Monday, March 27, 2006

Opinion: Living with Oil for the rest of the Oil-age

A significant section of charity and philanthropy is directly related to environmental issues. As yet I have not dealt much with this but I don’t want to exclude it from my blog. I like to focus on things I can understand rather than those I can't.
I don't understand how the climate changes, I'm not sure that it can be easily understood. Economists have trouble understanding phenomena with many variables because they have very limited opportunities to observe and control, I think climatologists could be in an even more limited position in this respect. I do understand that burning oil is toxic for us and even more toxic for our environment and that the global economy is addicted to it.
This in itself makes it a problem that needs to be fixed urgently. It seems that there is an awful lot of oil left to burn and as the stone-age didn’t end because people ran out of stones, the oil-age won't end because we are going to run out of oil. That is the easy part, understanding more and figuring how best to fix the problem of oil addiction is something I am less sure of but I'll address developments as they arrive. I would like to stake out what I think is possible.

-Consumers
Lowly consumers have some power and if their preference is distinct enough they can, to some degree, shape how energy needs are met. This will probably only have a limited impact but it may hasten the end of the oil age. Much more powerful forces are governments, oil companies and oil and gas producing nations and it is has been the producers who have dictated to the industry for decades.

-Governments and Producers
A major source of waste and pollution is the process of oil refining and in the larger scheme of things it is relatively easy to improve. The oil price is currently high largely because demand has grown quicker recently than appropriate existing refining capacity has been able to meet with supply. There has been very little investment in refining capacity in the last decades because oil producers have been hurt before by over supply and subsequent low prices. The straining ancient infrastructure of oil refining is the single biggest source of oil inefficiency and therefore it may be the source of most of the unnecessary pollution. About 10% of potential end petro-products are lost in this highly-polluting process. Right now oil producers, that is companies and countries, are making enormous profits and are beginning to invest in new refining capacity - this is an excellent and possibly a once off opportunity to make sure that the next generation of oil refinery is much cleaner and more efficient than it is now or has been previously.

Governments and consumers must make sure that this opportunity is not missed. All things being equal with the new refining capacity that is beginning to be built (regardless of its environmental friendliness) the price of oil will go down due to increase supply capacity. As this happens governments should slow down the decline in the oil price by increasing taxes on oil. This would not unduly affect the economy as consumers have already shown that they can handle higher prices. All the revenue from this increase in taxes should be used to insure that innovation and research continues to make refining cleaner. Oil companies and producers profits will fall as the price falls but the investment in refining will still need to continue. If we reach a stage were marginal improvements in efficiency are no longer necessary then the fiscal revenue could be diverted to other related innovation.

In step with the above national regulation in consuming countries should keep raising the bar to what is acceptable in regards clean and efficient refining and cleaner burning petro-products. Such regulation and cooperation between major governments, companies and producing countries is a massive task. Finding the correct balance of regulation, tax and investment would probably be more a difficult and politically sensitive operation than the Central banker’s task of manipulating interest rates. Many countries, both consumers and producers, may be reluctant to cooperate. The oil companies much publicised commitment to innovation in this area may be shown up to be lacking. Regardless of these problems it must be understood that the usage of oil as the dominant oil source for next twenty years is probably unavoidable and if we want to make it cleaner the cooperation described above is essential. The story of the oil-age so far is that the defining decisions on investment levels have been made exclusively by OPEC and oil companies. If the situation is to be improved to any degree of satisfaction parties representing consuming countries must have a powerful voice and cooperation between consuming nations must be increased.

It is difficult to imagine the best structure for this. Ideally an independent Energy Commissioner would be appointed to represent each of major oil consuming blocks, the US, EU, Japan, China etc. They could be non-partisan like a central banker or a Supreme Court judge. The obvious problem would be the source of their leverage and influence on oil producing nations and oil companies. This would have to be developed but sources could be regulation on the emission levels of refining and end products. The EU and the US have different standards for level of cleanliness for oil, gasoline and diesel. Lead in petrol has already been eliminated as a problem by regulation. If consumer countries cooperated they could quickly phase out the purchase of oil from inefficient refineries provided that there is adequate investment in cleaner refineries. Cooperation between national Energy Commissioners would be essential and maybe to a greater degree than how cooperation between Central Bankers is beneficial. They would also have a domestic role in encouraging the use of the best alternative energy sources. Initially they could expand the use of gas as it is a much cleaner fuel. They could foster preferences for hybrid technology or even for nuclear energy if needed.

In the end the way our energy needs are being met is evolving all the time and it is about time that more influence on that evolution is drawn away from parties whose interests do not prioritise the environment.

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