April 2000

PAIN at the pump

Energy Division’s David Greene has some views on the price of oil and what we ought to be doing about it.

Nearly everyone has noticed because nearly everyone drives: Since the beginning of the year prices at the gas pumps have bounded upward after a long period at near-depressed levels.

Corporate Fellow David Greene, a program manager in Energy Division’s Center for Transportation Analysis, is the Lab’s, and possibly DOE’s, foremost expert on fuel economy—a field that is experiencing renewed interest. He has some interesting views on why gas prices are up and what we ought to do about it.

The root of the problem, Greene says, is our still-growing dependence on foreign oil.

“We import half of the oil we use; those are record levels,” he says. “It is only partly our imports that give OPEC a large market share. It’s everyone else’s oil demands, as well, plus OPEC’s very large, 75 percent, share of the world’s proven oil reserves. OPEC has a large enough share of the oil market to manipulate prices, especially if they have cooperation from non-OPEC oil producers, as they have recently from Mexico and Norway. With Mexico and Norway, OPEC has a greater than 50 percent market share.

“Mexico and Norway usually produce more oil when prices are up, but this time they are not producing more, so there is definitely some collusion,” he says.

At the same time, gasoline stocks are at record, alarming lows. Greene says refiners overproduce gasoline in winter, building up stocks to meet higher demand in summer, which maximizes refinery productivity.

“But this year they haven’t made or stored as much gasoline,” he says. “It could be because they expected high crude prices to come down and were reluctant to buy more crude when prices were high.”

As a result, the Energy Information Agency, which tracks fuel supplies, is predicting that prices will go higher by about 25 cents per gallon, and may reach $2 per gallon in certain locations. Gasoline prices are highly sensitive to any occurrences in the market, a characteristic referred to as “inelasticity.” That’s why political turmoil, cartel shenanigans or virtually anything that affects the supply of oil shows up immediately on the service station signs. So why are the oil-producing nations behaving this way?

Greene was one of the few experts who stuck to his guns and warned that energy supply was still something to worry about.
“Money,” says Greene. “Why sell oil for $10 a barrel when you can get $20 and even $30? OPEC has reduced its output of 28 million barrels per day by only 1 million barrels, or about one and one-half percent of the overall world production of 66 million barrels, and we’ve seen the immediate result through the inelastic supply and demand.

“With the Asian economies coming back, which is increasing demand for oil, cutting back on oil production when demand is rising is a double whammy.”

That whammy may be blunted by OPEC’s recent decision, with considerable U.S encouragement, to increase production.

In a 1997 issue of Harvard International Review, Greene was one of the few experts who stuck to his guns and warned that energy supply was still something to worry about, even when the market was awash in cheap oil. He believes that the United States can best protect itself from the vagaries of the oil market, and avoid future energy crises, by investing in efficiency and renewable energy technologies. He gives four reasons why.

One, because of our growing dependence on oil, particularly foreign oil.

“We may decide we can afford to pay $100 to $200 billion a year more for oil. If we don’t mind paying more for oil, then dependence on foreign oil isn’t a problem. But every economic recession in recent times has been preceded by a major increase in oil prices. If a recession is a problem, then dependence on foreign oil is, too.”

Two, we should invest in new efficiency and renewable energy technologies because of the greenhouse gas emissions that arise from burning fossil fuels. More and more skeptics are becoming convinced that the Earth’s climate is changing largely as a result of the burning of fossil fuels like petroleum.

Third, because of other pollutants that come from burning fossil fuels.

Finally, because such new technologies offer sustainability to a world that is rapaciously consuming its supplies of petroleum.
Comeback for mpg: www.fueleconomy.gov/feg/
Car and truck buyers concerned about either the environment or the price at the pump can turn to the Fuel Economy Guide, an ORNL-maintained Web site with information about the environmental and energy consequences of vehicle choices. At www.fueleconomy.gov/feg/, shoppers can check out EPA gas mileage numbers, compare estimates of greenhouse gas emissions and follow links to other car buyer information sites.

DOE is distributing the EPA’s estimates of gas mileage for every 2000 model car and light truck, plus recently added data on used cars back to 1985. The site is maintained by Energy Division’s Center for Transportation Analysis, led by David Greene.

“We are not going to one day just run out of oil. That’s not how it is,” Greene says. “It is true that at current rates of consumption the world’s resources of conventional oil would be used up in 50 years. But much of the oil in wells is left in the ground, and technologies for retrieving more of that oil are improving.

“Natural gas is a promising transportation fuel. You can use shale oil and coal tar to make transportation fuel, but they come with their own environmental problems and are more expensive.

“Before we run out of oil, prices will rise and other energy sources will be substituted. The question is whether we want that transition to be disruptive to our economy and damaging to the environment or clean and economical. If we want the latter, we need to be developing the technology today.”

However, Greene, whose office décor includes leftover 50th birthday party favors, says talk of our having a “50-year supply of oil reserves” is pretty shortsighted.

“It took on the order of 200 million years to make the world’s fossil fuel resources, and in about 200 years we’ve used up half of the Earth’s conventional oil. Doing nothing and assuming a technology fix will come along seems imprudent. Something will happen. And that’s why DOE should be doing this research now.”

In the short term, what should be done? Greene thinks that selling off part of the Strategic Petroleum Reserve is a good idea. But isn’t that manipulating the market?

“The market is already being manipulated,” he replies. “It’s simply a case of buying low and selling high. Even though it’s not a big reserve, selling some of it could ease prices a bit, and might even help break down discipline in the cartel.”

In a competitive oil market, Greene believes the price of oil would be about $10 to $12 a barrel. High fuel prices in other countries and locales, he says, are mainly the result of taxes.

“We could take that route and discourage oil consumption through cost, but it’s probably not feasible politically,” says Greene.

“It’s much better to have better technologies—better, cleaner cars. Our supply of oil in the future is going to depend on our technology.”—B.C.


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