Oil Price Swings Should Not Delay U.S. Energy Strategy
By Lawrence P. Farrell Jr.
On Oct. 13, the former investment bank Goldman Sachs, now a bank holding company, slashed its year-end crude oil target to $70 a barrel, down from previous projections of $115 a barrel. Crude has plummeted 44 percent since it reached a peak of $147 in mid-July.
Goldman warned that oil might even fall to $50 per barrel by year’s end if the current economic slowdown takes a big bite out of demand. This abrupt switch from a bullish to a bearish outlook on oil and other commodities not only reflects the unstable and unpredictable market, but it underscores again the difficulty that such turmoil poses for alternative energy projects.
In an article in this month’s edition of National Defense, John M. Manoyan and Michael G. Frodl warn alternative energy efforts that ignore or work against energy market economics usually fail in the long run. In the past, energy reforms have not succeeded largely because the alternative energy sources have been unable to compete with fossil fuels without government funding or tax subsidies.
Alternative energy efforts, the authors caution, have ignored the resilience and robustness of traditional sources and have underestimated the ability of the oil industry to maintain its market share by aggressively competing on price and reliability.
This does not mean the nation can’t reduce its dependence on foreign oil, rather it needs to be done in a way that leverages the oil market, and does not take it head on, ignore it, attempt to will it away or prematurely announce its imminent demise.
Wide oil price swings almost always destroy the economic assumptions undergirding the rationale for alternative energy projects. If current projections for further drops in oil prices turn out to be accurate, only the economically strongest alternative energy projects will survive — and even they will need substantial government support for several years.
In an upcoming article, Manoyan and Frodl outline what they describe as a “defense energy strategy” that would help the nation move forward as it tries to become less dependent on oil. The idea is to diversify energy sources, including shifts in demand to alternative energies (solar, wind, nuclear and clean coal) and new energy technologies (hybrid vehicles).
The strategy also calls for the diversification of our sources of traditional energy (oil, natural gas and coal), while making sure that changes are achieved without an increase in environmental and climate costs when possible.
The authors make the point that a new energy program is not just a defense priority, it requires an integrated national effort. And we cannot do it without the active leadership and participation of the federal government.
How can government help?
First, government can help to stabilize and speed the development of alternative and renewable energy technologies by becoming a partner in these projects. This would provide steady capital regardless of oil price swings. Partnership and support at the federal level would attract and reassure private investment, which is a necessity for long-term success.
Government needs also to lead and push the development of a national electrical grid. This would be a requisite to the widespread adoption of new energy technologies.
The federal government is a huge buyer of vehicles. If it declared its intention to buy only alternative fuel or hybrid type vehicles with greatly increased efficiency, it would kick start the market production of such vehicles and lead to a larger commercial market. The government also has the power to change efficiency standards for mileage. More efficient use of energy in the transportation sector is probably the best and first thing we can do to lessen our dependence on imported petroleum. The government can make a huge difference here.
Another area where the government can help is in supporting energy-efficient buildings across the country. The potential for savings and the subsequent spread to the commercial economy would be rapid and substantial.
The benefit of these strategies is that the government can redirect existing spending rather that search for new monies. The government already buys large quantities of vehicles, facilities and equipment.
It would be foolish to allow the widely fluctuating price of petroleum to push us away from aggressive action. The next energy crisis will surely come — it may be in two, five or 10 years — and it will be worse than the last.
Critics will argue that the nation can’t afford this right now, given the worldwide credit crisis, economic slowdown, pressures on government budgets and large deficits. There are also those who say we can’t afford not to act.
In reality, there may not be a bigger long-term issue for this country than energy security. Now is the time for bold action. We need real leadership with a vision. It is an exciting and worthy cause for the new administration.