Fool's Gold in Alaska

Amory B. Lovins and L. Hunter Lovins

From Foreign Affairs, July/August 2001

Summary:  Alaskan politicians have used every oil-price rise since 1973 to push for drilling beneath the Arctic National Wildlife Refuge. But even putting environmental questions aside, refuge oil is unnecessary, insecure, economically risky, and a distraction from the real energy debate. Market solutions that enhance efficiency can provide secure, safe, and clean energy services at much lower cost.

Amory B. Lovins, a physicist, and L. Hunter Lovins, a lawyer and political scientist, founded and lead Rocky Mountain Institute, a market-oriented, nonpartisan, nonprofit applied-research center in Snowmass, Colorado. They are long-time consultants to major oil companies and have advised the Department of Defense on energy security.

Who, then, is pushing for drilling -- aside from the powerful Alaskan congressional delegation? Oil-service companies and Alaskan operations offices of major oil companies naturally want to extend and expand their activities and apply their special skills, but they would be risking others' money, not their own. Likewise, the taps consortium wants more revenue and a political commitment that might justify a later government bailout if the pipeline turned out to need costly repairs, but it too would not be the one making the huge investment. Conspicuously absent is a ringing endorsement from leaders of major oil firms. They understand the high risk and the prospect of poor rewards, and those that are more astute also fear global consumer boycotts. To the extent that any are interested, it is to seek a bargaining chip for other areas now off-limits or to avoid the social embarrassment of being left off the dance card if the government throws an oil party -- not because there is a sound business case.

Finally, the rationale that refuge drilling is urgently needed to relieve U.S. dependence on OPEC oil is full of holes. Net U.S. oil imports have indeed risen past their 1977 peak, but OPEC's share of those imports has fallen by one-third. Only a quarter of the oil consumed in the United States now comes from OPEC members. Imports are diversified and come mainly from western hemisphere countries that offer major opportunities for expanding both oil and gas supplies. The more that imports are a concern, however, the stronger the case for substituting not just any option but the cheapest one -- slashing America's energy bills by a further $300 billion a year by raising energy productivity.

IT'S EASY (AND LUCRATIVE) BEING GREEN

Oil is becoming more abundant but relatively less important. For each dollar of GDP, the United States used 49 percent less oil in 2000 than it did in 1975. Compared with 1975, the amount that energy efficiency now saves each year is more than five times the country's annual domestic oil production, twelve times its imports from the Persian Gulf, and twice its total oil imports. And the efficiency resource is far from tapped out; instead, it is constantly expanding. It is already far larger and cheaper than anyone had dared imagine.

Increased energy productivity now delivers two-fifths of all U.S. energy services and is also the fastest growing "source." (Abroad, renewable energy supply is growing even faster; it is expected to generate 22 percent of the European Union's electricity by 2010.) Efficient energy use often yields annual after-tax returns of 100 to 200 percent on investment. Its frequent fringe benefits are even more valuable: 6 to 16 percent higher labor productivity in energy-efficient buildings, 40 percent higher retail sales in stores with good natural lighting, and improved output and quality in efficient factories. Efficiency also has major policy advantages. It is here and now, not a decade away. It improves the environment and protects the earth's climate. It is fully secure, already delivered to customers, and immune to foreign potentates and volatile markets. It is rapidly and equitably deployable in the market. It supports jobs all across the United States rather than in a few firms in one state. Yet the energy options now winning in the marketplace seem oddly invisible, unimportant, and disfavored in current national strategy.

Those who have forgotten the power of energy efficiency should remember the painful business lessons learned from the energy policies of the early 1970s and the 1980s. Energy gluts rapidly recur whenever customers pay attention to efficiency -- because the nationwide reserve of cheap, qualitatively superior savings from efficient energy use is enormous and largely accessible. That overhang of untapped and unpredictably accessed efficiency presents an opportunity for entrepreneurs and policymakers, but it also poses a risk to costly supply investments. That risk is now swelling ominously.

In the early 1980s, vigorous efforts to boost both supply and efficiency succeeded. Supply rose modestly while efficiency soared. From 1979 to 1986, GDP grew 20 percent while total energy use fell by 5 percent. Improved efficiency provided more than five times as much new energy service as the vaunted expansion of the coal and nuclear industries; domestic oil output rose only 1.5 percent while domestic natural gas output fell 18 percent. When the resulting glut slashed energy prices in 1985-86, attention strayed and efficiency slowed. But just in the past five years, the United States has quietly entered a second golden age of rapidly improving energy efficiency. Now, with another efficiency boom underway, the whole cycle is poised to repeat itself -- threatening another energy-policy train wreck with serious economic consequences.

From 1996 to 2000, a complex mix of factors -- such as competitive pressures, valuable side benefits, climate concerns, and e-commerce's structural shifts -- unexpectedly pushed the pace of U.S. energy savings to nearly an all-time high, averaging 3.1 percent per year despite the record-low and falling energy prices of 1996-99. Meanwhile, investment in energy supply, which is slower to mature, lagged behind demand growth in some regions as the economy boomed. Then in 2000, Middle East political jitters, OPEC machinations, and other factors made world oil prices spike just as cold weather and turbulence in the utility industry coincidentally boosted natural gas prices. Gasoline prices are rising this year -- even though crude-oil prices are softening -- due to shortages not of crude oil but of refineries and additives. California's botched utility restructuring, meanwhile, sent West Coast electricity prices sky-high, although not for the oft-cited reasons. (Demand did not soar, and California did not stop building power plants in the 1990s, contrary to many observers' claims.)

The higher fuel and electricity prices and occasional local shortages that have vexed many Americans this past year have rekindled a broader national interest in efficient use. The current economic slowdown will further dampen demand but should also heighten business interest in cutting costs. Efficiency also lets numerous actors harness the energy market's dynamism and speed -- and it tends to bear results quickly. All these factors could set the stage for another price crash as burgeoning energy savings coincide, then collide, with the new administration's push to stimulate energy supplies. Producers who answer that call will risk shouldering the cost of added supply without the revenue to pay for it, for oil prices high enough to make refuge oil profitable would collapse before or as supply boomed.

Policymakers can avoid such overreaction and instability if they understand the full range of competing options, especially the ability of demand to react faster than supply and the need for balancing investment between them. As outlined above, in the first half of the 1980s, the U.S. economy grew while total energy use fell and oil imports from the Persian Gulf were nearly eliminated. This achievement showed the power of a demand-side national energy policy. Today, new factors -- even more powerful technologies and better designs, streamlined delivery methods, and better understanding of how public policy can correct dozens of market failures in buying efficiency -- can make the demand-side response even more effective. This can give the United States a more affordable and secure portfolio of diverse energy sources, not just a few centralized ones.