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In the Bozeman Daily Chronicle, August 06, 2008
High Energy Prices
by Pete Geddes
With the price of oil flirting around $150 a barrel, Americans’ views on energy and the environment are changing. Polling by the Pew Research Center indicates that people across party lines believe that expanding oil drilling and building new power plants should take priority over energy conservation. Have Americans abandoned support for environmental protection?
The answer is absolutely not. The change in attitude reported by Pew simply reflects that downward-sloping demand curves apply even to environmental issues. Even in wealthy countries, environmental quality is only one of several competing values, along with, for example, a quality education, safe communities, and convenient transportation.
If politicians do not derail the trend in increased prosperity, over the long-term the demand for environmental quality is very likely to grow. As incomes rise, demand for environmental quality increases.
The Pew poll reminds us that environmental quality at an exorbitant price is not sustainable. This is why polices that threaten economic wellbeing, like the Kyoto Treaty, are destined to fail. Any successful policy to address climate change must simultaneously stabilize greenhouse gases and maintain economic progress.
Global demand has driven oil prices to record levels. Demand is exacerbated when governments (e.g., in China, Mexico, Venezuela, and Iran) distort the market process by subsidizing the price of gasoline. This censors signals to reduce consumption of a resource that has become increasingly dear. Politics encourages the premature depletion of this finite resource.
High prices are bringing greener alternatives online, e.g., wind and solar. But they are not yet cost competitive with conventional fossil fuels. This is largely due to intermittent supply, difficulties with energy storage, and integration into the grid. For alternatives to gain meaningful market share, the price of oil must stay high, naturally, through supply and demand, or artificially, by placing a price floor on gasoline.
But here’s the stubborn reality. The world’s economic and social infrastructure is geared to run on fossil fuel. The development of new technologies requires time, and is slowed by long rates of capital stock turnover. Low carbon emissions sources must be affordable. Prematurely scrapping existing energy capital is likely to have profoundly negative economic, and hence environmental, consequences.
That’s why it’s important to make investments in both basic energy research and alternative energy demonstration projects. Such investment may have little effect in their first years or even decades. But by beginning now, we get on the learning curve and can realize significant progress over the long-term. As cleaner and more efficient technologies improve, we’ll need to understand how to scale them up to meet ever-growing energy demands.
High oil prices are inducing the search for more oil. Despite concerns about “peak oil,” only a small portion of the earth has been thoroughly explored for oil and gas. As high prices spur exploration, there is reason to believe that many large deposits of oil and gas will emerge. Here are but two recent examples.
Brazil’s national oil company, Petrobras, recently announced that its Tupi deepwater field (7000 feet) holds perhaps five to eight billion barrels of oil. In comparison, when discovered in 1967, Alaska’s Prudhoe Bay oilfield was estimated to contain 9 billion barrels. Ten billion barrels of oil have already been produced and 13 billion barrels are classified as recoverable with current technology. (Like most oil fields, Prudhoe Bay’s reserves “grow” over time as technology improves.)
The Denver-based Falcon Oil & Gas is poised to begin exploration of oil and gas reserves in Hungary’s Mako Trough. This area has long been considered too tough of a drilling challenge. Again, thanks to technological improvements, notably advances in fracturing rock to move the gas, this might be the biggest gas find in Western Europe since 1959. Falcon estimates its lease area alone contains gas reserves three times the size of Britain’s.
What should we do about ecologically valuable areas that are also rich in energy resources? At current prices, these areas act like huge electromagnets, attracting evermore attention. Some are places that Montanan’s hold dear, for example the Rocky Mountain Front, where thousands of acres are potentially available for energy development. What to do? I have some suggestions to explore with you in my next column.
Pete Geddes is Executive Vice President of FREE.
