The Current Fossil Fuels Revolution Is An Economic Blessing For America – Still, The US Should Pursue R&D In Renewable Energy

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By Paolo von Schirach

October 7, 2012

WASHINGTON – The year is 2050. Exxon is reporting its earnings from its main economic activity: commercial real estate. Indeed by 2040 Exxon had got out of the fossil fuels business entirely, after oil prices had collapsed following the large scale introduction of super cheap electricity from renewable sources that now fuel most of the world’s vehicles. A total fantasy? Not really. But getting there will take time, assuming intelligent policy makers.

The promises of green energy

Let’s take a step back. Green energy was supposed to provide a clean, efficient, low cost and above all virtuous way out of our sad dependence on dirty and expensive fossil fuels foisted on unaware societies by greedy coal, oil and gas interests. And so the battle for clean energy became a battle to clean not just the environment but our souls as well. We were promised an abundant and affordable stream of renewable energy that would have satisfied all our needs without any of the horrible consequences caused by the use and abuse of carbon.

Well, none of this happened, except for the significant waste of public resources due to the forced adoption of renewable energy mandated by ideological policy makers who really believed that this was the only way out of ecological disaster.

Renewables more cost effective, but not yet competitive

Sure enough, due in part to mandates and forced adoption of wind and solar power, renewable technologies have made significant progress. They are becoming more cost effective. Still, at present they are not yet fully competitive. Wind is doing much better than solar; but the economic (as opposed to moral) case for renewable energy has yet to be won.

This does not mean that viable, truly cost effective, renewable energy alternatives is out of the question and therefore should not be pursued. Of course they should be pursued. But one thing is to go spend money on research and development and quite another to force the adoption of still imperfect technologies today, on the assumption that emerging technologies need some extra help to get established in a highly regulated and thus non competitive energy sectors. While the general proposition regarding highly regulated sectors is true, it does not follow that it is smart policy to force the adoption of non yet fully viable alternatives that will require subsidies for an indefinite period of time.

Running out of oil and gas?

That said, until just a few years ago it was still possible to make a convincing case for the rapid adoption of renewable energy. Most forecasts indicated that we were running out of fossil fuels. It was assumed that the rapid modernization of Asia and then Africa would result in increased demand for existing fossil fuels that could not possibly be matched by existing supply.

Beyond environmental concerns, renewable energy therefore became also an urgent matter encompassing economic survival and national security, unless we wanted to contemplate a world in which energy hungry nations would go to war with one another to secure dwindling oil supplies for themselves.

But now all these dire predictions have vanished. And this is because, while global demand has increased and will continue to increase, so has global fossil fuels supply. There is a lot more oil than we thought. Production is up in the United States. Canada will flood world markets with oil extracted from its Alberta oil sands. More oil will come from Arctic regions previously inaccessible, along with more oil that will be extracted from off shore deposits in Brazil and elsewhere.

Enter shale gas

But the real game changer is shale gas, an abundant fossil fuel that could not be extracted in a cost effective manner until just a few years ago. Shale gas has transformed the entire American power generation industry. From being scarce and expensive, natural gas is now adundant and super cheap. And the good news is that, while America leads the world in shale gas extraction technologies, (hydraulic fracturing and horizontal drilling), there is plenty of shale gas around the world, from China to Poland and Argentina.

This means that the barrier to entry for renewable energy alternatives, including nuclear power, has just been raised. The US has enough natural gas for more than 100 of consumption. This is not an eternity; but it is a really long time. Hard to make the case to forgo the immediate, medium and long term economic benefits of this inexpensive fossil fuel because we really need to push the adoption of clean energy solutions.

Fossil fuels will be displaced by better alternatives

But this does not mean that innovation in energy and in all the critical energy related sectors has to stop. Indeed, Sheikh Ahmed Zaki Yamani, a former Saudi Oil Minister, famously said many years ago that “the stone age did not come to an end because we had a lack of stones, and the oil age will not come to an end because we have a lack of oil”. Take it from a pro: the real game changer will not be the depletion of oil supplies, but human ingenuity that will come up with something better than oil.

This being the case, policy makers will have to pursue at the same time parallel and seemingly contradictory policies. They will have to encourage the speedy utilization of new fossil fuel reserves, while fostering research and development of new technologies aimed at eventually displacing carbon based fuels.

Smart public policies?

This is inherently difficult because the established sectors do not like competition, while the innovators fear that without special treatment they will have no chance against the powerful fossil fuel lobbies that encompass large industrial sectors, ranging from utilities and oil services companies to gas stations owners. Given this complexity, an honest and not emotionally charged national energy debate would really help.

In the end, while we should look at the current fossil fuel bonanza as an economic blessing, we should also look forward to the day in which Exxon is no longer in the oil and gas business. A world with abundant, clean and inexpensive renewable energy will be a much better world.

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