What's Wrong With the SAFE Report?

Securing America’s Energy Future (SAFE), a group of corporate CEOs and active and retired military officers with concerns about oil released a report entitled “The New American Oil Boom, Implications for Energy Security” via Its Energy Security Leadership Council.[i]  The report applauds increasing U.S. oil production (96% of which is occurring on non-federal lands) but concludes more supply will not sufficiently enhance energy security.  Instead, the report concludes that real security comes from reducing dependence on oil as a transportation fuel, regardless of its source. The study promotes energy security through the following:

• Reducing oil demand through Corporate Average Fuel Economy Standards for vehicles promoted by the Obama Administration.
• Reducing oil demand through electrification of light duty vehicles, and natural gas and alternate fuel vehicles since they argue fuel economy by itself is insufficient to break the “stronghold” that petroleum has on the transportation sector.
• Encouragement of more domestic oil production.

The report does not address the added costs of improved fuel efficiency on vehicle prices or safety or compare the costs and attributes of alternate fueled vehicles to those of the traditional petroleum-fueled vehicles.  Furthermore, it does not address the reality that if alternatively fueled vehicles were comparable, the market would have undertaken these changes on its own.  Moreover, the report does not acknowledge new information about the vast oil resources the United States has which would last 210 years at current consumption rates without any imports if American producers were allowed access to the oil resources on public lands and waters and federal policies were not inimical to more investment in oil production in the U.S.

Further energy security could be nearly achieved by using domestic, Canadian and Mexican resources if the government would allow more domestic production on federal lands, encourage rather than discourage the construction of pipelines like the Keystone XL pipeline bringing oil from Canada, and not propose policies which increase costs, taxes and regulatory burdens on the men and women who supply America’s oil resources for our use.

The SAFE Report

The panel noted that the current oil and gas boom is significant in reducing petroleum imports, spurring job creation and reducing the trade deficit. The report notes that forecasters see the trend of increased domestic production and decreased imports continuing. While the authors believe the federal government should make the most productive federal oil and gas holdings available for development, they note that environmental regulations should “hold the industry to the highest performance standards attainable.”  The authors did not stipulate what the standards should be, or whether they believe the Obama Administration’s policies of leasing fewer lands for energy exploration than any administration in history was consistent with their calls for making lands available for development for the nation’s security interests.

The report describes corporate average fuel economy standards as “the most important energy security accomplishment in decades.”  According to the panel, policymakers should focus on vehicle mileage improvements in the near term and alternate fueled vehicles (electric and natural gas-fueled) in the longer term, supporting research and development, infrastructure investments, and early adopters of the new technologies. The report calls for expanded use of electric vehicles, using electricity from the grid paired with batteries to replace gasoline fueled light duty vehicles and natural gas to replace diesel in heavy-duty tractor-trailers.  This appears to be consistent with the Obama Administration’s proposals.

The Cost and Timing of Implementation

While technologies exist to improve automobile fuel efficiency, automobile producers weigh a buyer’s interest in vehicle performance, utility, cost and safety against the cost of improved fuel efficiency when developing new model vehicles in the absence of a government-mandated standard. If there were no tradeoffs for improved efficiency and consumer preferences were solely focused on improved efficiency, automobile manufacturers would automatically make the changes without government intervention.

Further, if the costs and attributes of alternate fueled vehicles were the same as gasoline or diesel fueled vehicles, those vehicles would be flooding the market. But, alternate fueled vehicles cost more than traditional gasoline and diesel vehicles and their attributes are not the same. For example, an electric vehicle is much more expensive than a comparable gasoline vehicle, has a much shorter vehicle range, far less trunk space due to the battery storage, and infrastructure is not available for quick and easy refueling most Americans have come to expect for their transportation.[ii]

A gasoline vehicle has a range of 400 miles, while the range of an electric vehicle is about 100 miles with recharging taking 4 to 12 hours, depending on the vehicle and the charger. That compares to a 5-minute fill-up for an internal combustion engine at a gasoline station. Further, while there are 160,000 gasoline stations already constructed and paid for to obtain a fill-up[iii], the infrastructure for recharging stations does not exist and would need to be built to replace those developed for gasoline vehicles that have been amortized over a century. That means these electric vehicles will have limited use, restricting their purpose to running errands in the local area or for a short round-trip work commute.

Due to their cost, electric vehicles are likely to be purchased only by a very small niche market. GM President Dan Akerson has said the average Chevy Volt buyer has an income of $170,000 per annum.[iv] A report by the Center for Automotive Research estimates at best less than a half million electric vehicles would be on the road by 2015 based on deployment rates of hybrid vehicles. The cost of around $40,000 for an electric vehicle is double the cost of some internal combustion cars mainly due to the cost of batteries for electric vehicles, which are very expensive. According to the Department of Energy, battery costs need to come down to $350 per kilowatt-hour to make electric vehicles competitive in the market place. Such a battery breakthrough could take 10 years or more.

Vast Domestic Oil Resources

The report did not detail the extent of recoverable resources in North America.  The United States has 1,442 billion barrels of technically recoverable oil, of which about 400 billion barrels is from conventional and unconventional sources and almost 1,000 billion barrels is oil shale. [v] Unfortunately, much of our oil resources are on federal lands that are not being leased by the Obama Administration. The Administration’s draft 2012 to 2017 offshore leasing plan restricts oil and gas leasing areas to those areas open prior to 2008 when the executive ban on offshore oil exploration was removed by President Bush and prior to the expiration of the moratorium by Congress on October 1, 2008.[vi] While President Bush had taken steps to lease these areas before leaving office in January 2009, the Obama Administration put forth delay after delay, and then excluded the areas previously under moratorium from its most recent offshore leasing plan. And, oil shale, which is found mostly on federal lands in Colorado, Wyoming, and Utah, is prohibited from being leased for production by the Obama Administration.  China, Estonia and other countries are pursuing their oil shale resources, which are much smaller than the world-leading U.S. resource base.

Further limiting our future energy security is the Obama Administration’s delays in approving the permit for the Keystone XL pipeline. Canada has 175 billion barrels of proved oil reserves that can be produced now and moved to U.S. refineries via the pipeline. If the pipeline had been approved when submitted, more oil could be flowing into this country in the near future. While Canadian oil would be imported, it is a secure oil supply, as they are our friend and ally, and largest trading partner.

A recent study commissioned by the American Petroleum Institute found that the U.S. could come close to producing enough new oil and natural gas to displace all non-North American imports within 15 years. The study, by energy consultants Wood Mackenzie, assumed oil drilling would be allowed off the currently prohibited areas of the East and West Coasts, in waters off Florida’s Gulf Coast, in Alaska’s Arctic National Wildlife Refuge, and on most federal public land that is not set aside where oil and gas or any commercial activities are generally excluded, including national parks and wilderness areas. It also assumed that permits would be granted to build pipelines to accommodate a doubling of Canadian oil production and the continuation of current tax rates for U.S. industry.[vii]

The study found that if the oil industry was allowed access to the resources and the pipelines, domestic liquids production could reach 15.4 million barrels per day, close to the 19 million barrels a day that we currently consume, creating 1 million new jobs over the next seven years and 1.4 million by 2030.[viii] More than $800 billion in cumulative new government revenue could be generated by 2030 and $127 billion by 2020. Most importantly, no new taxes or increased government spending is needed to accomplish these results, just the opposite of the conditions necessary for possibly creating a breakthrough technology and infrastructure for electric vehicles.

Conclusion

The United States has a vast amount of oil resources—oil producers just need access to them and policies that are not hostile to investment in the United States.  However, the SAFE report downplays this aspect of energy security, instead focusing on new vehicle technologies to displace oil consumption, which will cost consumers and taxpayers more money.  Rather than allowing market forces and consumers to determine when technology breakthroughs make it economic to replace petroleum in the transportation sector, the report supports policies entailing the entire reworking of the transportation system of the United States, with all of its attendant costs and unforeseen consequences yet to be determined, in pursuit of a hypothetical replacement for a system that has made U.S. individual transportation and consumer transportation choice the envy of the world.

Recent studies have pointed to enormous increases in domestic and North American oil production if the proper policies are adopted, including continuation of hydraulic fracturing on shale oil formations, offshore development including in the Gulf of Mexico and the Arctic and the permitting of pipelines to rationalize energy markets and attract more capital to Canada and the Bakken formation in North Dakota.

Polling and focus groups show that most Americans believe prices for gasoline can be significantly lower through increased North American production.[ix] And when they are presented with facts regarding North America’s energy wealth, their overwhelming response is to ask why the United States is not allowing those resources to be developed as other countries throughout the world are doing.

In a representative democracy, government officials are expected to leave most important choices to their free citizens, rather than order activities to be undertaken, as is necessarily and understandably the  case in the corporate and military worlds.  Policy makers should be cognizant of the different roles of institutions within our nation, and remember that citizens of the republic are also voters for whom they work.