_______________________________________
Power and Interest News Report (PINR)

https://www.pinr.com
[email protected]
+1 (312) 242-1874
------------------------------

29 October 2007

------------------------------

Record Oil Prices and Washington's Desire for Energy Independence
Drafted By: Michael Piskur
https://www.pinr.com

During the month of October, oil prices reached record highs, resulting from fears of a Turkish military intervention in northern Iraq, the weak U.S. dollar, and increased demand for energy before the coming winter. O.P.E.C. blames the spike on geopolitical developments and speculation, and maintains that there is no supply shortage and no reason to boost production. However, with a scheduled increase in output already set to take effect on November 1, O.P.E.C. may meet again next month to discuss an additional supply boost.

Although oil prices will likely stabilize, the current turbulence illustrates the growing volatility of energy markets. A supply shortage, whether as a result of geopolitical developments or increasing demand, will ultimately drive prices to even greater levels and, when factoring in the finite nature of oil supplies and the consequences of greenhouse gas emissions, lead states to expand their pursuit of alternative sources of energy.

The Prospect of U.S. "Energy Independence"

Unconventional fossil fuels and ethanol are touted as the future of U.S. energy. The United States is exploring their feasibility as a means to achieve independence from foreign oil. In February, President George W. Bush called for the production of 35 billion gallons of renewable fuels and a 20 percent decrease in gasoline consumption by 2017. The U.S. ethanol industry boomed in 2006, with a surge of investment in production and new plant construction, but with the increasing cost of corn and decreasing price of ethanol fuel the market began to slump in recent months.

U.S. corn futures have increased sharply from last year to nearly US$4 per bushel, and ethanol prices are down 35 percent from the yearly high. Several existing plants have suspended production and new construction has been halted as a consequence of this narrowing profit margin. The U.S. ethanol industry nonetheless continues to expand: it will produce approximately seven billion gallons of fuel this year, a 40 percent increase from a year ago, and is projected to reach eight billion gallons in 2008.

Ethanol is the key to Washington's desired energy independence. A growable and renewable energy source is promoted as the remedy to energy geopolitics, or at the very least a key to restructuring the existing geopolitical order. Washington is keenly interested in Brazil's ethanol production, where an abundance of sugar cane sustains a booming industry that promises to transform the South American country into a major energy producer in the 21st century.

In March 2007, the United States and Brazil agreed to collaborate on ethanol research and development, and in establishing codes and standards that will shape the future of the industry. Brazil hopes to increase output by ten percent annually and produce three-quarters of the world's ethanol within five years.

While at present ethanol output in the United States and Brazil are comparable, the maturity of the latter's industry and the comparative ease of producing fuel from sugar cane as opposed to corn will allow Brazilian output to greatly outpace U.S. production in the coming years. As U.S. lawmakers push for higher fuel efficiency standards and increased reliance on flex fuels, it appears likely that, in the short term, U.S. demand will outstrip supply and result in the United States having to import ethanol from Brazil.

Unconventional Fossil Fuels

A recent report by the Task Force on Strategic Unconventional Fuels examines the feasibility of Washington's aspirations for energy independence. The U.S. Congress established the panel in 2005 to "develop a program to coordinate and accelerate the commercial development of strategic unconventional fuels, including, but not limited to, oil shale and tar sands resources within the United States."

The Task Force survey determined that unconventional fossil fuels would produce, at optimum output, fewer than three billion barrels per year by 2035, and fewer than one billion barrels per year in the same timeframe at the current rate of development. Considering that current U.S. consumption is approximately eight billion barrels per year, the report concludes that "unconventional fuels development would only slightly reduce the volume of net imports, after offsetting expected demand growth. As such, reducing demand must also be part of the nation's overall strategy for lowering imports and achieving greater self sufficiency."

While research of tar sands and heavy crude has increased with the rising cost of oil, the feasibility of unconventional fuels and biomass fuels hinges on Energy Return on Investment (E.R.O.I.), or the energy cost to recover and produce a given energy source. Sweet and light crude oil became the world's primary energy source precisely because of its high E.R.O.I.; the extremely high net energy gain of the oil used to date equates to the low cost to recover and refine it.

Unconventional fuels have a far lower E.R.O.I. simply because they exist as solids, and the resultant production costs are higher by magnitudes. The Task Force states, "For unconventional resources we can anticipate that there will be some cutoff grade below which recovery is not economically possible." Although a scientific consensus has not yet been reached, the E.R.O.I. for corn ethanol is believed to be even lower than that of unconventional fossil fuels, with some studies predicting it will in fact result in a net energy loss.

Washington points to its massive coal reserves, the world's largest, as a potential source of oil. Proponents of Coal-to-Liquid fuel (C.T.L.) claim that the United States possesses oil reserves that are, in theory, greater than Saudi Arabia's; however, many obstacles impede C.T.L. production. Just one million barrels of oil produced through C.T.L. would require approximately 120 million tons of coal and tremendous amounts of water, and the resulting carbon emissions are roughly twice that of oil production.

Moreover, the financial costs are so prohibitive that Washington would simply turn to Canadian tar sands before exploring C.T.L. on an extensive basis. As explained by a U.S. Energy Department spokesperson, "Globally, oil prices are not the thing that is going to cause us problems. The key thing is that hydrocarbons are becoming more difficult to develop, taking more time, and the cumulative effect of this is a more challenging supply situation."

Conclusion

Steadily increasing U.S. oil consumption is coinciding with declining domestic production to create an ever greater dependence on imported energy. It is not likely that the U.S. ethanol industry will be capable of countering demand of oil for decades, particularly with the modest increase in renewable fuel production recommended by the Bush administration. Similarly, unconventional fossil fuels will have little impact on the U.S. "addiction to oil." Barring a major technological breakthrough, talk of energy independence in Washington is merely rhetoric meant to attract votes and appeal to nationalist sentiments.

Future regulation of greenhouse gases will greatly impact the viability of unconventional fuels and biofuels. Whether Washington decides to impose mandatory caps on carbon emissions or seek a market-based approach, the shape of the global framework to succeed Kyoto will ultimately decide the fate of these nascent industries. In the short term, with U.S. energy independence an unrealistic goal, increased efficiency and an overall reduction of consumption are the most practical means for reducing dependence on foreign oil.

Report Drafted By:
Michael Piskur

------------------------------
The Power and Interest News Report (PINR) is an independent organization that utilizes open source intelligence to provide conflict analysis services in the context of international relations. PINR approaches a subject based upon the powers and interests involved, leaving the moral judgments to the reader. This report may not be reproduced, reprinted or broadcast without the written permission of [email protected]. PINR reprints do not qualify under Fair-Use Statute Section 107 of the Copyright Act. All comments should be directed to [email protected].