that would benefit niche applications, such as defense resilience pilot projects, and technology certifications.

The U.S. electric grid must be modernized to enable more use of renewable energy, deploy storage, and assure we improve the resilience. A test facility, such as the GRID facility described above, could help with modernization and entice investments toward deployment of new technologies. As a result, federal investment in the GRID Network would pay off directly or indirectly in four key ways:

1. Modernizing the U.S. electric grid will create shovel-ready construction jobs across the country. Since the GRID facility would be oriented toward rapid development and deployment of innovations, the facility could help enable aggressive and comprehensive modernization of the electric grid, which would involve construction jobs.
2. Grid components that are critical to U.S. infrastructure and national security—ranging from sensors to transformers—must be made through a trusted U.S. supply chain. Investments in the GRID Network hence represent investments in American manufacturing.
3. The GRID Network will support user generation of intellectual property and associated small business start-ups because some of the innovations that are tested and deployed will be manufactured, distributed and installed by start-ups, which will strengthen the U.S. supply chain. This new wave of business activity will propel the U.S. economy for years to come.
4. Grid modernization is a huge effort that will cost at least $500 billion and likely $1–2 trillion. Investing in technologies that could facilitate modernization will retire risks for grid modernization as the decisions by the various grid operators will be based on testing at an applicable scale. As a result, the GRID facility should help ensure the costs for grid modernization are in the middle of the range rather than at the higher end or above.

Conclusion

The U.S. electric grid is a crucial piece of the nation’s infrastructure. If it fails, critical sectors such as finance, healthcare, transportation, defense, agriculture, and manufacturing are at risk of failure as well. Yet the grid remains unacceptably vulnerable to threats large and small. There is a real danger of attacks on the grid by adversarial nations, and natural disasters can wipe out large sections of the grid for hours, days, or longer. Even factors as seemingly trivial as mylar balloons, small arms fire, and broken tree branches can cause costly damage when they interfere with critical grid components. It is past time to create a more robust and resilient system. Creating a testing ground for innovative solutions in grid operations and technology is an important step: one that will not only shore up a glaring weakness in our national security, but will also boost our economy through shovel-ready construction projects, creation of new and good-paying jobs, and development of intellectual property.

The next administration can achieve significant reductions in greenhouse-gas emissions by helping transition the commercial truck and bus industries to cleaner fuels like electric power and hydrogen. A key role for the Federal Government is to support the build-out of a nationwide network of zero-emission (i.e., alternative) fueling stations, including electric charging and hydrogen fueling stations. Achieving this goal will require federal leadership and significant collaboration with Congress, states, electric utilities, the private sector, and others. The amount of effort and time necessary for this effort means that it must be a day one priority to achieve meaningful progress within four years. A robust network of zero-emission fueling stations for trucks and buses will facilitate a significant and permanent reduction in greenhouse-gas emissions, improve air quality for communities nationwide, result in safer highways, and help create of hundreds of thousands of new jobs.

Challenge and Opportunity 

The threat of climate change demands immediate action. The transportation sector is the top emitter of greenhouse gas (GHG) emissions in the United States, outpacing the energy, agriculture, residential, and commercial sectors. Any serious effort to cut GHG emissions overall must therefore include serious efforts to cut transportation-related GHGs. 

GHG emissions from commercial trucks and buses contribute significantly to the transportation sector’s overall emissions. From 1990 to 2018, GHG emissions from commercial trucks and buses increased far more than emissions for passenger cars (emissions increased by 90.1% for commercial trucks, 158.8% for buses, and only 21.6% for passenger cars) despite the lower number of vehicle-miles traveled for commercial trucks and buses. In 2018, the collective emissions from medium-duty and heavy-duty trucks were the second-largest category of transportation-related GHG emissions.

Alternative fuels like hydrogen fuels, biofuels, and electric power present an enormous opportunity to cut transportation-related emissions while boosting the U.S. economy. Alternative fuels are gaining commercial acceptance in the freight and tourism industries. There is also an emerging U.S. industry around manufacturing alternative-powered vehicles that promises to create millions of new jobs in the years ahead. Domestic companies that have already seen success in this space include Workhorse, a company based in Lordstown, OH that is producing electric delivery vehicles for UPS, FedEx and DHL; Rivian has recently signed a contract with Amazon to provide 100,000 electric delivery vans; and Tesla, the world’s most valuable car company, is developing its own battery-powered long-haul trucks.

But there is a major barrier hampering wider deployment of these vehicles: fueling stations. Adoption of zero-emission trucks and buses will be slow until a robust, nationwide network of zero-emission fueling stations is available. Modest efforts are already underway in California and the northeastern United States to build new zero-emission fueling stations, but federal leadership is needed to accelerate and expand these efforts to a national scale. The Federal Government can facilitate build-out of the country’s network of zero-emission fueling stations by providing tax credits and other financial incentives for station construction and by providing the nationwide planning and coordination capacities that the private sector alone cannot.

Key considerations

The U.S. Department of Energy reports that there were 41 open retail hydrogen fueling stations in the United States in 2019, with an additional 36 stations in various stages of development. Most of these stations are in California and the northeastern states. Various electric-fueling stations—most designed for passenger cars—are scattered throughout the United States. The next administration should focus on building out the national network of zero-emission fueling stations in the Midwest and other parts of the United States that currently lack zero-emission infrastructure. The following considerations can guide this effort.

The commercial truck and bus industry. Most truck and bus companies are small businesses, utilizing fleets of seven to ten vehicles and operating on tight profit margins. Capital is limited for many of these companies, especially in the wake of the devastation that COVID-19 has wreaked on the larger economy and tourism industry. Therefore, it will be difficult for these companies to invest in new, alternative-powered vehicles. Moreover, the rate of fleet turnover for most trucking and bus fleets is slow – a company will typically retain their commercial trucks and buses for a decade or more, and often times these vehicles will then be sold to a secondary market where they will be utilized for several years longer. The next administration should work closely with stakeholders to craft financial incentives that allow commercial truck and bus companies to purchase new trucks and buses that run on alternative fuels.

Travel-plaza owners. Commercial travel-plaza owners are among the largest distributors of diesel fuel and gasoline in the nation. Travel-plaza owners also generate revenue by selling food and other items to truck drivers and other motorists. The deployment of zero emission fueling stations could represent an existential threat to many of these operators if handled poorly: for instance, if zero-emission fueling stations become direct competitors to existing travel plazas. But commercial travel-plaza owners could also be important champions of zero-emission fueling stations if deployment is handled well: for instance, if resources are provided to help travel-plaza owners incorporate zero-emission fueling infrastructure into existing facilities, or if operators who build out zero-emission fueling infrastructure are rewarded with grants to upgrade on-site food and retail establishments.

Congress. Congress must provide new tools for the federal government to accelerate deployment of zero-emission fueling stations. Specifically, Congress should amend title 23, United States Code (USC) so that federal dollars are eligible to support construction of zero-emission fueling stations, including at truck rest stops and via Community Mitigation and Air Quality (CMAQ) projects.

Alternative-fuel types. There currently is no “preferred” alternative fuel in the commercial truck and bus industries. While some think hydrogen fuel has the greatest potential, others are betting on natural gas and batteries. For now, most businesses are making decisions based on current advantages and limits of different alternative fuels. For example, battery cells are less attractive for long-haul trucking and bus trips because of the batteries’ weight and their limited range compared to motor fuels. But battery-powered vehicles are ideal for city deliveries, where many daily trips can be completed on a single charge. The next administration should therefore work to expand the nation’s network of zero-emission fueling stations in ways that support multiple alternative-fuel types.

Fueling technologies and costs. The reality is that zero emission technologies are relatively new. There is still work that must be done to understand the emissions-reduction and fuel-reduction technologies that are available, the challenges to wider adoption of these technologies, where these technologies effectively fit diverse geography and efficient supply-chain needs, and the potential emissions reductions. But doing this work will result in significant impacts on truck freight emissions and fuel usage.

Existing federal regulations. The commercial truck and bus industries are highly regulated. New fueling technologies will need to work within these regulations, not against them. For example, federal requirements limit the number of hours a truck or bus driver may work per day. If refueling an alternative-fuel truck takes longer than refueling a diesel truck, drivers will lose valuable driving time. Additionally, weight limits on commercial vehicles designed to prevent damage to road and bridge infrastructure also discourage the use of heavy batteries for long-haul trips, as the weight of the batteries displace the amount of freight a truck can haul. The next administration should be aware of issues like these, crafting policies to encourage development of alternative-fueling technologies that do not inadvertently hurt businesses or undermine other priorities like highway safety or infrastructure maintenance. Truck and bus drivers should also be included in these discussions, to better understand how to successfully integrate existing practices.

Truck and bus manufacturers and dealers. A handful of companies manufacture the majority of commercial trucks and buses sold and used in the United States. Most of these companies are not significantly invested in alternative-fuel vehicles. The next administration needs to be mindful that it is not pitting established manufacturers against the startups referenced above in supporting the expansion of zero-emission fueling stations, lest it encounter serious opposition among the business community and Congress. Finally, the U.S. Department of Transportation reports approximately 12.5 million commercial trucks and buses are currently registered in the United States. There will need to be significant manufacturing capacity to support the wide-scale adoption of alternative-powered trucks and buses, and these manufacturers could be a valuable partner for this effort, especially if they understand the market potential.

Plan of Action

Keeping the considerations above in mind, there are several concrete actions that the next administration can take to build out of a national network of zero-emission fueling stations. In its first 100 days, the next administration should: 

Prioritize passage of critical legislation

This legislation should provide the Federal Government the authorities and resources needed to support the build out of this zero-emission fueling network. Specifically, this legislation should

• Provide flexibility in title 23 USC to enable states to apply gas-tax dollars towards funding zero-emission fueling stations at truck parking stops and other places along highways – where such projects make sense.
• Allocate resources for financial incentives, including grants, tax rebates, and credits, to incentivize adoption of zero-emission fueling stations and vehicles.
• Utilize “Jason’s Law” surveys (a federal product that documents truck-parking capacity nationwide, including parking shortages) to identify truck-parking locations that could be used for fueling stations.
• Authorize pilot programs and public-private partnerships to provide flexibility in developing “best practices” and techniques with key stakeholders, including the private sector, for building out a commercially viable nationwide network of zero-emission fueling stations.
• Permit fast-track approval to site zero-emission fueling stations, in consultation with local utility regulators.

Strong White House coordination

The White House should work closely with key agencies to ensure coordination and eliminate redundancy with respect to federal efforts to advance zero-emission fueling stations. These agencies include the Department of Transportation (DOT) for its partnership with the states to maintain the nation’s major roads and highways, the Department of Energy (DOE) for its ongoing work to deploy alternative-fueling stations, and the Environmental Protection Agency for its regulatory work on clean air.

Gather stakeholder input

The business community recently has adopted a new level of urgency in confronting climate change. To discuss opportunities for building out zero-emission fueling infrastructure, the next administration should harness this energy by convening key stakeholders, including vehicle manufacturers, truck and bus companies, metropolitan planning organizations, port authorities, labor organizations, truck-stop owners, and owners of large freight-generating facilities (like hospitals, universities, airports, and convention centers). Opportunities may include the following: partnerships with local utilities to integrate new electric-charging stations with existing electric infrastructure; strategic plans for developing infrastructure tailored to specific routes, applications, and duty cycles in order to minimize refueling costs; and joint efforts that distribute capital expenses of infrastructure construction across private fleets as well as government agencies.

Establish pilot programs and public-private partnerships

Highly traveled truck and/or bus corridors along the National Highway System are natural places to pilot policies and public-private partnerships (PPP) designed to support construction of zero-emission fueling stations. Because there are relatively few examples of real-world experiences and limited opportunities to test emerging zero emission technologies and the strategies for their deployment, these pilots and PPPs will provide immense benefit in sharing information and developing best practices. Immense benefits towards wider adoption will come from understanding the emissions-reduction and fuel-reduction technologies available, the challenges to wider adoption of these technologies, and where these technologies effectively fit diverse geography and efficient supply-chain needs will have. The next administration should partner closely with states and the private sector on initiating and overseeing such pilots and PPPs.

Cumulatively, these activities and authorities will spur development of a nationwide zero emission fueling network because they provide stakeholders with a federal partner in navigating the risks and challenges of this effort while also providing necessary incentives to accelerate stakeholder investment in zero emission technologies and fueling stations. But the benefits of this effort may take years to fully realize, so it is critical that the next administration begin work on this effort on day one to see this through.

Conclusion

Commercial truck and bus volumes will only continue to grow in the future and with it their GHG emissions. While changing CAFÉ standards for commercial trucks and buses will make modest reductions in their GHG emissions, the reality is that the only way to significantly reduce these emissions is to accelerate the deployment and adoption of zero emission technologies. But because these technologies are relatively new and untested, the Federal Government must help stakeholders navigate the challenges and opportunities that these technologies present while also supporting the build out of critical infrastructure like fueling stations to improve confidence in adopting zero emission trucks and buses. The steps outlined in this proposal provide a roadmap to making that a reality.

The next administration should establish a national initiative built around ambitious goals to accelerate development and deployment of dramatically improved energy-storage technologies. Developing such technologies would help establish a strategic new domestic manufacturing sector. Deploying such technologies would expand the range of low-carbon pathways available to fight climate change—especially those relying on variable renewable energy resources, like wind and solar power. Deploying such technologies would also improve the performance of smartphones, drones, and other vital electronic tools of the 21st century.

Challenge and Opportunity

Electricity systems, no matter how big or small, must instantaneously balance supply and demand, generation and load—or suffer blackouts. This imperative has long motivated scientists and technologists to seek the holy grail of affordable, reliable, durable, and safe energy storage. Yet, despite many decades of efforts, batteries remain expensive, fickle, short-lived, and dangerous for many applications. Other forms of energy storage, like thermal and compressed-air storage, suffer from major drawbacks as well. 

Radically improved energy-storage technologies would help the nation and the world solve some of their most pressing problems. Most urgently, improved energy storage would expand the range of low-carbon pathways to fight climate change and reduce dependence on fossil fuels by allowing the electricity grid to accommodate higher levels of renewable energy. Improved energy storage would allow electric vehicles (EVs) to better meet drivers’ expectations for value and performance, thereby speeding up EV adoption and further helping to address the climate challenge. Better batteries would also let people stop worrying about whether their electronic devices are charged, improving security and strengthening the economy in a world where these and other connected devices are ubiquitous.

Given the importance and magnitude of these opportunities, energy storage has become a critical industry of the future—one that nations around the world seek to capture. China and the European Union, for instance, are making significant strategic investments to build domestic capabilities for development and manufacturing of energy storage technologies. These and other international competitors are challenging the U.S. energy innovation ecosystem—our research universities, national laboratories, start-up companies, and established technology firms to invent, commercialize, and scale-up next-generation energy-storage technologies.

Opportunities by sector

Electric power

The rapidly dropping cost of wind and solar power has opened major pathways to decarbonize electricity systems. But these power generation technologies are variable: that is, their output fluctuates by the hour, day, and season. As the renewable share of generation rises on a grid, such fluctuations make balancing supply and demand increasingly difficult, threatening brownouts and blackouts. Grid-scale energy storage has the potential to address this challenge. Although one energy-storage technology (lithium-ion batteries) has been improved to the point that it has begun to make a significant impact on the grid, major gaps remain. Fully solving the grid-storage problem requires technologies that are much cheaper and last much longer than current systems. Grid-storage technologies must be able to hold enough electricity to power a grid for a week or more at a cost of just a few cents per kilowatt-hour (kWh), while operating only a few times each year.

Transportation

Lithium-ion batteries are also kick-starting the electrification of transportation. Their declining cost is one of the key factors helping to bring EVs into the mainstream. EVs are cleaner than gasoline-powered cars if they are charged on low-carbon electricity grids. EVs are also easier to maintain and cheaper to operate. However, the ultimate triumph of EVs in the auto market is far from assured. Batteries that are safer, rely on more abundant materials, allow vehicles to go 500 miles or more on a charge, last for at least a decade, and are easily recharged and recycled would make the success of EVs more likely, with huge payoffs for the global climate.

Electronics

The suite of technologies sometimes lumped together as the “fourth industrial revolution” is another broad domain that would benefit from advances in energy storage. Robots, drones, sensors, and smartphones—and the systems by which they process and exchange information—have become essential tools in modern society.

Most of these electronics are more useful when they can operate without having to maintain a constant connection to the grid. Although batteries are becoming lighter and more efficient, the demands being placed on them are also rising, straining the limits of lithium-ion technology. An order-of-magnitude leap in the energy density of batteries— the amount of electricity stored in a given mass or volume—would unlock a diverse array of valuable new applications for a wide range of electronic devices. For instance, drones, whether they are being used by combat forces, farmers, or utility crews, would be able to stay aloft for days and carry more sophisticated payloads, such as weapons or sensors.

Domestic manufacturing

Paradigm-shifting improvements in energy storage technologies would also create opportunities to build domestic manufacturing capacity in a growing industry of the future. The supply chain for making lithium-ion batteries migrated to East Asia years ago. The largest battery factory for EVs in the United States, Tesla’s “giga-factory” in Reno, NV, is run by a joint venture with the Japanese-headquartered firm Panasonic. Tesla has been unable to fully master the finicky methods used to make battery cells. Other U.S.- based EV assembly plants rely on Asian-headquartered battery contractors as well. 

Nonetheless, the United States continues to generate new energy storage technologies, including some that could supplant the current generation of lithium-ion batteries. For example, Sila Nanotechnologies, founded in 2011 and based in the San Francisco Bay Area, raised $215 million in 2019 to scale up its manufacturing activity. A half-dozen other U.S.-based battery start-ups have also raised large funding rounds in the past year. Investors include not only venture-capital firms, but also big companies based in Europe and Asia as well as North America. It remains to be seen where the battery supply chain of the future will be located.

Plan of Action

The next administration, building on the Department of Energy’s (DOE) recently announced “Energy Storage Grand Challenge,” should establish a National Energy Storage Initiative (NESI) built around ambitious goals to accelerate development and deployment of dramatically improved energy-storage technologies. These goals should include widespread adoption of:

• Grid-scale systems that can provide at least 500 megawatts (MW) of power for a week at a cost of three cents per kWh or less.
• Vehicle-scale energy-storage systems with performance, safety, and cost characteristics as good as or better than internal-combustion systems (including lifespan and recharging speed).
• Batteries for small devices exhibiting energy density an order of magnitude greater than current lithium-ion batteries.

The NESI should also seek to achieve economic and international goals such as:

• A positive international trade balance in energy-storage technologies and components.
• Global adoption of energy-storage technologies invented and commercialized in the United States across major application domains.

The NESI will require deep collaboration among key federal agencies and with the private sector, academia, and states and localities. This initiative would galvanize the still-thriving energy-storage science and technology community in the United States, spurring the development of better energy-storage technologies and ensuring that the next generation of storage devices are built here. The case for the NESI is two-fold. First, expanded research, development, and demonstration (RD&D) funding is needed to address market failures in the energy-storage domain. Expanded funding would enable scientific and mission agencies to pursue a diverse array of promising opportunities that have gone un- or under-explored. The result would be new energy-storage materials and concepts, breaking through barriers that have limited current technologies. Second, federal resources and leadership—as well as deep engagement with the private industrial and financial sectors and with key states and localities—are crucial for domestic scale-up and manufacturing made possible by this expanded RD&D portfolio. International competition surrounding energy storage is already fierce. China, in particular, has made no secret of its plan to dominate the global battery and EV industries. The United States must assert leadership on energy storage or risk being left behind.

Implementation

The NESI should include four key components: (1) White House leadership and coordination, (2) a federal RD&D budget commitment, (3) increased agency participation and use of an array of policy tools, and (4) mobilization of non-federal actors to undertake aligned actions.

White House leadership and coordination

An Executive Order (EO) from the White House, implemented by the Office of Science and Technology Policy (OSTP) and the National Science and Technology Council (NSTC), would be the foundational action to launch the NESI. White House leadership and attention would catalyze implementing agencies to identify lead units and staff members for the interagency initiative and to undertake internal coordination among their component units (e.g., the science and applied energy offices within DOE). OSTP, NSTC, and agency staff would spearhead the initiative, driving its progress throughout the executive branch and mobilizing support in Congress, industry, science, and the public.

Budget

Delivering on the aforementioned goals would require, at a minimum, tripling current spending on energy storage RD&D programs over five years. The most comprehensive estimate of federal RD&D spending on energy storage comes from a 2015 OMB interagency “crosscut”: $300 million. Increasing spending to $900 million or more per year would allow participating agencies to take the following actions:

• Accelerate fundamental research on promising energy-storage materials and systems.
• Create and expand centers of excellence in RD&D on energy storage at universities and government laboratories.
• Build academic-government-industry partnerships to create energy-storage prototypes and pilot projects.
• Conduct large-scale energy-storage demonstration projects in collaboration with end users, such as urban and rural electricity systems and military bases.
• Establish regional manufacturing innovation centers that facilitate technology development, worker training, and small- and medium-enterprise (SME) engagement related to energy storage

Increased agency participation and use of other policy tools

In addition to DOE, the Departments of Agriculture (USDA), Commerce (DOC), Defense (DOD), Health and Human Services (HHS), Housing and Urban Development (HUD), and Transportation (DOT) as well as the National Science Foundation (NSF) and National Aeronautics and Space Administration (NASA) should be mobilized to accelerate innovation in energy storage. DOC, DOD, HHS, and NSF should collaborate with DOE in expanding the energy storage RD&D enterprise. The other agencies, along with DOE and DOD, should use policy tools such as procurement, regulation, and investment support (e.g., loan guarantees) to help “pull” nascent energy-storage technologies into markets and to assist in establishing domestic production capacity. Tax incentives, legislated by Congress and administered by executive agencies, may also be helpful to accelerate market growth and drive down costs for particular technologies.

Mobilization of non-federal actors

Academia and industry are critical to the success of energy-storage RD&D, manufacturing, and adoption. The vast scope of energy-storage applications amplifies the importance of engaging with a wide variety of end-user industries—especially power-system vendors, utilities, electronics manufacturers, and automakers—as well as producers of storage technology. States and localities, many of which have announced ambitious goals for grid-scale storage, should also be incorporated into the NESI. A few states could house federally supported manufacturing and innovation “clusters” for energy-storage solutions. All states could accelerate adoption of improved energystorage technologies by fostering receptive markets: for instance, by reforming electricity regulation.

Precedents

The proposed NESI is similar to successful efforts such as the Clinton administration’s nanotechnology initiative and the Obama administration’s advanced manufacturing initiative. Such initiatives mobilize and coordinate multiple agencies in pursuit of technological capabilities that will contribute significantly to a set of broadly agreed national goals. Success depends on strong presidential commitment at the start and cultivation of stakeholders across partisan, regional, and sectoral lines over time. Effective technology initiatives have major on-the-ground impacts and ultimately become self-sustaining. Two keys to success are (1) White House leadership and attention to foster interagency cooperation, and (2) increased agency budgets to limit resistance from incumbent programs.

Federal funding for energy-storage science and technology has a long track record, particularly with regard to basic research. The American Recovery and Reinvestment Act (ARRA) expanded federal energy-storage funding considerably in the 2010s. ARRA funding supported establishment of the Advanced Research Projects Agency—Energy (ARPA-E), which has become a major source of funding for applied research and prototype development in energy storage. ARRA funding also supported the Joint Center for Energy Storage Research (JCESR) at Argonne National Laboratory; a collaborative demonstration program within DOE’s Office of Electricity that worked with utilities, states, and local governments; and loan guarantees for battery manufacturing and grid-scale storage projects. 

Many of these investments have paid off handsomely. For instance, an evaluation by the National Academies found that ARPA-E’s funding of energy-storage technology has been “highly productive with respect to accelerating commercialization” and led to the formation of at least six new companies in the field. JCESR was renewed for an additional five years in 2018. However, the demonstration and manufacturing elements of the ARRA-funded push were not sustained, primarily due to ideological objections by the Congressional majority that came in after the 2010 midterm elections. 

The Department of Energy announced an Energy Storage Grand Challenge on January 8, 2020. This initiative is a welcome step toward the broader initiative outlined in this paper. It seeks ambitious advances in technology, rapid commercialization, and the creation of a domestic manufacturing supply chain. But it does not extend beyond DOE, and whether it will be implemented with the appropriate resources and presidential support is uncertain.

International context

Many countries have made energy storage a priority. The European Union has embarked on a multi-billion-dollar battery initiative that led to the establishment of Northvolt, a European-owned battery cell manufacturing start-up. Volkswagen bought 20% of Northvolt and is working with it to build a second cell factory. Energy storage and EVs are among the sectors targeted by China in its Made in China 2025 program. Massive subsidies from all levels of the Chinese government have flowed through a variety of channels to energy storage projects and companies to fulfill this program, helping China become the world’s largest EV market (with more than 50% market share). Korea, Japan, and India are among the other countries undertaking national energy storage initiatives.

Although the global race to advance energy-storage technology is intense, the United States possesses many strengths that would allow a domestic energy-storage effort to succeed. These strengths include outstanding research capabilities at universities and national laboratories, a vibrant start-up ecosystem, and a strong industrial sector. The NESI would provide the leadership, funding, and coordination needed to realize the full potential of these assets. It is also important for the United States to foster international cooperation around science underlying energy-storage technology. Scientific knowledge is a global public good that will be under-provided without the leadership of the world’s top scientific nation.

Stakeholder support

The NESI has a wide range of potential champions and advocates on both sides of the aisle. Congressional Republicans have expressed their support for energy storage through expanded RD&D funding and more ambitious authorizations. The administration’s new grand challenge taps into this legislative support. Environmental advocates on the left of the political spectrum are also supportive, perceiving limited energy storage as the biggest technological barrier to expanded deployment of renewables. Similar enthusiasm may be expected from the research community and investors, as well as from states seeking to build a domestic energy-storage industry. These interests have been frustrated by the “invent here, produce there” outcomes of past breakthroughs, such as lithium-ion batteries.

Technology end users may be less enthusiastic or indifferent. Low prices in the short term may be more important to them than innovation in the long run. They may also see the location and ownership of production facilities as irrelevant or argue that the current global division of labor, in which Asian factories built with cheap public-investment capital supply U.S. needs, is favorable for the United States. Other skeptics may argue that when it comes to supporting expanded deployment of renewables, investing in demand response, larger grids, or other forms of low-carbon electricity generation, such as nuclear power or natural gas plants with carbon capture systems, are better options than energy storage.

Goals and metrics

The overarching (e.g., within 10 years) goal of NESI is to make the United States a major center for energy storage innovation and production. 

One essential short-term step towards achieving this goal is establishing key organizational components of the NESI, such as an interagency working group and a mechanism to engage with non-federal stakeholders, including industry, academia, and states. A second critical step is expanding budgets for relevant federal agencies to put them on a pathway to triple federal funding for energy-storage RD&D. 

In the medium term, metrics such as growth in scientific publications and patents, formation of new energy-storage companies, equity and project investment, product introduction, and manufacturing-cost reduction will provide insights on progress. 

In the long term, success of the NESI should be assessed by the level of market penetration of new energy-storage storage products across application domains including electric power, transportation, and electronics in the context of a growing overall storage market. Success of the NESI should also be assessed through consideration of the international trade balance related to energy storage and adoption of U.S.-developed energy-storage technologies.

Proposed initial steps

The next president should sign an EO establishing the NESI and directing the White House Office of Science and Technology Policy to convene a federal interagency task force. The task force should prepare a strategic plan and develop a budget for the initiative in consultation with key stakeholders. The plan should identify technological needs and opportunities and set specific objectives, taking into account global competition and cooperation with respect to energy storage. Congress should support the NESI by appropriating funding needed to implement the strategic plan, and by providing additional authorization as required.

Implementing agencies should pursue energy-storage RD&D as it relates to their respective missions, while collaborating to manage overlaps and avoid gaps. RD&D activities should strengthen the intramural and extramural research and industrial communities. As innovative storage technologies reach maturity, DOC, DOD, and DOE should work with states and regional economic-development agencies to foster markets and develop manufacturing capabilities. Congress should provide tax incentives that help to pull these technologies into the market, thereby driving down cost and expanding deployment.

Conclusion

Energy-storage technologies in widespread use today are not good enough to meet fundamental 21st-century challenges, including climate change, economic growth, and international security. A national initiative to accelerate domestic development and deployment of dramatically improved energy-storage technologies would position the United States to lead the world in addressing these challenges while building its economy. Although global competition in energy storage is fierce, our nation has strong capabilities that—if used strategically—position the United States to catch up with and ultimately surpass its rivals in this vital emerging industry. The NESI provides a pathway for the next president to translate this vision into reality.

Climate solutions and nuclear energy

The full House Science, Space, and Technology Committee discussed climate hurdles and solutions in a January 15 hearing titled, “An update on the climate crisis: From science to solutions.” Interestingly, the main point of debate during this hearing was not whether climate change was occurring, but rather the economic impacts of climate change mitigation. As predicted, the debate was split down party lines.

While the Democrats emphasized the negative consequences of climate change and the need to act, several Republican members insisted that China and India rein in their greenhouse gas emissions first.

Congressman Mo Brooks (R, AL-05) asked the most heated series of questions during the hearing, related to India and China’s carbon emissions. He asked if there was a way to force both to reduce their emissions, which, according to a report by the European Union, have seen increases of 305% and 354%, respectively, between 1990 and 2017.

Democrats focused their questions to highlight the science behind climate change. Chairwoman Eddie Bernice Johnson (D, TX-30) asked each witness about the biggest hurdles in their fields. Richard Murray, Deputy Director and Vice President for Research at Woods Hole Oceanographic Institution, said that more investments in large-scale ocean observations and data are needed. Pamela McElwee, Associate Professor of Human Ecology at Rutgers, said that a lot of advances in land conservation can be made with existing technology, but that investments in genetic modification of crops to restore nutrients to the soil, for example, could be developed. Heidi Steltzer, Professor of Environment and Sustainability at Fort Lewis College, encouraged the inclusion of diverse perspectives in climate research to develop the most creative solutions. Congressman Paul Tonko (D, NY-20) summed up the Democrats’ views on climate change by stating that the climate science performed by researchers like the witnesses should inform federal action and that inaction on this issue is costly.

While committee Republicans expressed concerns over the impact of climate regulations on business, members of the committee did emphasize the importance of renewing U.S. leadership in nuclear power, pointing to competition from Russia and China. Nuclear power continues to be the largest source of carbon free electricity in the country.

One of the witnesses, Michael Shellenberger, Founder and President of Environmental Progress noted that the US’ ability to compete internationally in nuclear energy was declining as Russia and China rush to complete new power plants. Losing ground in this area, he added, negatively impacts the U.S.’ reputation as a developer of cutting edge energy technology and dissuades developing countries interested in building nuclear power plants from contracting with the U.S.

As the impacts of climate change take their toll in California, the Caribbean, Australia, and elsewhere, the U.S. Congress remains divided on how to address it.

We thank our community of experts for helping us create an informative resource and questions for the committee.

Supercomputing a high priority for DOE Office of Science

While last week’s House Science Subcommittee on Energy hearing about research supported by the Department of Energy (DOE) Office of Science touched on a range of issues, competition with China on high-performance computing took center stage.

The big milestone that world powers are competing to reach in the high-performance computing field is the development of the first-ever exascale computer. An exascale computer would greatly enhance research areas like materials development for next-generation batteries, seismic analysis, weather and climate modeling, and even clinical health studies like “identifying risk factors for suicide and best practices for intervention.” It would be about a million times faster than a consumer desktop computer, operating at a quintillion calculations per second. The U.S., China, Japan, and European Union are all working to complete the first exascale system.

In the competition to develop faster and faster supercomputers, China has made rapid progress. In 2001, none of the 500 fastest supercomputers were made in China. As of June 2019, 219 of the 500 fastest supercomputers had been developed by China, and the US had 116. Notably, when the computational power of all these systems is totaled up for each country, China controls 30 percent of the world’s high-performance computing resources, while the U.S. controls 38 percent. In the past, China had asserted that it would complete an exascale computing system this year; however, it is unclear if the country will meet its goal.

A U.S. exascale system due in 2021 – Aurora – is being built at Argonne National Lab in Illinois, and hopes are high that it will be the world’s first completed exascale computer. During the hearing, Representatives Dan Lipinski (D, IL-03) and Bill Foster (D, IL-11) both raised the issue of progress on the project. According to DOE Office of Science director Dr. Christopher Fall, the Aurora project is meeting its benchmarks, with headway being made not only on the hardware, but also on a “once-in-a-generation” reworking and modernization of the software stack that will run on the system, as well as developing high-speed internet for linking generated data with the computation of that data. DOE believes that the U.S. is in a strong position to complete the first-ever exascale computing system, and that our holistic approach to high-performance computing is something that is missing from competitors’ strategies, giving the U.S. even more of an edge.

In addition to the Aurora project, two more exascale computing projects are underway at U.S. National Labs. Frontier, at Oak Ridge National Laboratory in Tennessee, is also projected to deploy in 2021, while El Capitan, based at Lawrence Livermore National Laboratory in California, should launch in 2022. El Capitan will only be used by individuals in the national security field.

In addition to research in high-performance computing, the diverse and impactful science supported by the DOE Office of Science is truly something to protect and promote. To review the full hearing, click here.

The JASON scientific advisory panel cautiously endorsed further research into what is known as Magneto-Inertial Fusion (MIF) as a step towards achieving fusion-generated electricity.

“Magneto-Inertial Fusion (MIF) is a physically plausible approach to studying controlled thermonuclear fusion in a region of parameter space that is less explored than Inertial Confinement Fusion (ICF) or Magnetic Confinement Fusion (MCF).”

“Despite having received ~1% the funding of MCF and ICF, MIF experiments have made rapid progress in recent years toward break-even conditions,” the JASONs said in a report to the Advanced Research Projects Agency-Energy (ARPA-E) late last year.

Even so, “Given the immaturity of the technologies, the future ability of fusion-generated electricity to meet commercial constraints cannot be usefully assessed. Rapidly developing infrastructures for natural gas and renewable energy sources and storage will compete with any future commercial fusion efforts.”

See Prospects for Low Cost Fusion Development, JASON Report JSR-18-011, November 2018.

The fusion report is one of two unclassified reports prepared by the JASONs in 2018. (Release of the second is pending.) The other twelve reports from last year are classified.

The New York Times recently provided an overview of fusion research in Clean, Abundant Energy: Fusion Dreams Never End by C. Claiborne Ray, January 11, 2019.

Meanwhile, the Federation of American Scientists warned that the current shutdown of federal agencies threatens many aspects of U.S. science and technology.

“The partial government shutdown is compromising the very research that is important to the health and security of our nation. Important scientific breakthroughs could be compromised or lost with each and every day that the shutdown continues,” FAS said in a January 16 letter to the White House and Congress.

“We therefore urge you to open the federal government, send researchers back to work at their agencies, and allow science to flourish throughout the United States.”

The Trump Administration budget request for FY 2018 would “severely reduce” Energy Department funding for development of carbon capture and sequestration technologies intended to combat the climate change effects of burning fossil fuels.

The United States has “more than 250 years’ worth of clean, beautiful coal,” President Trump said last month, implying that remedial measures to diminish the environmental impact of coal power generation are unnecessary.

Research on the carbon capture technology that could make coal use cleaner by removing carbon dioxide from power plant exhaust would be cut by 73% if the Trump Administration has its way.

“The Trump Administration’s approach would be a reversal of Obama Administration and George W. Bush Administration DOE policies, which supported large carbon-capture demonstration projects and large injection and sequestration demonstration projects,” the Congressional Research Service said this week in a new report.

“We have finally ended the war on coal,” President Trump declared.

However, congressional approval of the Administration’s proposal to slash carbon capture and sequestration (CCS) development is not a foregone conclusion.

“The House Appropriations Committee’s FY2018 bill funding DOE disagrees with the Administration budget request and would fund CCS activities at roughly FY2017 levels,” the CRS report said.

“This report provides a summary and analysis of the current state of CCS in the United States.” It also includes a primer on how CCS could work, and a profile of previous funding in this area. See Carbon Capture and Sequestration (CCS) in the United States, July 24, 2017.

Other new and updated reports from the Congressional Research Service include the following.

Methane and Other Air Pollution Issues in Natural Gas Systems, updated July 27, 2017

The U.S. Export Control System and the Export Control Reform Initiative, updated July 24, 2017

Base Erosion and Profit Shifting (BEPS): OECD Tax Proposals, July 24, 2017

Oman: Reform, Security, and U.S. Policy, updated July 25, 2017

Lebanon, updated July 25, 2017

Aviation Bills Take Flight, but Legislative Path Remains Unclear, CRS Insight, July 25, 2017

Military Officers, CRS In Focus, July 3, 2017

Military Enlisted Personnel, CRS In Focus, July 3, 2017

Transgender Servicemembers: Policy Shifts and Considerations for Congress, CRS Insight, July 26, 2017

Systematic, authorized publication of CRS reports on a government website came a step closer to reality yesterday when the Senate Appropriations Committee voted to approve “a provision that will make non-confidential CRS reports available to the public via the Government Publishing Office’s website.”

As I write this president’s message, the U.S. election has just resulted in a resounding victory for the Republican Party, which will have control of both the Senate and House of Representatives when the new Congress convenes in January. While some may despair that these results portend an even more divided federal government with a Democratic president and a Republican Congress, I choose to view this event as an opportunity in disguise in regards to the important and urgent issue of U.S. energy policy.

President Barack Obama has staked a major part of his presidential legacy on combating climate change. He has felt stymied by the inability to convince Congress to pass comprehensive legislation to mandate substantial reductions in greenhouse gas emissions. Instead, his administration has leveraged the power of the Environmental Protection Agency (EPA) to craft rules that will, in effect, force the closure of many of the biggest emitters: coal power plants. These new rules will likely face challenges in courts and Congress. To withstand the legal challenge, EPA lawyers are working overtime to make the rules as ironclad as possible.

The Republicans who oppose the EPA rules will have difficulty in overturning the rules with legislation because they do not have the veto-proof supermajority of two-thirds of Congress. Rather, the incoming Senate majority leader Mitch McConnell (R-Kentucky) said before the election that he would try to block appropriations that would be needed to implement the new rules. But this is a risky move because it could result in a budget battle with the White House. The United States cannot afford another grinding halt to the federal budget.

Several environmental organizations have charged many Republican politicians with being climate change deniers. Huge amounts of money were funneled to the political races on both sides of the climate change divide. On the skeptical side, political action groups affiliated with the billionaire brothers Charles and David Koch received tens of millions of dollars; they have cast doubt on the scientific studies of climate change.  And on the side of wanting to combat climate change, about $100 million was committed by NextGen Climate, a political action group backed substantially by billionaire Tom Steyer. Could this money have been better spent on investments in shoring up the crumbling U.S. energy infrastructure? Instead of demonizing each side and just focusing on climate change, can the nation try a different approach that can win support from a core group of Democrats and Republicans?

Both Democratic and Republican leaders believe that the United States must have strong national security. Could this form the basis of a bipartisan plan for better energy policy? But this begs another question that would have to be addressed first: What energy policy would strengthen national security? Some politicians, including several former presidents, have called for the United States to be energy independent. Due to the recent energy revolution in technologies to extract so-called unconventional oil and gas from shale and sand geological deposits, the United States is on the verge of becoming a major exporter of natural gas and has dramatically reduced its dependence on outside oil imports (except from the friendly Canadians who are experiencing a bonanza in oil extracted from tar sands). However, these windfall developments do not mean that the United States is energy independent, even including the natural resources in all of North America.

Oil is a globally traded commodity and natural gas (especially in the form of liquefied natural gas) is tending to become this type of commodity. This implies that the United States cannot decouple its oil and gas production and consumption from other countries. For example, a disruption in the Strait of Hormuz leading to the Persian Gulf will affect about 40 percent of the globe’s oil deliveries because of shipments from Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirate. Such a disruption might occur in an armed conflict with Iran, which has been at loggerheads with the United States over its nuclear program. Moreover, while the United States has not been importing significant amounts of oil from the Middle East recently, U.S. allies Japan and South Korea rely heavily on oil from that region. Thus, a major principle for U.S. national security is to work cooperatively with these allies to develop a plan to move away from overreliance on oil and gas from this region and an even longer term plan to transition away from fossil fuels.

Actually, this long term plan is not really that far into the future. According to optimistic estimates (for example, from Cambridge Energy Research Associates) for when global oil production will reach its peak, the world only has until at least 2030 before the peak is reached, and then there will be a gradual decline in production over the next few decades after the peak.¹ (Pessimistic views such as from oil expert Colin Campbell predict the peak occurring around 2012 to 2015.² We thus may already be at the peak.) Once the global decline starts to take effect, price shocks could devastate the world’s economy. Moreover, as the world’s population is projected to increase from seven billion people today to about nine billion by mid-century, the demand for oil will also significantly increase given business as usual practices.

For the broader scope national security reason of having a stable economy, it is imperative to develop a nonpartisan plan for transitioning from the “addiction” to oil that President George W. Bush called attention to in his State of the Union Address in January 2006. While skepticism about the science of climate change will prevail, this should not hold back the United States working together with other nations to craft a comprehensive energy plan that saves money, creates more jobs, and overall strengthens international security.

FAS is developing a new project titled Sustainable Energy and International Security. FAS staff will be contacting experts in our network to form a diverse group with expertise in energy technologies, the social factors that affect energy use, military perspectives, economic assessments, and security alliances. I welcome readers’ advice and donations to start this project; please contact me at cferguson@fas.org. FAS relies on donors like you to help support our projects; I urge you to consider supporting this and other FAS projects.

Legal and illegal power connections in Lahore, Pakistan

A stable and thriving Pakistan is the key to preserving harmony and facilitating progress in the broader South Asia region. Afghanistan, which is to the west of Pakistan, has a long border that divides the Pakhtun people between the countries. As a result of this border, Pakistan not only has a significant role in the Afghan economy, but instability in the loosely governed Pakistani frontier region spills across the border into Afghanistan. Because of this relationship, Pakistan has a direct impact on the outcome on the 13 year U.S. led war in Afghanistan.  On the other hand, an unstable Pakistan would not only shatter budding trade relations with India, but could also spark conflict between the two nuclear armed rivals.

From frequent attacks by Islamic militants across the country to a slowing economy, it is clear that there are many issues that threaten Pakistan’s stability. However, the most pressing issue that Pakistan faces today is its deteriorating economy. In particular, a crushing energy shortage across the country significantly constrains economic growth. This fiscal year, Pakistan’s Gross Domestic Product (GDP) is forecasted to grow by measly 3.4 percent. At the same time, the country’s population is expected to grow by 1.8 percent adding to the 189 million people living there today. If there aren’t jobs available for the millions of young Pakistanis entering the work force, not only will poverty increase, but there is a strong possibly that some of these youth could vent their frustrations by joining the countless Islamic militant groups active in the country.

To build a more prosperous economy, Pakistan needs to address its energy problems. Without a reliable source of electricity or natural gas, how can Pakistani businesses compete on the global market? Large parts of the country today face blackouts lasting an average of 10 hours each day because of the electricity shortage. The current gap between electricity generation and demand is roughly 2500 MW, a shortage large enough to keep a population of 20 million or the city of Karachi in the dark.

These power shortages are only expected to become worse in the coming summer months. This is because demand for electricity peaks in the sizzling heat, while hydroelectric generation decreases as the water flow in the rivers drops due to seasonal fluctuation. This article will focus on the causes of the country’s energy problems involving the electricity sector and explore possible directions Pakistan can take to improve its energy situation, building its economy in the process.

How Does Pakistan Generate its Electricity?

Figure 1: Pakistan’s Electricity Generation by Source

Figure 1 breaks down Pakistan’s electricity generation by source. Thermal power, which includes natural gas, oil, and coal generated electricity, accounts for 70 percent of Pakistan’s total electricity generation, while hydroelectric generation is roughly responsible for the remaining 30 percent.

Electricity generated from furnace oil accounts for slightly over a third of Pakistan electricity. In the early 1990s, the country faced a power shortage of about 2000 MW when there was a peak load on the electricity grid. To resolve the growing crisis, the Pakistani government implemented a new policy in 1994, which was designed to attract foreign investment in the power sector and as a result there was construction of oil based power plants. These power plants were cheaper and faster to construct compared to other electricity generation plants such as hydroelectric dams. At the same time, the relatively low prices (below $17 a barrel) of crude oil meant that these plants generated electricity fairly cheaply. Fast forward to present times, the price of crude oil has risen to hover roughly around $100 a barrel. Unlike nearby Saudi Arabia, Pakistan is naturally not well endowed in crude oil reserves. This means that Pakistan must ship increasing amount of valuable currency abroad to secure the oil it needs to keeps these power plants running.

Along with furnace oil power plants, natural gas is used to generate about another third of electricity; it is provided by domestic reserves, thereby helping Pakistan’s economy and energy security. According to the U.S. Energy Information Administration, Pakistan has proven natural gas reserves of 24 trillion cubic feet (Tcf) in 2012. These reserves will last Pakistan an estimated 17 years based on the country’s annual consumption rate of 1.382 Tcf in 2012. At the same time, consumption rates are estimated to increase four fold to nearly 8 Tcf per year by the year 2020, further reducing the size of the domestic reserves.

The Pakistani government in 2005 under President Pervez Musharraf promoted the conversion of cars to run on compressed natural gas (CNG) instead of gasoline. The rationale was that this conversion would reduce the amount of money spent on purchasing and importing oil abroad. At the same time, CNG is cleaner for the environment than burning gasoline. As a result of this policy, more than 80 percent of Pakistan’s cars today run on CNG.But because of this surging demand for its limited natural gas, there is a critical shortage of it which has adversely impacted the country’s ability to use this fuel source to generate electricity. Essentially Pakistanis are forced to decide whether to use natural gas to fuel their cars, cook their food, or generate electricity.

Power Theft and the Circular Debt Issue

The reliance on oil and natural gas to generate electricity is incredibly inefficient, but these inefficiencies alone are not responsible for the crippling power shortages. The other source of tension involves the accumulation of circular debt in the electricity sector over the past few years. Circular debt is a situation where consumers, electricity producers and the government all owe each other money and are unable to pay. By June 2013 when the new government led by Prime Minister Nawaz Sharif took control, this circular debt had ballooned to $5 billion.

There are several reasons for the accumulation of this debt; the largest problem stems from power theft. Many Pakistani elites and even parts of the government do not pay their electricity bills. The law and order situation also prevent power companies from collecting bills in certain parts of the country. As a result, Pakistani electricity companies currently recover only 76 percent of the money that electricity consumers owe them. In fact, the Pakistani Minister for Water and Power, Mr. Khwaja Muhammad Asif, has acknowledged that the Pakistani government is one of the country’s largest defaulters of electricity bills. As part of recent crackdown, the power ministry cut supplies to the Prime Minister’s home and the Parliament House (among many government offices) because they were delinquent on their electricity bills. While many Pakistanis don’t pay their electricity bills, others steal power by illegally hooking into the power grid. This theft coupled with an inefficient electricity grid and the associated transmission loss means that Pakistan’s electricity generators are left with huge financial losses.

All these losses accumulate to form the circular debt and it places power producers in a position where they are unable to purchase enough fuel from abroad to operate power plants at full capacity. With an installed generation capacity of 22500 MW, Pakistan currently has more than enough installed capacity to meet peak demand levels today. The power producers are in reality only able to generate between 12000MW and 15000MW because of both inefficient energy infrastructure and circular debt. This actual amount of electricity generated is far less than the 17000 MW of demand nationwide during peak hours of electricity usage.

The circular debt also makes it more difficult for power producers to invest in upgrading existing electricity infrastructure. If power producers don’t have the money to operate oil based power plants at full capacity, they certainly do not have enough capital to build newer, more efficient power plants. Even when the lights are on, the inefficient electricity system takes an additional toll on the country’s economy. Pakistanis today pay more than double their Indian neighbors for electricity (16.95 Pakistani Rupees vs. 7.36 Pakistani Rupees per KWh respectively), putting Pakistani firms at a further disadvantage compared to regional competitors.

Fixing Pakistan’s Electricity Problems

One of Prime Minister Nawaz Sharif’s first actions after taking office was to pay off the $5 billion in circular debt that had accumulated by July 2013. Unfortunately, this step alone will not solve the power woes as it does not fix the underlying causes of the country’s power crisis. In fact, the circular debt has accumulate again, and stood at $1.8 billion by January 2014.  To sustainably address the power crisis, Pakistanis need to change their attitude towards power theft by forcing the government and those delinquent to clear outstanding bills. At the same time, Pakistan must improve the efficiency of its electricity sector as well as expand and diversify its electricity generating capacity in order to ensure that the country can handle the expected growth in demand over the coming years.

Hydroelectric Generation

Pakistan has tremendous potential to expand its electricity generating capacity by developing its renewable energy resources. At nearly 30 percent, hydroelectricity is already a major source of electricity generation, but according to the Pakistani government, this reflects only 13 percent of the total hydroelectric potential of the country. There are several drawbacks of major hydroelectric projects including that they are capital intensive and require extensive time to build. Furthermore, hydroelectric dams are harmful to the local ecosystem and can displace large populations. The U.S. government is actively investing in helping Pakistan develop its hydroelectric resources; in 2011, USAID funded the renovation of the Tarbela Dam. In the process, this added generation capacity of 128 MW, which is enough electricity for 2 million Pakistanis.

Solar Energy

Figure 2: Pakistan’s Solar Generation Potential

According to the USAID map of solar potential in Pakistan, the country has tremendous potential in harnessing the sun to generate electricity.  Pakistan has an average daily insolation rate of 5.3 kWH/m², which is similar to the average daily insolation rate in Phoenix (5.38 kWH/m²) or Las Vegas (5.3 kWH/m²), which are some of the best locations in the United States for solar generated electricity. So far, Pakistan has begun construction on a photovoltaic power plant in Punjab that will begin to produce 100 MW by the end of 2014.According to the World Bank some 40,000 villages in Pakistan are not electrified. Tapping into these solar resources could easily electrify many of these off the grid villages, while avoiding an increase in demand on the national electricity grid.

Nuclear Energy

Pakistan has three currently active nuclear power plants: two located in Punjab and one in the southern port city of Karachi. The two Chinese built nuclear power plants in Punjab each have a net generation capacity of 300 MW. The Karachi power plant, which was built with a reactor supplied by Canada in 1972, has a net generation capacity of 125 MW, enough to provide power to 2 million Pakistanis. China has been a key supplier and investor in Pakistani nuclear energy, but there are some concerns regarding the transfer of nuclear technology to Pakistan, where A.Q. Khan’s nuclear network was headquartered. Specifically, China argues that its alliance with Pakistan predates its joining of the Nuclear Suppliers Group (NSG), which has restricted nuclear sales to Pakistan, so this justifies its desire to supply Pakistan with the technology. The Chinese are helping construct four more nuclear power plants, the first of which is expected to be online starting in 2019. While these plants will add 2,200 MW of generation capacity, these nuclear power projects are expensive; the current nuclear power plants under construction are said to cost about $5 billion per plant, an investment that China is helping finance.

Coal Power

There is a large amount of coal located in the Thar Desert in the southeastern part of the country. While the quality of the coal isn’t the best, Pakistan has a lot of it, nearly 175 billion tons, which is enough to meet current electricity demands for more than 300 years. However, Pakistan currently only has one operational coal power plant.

Pakistan is taking steps to develop this resource. In January 2014, Prime Minister Nawaz Sharif and former President Zardari broke ground on a $1.6 billion coal power project in the Thar Desert. This particular project is expected to be operational by 2017.

Pakistan has taken some clear steps such as developing its renewable resources and tapping its coal reserves, which can help expand and diversify where and how it generates its electricity. Further harnessing these resources will help alleviate the electricity shortfall. However, these steps alone will not solve the energy crisis. The more difficult solution involves changing the country’s attitude toward power theft, both by private citizens and the government. Convincing people to pay their electricity bills is difficult when even the government itself doesn’t pay its fair share. At the same time, there is less incentive to pay when citizens don’t even have access to a dependable source of electricity when they need it. As long as this attitude is prevalent among Pakistanis from all walks of life as well as the government, the country cannot sustainably solve its energy woes. Circular debt will continue to accumulate and large sections of the country will face hours of darkness each day.

Tackling the energy problem is the first step to strengthening the economy; over time, a growing economy will attract greater investment in the energy sector. Pakistan’s sensitive geographic location could become a strategic asset as it would serve as a bridge linking the economies of Afghanistan and Central Asia with the broader Indian subcontinent. Not only does the population provide Pakistan with a large domestic market, but it also empowers the country with a young, entrepreneurial workforce. This gives Pakistan tremendous potential, but can only be unleashed if the country figures out a way to keep the lights on and the factories humming.

Population Projection Tables by Country: Pakistan. The World Bank. 2014.

“Global Economic Prospects: Pakistan,” The World Bank, 2014. http://www.worldbank.org/en/publication/global-economic-prospects/regional-outlooks/sar

Ghumman, Khawar, “Increased loadshedding worries Prime Minister,” Dawn, April 24 2014. http://www.dawn.com/news/1102953

“Electricity shortfall reaches 2,500MW,” The Nation, Jan 2 2014. http://www.nation.com.pk/national/02-Jan-2014/electricity-shortfall-reaches-2-500mw

“Pakistan Energy Yearbook,” Hydrocarbon Development Institute of Pakistan, 2012. http://www.kpkep.com/documents/Pakistan%20Energy%20Yearbook%202012.pdf

“Policy Framework and Package of Incentives for Private Sector Power Generation Projects in Pakistan,” Government of Pakistan, 1994. http://www.ppib.gov.pk/Power%20Policy%201994.pdf

Beg, Fatima and Fahd Ali, “The History of Private Power in Pakistan,” Sustainable Development Policy Institute, 2007. http://www.sdpi.org/publications/files/A106-A.pdf

“Crude Oil Purchase Price.” U.S. Energy Information Administration, 2014. http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=F004056__3&f=M

Pakistan. U.S. Energy Information Administration. http://www.eia.gov/countries/country-data.cfm?fips=pk

Tirmizi, Farooq, “The Myth of Pakistan’s infinite gas reserves,” The Express Tribune, Mar 14 2011. http://tribune.com.pk/story/132244/the-myth-of-pakistans-infinite-gas-reserves/

“Natural Gas Allocation and Management Policy,” Government of Pakistan: Ministry of Petroleum & Natural Resources, Sept 2005. http://www.ogra.org.pk/images/data/downloads/1389160019.pdf

Boone, Jon, “Pakistan’s government deflates dream of gas-powered cars,” The Guardian, Dec 25 2013. http://www.theguardian.com/world/2013/dec/25/cars-pakistan-compressed-natural-gas-rationing

Bhutta, Zafar, “Circular debt: Power sector liabilities may cross Rs1 trillion by 2014,” The Express Tribune, May 26 2013. http://tribune.com.pk/story/554370/circular-debt-power-sector-liabilities-may-cross-rs1-trillion-by-2014/

Pakistan’s Energy Crisis: Power Politics. The Economist, May 21 2012.http://www.economist.com/blogs/banyan/2012/05/pakistan%E2%80%99s-energy-crisis

Jamal, Nasir. “Amount of unpaid power bills increases to Rs286bn.” Dawn. Apr 16 2014. http://www.dawn.com/news/1100237

“Govt one of the biggest electricity defaulters, says Khawaja Asif.” Dawn, May 2 2014. http://www.dawn.com/news/1103707

“Pakistan cuts prime minister’s electricity for not paying bills” Reuters. Apr 29 2014. http://in.reuters.com/article/2014/04/29/uk-pakistan-electricity-idINKBN0DF1DL20140429

Kazmi, Shabbir. “Pakistan’s Energy Crisis.” The Diplomat, Aug 31 2013. http://thediplomat.com/2013/08/pakistans-energy-crisis/

Abduhu, Salman. “Lack of funds real reason behind loadshedding.” The Nation, May 9 2014. http://www.nation.com.pk/lahore/09-May-2014/lack-of-funds-real-reason-behind-loadshedding

Electricity Shock: “Pakistanis Paying the Highest Tariffs in Region.” The Express Tribune, Jan 31 2014. http://tribune.com.pk/story/665548/electricity-shock-pakistanis-paying-highest-tariffs-in-region/

Chaudhry, Javed. “Circular Debt: ‘All dues will be cleared by July’.” The Express Tribune, June 14 2013. http://tribune.com.pk/story/563095/circular-debt-all-dues-will-be-cleared-by-july/

“Hydropower Resources of Pakistan.” Private Power and Infrastructure Board, Feb 2011.  http://www.ppib.gov.pk/HYDRO.pdf

USAID Issues $6.66 m for Tarbela Units. Dawn. Mar 9 2011. http://www.dawn.com/news/612058/usaid-issues-666m-for-tarbela-units

“Tarbela Dam Project.” USAID, Sept 26 2013. http://www.ppib.gov.pk/HYDRO.pdf

“Pakistan Resource Maps.” National Renewable Energy Laboratory, Aug 2006. http://www.nrel.gov/international/ra_pakistan.html

The Feasibility of Renewable Energy in Pakistan, Triple Bottom-Line, 2012. http://www.tbl.com.pk/the-feasibility-of-renewable-energy-in-pakistan/

“Surface Meteorology and Solar Energy,” NASA, 2013. https://eosweb.larc.nasa.gov/sse/RETScreen/

Quad-e-Azam Solar Power. http://www.qasolar.com/

Renewable Energy in Pakistan: Opportunities and Challenges, COMSATS-Science Vision, December 2011. http://www.sciencevision.org.pk/BackIssues/Vol16_Vol17/02_Vol16_and_17_Renewable%20Energy%20in%20Pakistan_IrfanAfzalMirza.pdf

CHASNUPP-1. Nuclear Threat Initiative, 2014. http://www.nti.org/facilities/112/

CHASNUPP-2. Nuclear Threat Initiative, 2014. http://www.nti.org/facilities/113/

KANUPP. Nuclear Threat Initiative, 2014. http://www.nti.org/facilities/111/

Shah, Saeed. “Pakistan in Talks to Acquire 3 Nuclear Plants From China.” The Wall Street Journal, Jan 20 2014. http://online.wsj.com/news/articles/SB10001424052702304757004579332460821261146

Mahr, Krista. “How Pakistan and China Are Strengthening Nuclear Ties.” Time, Dec 2 2013. http://world.time.com/2013/12/02/how-pakistan-and-china-are-strengthening-nuclear-ties/

“Pakistan’s Thar Coal Power Generation Potential.” Private Power and Infrastructure Board, July 2008.http://www.embassyofpakistanusa.org/forms/Thar%20Coal%20Power%20Generation.pdf

“Discovery Of Ignite Coal In Thar Desert.” Geological Survey of Pakistan, 2009. http://www.gsp.gov.pk/index.php?option=com_content&view=article&id=30:thar-coal&catid=1:data

“Nawaz, Zardari launch Thar coal power project.” Dawn, Jan 31 2014. http://www.dawn.com/news/1084003

Ravi Patel is a student at Stanford University where he recently completed a B.S. in Biology and is currently pursuing an M.S. in Biology. He completed an honors thesis on developing greater Indo-Pakistan trade under Sec. William Perry at the Center for International Security and Cooperation (CISAC). Patel is the president of the Stanford U.S.-Russia Forum. He also founded the U.S.-Pakistan Partnership, a collaborative research program linking American and Pakistani university students. In the summer of 2012, Patel was a security scholar at the Federation of American Scientists. He also has extensive biomedical research experience focused on growing bone using mesenchymal stem cells through previous work at UCSF’s surgical research laboratory and Lawrence Berkeley National Laboratory.

Nelson Zhao is a fourth year undergraduate at University of California, Davis pursuing degrees in economics and psychology. Nelson is the Vice-President at the Stanford U.S.-Russia Forum and the Program Director at the U.S.-Pakistan Partnership. At the U.S.-Pakistan Partnership, he aims to develop a platform to convene the brightest students in order to cultivate U.S.-Pakistan’s bilateral relations.

Whether an oil and gas company is working in the United States or is spread throughout the world, it will face geopolitical and cyber risks which could affect global energy security.

Geopolitical Risk

There are numerous geopolitical risks for any oil and gas company. Even if a company just works in the United States, it needs to know what is happening in countries all over the world, especially those countries that are large oil and gas producers. Because oil markets are so tightly connected globally, major political events in oil exporting states could seriously affect the price and even availability of oil. An attack on an oil platform in Nigeria, a terrorist event in Iraq, the closing down of port facilities in Libya and many other examples come to mind. Consider the potential effects of a major attack on the Ab Qaiq facility in Saudi Arabia. If this facility is damaged or destroyed on a large scale by rockets or bombs, the world oil market could be out 6-7 million barrels of oil a day- out of the 90-92 millions of barrels a day the world needs. World spare oil production capacity is about 2.3 million barrels a day. It could take some time to get this online. The spare production can be ramped up, but not immediately. Given that the grand majority of excess capacity in the world is located in Saudi Arabia and that this excess capacity could be significantly cut back with damage to Ab Qaiq, the situation is even riskier.

Another major risk nearby is transits through the Straits of Hormuz. About 16-17 million barrels a day goes out of the Straits. Any attempts to close the Straits (even unsuccessful ones) could have significant effects on the prices of various grades of oil. Even with the seemingly warming in relations between the U.S. and Iran, it is still possible that things could take a turn for the worse in the Gulf region. If the present negotiations with Iran break down, tensions could rise to even higher levels than before negotiations began. This could bring discussions of the military option more public. If there is a major conflict involving Gulf countries, the United States and its allies, then all bets are off on where oil prices may go. There could be many scenarios: from oil prices increasing $100 over the pre-conflict base price to well over $200 over the pre-conflict base price.

In many other parts of the world, geopolitical risks going “kinetic” can affect oil markets. Syria is a potential whirlpool of trouble for the entire Middle East. Egypt and Libya are far from stable. Algeria could be heading into some rough times. The Sudan’s will remain problematic and potentially quite violent for some time to come. The East China Sea and South China Sea disputes are not resolved. The Central Sahara could be a source and locale for troubles for some time to come.

Terrorist events can happen anywhere. Google Earth allows terrorists and others to get very close looks at major oil and gas facilities, transport choke points and more. Also, there are not that many tankers plying the vast seas and oceans of the world. Some of the most important routes are between the Gulf region and East Asia and Europe. Others travel from West Africa to Europe, and less so to the United States than before its shale oil revolution. The Mediterranean has many important tanker shipping routes. The Red Sea is a crucial route for both ships going north and south. Over 50 percent of oil trade happens on maritime routes. Many of these tankers cross through vital chokepoints like the Strait of Malacca, the Strait of Hormuz, The Bab al Mandab, The Suez Canal, The Turkish Straits, The Danish Straits, The Panama Canal, and various harbor and river routes where risks may be higher r at sea. Even whilst at sea, ships are at risk as shown by pirate attacks and hijackings off of East Africa, West Africa and previously off of Indonesia. There are about 1,996 crude oil tankers. However, only 623 of these are of the Ultra Large Crude Carrier (ULCC) or Very Large Crude Carrier (VLCC) variety that are the most important for transporting crude oil economically over long distances from the Gulf region to places like China (the biggest importer of oil), the United States, Japan, South Korea, and Europe. VLCCs can carry about 2 million barrels of oil while ULCCs can carry up to 2.3 or, rarely, 2.5 million barrels of oil. Normally these massive ships carry crude oil, but sometimes carry many different types of crude oil. Smaller petroleum tankers may carry both crude and refined products depending on their trade routes and the state of the markets at any times. There are about 493 Suez Max tankers, which can hold about 1 million barrels of oil and refined products and about 408 Afrimax vessels, which hold about 500,000 to 800,000 barrels of crude or refined products. Additionally, there are 417 Panamax vessels, which can carry 300,000 to 500,000 barrels of oil or refined products.

This may seem like a lot of ships to some. However, especially in tight markets, the pressure is immense to keep these ships at sea and to keep them on time. Moreover, there are lots of logistical complexities in trying to keep the crude moving at the right times and to the right places. If anything disturbs this complex economic and logistical ballet of behemoths, then the economic effects could be considerable. If the oil does not arrive on time then refinery production and deliveries of refined products to markets could be disturbed. Most countries have crude and product reserves to handle short term disruptions that may result from tanker losses. If the tanker losses are large or other disruptions occur in the supply chains of crude via ships, then those reserves could be worn down. It takes well over a year to build one of these tankers.

If the market for tankers is soft and some available tankers are moored in port, (such as when close to 500 hundred ships and dozens of tankers were moored off Singapore a few years ago), then the chances are better of getting the shipping logistics back to normal faster. However, problems could still arise in getting ships needed in Houston or Ras Tanura from Singapore. The travel times of these massive ships add considerable costs and disruptions.

When disruptions occur, some crude cargos can change direction and can be sold and resold, depending on the sorts of contracts that are in effect, along the way. Sometimes the disruptions are from political events, such as revolutions, insurrections, civil instability, and natural events like hurricanes and tsunamis. For example, when the tsunami hit Japan on March 11, 2011, many cargos were delayed or reconfigured. However, these sorts of events are different from terrorists blowing up a series of ships, as the psychology is different.

There is a certain amount of flexibility built into crude tanker transport markets, but a larger question is what would happen if many of them were taken out in various parts of the world. Would such a “black swan event” cause great disruptions? This is most likely. The follow on question would be how the tanker and other connected markets would react to this to help resolve the logistical attacks and how this might affect tanker insurance and lease rates.

Given that the crude and other products feed into other supply chains and markets, there could be cascades of disruptions in many parts of the world from a significant attack on even one large VLCC. Attacks on more ships would become increasingly more complex and costly in their effects.

If even one ship is sunk with a missile, the effects on oil markets and the world economy could far outweigh the mere few hundred millions of dollars in value the tanker and its cargo may represent. Ports, pipelines, refineries, tankers and other parts of the oil, transport and other infrastructures could be affected.

The destruction of an oil facility in a sensitive area that may be worth a few billion dollars could have a negative economic impact globally in the hundreds of billions, if not more. Attacks on the Houston Ship Channel, the Louisiana Offshore Oil Port, Ras Tanura in Saudi Arabia, the Jubail Complex in Saudi Arabia, Kharg or Lavan Island in Saudi Arabia could have considerable impacts economically and even militarily.

The impacts of attacks on these facilities would be stronger when oil and tanker markets are tight, and when the world or salient regional economies are growing quickly. An attack on a major tanker route out of Saudi Arabia heading to China or Japan will have a lot less effect on tanker and oil markets when there are excess tankers at anchor, and when there is excess capacity in oil production to make up in a relatively short time than when both tanker and oil markets are tight and there is little excess capacity. The less elastic the markets, the more effect any attacks will have. If a terrorist group wanted to have the most impact on the world economy it would likely attack in times of high growth in various important economies and when there is little excess oil capacity and no spare tankers. Often these three markets are tied together. When the global economy is growing quickly oil markets are under stress. When oil markets are under stress then tanker markets are stressed.

Looking to the future, some countries could be facing political turmoil such as Russia, Saudi Arabia, Iran, and Venezuela. This turmoil is not deterministic, but it is also not completely out of the bounds of probability. Depending on the type of turmoil, damage, and loss of production and export capacity, these events could have significant effects on world oil markets.

If such turmoil is going to happen, it is better for the world oil markets and the world economy that these happen during times of greater excess production and export capacity than the losses in oil production and export capacity from the turmoil. The worst of all possible combinations would be the loss of production and export capacity during very tight market times in a country where most of the excess capacity is found, which is in Saudi Arabia. If the world economy is growing quickly all around, then the effects of such turmoil will be far greater than if the world economy is in a slow growth period.

There are also regional aspects; during the 2011 Libyan Revolution, Europe’s economy was starting to dig itself out of a deep recession that had affected most European countries. Most of Libya’s oil that was cut off for a while was supposed to go to European countries, especially Italy, Spain, and France. Libyan oil production was about 1.7 million barrels a day until the civil war/ revolution began in February 2011. About 1.5 million barrels a day was exported. After the beginning of the conflict, production dropped to about 200,000 barrels a day, and did not recover until the post-civil war “recovery” that began about 8 months later. In the period between the start of the civil war/ revolution and the start of the ramp up, oil production dropped to 100,000 barrels a day and then on down to about zero barrels a day. Very little was exported during the times of the conflict. The fact that many European economies were growing slowly, or in some cases not growing at all, helped alleviate the potential effects of the cutting off of oil shipped from Libya. About 85 percent of Libya’s oil exports before the conflict went to Europe. The countries that relied considerably on Libyan were Italy, Austria, Ireland, Switzerland, Spain, Austria, and France. However, most of these were in slow-growth phases due to the ongoing recession and growing financial crises in their countries. The tanker markets were also soft and there was significant excess capacity of oil production in Saudi Arabia. The Saudis tried to backfill some orders for Libyan crude, but some of these did not work out well due to the heavier, sourer nature of the available Saudi crude compared to the usually light, sweet crude out of Libya. Switzerland is different from the other European countries as its “consumption” of Libyan oil was mostly for trading the oil in hedge funds and the big commodity firms in Geneva. The rest of these countries needed it for their overall economic needs.

Libyan crude production increased to about 1.4-1.5 million barrels a day until further problems occurred in mid-2013 with strikes at the ports and some energy facilities. Production is now down to 200,000 barrels per day. The effects on prices has been a lot less this time than during the civil war due to new, more flexible trading arrangements and better planning for such contingencies out of Libya, but also because the European economy and tanker markets remain weak.

Many Americans may think that they are relatively immune from geopolitical turmoil in oil disruptions because of the shale oil and gas revolution in the United States and Canada. However, there is potential for the increase in trade of oil with Canada which will result in greater access to oil and gas.  But, this will not buffer the United States from the vagaries of oil prices caused by geopolitical events. This is mainly due to oil being a globally traded commodity.

Unlike the oil industry, the natural gas industry is not fully globally integrated, but it looks to be heading that way. As more countries invest in both conventional and unconventional reserves production, the development of LNG (Liquefied Natural Gas) export and import facilities, and expansions of major international pipeline networks, the world natural gas market will have some great changes. Some of these may include the convergence of prices of natural gas globally. Recent prices of natural gas (FOB – Freight on Board, where the buyer pays for transport costs) in China were about $15 per MMBTU (Million British Thermal Units), a common measurement of natural gas amounts. In Japan they were in the $16-17 ranger per MMTBTU. In many parts of Western Europe LNG (FOB) prices were about $9-11 per MMBTU. Natural gas in the United States recently has sold for about $3 per MMBTU. Qatar could sell at cost for much lower, as it sells to the United States for about $3 MMBTU similar LNG that it sells to China and Japan for much higher prices. With the convergence of prices, the lower cost countries will likely be the survivors. Others may have to drop out if they have to export the LNG at a loss, unless the country subsidizes these exports, which would be problematic under the World Trade Organization (WTO) agreements.

Those countries that develop their LNG export facilities the fastest will capture more of the most important markets (such as Japan, South Korea, and especially the potentially gigantic market in China), than those countries that doddle along in their decisions to export or not. The future of global gas markets is more of a very competitive and very expensive 4D chess game played by very powerful people, rather than just some engineering or economics exercise as some look at it.

As the now regional and segmented natural gas markets develop into global integrated markets, they  will become more efficient and regional prices will start to converge toward a global price, much like oil. As the global natural gas markets develop, there will be more spot markets developed and less need for long term contracts in many instances. For decades, oil and gas prices were linked. As a global natural gas market develops, and especially with the further spread of the shale gas revolution, fewer and fewer natural gas contracts will be linked to oil prices. However, this integration of the natural gas industry globally also brings the risk of terrorist or political driven turmoil at or near LNG ports, LNG ships, and even in the market trading centers in places far removed from the United States. The more globally integrated the natural gas markets are, the more likely reverberations to prices will occur globally, rather than just locally. It is sort of like dropping a large rock in a pond with many barriers compared to dropping a large rock in a pond without many barriers in it. The waves will have more extensive effects without the barriers.

At the moment, the United States has a special domestic market that is fairly immune from outside events, as one would expect that they would happen in Canada, the United States’ major natural gas trading partner. This will change over time as U.S. natural gas markets get more connected with the world. The United States have some buffers during difficult gas shocks globally due to massive shale gas reserves. However, it could take a long time for these reserves to surge into the domestic markets to make up for the price increases.

Large profits can be made in exporting natural gas to places like China, Japan, South Korea, and Western Europe where gas prices are much higher. Over time those price differentials will decline because more LNG and piped gas will be flowing to the more profitable markets, hence putting pressure on prices.  Global gas prices will tend to converge, but not entirely given different extraction, production, liquefaction and gasification prices.

With greater integration there are also new risks to consider. Some of these include potential attacks on major LNG facilities as natural gas becomes a more vital part of the world economy and some countries. There are also increased risks that as the global markets get more integrated in natural gas, events distant from the United States could affect prices in the United States much like what happens now with oil markets.

There are great profits to be made from exporting the potentially massive amounts of natural gas (mostly shale gas), from the United States into these newly developing world markets. (The greatest profits can be made in the first years of the development of these markets prior to the lowering of prices in Asia, Europe and higher priced areas as the markets get integrated.)

However, nothing is ever certain and some planning and emergency regulations may be required to help potential shocks from entering U.S. markets. Complete immunity is not possible when a market is globalized, but with proper consideration risks might be mitigated. A very large natural gas strategic reserve system might be best built and filled when the natural gas is cheap for times when it may be less accessible (likely for the short run given how quickly shale gas pads and production can be set up).

Cyber Risks

According to Europol there have been many cyber-raids in 2012 on logistics and computer networks connected to container ships by criminal gangs to obtain the illegal drugs they had hidden in the holds of the ship. The gang truck drivers were able to find the containers, get the security codes, and were able to get the drugs off the ship without being caught. This could be the start of far more serious cyber-attacks on shipping and maritime logistical networks. The oil and gas industry is information intensive and it is hard to get around that. Computer systems, the internet, and other cyber-based devices and operations are key elements to the operations of the industry. For example, Saudi Aramco and many other oil companies in the Middle East region have been cyber-attacked in recent years.

In addition, cyber-attacks have both financial and real effects, including distortions in the prices of oil and gas. Hacking into the derivatives and futures markets could wreak serious havoc on the industry. Real effects could include attacks on SCADA (Supervisory Control and Data Acquisition) systems that control oil and gas pipelines. SCADA is also used in refinery operations.  If a container ship can be hacked, how far off is it when an LNG or oil tanker is taken over or hacked? Tanker traffic is often controlled and monitored via computer systems and the internet. Clever cyber warriors and others are likely trying to crack these systems (or potentially have even cracked them at times), but the industry would rather not discuss such events. It may be entirely possible to use something like STUXNET on affected SCADA systems to send the wrong signals to those trying to monitor the complex logistics of the shipping. A ship may be seen on the company’s monitor being one place, whereas it might be somewhere else. That is anyone’s guess, but I suggest that is not impossible. The new pirates attacking tankers may be cyber-pirates sending in malicious code, not just the barefoot Somalis and others tossing hook anchors on to the stern of the tanker and climbing up.

Cyber risk can also have considerable effects on the overall supply chains for the oil and gas industry. To get an oil rig, a refinery, a series of pipelines up and running takes a massive administrative supply chain effort that could involve sometimes hundreds if not thousands of subcontractors and suppliers that have to get things done in a specific order and on time. Anyone who has built a house or even had a kitchen remodeled knows how important it is to get the carpenters, electricians, masons, and roofers to be on schedule and in the right order. Now consider the complexity of getting all the right people, equipment and information on schedule and in the right order in the build out of a complex oil rig in 10,000 feet of water 150 miles at sea with millions of dollars (and maybe lives) at risk due to any scheduling mistakes.

A cyber-attack on major refineries and pipeline systems could bring costs that may seem unthinkable at the moment. However, this could just be a matter of time if the industry does not constantly update its protective systems and understanding of the risks. The industry remains constantly vigilant as hackers and cyber-warriors like the SEA (Syrian Electronic Army) are always looking for opportunities to attack. Constant vigilance will not be enough if one of these attackers gets “lucky” and gets through. The sophistication of cyber warriors and hackers is not static, nor should the sophistication of the oil and gas industry to counter these threats be static.

Note: All opinions expressed are those of the author alone. Sources supplied upon request.

Paul Sullivan is the Adjunct Senior Fellow for Future Global Resources Threats at the Federation of American Scientists and a Professor of Economics at the Eisenhower School at the National Defense University. He is also an Adjunct Professor of Security Studies at Georgetown University and a columnist for newspapers in Turkey and Mongolia.

Dr. Sullivan is an expert on resource security issues, with a special focus on the nexus of energy, water, food and land. He is also an expert on issues related to the economics, politics, and militaries in the Middle East and North Africa. 

Introduction

Rapid growth in the developing world has changed the economic center of gravity towards Asia, especially with regard to the world’s energy economy. World-wide demand for energy, especially energy that can propel automobiles, is increasing. High energy growth is producing two problems.  The first, widely recognized, is the increased greenhouse gas concentrations that result from burning fossil fuels. Barring a substantial reduction of fossil fuel use, world-wide temperatures could increase to dangerous levels. While the huge infrastructure of the energy economy rules out quick changes, if action is taken now, the necessary world-wide reduction of greenhouse gas emissions may still be possible. However, the required uptake of clean energy technologies will require strong government policies to offset initial investment costs.¹

The second problem is less widely recognized. The share of GDP that must be spent on oil supplies may also limit economic growth. At times, the price of oil is limited only by the strain it places on the world economy. We have seen episodes where high and rising oil prices precede an economic downturn. During the downturn, oil prices can drop to levels that, along with a weak economy, discourage investment in new oil production. When strong growth returns, we can see the cycle repeated.

These events are not surprising because oil has a very low elasticity of demand and supply with respect to price. That means very large price changes are required to increase supply or decrease demand. In addition, oil has a very high elasticity of demand with respect to income. That means economic growth strongly increases oil demand. Lastly, oil expenditures can be a large enough component of GDP to adversely affect economic growth if they grow too large. Added together, these interactions can produce the following cycle:

• High GDP growth drives oil prices to high levels since high income elasticity increases oil demand while low price elasticities require high oil prices to balance demand and supply²;
• The resulting high share of GDP spent on oil reverses GDP growth;
• With lower GDP growth, high income elasticity reduces oil demand;
• With lower oil demand, low oil price elasticities sharply lower oil prices; and
• Low oil prices reduce oil production investments but encourage high GDP growth.

Oil prices are only one factor affecting the world economy. Nonetheless, world GDP growth and oil prices are periodically engaged in the cycle described above. Oil prices can also stabilize at levels that are not high enough to cause a downturn in GDP growth, while GDP growth is not high enough to push oil prices past the level where the share of GDP spent on oil reverses GDP growth.³

The Clean Energy Challenge

High economic growth encourages more fossil fuel use and increased greenhouse gas concentrations.  High oil prices also provide an opportunity for clean alternatives to be more competitive. However, if high oil prices periodically blunt economic growth, it is more difficult to make clean-energy policies a government priority. Economies that are struggling with low growth and high unemployment are less likely to maintain strong clean-energy policies. Without these policies, we cannot hope to limit the increase of world-wide temperatures to 2^oC above pre-industrial levels, the level deemed likely to avoid the more serious consequences of climate change and accepted by the G8 countries as a target to be achieved by international climate policies.⁴

A recent IEA study⁵ estimated the increase in clean power-sector technologies that would be needed to prevent a world-wide temperature increase of over 2^oC (Figure 1). They estimate that the future annual growth of nuclear power must be between 23 and 31 gigawatts (GW). To put this into perspective, the historic high in building nuclear power plants was 27 gigawatts per year (GW/yr).  Photovoltaic power must, after 2020, reach 50 GW/yr and, after 2030, exceed 100 GW/yr. Onshore wind investments must exceed 60 GW/yr from now through 2050. Offshore wind must exceed 20 GW/yr after 2020. After 2020, coal with carbon capture and storage would need to grow by more than 20 GW/yr.

The challenges to achieving the 2^oC scenario in the transport sector are no less daunting, requiring that the world sales of electric vehicles double each year between 2012 and 2020. Advanced biofuel production must grow from ~ zero to 22 billion gallons by 2020. IEA estimates that the incremental energy-sector investment that would be needed to keep world-wide temperatures from increasing over 2^oC is $37 trillion (cumulative investment between now and 2050).⁶ The bulk of this investment would have to be made in the developing world.  It is not likely that these additional investments, over and above what is necessary to provide required energy supplies, will be made without strong government policies, even though they would produce offsetting savings in the long term. Without strong world-wide economic growth, it will be difficult, if not impossible, to implement the policies necessary to achieve the 2^oC scenario.

Figure 1

Average Annual Electricity Capacity Additions to 2050

2012 IEA Energy Technology Perspectives 2^oC Scenario

Source: IEA, Energy Technology Perspectives 2012

Oil and Economic Growth

World oil prices have, from time to time, reached levels that have impaired world economic growth such as the aftermath of the 1973 oil embargo. This first “energy crisis” accompanied a major change in the way petroleum was controlled and priced. Prior to 1970, world oil prices were managed by a relatively small number of large oil companies. These companies enjoyed liberal access to most countries’ oil resources. They could develop large oil fields in host countries with terms that allowed ample world supply at non-competitive but reasonable prices. These companies pursued a strategy to maintain affordable and stable oil prices that supported economic growth in the industrialized world and encouraged increased demand for oil. These arrangements were undone by reforms in the member-countries of the Organization of Petroleum Exporting Countries (OPEC). The reforms moved the control of the world’s largest oil resources from the international oil companies to OPEC and, given sufficient OPEC cohesion, the ability to control of world oil prices. OPEC’s control of oil prices was short-lived. The rapid price hikes associated with the 1973 embargo and the 1979 Iranian revolution stimulated new supplies, especially from the North Sea and Alaska. High oil prices also stymied demand as consumers turned to more efficient automobiles.

By 1981, oil prices began a steady decline. Saudi Arabia tried to maintain higher prices by cutting production until by 1985, its output had fallen to 3 million barrels per day (mmb/d), 70 percent lower than it had been in 1980.  In 1986, Saudi Arabia adopted netback pricing⁷ to regain market share. Oil prices collapsed to $10 per barrel (/b)⁸. By 1988, the OPEC pricing regime was replaced by commodity market pricing, a system that remains in place today and for the foreseeable future. The London InterContinental Exchange (ICE) established a contract for Brent, a mixture of high quality North Sea crudes[ref]The selection of Brent and WTI as marker crudes reflected several factors: 1) the desirability of Brent and WTI to most refiners; 2) the sources of Brent (UK and Norway) and WTI (United States) relative to the world’s financial capitals, London and New York; 3) the supply of Brent and WTI would not be controlled by national governments or OPEC; and 4) Brent and WTI were produced in sufficient volume to be an important component of world oil supply.[/ref].  Additionally, the New York Merchantville Exchange (NYMEX) established a contract for West Texas Intermediate (WTI), high-quality crude similar to Brent.

Only a small percentage of the world’s crude petroleum is WTI, Brent or other traded crudes.  Nonetheless, these marker crudes affect the contract price of other types of crude oil since most crude oil contracts are indexed to one or more marker crudes. Spot oil prices also respond to whether the oil commodity markets are in backwardation or contango⁹

This new pricing regime did not entirely eliminate OPEC’s price setting role. A few OPEC countries maintain spare production capacity. Saudi Arabia, by far, keeps the largest production capacity in reserve. Saudi Arabia can increase or decrease its oil production in response to world market conditions. If Saudi Arabia believes that prices are too high, they can put spare capacity into production, putting downward pressure on market prices. Likewise, if Saudi Arabia believes that prices are too low, they can reduce production (increasing spare capacity) putting upward pressure on market prices.  Most other oil producing countries and all private oil companies are price takers. They only respond to higher or lower oil prices by increasing or decreasing planned investments in new production capacity. Whether or not these investments are made has little impact on current oil supplies or prices, but has a large impact on future oil supplies and prices.

Figure 2

The new pricing regime produced relatively stable oil prices until 1999 (except for a sharp increase in 1990 due to the Gulf War). In 1999, oil prices began a sharp upward trend culminating in an extremely sharp $40/b rise from January 2007 to June 2008. With record high oil prices, U.S. demand finally slackened and, soon after, failing financial institutions launched a world-wide banking crisis.  Oil prices plummeted reversing in one year the gains made since 2005.

Since 2008 there have been two rapid increases in oil prices. In early 2011, the Libyan civil war removed 1.5 mmb/d of light-sweet crude from the market. Oil prices spiked again in 2012 due to increased supply outages from Iran, Nigeria, Sudan and Yemen. The 2012 run-up was followed by a significant price slide due to a deteriorating economic outlook in the Eurozone and uncertainty whether the EU and the European Central Bank would take the necessary actions to prevent an unraveling of the euro.

Figure 3

Source: IEA, World Energy Outlook 2011

Figure 3 shows oil prices and annual changes in world-GDP. Each spike in oil prices was followed by a sharp drop in world GDP growth. The price rise from the 1973 oil embargo preceded a 4% drop in world GPD growth. Within two years, world growth slid from over 6% to 1%. The oil-supply outage resulting from the 1979 Iranian revolution doubled oil prices. Growth slid from 4% to 2% and, later, to below 1%.

The spike in oil prices resulting from the 1990 Gulf War led to a drop in world GDP growth from over 3% in 1990 to 1% in 1991. GDP growth did not reach 3% until 1994. The price spike from 1999-2000 was followed by a drop in world GDP growth from over 4% in 2000 to 2% in 2001. The world economy appeared to survive the long price rise from 2002 to 2007 until 2008, when the world suffered the worst financial crisis since the 1930s. World GDP growth dropped from over 4% in 2007, declined to less than 2% in 2008 and plummeted to -2% in 2009. While these high oil prices did not cause the world-wide recession, they were a contributing factor. High oil prices directly affected automobile sales and travel-related industries. High oil prices also reduced a household’s disposable income for other goods and services that remained after paying unavoidable fuel expenses.¹⁰

While each oil spike has been followed by a sharp drop in world economic growth, since 1987¹¹, there has been only one sharp reduction in world economic growth that was not preceded by an oil price spike.¹² GDP growth has remained above 3%, apart from the 2^nd or 3^rd years following an oil price spike.

The world oil market has been subject to unplanned supply outages for quite some time. However, since 2011, supply outages have increased considerably from most prior years. They also reflect causes are likely to be chronic conditions as opposed to one-off events. During 2010, oil supply outages averaged less than 1 mmb/d; since 2011, they have averaged ~ 3 mmb/d and remain high today. Reports of insurgent attacks on oil-producing and distribution infrastructure, ethnic or sectarian conflict and civil war in the oil-producing states of the Middle East and North Africa (MENA) are too common to enumerate. The security situation has caused private industry to withdraw personnel from regions that are not deemed to be safe. In addition to loss of trained personnel, insurgent attacks on infrastructure, political disputes concerning sovereignty, disagreements about the validity of oil-related contracts and other problems are not likely to be passing problems that we can assume will be resolved. While these may be necessary side effects as countries replace autocratic rule with democratic governments, they nonetheless pose a great risk for future oil supplies. The International Energy Agency recently warned that relatively stable oil prices should not conceal “an abundance of risk” as “much of the Middle East and North Africa remains in turmoil.” “The current stalemate between the West and Iran” is “unsustainable” and “sooner or later, something has to give.”  The political situation in the MENA region reflects a “precarious balance” that does not bode well for “clear, stable and predictable oil policies, let alone supplies.”¹³

OPEC production capacity has been essentially flat for the last 30 years. Over that time, growing oil demand has been met by additions to non-OPEC capacity. A number of disappointing non-OPEC supply developments helped drive the sharp rise in oil prices from 2002 and 2008. During that period, the cost of oil and gas drilling equipment and support activities increased by 260%.¹⁴ More recently, the growth of Canadian oil sands and U.S. tight oil production has kept the world oil market in balance. Without increased oil production in the United States and Canada, non-OPEC production would have been in decline in recent years.

Sufficiently high oil prices are needed to sustain the growth on non-OPEC oil. The IEA estimates that the cost of oil sands and tight oil production ranges from $45/b to over $100/b. ¹⁵ As production moves from the most productive plays to less promising plays, costs will tend to move to the upper end of the IEA range. For example, Global Energy Securities estimates that the price of oil needed to generate an attractive internal rate of return increases from $67/b in Eagle Ford (Texas) to $84/b in Monterey/Santos (California).¹⁶ While current oil prices are higher than they need to be to justify increased investment, they are not that much higher than what’s needed to motivate the large investments needed to grow non-OPEC oil production.¹⁷

As long as world oil demand grows, so will the cost of oil. The only long-term pathway to lower oil prices is to reduce and reverse the growth of world oil demand.

World Economic Growth, Unemployment and Poverty

In OECD ¹⁸ economies, unemployment is the most serious consequence of limited GDP growth. Okun’s law describes a statistical relationship between an economy’s potential rate of growth, its actual rate of growth and changes in unemployment. According to this rough relationship, a 2% difference between a country’s actual GDP and its potential is associated with 1% more unemployment. Applied over time, unemployment will grow by 1% if economic growth is 2% below an economy’s potential.¹⁹ The picture in developing countries is more complicated because of movements of labor between the agricultural and industrialized economies. Growth below a developing country’s economic potential limits or reverses the movement from the agricultural sector to the industrial sector causing underemployment.²⁰

While increasing productivity within the agricultural sector is a development priority, it also leads to underemployment in the agricultural sector.

The relationship between economic growth and the movement of the population out of the agricultural sector is vividly illustrated in the recent history of China. By the late 1970s China possessed an inefficient agricultural economy with a rudimentary industrial sector. China possessed a population exceeding 1 billion people, of which the vast majority lived in poverty. Economic reforms produced a sustained GDP growth that has averaged 10.2 percent per year.²¹As a result, China has moved 400 million people out of poverty into the modern economy. Currently, ~ 650 million people still live in the agricultural sector, 450 million more people than are needed.

High Chinese economic growth would permit more people to move out of the underemployed agricultural economy to productive labor in the modern economy, as there are 450 million people living in poverty.²² Within one generation, emigration out of the agricultural sector can be the first step to careers in commerce, business, education, medicine, engineering, science and management.

Reducing Petroleum Demand

By 2014, more oil will be consumed outside the OECD than within.²³ Increased personal income and increased auto ownership appear to be as inextricably linked in rapidly developing economies as it had been in the OECD after the Second World War. With economic growth, automobiles (especially luxurious automobiles), are likely to be purchased in increasing numbers. Domestic automobile consumption will also help developing economies move from export reliance to supplying domestic markets.

With a rapidly increasing consumption of energy for personal mobility, it is imperative to satisfy this growth with non-petroleum energy. If the world continues to rely on petroleum fuels for personal mobility, high oil prices are likely to cause periodic episodes of low growth causing significant hardships for hundreds of millions of people.

Energy Security Trust

The Energy Security Trust, proposed by President Obama,²⁴ aims to make current electric vehicle technologies cheaper and better with $2 billion for research. In addition to advances in batteries, electric vehicles and ubiquitous electric refueling, it will also fund sustainable biofuels.²⁵ As stated by the White House; “In each of the last four years, domestic production of oil and gas has gone up and our use of foreign oil has gone down. And while America uses less foreign oil now than we’ve used in almost two decades, there’s more work to do. That’s why we need to keep reaching for greater energy security. And that’s why we must keep developing new energy supplies and new technologies that use less oil. The Secure Energy Trust will ensure American scientists and research labs have the support they need to keep our country competitive and create the jobs of the future.” The success of initiatives like the Energy Trust Fund would produce world-wide benefits as the uptake of competitive advanced clean energy technologies would be global. Competitive alternatives to petroleum-fueled personal transportation, combined with strong clean-energy policies, would go a long way to achieving the G8’s 2^oC climate goal. They would also remedy an important impediment to world GDP growth.

Carmine Difiglio is the Deputy Assistant Secretary for Policy Analysis, U.S. Department of Energy and may be reached at carmine.difiglio@hq.doe.gov.  His work and publications include the first engineering-economic transportation-energy model, several other modeling projects including the International Energy Agency’s Energy Technology Perspectives project, studies of international oil and natural gas markets, and policies to promote energy security, energy efficiency, motor-vehicle efficiency and alternative transportation fuels.  Difiglio also serves as Co-Chair of the World Federation of Scientists’ Permanent Monitoring Panel on Energy and Vice-Chair of the IEA Standing Group on the Oil Market.  He was Vice-Chair of the IEA Committee on Energy Research and Technology, Chairman of the IEA Energy Efficiency Working Party and Chairman of the Transportation Research Board Committee on Energy and Transportation. Difiglio’s Ph.D. is from the University of Pennsylvania. The data and views expressed in this paper are those of the author and are not endorsed by the U.S. Department of Energy or the United States government.