Why $5 Gas Is Good for America
The skyrocketing cost of oil is sending pump prices soaring. But it's also subsidizing research into new technologies that can change the energy game.
So rising oil prices are more than just an irritant or even an ominous nick out of the GDP. They're an invitation to corn and coal and hydrogen. For anyone with a fresh idea, expensive oil is as good as a subsidy - with no political strings attached. Indeed, every extra penny you pay at the pump is an incentive for some aspiring energy mogul to find another fuel.
For the better part of a century, cheap oil has fatally undercut all comers, not to mention smothered high-minded campaigns for conservation, increased efficiency, and energy independence. But growing demand is outrunning the oil industry's carefully computed supply curves, bidding up long-term expectations for the price of energy. The long term may not mean a lot when you're standing at the pump, but the oil industry lives in a world where big projects take a decade to build and the checks that pay for them have eight or nine zeroes. Crude hit $70 a barrel last August, but oil companies have learned the hard way how quickly prices can crash. They adjust their expectations accordingly - downward.
For years, the industry's long-term benchmark was $20 a barrel in today's dollars; to get a green light, new investments needed to be profitable at that level. Now the industry is counting on prices to settle near $30. Some aggressive CEOs believe they'll stay as high as $40.
The changing outlook opens horizons - for conventional drilling, sure, but also for alternatives. Some new technologies merely produce more crude. But others tap energy supplies that have nothing to do with black pools under the Middle East.
Big Oil is already reaping the benefits of innovations developed in the 1990s, when long-term forecasts still pegged oil at $20 a barrel. Take digital oil fields - sensor-laden pumping operations under remote control - and ultradeep offshore platforms that drill beneath miles of water and rock to get at previously inaccessible deposits. But with the high end of long-term expectations hitting $40, novel energy sources are becoming attractive. Natural gas that used to be burned as an unwanted oil-field byproduct is being compressed into liquid fuel, and gooey tar sands are being shoveled out of the Canadian countryside to extract the embedded petroleum.
Push the long-term price forecast above $40, and more exotic possibilities come into play. Remember Jimmy Carter's synfuel program, which aimed to turn huge US coal reserves into gasoline? Three billion dollars in federal research money is now committed to making it happen. Corn, sugar, and soybean farmers hope rising prices can do what billions in subsidies and tax-funded research couldn't: make ethanol and biodiesel cost-effective. Smarter money is betting that using plant waste will prove more economical. These technologies join compressed natural gas, already widely used where it's worth spending extra money for cleaner exhaust.
Sustained crude prices above $60 would make feasible technologies that today seem too expensive or entirely speculative. It's hard to see demand for oil surviving long at such a cost. But given a push now, some nascent technologies - hydrogen, most obviously, but also hydrocarbons locked away in methane hydrates - could become viable at the end of a long road. Technology breakthroughs are the key here: For instance, Shell has found a better way to extract oil from shale, reviving a long-abandoned resource. And some seemingly distant options are right under our noses; consider the plug-in version of the hybrid car.
The cost of developing entirely new energy supplies is daunting, but the money is available - and we're not talking about the $14.5 billion porkfest served up by Washington's recent energy bill. The global oil industry will rake in three quarters of a trillion dollars this year. And when that kind of money is up for grabs, investors are never far away.
But it's not just energy producers and their shareholders who should be smiling about today's high prices. Conservation your thing? Savor the long faces worn these days by Hummer salespeople. Eager for energy independence? There won't be any wars for oil in Colorado shale country. Praying for reductions in atmospheric carbon? Synthetic diesel made from natural gas would be a step in the right direction.
True, fuzzy logic can't refill spent oil wells. But neither are digital oil fields and coal-to-liquid processing some last, forlorn rest stop on the highway back to the Stone Age. It was James Watt's steam engine that chained sailing ships to their berths - not lack of wind. Petroleum sent coal and horse power packing, even though mountains of coal waited to be mined and plenty of stallions remained in the barn. The oil shocks of the '70s gave a boost to funny little cars from Japan, and mid-20th-century American industrialism never recovered.
So what's a price-shocked, carbon-afflicted highway jockey to do? Keep driving. In fact, drive more. The longer gas stays expensive, the higher the chance we'll see alternatives. Put that pedal to the metal. And smile when you see a big black $3 or $4 out in front at the gas pump. Those innovators need all the encouragement they can get. Shale oil, uranium, sunlight - there's enough energy out there for a dozen planets. Where we'll all park is another matter.