John Kerry: Energy Independence Program
By Hisham Khatib
The following critique was written for MEES by Dr Khatib, Honorary Vice-Chairman, World Energy Council.
The article reflects the author’s personal views.
MEES recently published two statements by Senator John Kerry (the Democratic Party nominee for President in the November 2004 elections) – one on his energy strategy and the other on his policy towards Middle East oil. The two are complementary in terms of energy technology and strategy, but not so in terms of Mr Kerry’s Middle East orientation. So I am analyzing these two statements separately with a common conclusion.
In its 2 August issue, MEES published Mr Kerry’s Energy Independence Policy (EIP) – also available on-line at www.independentsforkerry.org. Probably it represents more the views of the Kerry lobby (Independents for Kerry) than his own commitments. Oil and US dependence on imports from the Middle East are central to this policy which contains strong political implications for the region’s oil exporting countries. But here we are more concerned with the viability of the energy strategies outlined in Mr Kerry’s EIP, the practicality of the ideas and the fairness of some of the statements.
The main theme is that “Americans spend more than $20bn each year on oil from the Persian Gulf, often from nations that are unstable and hostile to our interests and our values. Kerry believes that America must end this dangerous dependence because it leaves American security and the American economy vulnerable”.
To term countries of the Gulf as “hostile” to American interests is, to say the least, a distortion of the facts. The statement does not point out how much of the $20bn/year is recycled into the US economy in payment for weapons which are bought by Gulf states, willingly or unwillingly, as a result of marketing visits by a US secretary of defense and his staff. Arab Gulf counties spend an average of 8% of their GDP on defense. This will amount to over $30bn in 2004, most going to the US. The Kerry statement also ignores Gulf investment funds recycled into the US, profits of US oil firms and their activities and employees, and facilities provided by some Gulf countries to US troops. On balance, it would not be surprising if the US received from the Gulf States more than the $20bn it pays for oil.
Demand for oil, particularly from the US economy, is dictated by markets and economic growth. Governmental policies influence these factors to a limited extent. But extensive change needs unpopular polices and a long lead time. All independent studies, including that of the US Department of Energy (DOE), point to a gradual increase in US oil consumption of around 1.4-1.5% annually. The US DOE/EIA (Annual Energy Outlook 2004) expects US oil consumption to rise from the current level of slightly more than 20mn b/d to reach 28.3mn b/d in 2025 in the reference case (a slow US economic growth scenario can only bring this down to 1.2% annually). The IEA (WEO 2002) predicts a slightly lower growth of 1.0-1.1% average annually for US oil demand growth to 2030. Mr Kerry’s EIP does not say when its aim is to be achieved. But any policy to reverse US oil consumption growth before 2025 is merely wishful thinking. The US, which today imports 2mn b/d plus from the Middle East, will be importing at least twice as much Gulf oil in 2020. Markets determine these figures, not Mr Kerry's EIP.
The EIP’s Targets
The technical priorities of the EIP and the viability of its prospects are evaluated below
• Energy Security and Conservation Trust. John Kerry will create an Energy Security and Conservation Trust Fund capitalized by existing oil and gas royalty revenues and dedicated to accelerating the commercialization of technologies such as the manufacture of more efficient cars and trucks, the development of biofuels, and the creation of a hydrogen based energy economy that will reduce America's dangerous dependence on oil.
No doubt the aim of developing more efficient cars is a viable one; but, with the US dream of large cars and SUVs, economy in oil use may not be a possible target. However, the development of biofuels and the creation of hydrogen-based energy economy are not viable objectives in the near future and their development will need more than the eight years that Mr Kerry could be in office.
One alternative fuel option is the production of ethanol from corn or other crops. Research by ExxonMobil (February 2004) showed that cultivation of crops for use as fuel requires substantial land that would otherwise be available for food, forests or other use. With current technology, ethanol also costs consumers more than gasoline does, unless it is subsidized, and it requires substantial inputs of fossil fuels for both the production of the crops and the conversion into fuel.
• Reducing oil dependence. Reducing oil dependence by 2mn b/d, as much as we currently import from the Middle East.
Once more is this viable or practical? While the efficiency of cars is slowly increasing, so is the Americans’ thirst for more and bigger cars. No dramatic change is expected in transport fuel economy in the US as long as transport fuel there is cheaper than in European and other OECD states. The price of transportation fuels in the US is one third of that of some European countries – which is no incentive for economy.
Fuel economy for the US light-duty vehicle stock is projected to improve by 6% over the next two decades but not as much as 36 miles/gallon by 2015. Projected low fuel prices and higher personal incomes are expected to increase the demand for larger, more powerful vehicles; however, advanced technologies and materials are expected to provide increased performance and size while improving new vehicle fuel economy.
Demand for energy in the US transportation sector is expected to grow rapidly as the result of a projected increase in per capita travel, along with a slower increase in fuel efficiency than was achieved over the past two decades due to projected stable fuel prices and the absence of new efficiency standards.
As important, air transport fuel consumption is growing at a higher rate (1.8% annually) than road fuel. Air transport in 2025 will account for more than 10% of total transport fuel consumption. By that time transportation energy demand in the US is expected to approach 1,000mn tons/year of oil equivalent, 55% higher than 2001 demand. Consecutive US administrations have been unwilling to undertake the only measure that would restrict that growth: the imposition of heavy taxation on transport fuels.
• Hydrogen. A plan to use hydrogen throughout the nation.
Mr Kerry believes that hydrogen is clean fuel that we can eventually get entirely from renewable sources: farms, wind, solar energy, hydropower and geothermal sources. But when? Definitely not in the foreseeable future (2025-30) – more likely by the middle of the century.
There has been much optimistic speculation about hydrogen as a source of energy in the future. President George W Bush pledged in his 2003 State of the Union address that “the first car driven by a child born today could be powered by hydrogen and pollution-free.” But is this realistic? The most ambitious use of hydrogen is in a car powered by a fuel cell, a battery-like device that turns hydrogen into electricity while emitting only heat and water vapor. Hydrogen can also be burned directly in engines much like those that run on gasoline; but the goal is fuel cells because they get twice as much work out of a pound of hydrogen. But where is this hydrogen coming from? The main source of hydrogen is natural gas, which is in short supply, cumbersome to convert and may have better uses.
• Energy efficiency. Making our homes, offices, schools and cities more energy efficient.
The viability of this will be greatly assisted by pricing (an issue that administrations have been avoiding) and legislation (which is delayed). The US economy is expected to grow 3% annually over the next two decades against a growth of only 1.4% annually in primary energy consumption. This signifies a 1.6% annual efficiency improvement which is very healthy. It matches what has been achieved in the last decade where the economy grew at 2.95% annually against a 1.25% increase in energy consumption, and other OECD figures. The only way to improve significantly on this is by imposing steep price increase and strict legislation.
• Renewable sources. Assuring that 20% of electricity comes from renewable sources by 2020.
How can this be achieved? It is much easier said than done, particularly in a market economy like that of the US.
The DOE/EIA Annual Energy Outlook 2004 reference scenario points out that despite improvements and incentives, grid-connected generators that use renewable fuels (including combined heat and power and other end-use generators) are projected to remain minor contributors to US electricity supply, increasing from 343bn kw-hours (kWh) of generation in 2002 (9.0% of total generation) to 525bn kWh in 2025 (9.1%of generation). It will take enormous effort and major investment to ensure that, by 2020, 10% of electricity comes form renewable sources. To go from 9% of total electricity generation into 20% (ie 1,000 TWh) by 2020 will mean almost 7% growth per annum in the renewable electricity contribution. This is impossible.
• Natural gas cooperation. A new North American partnership to expand the supply of natural gas.
This is an important and viable goal. Natural gas consumption will remain inferior to oil and no more than coal. However, shortages will cause high prices which will not only affect industry but also homes and the middle and low income bracket of the population. Mr Kerry has an ambitious, but achievable program through providing effective market monitoring and enforcement, developing long-term partnership with neighbors (Canada and Mexico), developing the Alaska natural gas pipeline, enhancing the gas infrastructure and improvement of the LNG transportation system, and achieving efficiency in energy use.
• Subsidies. Redirecting unwarranted subsidies to invest in energy technology.
Mr Kerry would like to invest in renewable energy that can reduce dependence on foreign oil. We have already explained the limitations of this goal.
• Coal. Making coal part of the 21st century solutions".
This is an important policy for the US, for coal accounts for more than 50% of electricity production. It is also relatively abundant and is a component in any national energy security program. Environmental issues are prominent in any coal development debate. Correspondingly, clean coal development, carbon sequestration and storage, and integrated gasification combined cycle (IGCC) development are areas of interest for the current administration and will continue to be for any future one. The results remain to be seen.
Kerry-Edwards Energy Plan
Speaking in Kansas on 6 August (MEES, 16 August), Senator Kerry unveiled the “Kerry – Edwards Energy Plan”, which is a mere repetition of his EIP with two notable additions. These are a claim that the Bush-Cheney administration has not only done nothing to alleviate high oil prices, but that their foreign policy has contributed to an additional $8-15/B premium on oil. Mr Kerry went on to say his plan would “rein in out-of-control” gasoline prices by: reestablishing American leadership abroad by engaging in an aggressive, effective diplomacy that will reduce tension in the Middle East and reduce the “risk premium” for oil.
Such view and policies are rational and promising. Without doubt, Mr Bush’s foreign policy is a major contributing factor in the present confusion in the oil markets. Prices are pushed up by speculation in the US market rather than by lack of resources or shortages in the Middle East. This speculation was brought about by the Bush administration’s foreign policy more than anything else. Practically everybody is looking for a US leadership that will engage in aggressive and effective diplomacy to reduce tension in the Middle East and bring down the “risk premium” for oil. Such a move would significantly improve US energy security.
The Kansas speech was more specific on investments, calling for $30bn to be invested over 10 years in an effort to change the US energy scene. But there will be no significant change in the US energy economy in the next 10 years. Energy needs a long lead time, and investments will need more than a decade to show significant results and probably two-to-three decades to mature. According to the IEA, the US and Canada are likely to invest $3,164bn in the energy sector over the period 2001-30. The $30bn promised by the Kerry plan is a welcome, but only marginal addition, intended for research.
Another significant addition in the 6 August speech was a commitment to make “the US electricity grid more reliable and safe through a number of measures.” This, although internal to the US, is important. The California problems a few years ago were accentuated by poor grid connections. Transmission is not a profit making business, so few private investors or utilities are willing to undertake it. Any future administration will need to enact mandatory, enforceable reliability standards, employing innovative technologies to develop a “Smart Grid”.
Otherwise, the US electricity system will suffer more California-style problems in the future.
The core of the Kerry-Edwards Energy Plan is to “make America independent of Middle East oil”. The Middle East supplies around 12% of US oil needs. The only sure thing is that this contribution, in quantity as well as in proportion, will increase under the next administration, whether Mr Kerry or Mr Bush is elected, and will continue like that for many years to come. The only viable energy security policy that the US administration can follow involves the US leadership engaging in an aggressive, effective diplomacy that will reduce tension in the Middle East and reduce the “risk premium” for oil.