Winning the Oil Endgame-Implications and Conclusions

Implications and Conclusions

Endgames in chess have just two players. Their dance of their moves and countermoves shapes the outcome with an intricacy that only the world's finest grandmasters and fastest computers can hope to anticipate, and that only in broad strokes. The Oil Endgame has innumerable players, and its complexity is far too great to grasp or foresee. But its implications merit discussion relating to employment, allies and trading partners, developing countries, oil-exporting countries, oil companies, other energy industries, military affairs, the federal budget, and environment and public health. We then conclude with some broad lessons and next steps.

Implications

Employment

A welcome effect of displacing oil with cheaper alternatives is significant creation of good jobs, both to produce the biofuels and the oil-saving hardware, and through respending the saved oil expenditures, turning a cash outflow into a domestic multiplier of jobs and income. Such increased employment on a broad geographic and skill base is a vital sociopolitical need in most industrialized countries. Renewable energy is already making new jobs in Europe, which expects 0.9 million net by 2020 (over half from biofuels)⁹²⁴ and may get even more as the pace of switching to renewables accelerates (the current EU target for electricity is 20%-renewable by 2010). Denmark reportedly has about three times as many jobs from manufacturing wind turbines, in which it's the world market leader, as from its electric utility industry.

In the United States, our rough estimates suggest that by 2025, the higher-value vehicles being made by the revitalized automotive industry could generate ~240,000 new automaking and supplier jobs;⁹²⁵ making their lightweight materials could generate possibly some more, due to higher value-added (pp. 161–162); and producing biofuels, nearly 780,000 jobs just from 10% displacement of gasoline by ethanol by 2020, or nearly 1.5 million jobs at our projected 2025 ethanol volume (p. 165). Inevitably, some jobs will also be displaced. By 2020, ~86,000 jobs, mainly within the petroleum industry, will be lost, with some positions such as petroleum engineers, refinery technicians, and pump operators eliminated.⁹²⁶ However, many of those skilled and versatile people are likely to be rehired by successor industries, such as biorefineries, in the revitalized rural economy (pp. 162–165). Over all end-uses (those just counted explicitly plus a conservative estimate for trucks, airplanes, buildings, and industry), we estimate a net increase in U.S. jobs, due to efficiency improvements, of more than a million jobs by the year 2025 just from producing oil-saving hardware and biofuels. Respending the net saving in oil dollars—$133 billion a year by 2025, equivalent to a very large tax cut—should also stimulate employment considerably.

Allies and trading partners
"Under current circumstances," former CIA Director R. James Woolsey recently testified, "an oil crisis will affect all our economies, regardless of the source of our own imports. We must think in terms of the world's dependence, not only our own."⁹²⁷ Moral, cultural, and historical ties aside, there are compelling commercial reasons for encouraging allies and trading partners to engage in their own versions of the Mobilization strategy. The U.S. invests heavily in the military security of Western Europe, Japan, South Korea, Taiwan, and Israel, none of which has oil; indeed, they depend on oil and oil imports even more than we do. Those relationships are important for other reasons. Many countries are more worried about oil than the United States seems to be, and may well choose to embark on a new path of aggressive oil displacement once they realize it's possible. The more oil such friends join in saving, the more the common oil problem diminishes. America should therefore invest the persuasive power of its own example, the creativity of its scientists and technologists, the competitive skills of its businesspeople, and the energy of its citizens in making the transition beyond oil a compelling global trend. The alternative is spending blood and treasure to get and keep access to oil that others, for their own deeply held reasons, will increasingly seek to deny to developed countries in general and to the United States in particular.

In our professional careers, the coauthors of this report have worked on energy issues in the private and public sectors in more than fifty countries worldwide. Each society has a unique economic structure, culture, and climate, and they differ widely in styles of governance (e.g., laissez-faire vs. dirigiste). Yet so far we have not found one to which a variant of the technological and policy approach described here could not be effectively adapted if skillfully tailored to local conditions.

The main obstacle to hatching home-grown versions in some countries has been their erroneous conviction, born of their striking progress in saving energy two or three decades ago, that they are already as energy-efficient as they can be. Of no country on earth is that true. There are, of course, many differences; savings in places like Western Europe and Japan may be modestly smaller and costlier than in the U.S. But savings will still be large and lucrative, because the differences are less important than the similarities. A strong U.S. example, a helping hand, technical and policy collaboration free of "not-invented-here" constraints, a friendly rivalry in who can save oil fastest, and the spillover of U.S.-led technology acceleration into global markets would do wonders for rapidly reaching a "tipping point"⁹²⁸ that turns global oil consumption irrevocably downward.

Developing countries
The World Bank estimates that 2.3 billion people today have no access to electricity and 1.6 billion have no access to modern fuels. For many of those people, life is nearly as nasty, brutish, and short as it was a thousand years ago. Such deprivation, hunger, preventable disease, and illiteracy are blots on the world's conscience. Turning these conditions into opportunities for shared wealth creation is an unimaginably large opportunity for which the pioneers of "Bottom of the Pyramid" thinking and action make a powerful business case.⁹²⁹

Leapfrog development
Among the several billion people who are starting to get ahead, most notably in the burgeoning commercial centers of China and India, the oil-displacing potential for leapfrogging over obsolete development patterns is stupendous. Societies that are building housing, offices, factories, and infrastructure and are producing appliances, vehicles, and industrial equipment have the chance to do it right the first time and to adopt world-class resource efficiency. In fact, failure to do so is one of the heaviest drags on development, because inefficient resource use diverts most of the investment into costly supply-side projects, leaving too little to buy the things that were supposed to use the resources. For example, the financial capital needed to build a factory making quintupled-efficiency compact-fluorescent lamps or heat-blocking superwindows is about a thousandfold less, and pays back about ten times faster, than the capital otherwise needed to expand the supply of electricity to provide the same increase in light or comfort. The product of intensity times velocity of capital implies about a ten-thousandfold saving from buying "negawatts" wherever they're cheaper than megawatts. This strategy—based on rewarding electricity providers for reducing bills rather than selling energy—could turn the power sector, which now gobbles about one-fourth of the world's development capital, into a net exporter of capital for other development needs.⁹³⁰

What does this have to do with oil? A lot. Building an oil-frugal or even an oil-free economy from scratch is easier than converting an oil economy to kick the habit. Superefficient energy use, built in the first time, actually reduces the capital cost of many buildings and industrial processes; non-oil supplies suffer less hard-currency outflow and price volatility; and the high capital intensity of oil-related supply investments is avoided. It's gratifying that many developing countries are eager to progress past the oil trap without falling in, and disappointing that bilateral and multilateral aid and advice efforts are doing so little to help them execute this emerging strategy. The opportunity is unprecedented; the prize is vast; the time is short. China's mid-2004 energy strategy, making efficient use the top national priority (pp. 135–136, above) is an act of farsighted leadership that we hope others, in both the developing and developed worlds, will emulate.

Climate change and development
There's a striking convergence between the goals of accelerating equitable global development, averting oil dependence by those not already suffering from it, and helping developing countries avoid becoming as much of the climate problem as developed countries now are. As Lord Browne, Group Chief Executive of BP plc, recently wrote:⁹³¹

: It would be morally wrong and politically futile to expect countries struggling to achieve basic levels of development to abandon their aspirations to grow and to improve their people's living standards. But it would be equally wrong to ignore the fact that by 2025, energy-related carbon dioxide emissions from development countries are likely to exceed those from the member states of the Organization [for] Economic Cooperation and Development. Instead of being daunted by the scale of this challenge, policymakers must recognize the scale of the opportunity: developing countries have the potential to leapfrog the developed world's process of industrialization, thereby providing an enormous opportunity to improve energy efficiency and reduce emissions.

He elaborated this theme in the same spirit as our case for displacing oil:

: Seven years after the Kyoto meeting, it is becoming clear that the reduction of greenhouse gas emissions is a soluble problem, and that the mechanisms for delivering the solutions are within reach. In that spirit of cautious optimism, it is time to move beyond the current Kyoto debate....[T]he costs of deep-water oil and gas development have fallen by a factor of three over the last 15 years, dramatically extending the frontier of commercial activity. There is no reason to think that research and development in the area of benign energy systems would be less successful....Counterintuitively, BP found that it was able to reach its initial target of reducing emissions by 10 percent below its 1990 levels without cost. Indeed, the company added around $650 million of shareholder value, because the bulk of the reductions came from the elimination of leaks and waste. Other firms—such as electricity generator Entergy, car manufacturer Toyota, and mining giant Rio Tinto—are having similar experience. The overwhelming message from these experiments is that efficiency can both pay dividends and reduce emissions.⁹³²...Neither prescriptive regulations nor fiscal interventions designed to collect revenue rather than to alter behavior provide the answer. Rather, governments must identify meaningful objectives and encourage the business sector to attain them by using its knowledge of technology, markets, and consumer preferences.

The global economy, oil savings, and development
We've already noted the salutary effects of biosubstitution on rural economies and hence on the prospects for replacing agricultural subsidies, especially in the U.S. and EU, with real revenues for new rural outputs. This could be a big step toward letting developing-country farmers compete fairly to serve both home and export markets (p. 210). The future we envisage may or may not entail large-scale international trading of biofuels, such as Brazilian ethanol. It would certainly involve dwindling trade in oil—a roughly $400-billion business in 2002. But the decline of oil as an important trade commodity should be more than offset by the rise in trade for oil-displacing technologies and materials. Correcting highly suboptimal investments in using oil and spending its proceeds should also markedly improve global economic efficiency, vitality, and equity.

What would happen if not just other OECD nations but also the emerging economies of Brazil, Russia, India, and China (the BRIC nations) followed the U.S. lead and secured their own energy-efficient futures? According to Goldman Sachs,⁹³³ the BRICs' economies will be half the size of the G6 by 2025, and will overtake their GDP by 2045. Therefore, these countries' energy development path matters a great deal to the overall energy markets and the health of the global economy. Our initial view is if these nations achieved the levels of energy efficiency we've described for State of the Art technologies, then total global demand for oil in 2025 would stabilize at close to 2000 levels, while accommodating tremendous economic growth that doubles the BRIC nations' GDP.

This suggests that advanced technology, which all the BRIC nations and many more can perfectly well produce and improve further, can provide a vehicle for increased and broader prosperity without the associated problems of environmental degradation and climate change. Oil would have a decreasing impact on the global economy, further limiting OPEC's pricing power (as well as that of the LNG cartel), thereby reducing the risk of periodic global recessions triggered by oil-price volatility. Moreover, this implies that the global gap between the haves and the have-nots can be reduced, since, for example, consumer products would be increasingly affordable if they did not come with a big energy bill attached to operate them. Finally, for oil-producing nations, it means that the inevitable reforms in their economies and political systems must be accelerated.

924. ECOTEC 1999.

925. Estimated from EIA's 21.6-million-light vehicle sales projection for 2025, 77% new-sales share of SOA vehicles in 2025 (Fig. 36i), 75% domestic manufacturing share (as in 2003 per Automotive News 2003, pp. 16, 20, 25), additional manufacturing cost of $2,544 per unit (p. 70 above, note 345), the 1998 coefficient of 7.57 direct and supplier jobs (excluding respending multiplier) per million 2000 $ of automaking revenue (McAlinden, Hill, & Swiecki 2003, pp. 8, 16), and a ~0.5% sales loss from gross price elasticity. These inputs yield 239,000 marginal automaking and supplier jobs due to the higher value-added to make State of the Art vehicles. We didn't try to calculate potential shifts, in either direction, in job intensity; this is just a first-order approximation.

926. Bezdek & Wendling 2003.

927. Woolsey 2004.

928. This characteristic of nonlinear systems means that a process of change reaches the point where a small, seemingly unimportant, incremental change tips the system into a wholly different mode of behavior. Malcolm Gladwell (2000) illustrates with a rhyme: "Tomato ketchup / in a bottle, first none'll come, / and then the lot'll."

929. Prahalad 2004.

930. Lovins & Gadgil 1991

931. Browne 2004.

932. RMI estimates that operational energy and carbon savings are broadly similar among Shell, BP, and ExxonMobil, which modestly reports that over 25 years, its refineries and chemical plants "have improved their energy efficiency by more than 35 percent and opportunities have been identified to achieve an additional 15 percent improvement" (ExxonMobil 2004).

933. Wilson & Purushothaman 2003.

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