Can Bush's oil plan work?

A sweeping proposal by President Bush to dramatically cut US gasoline consumption over the next decade -- and perhaps change US car culture -- was greeted with widespread skepticism from automakers, environmentalists and political experts yesterday. Greenpeace called the plan, unveiled in Bush's State of the Union address to Congress on Tuesday evening, "delusional," while the automobile industry insisted it was already going down the environmental green road and did not need new legislation to reduce fuel consumption. Some long-time presidential watchers noted every president since Richard Nixon has pledged to cut US dependence on foreign oil, only to see the plans ultimately fail when subsequent Congresses fail to take up the cause. "When you see legislation full of wonderful promises, think of it like a New Year's Resolution," said Jerry Taylor, senior fellow at the Cato Institute, a Washington think-tank. "Easy to make but rarely kept."

The proposals outlined in Bush's second last State of the Union Address call for a 20% cut in gasoline use over 10 years. That could mean a radical change in how Americans use cars every day -- there are about 140 million cars in the US and 17 million new ones are sold every year --by forcing them to drive less or use public transport. Americans burn 385 million gallons of gasoline each day. David Sandalow, an energy expert at Washington's Brookings Institute, is skeptical there can be any quick fixes on that front since more than 97% of the fuel for American transportation fleets -- consumer and freight -- is based on oil. That is only barely different than a generation ago and not expected to change anytime soon. As well, Mr. Sandalow noted, it is unlikely US voters would tolerate a substantial change in their way of life, especially now that oil prices have sunk. Rather than try to wean Americans from their cars, Bush wants to cut US gasoline consumption through technological means, largely by increasing ethanol use and forcing automakers to make their cars more efficient. But this approach, too, has its skeptics. "Even if you take all of America's corn production and put it into ethanol, it would only reduce gasoline consumption by 12%," said Taylor. Charlie Territo, with the Washington-based Alliance of Automobile Manufacturers, said the auto industry has already put nine million alternative-fuel cars on US roads and is working hard to increase that. But he said that any move to increase fuel efficiencies should only be done after a careful review by the US National Highway Transportation Administration, which looks at other issues, including safety, costs and impact on jobs. "It should be done through regulations, not legislation," said Territo whose organization represents BMW, DaimlerChrysler, Ford and Toyota among others.

Bush is not alone in promising policies that would slash oil demand - the European Union and China have also set ambitious efficiency targets. And that concerted action by the world's three leading energy consumers could put a damper on demand for crude oil and downward pressure on prices over the long term. While Bush talks about ending dependency on imported oil from the Middle East, Canada is the largest single supplier to the US - exporting as much crude to the US as the Persian Gulf countries combined. And it is the high-cost producers, such as Alberta's oil sands companies, that would be hit hardest by weak demand and soft prices. “If I was a producer, I would be really, really concerned,” said Paul Ting, a long-time Wall Street energy analyst who now runs his own consultancy. “There's not going to be demand destruction, but there will be erosion, and that is going to be a big problem for them.”

Producers have been getting a clear-eyed view of what can happen to crude prices when demand softens, as it has since mid-2006, sending prices to a recent low of $50 per barrel. The International Energy Agency - the developed world's energy watchdog - reported last week that oil consumption among its members fell 0.6% in 2006, the first significant decline since the 1980s. Spurred by high pump prices and warm weather, US oil demand was 0.9% lower in December compared with the previous year. While high prices and weather take their toll, governments are entering the marketplace in a fashion not seen since the oil crisis of 1970s. Ting noted that China has set a target of improving the energy efficiency of its economy by 20% over five years, with further improvements after that. He said growth in Chinese oil demand slowed from double-digit rates at the beginning of last year to about 4% by the end of the year - and that's in an economy where product prices are controlled and did not experience the runups that North America did. The European Union is even more aggressive, pledging to reduce its energy consumption by 20% below 1990 levels by 2020. European governments are more committed to meeting greenhouse gas emissions under the Kyoto Protocol than are their North American counterparts. They are also increasingly uncomfortable about their reliance on Russia and the Middle East for their energy security. Energy economist Peter Tertzakian of Calgary-based ARC Financial said Bush's speech marked an important milepost in the long-term decline in the fossil fuel economy to a system that is both more efficient and more varied in supply sources. “This is more validation that we are in the early phase of energy transition,” Tertzakian said. “We're approaching the breaking point at which the way energy is supplied and the way energy is demanded is no longer sustainable.” He said crude markets will still experience short-term swings, and prices could spike sharply higher if there is further geopolitical instability in the Mideast. But over the longer term, he said, the world is going to wean itself off its oil addiction.
(Globe and Mail, Globe and Mail 070125)

This is all so freakin' complicated. Yeesh.