Seeker Blog

This is the first of a series of SeekerBlog posts on energy policy options. Readers seeking a practical, economics-aware energy policy guide will find the captioned report by Dr. Amory Lovins of serious interest. This is the first study I have seen that lays out a politically-feasible policy roadmap. From the executive summary:

… a strategy for ending US oil dependence, and is applicable worldwide. There are many analyses of the oil problem. This synthesis is the first roadmap of the oil solution - one led by business for profit.

In this first post, we’ll look at two reviews of the Lovins study.

(1) Former National Security Advisor Robert McFarlane reviewed the book (PDF, Wall Street Journal, December 20, 2004):

Perhaps the most rigorous and surely the most dramatic analysis of what it will take to wean us from foreign oil was tasked by the Pentagon and carried out by the Rocky Mountain Institute, a respected center of hard-headed, market-based research. The report, "Winning the Oil Endgame: Innovation for Profits, Jobs and Security", is now out in book form and has received positive reviews.

In his forward to the book, George Shultz writes, "How many more times must we be hit on the head by a two-by-four before we do something decisive about this acute problem? . . . Hybrid technology is already on the road and currently increases gas mileage by 50% or more. . . . New, ultralight-but-safe materials can nearly redouble fuel economy at little or no extra cost . . . hydrogen could be produced from natural gas saved from currently wasteful practices."

The report outlines the steps to get us from here to zero reliance on foreign oil: First, to retool automobile, truck and aircraft manufacturing to reap fuel efficiencies by using advanced composite and lightweight steel construction. Such a metamorphosis could eliminate as much as 52% of the oil we use today by 2030 with no loss in safety or performance. Second, we should exploit recent advances in technologies for converting cellulose to ethanol and thereby replace another 25% of the oil we consume today. In the process we could increase farm income by tens of billions of dollars and create 750,000 jobs.

In the book’s powerful summary conclusion, Dr. Amory Lovins, president of the Rocky Mountain Institute and the report’s principal author, argues persuasively that by 2035 we can be entirely independent of imported oil and that "it will cost less to displace all of the oil that the United States now uses than it will cost to buy that oil." Specifically, he continues, "by 2025, the annual economic benefit of displacing all of our current oil imports would be $130 billion gross (or $70 billion net of the displacement’s cost). To achieve this does not require a revolution, but merely consolidating and accelerating trends already in place."

One of my grounds for some optimism on how successful a good energy policy could be is that energy-productivity has been improving for 150 years. I.e., energy-input per unit of GDP output has been decreasing at an average rate of 1%/annum. We need only a slightly higher rate to overcome population & underdeveloped nation growth. Note: the 1973 oil embargo boosted energy-productivity improvements to 4%/annum.

If we could implement policies that raised the historical 1% rate to a 2% per annum rate, that would overcome the combined impact of both population growth and expected industrial growth of China, India, Brazil, etc. Absolute energy consumption would still increase for a some decades due to the industrial growth, but the compounding productivity improvements should cause a peak roughly 50 years out. (the difference over 100 years illustrates the idea: 1% compounds to a reduction of 2.7x, while 2% compounds to a reduction of 7.2x).

I have a paper on energy-productivity archived - I’ll post on it as soon as I locate it. Back to reviews of the Lovins study:

(2) Scott Burns just reviewed the book (The Dallas Morning News, March 28, 2005), including links to related web resources. Excerpts:

• How much? How fast? Think about this timetable:
• Cut consumption by the amount we import from the Persian Gulf by 2015.
• Use less oil by 2025 than we used in 1970.
• Import no oil at all by 2040.
• Use no oil at all by 2050.

More impressive, much of this can be done simply by getting back on the efficiency improvement path we were on when we responded to the first and second OPEC oil price shocks in 1973 and 1979.

An idle dream, you say?

Not hardly. The book is supported with a "Technical Annex," a collection of studies and spreadsheets that totals a massive 15 megabytes, much of it in compressed Zip format, and all available as a free download. This is no pipe dream.

Big changes

The centerpiece of Mr. Lovins’ plan is a transformation of the largest oil consumer – transportation.

As you might expect, he starts with the American automobile. The plan calls for a transition to lightweight but safer carbon fiber-based vehicles that start as near-80 mpg hybrids (like the Toyota Prius) but evolve into fuel-cell vehicles.

If you are thinking to yourself, "Oh great, we’ll all be riding around in three-wheeled Dinky Toys," relax. A pragmatist, Mr. Lovins’ designs for future automobiles call for reduced weight but not reduced acceleration or safety.

More important, this is a market-oriented plan. Both political parties can back it, if they can sheathe their knives and ideology for a few moments.

Once particular concern of mine is that the current US focus on converting transportation to the "hydrogen economy" may be sub-optimal or worse. The challenge to reverse the absolute growth in fossil fueled consumption is hard enough - we should not squander resources on romantic but ineffective policies. For the details, please see Carrying the Energy Future Comparing Hydrogen and Electricity.

Update 03/29/05- the entire book can be quickly downloaded here (PDF 1.9MB). At that URL you will also find a slide presentation, a discussion forum and other materials.

Update 03/30/05: Richard has emailed a series of excellent criticisms of the Lovins’ study. I’m adding the dialog in the form of updates for the benefit of readers who don’t get into the comments section.

Richard is arguing for the absolute minimum of government "command economy" tinkering. Instead restrict the government tinkering to tax-driven gradual oil price increases, allowing free market decisions to find the most efficient paths to increasing energy productivity.

It would be great if we could get a dialogue going to better assess which parts of the Lovins’ proposals are worth supporting.

03/29/05 Dear Steve,

Thanks for your blog. You find interesting things to write about.
Pretty neat that he put the whole book on the net. I didn’t notice that
in your post or at the site. Don’t know if I’ll get to read the whole
thing or not. It sounds almost like a reference work.

I would argue that tax based increases are sufficient to motivate
consumers and producers to make optimal decisions, or at least
decisions as good as can be made any other way. I see increases in the
price of oil being inevitable. What we have now is uncertainty about
when price increases will occur and their size. Consequently, we tend
to ignore the inevitable rise until we get a big ratchet like the one
we just had to $50 per barrel, if it lasts. When the ratchet effect
does hit, it causes greater economic dislocation than would equivalent
gradual scheduled increases. Knowledge about the future base price of
crude oil would allow consumers and producers to make long term
investments with greater confidence and require a lower rate of return.

Note that I would use the duty to maintain a minimum price for oil, not
a maximum. That allows the price information to help decision makers
without getting the government into the price control business. Part of
what I’m talking about is also having more of the price increase stay
in the U. S. rather than go to producers.

If you want to use something other than price to influence decision
makers, what is it?

03/30/05 Dear Richard,

> If you want to use something other than price to influence decision
> makers, what is it?

The slide presentation may be the most efficient way to surf over the key proposals - even so it is much more than a 30 minute task to assess and summarize (possibly a good sign that the work is non-trivial).

There appears to be serious thinking behind all this - I’m not finding it easy to quickly latch onto the essence.

A central idea is "creative destruction" of existing manufacturing tech - particularly auto production. E.g., from steel stampings to carbon composite parts –> 50% weight savings –> 68% fuel savings.

They claim to have done a complete virtual design with production-costing.

Another central theme is accelerate the market changes over what would be expected from tinkering with price. To slash the first 10% of the typical 15 year tech transformation from 10% to 90% adoption.

I do think there is meat in the sandwich… it looks exciting!

03/30/05 Dear Steve,

The one thing I am sure of is that every projection in there is wrong.
How wrong? In which direction? Darned if I know. But I know that the
authors cannot predict the future, just as the whalers could not. They
may have some promising ideas that may very well be worth implementing.
I don’t know and neither does anyone else. Why? because we don’t know
what will happen to the price of oil.

Instead of using price as information to decision makers, the authors
assume they know everything necessary to come up with the best
solution. I am always skeptical of the brilliant beautiful people at
the center who know more than anyone else.

Note the "Four Basic Market Failures" in slide 21

Oil is priced below its societal cost
Most customers are very short sighted
Most customers have poor information
Most managers resist disruptive innovation

I agree with every one of those points. A continuously increasing
minimum price of oil addresses each of them directly.

Now look at slide 22, "Five ways Government can help"

Stimulate demand for very efficient vehicles
Build vibrant 21st Century industries by sharing risk and deploying
faster than the private market
Lower risk of investment for new manufacturing plants through loan
guarantees to automakers
Support development of domestic energy supply infrastructure
(hydrocarbons carbohydrates)
Remove barriers to efficiency through coherent policies and purging
perverse incentives.

How do any of these directly address the four basic market failures? By
saying that government knows better what should be done than all the
rest of the people in the country. I don’t agree. This program calls
for government circumventing the free market system to impose a
solution on every one. Another government tried that in the 20th
century. It was called the Soviet Union. It imploded.

Look at each in detail.

Stimulate demand for very efficient vehicles. His solution? Bribe
people to buy cars they don’t want. Start with poor people and give
them new cars with subsidized lease payments. Mine? Constantly jack up
the price of oil at a rate higher than growth in personal income.
People will do the right thing. They aren’t doing the "right thing"
fast enough? raise the price faster.

Build vibrant industries by sharing risk and deploying faster than the
private market. Sharing risk means protecting incompetent business men
from suffering failure and the competent ones from getting richer than
Rockefeller. Do you think this will motivate business to solve the
problem or to do whatever government says? And deploying faster than
the private market? When it absolutely, positively has to bet there
overnight, do you use the Post Office?

Lower risk of investment through loan guarantees to automakers!
Subsidize Detroit! Because they have contributed so much to the
American economy in the last 50 years? Because they have shown such
ability to innovate? I suppose this is supposed to address managers who
resist disruptive innovation. But what really motivates people,
including managers, is the opportunity to make a lot of money. If
Detroit can figure out how to respond to continuously rising prices of
gas, they’ll get rich. If someone else does first, that’s fine with me
too.

Support new hydrocarbon to carbohydrate infrastructure change. He’s
already picked his post petroleum energy source! He may be right, but
why not let the market decide?

Remove barriers to efficiency. This sounds like change perverse
government regulations that have made the current problem worse. Like
the EPA? These are things that should probably be done regardless of
whether one implements his high tech program or my raise the price and
let the market sort it out plan.

I think these folks may well have mastered the technology and economics
of a probable solution. But the more I see the less convinced I become
that they understand governments, people or markets.

03/30/25 Dear Richard,

I find it a challenge to pick holes in your "Chicago school" analysis - as you are working (I think) from my own ideological home base. In spite of my general lack of confidence in projections (as you noted), I am intrigued with Lovins’ projected outcomes. So as time permits I want to chew on his bone some more to see what marrow may be there.

Oil is priced below its societal cost
Most customers are very short sighted
Most customers have poor information
Most managers resist disruptive innovation

I agree with every one of those points. A continuously increasing
minimum price of oil addresses each of them directly.

Regarding "very short sighted" and "have poor information", I believe that Ms. Voter isn’t good at discounting. So I wouldn’t expect voters to correctly discount the probable future costs of alternatives. Aren’t there many examples of this in our current experience? E.g., lack of interest in nuclear power? E.g., continuing to build more/wider freeways for single-driver commutes?

The "tragedy of the commons" is a collorary to the inability to discount consequences. Surely buying gas guzzling SUVs is an example? There may be a present reward to have the shiny Suburban in your drive, but it’s difficult to see any future common reward in such decisions.

That said, I don’t know how to counter those behavioral problems with no-regrets policies that are certain not to have the problems you describe. Perhaps we could progress by focusing on only one of Lovin’s proposals, which looks promising to me - the "feebates". On p. 186 Lovins writes "The centerpiece of our policy recommendation is the “feebate”. From the book-text, some extracts to stimulate the discussion:

Most importantly, revenue- and size-neutral “feebates” can shift customer choice by combining fees on inefficient vehicles with rebates to efficient vehicles. The feebates apply separately within each vehicle-size class, so freedom of choice is unaffected. Indeed, choice is enhanced as customers start to count fuel savings over the vehicle’s life, not just the first few years, and this new pattern of demand pulls superefficient but uncompromised vehicles from the drawing-board into the showroom.

…

…Starting on p. 186, we’ll discuss and simulate the most important way to do this: policies known as “feebates,” 636 which reward a shift to more fuel-efficient vehicles without distorting choices between vehicle classes or burdening public revenues. If enacted regionally or nationally, feebates alone would create the incentive for manufacturers to accelerate and increase their investments in developing and making very efficient vehicles. Our policy portfolio also includes complementary policies to increase early demand and accelerate supply of advanced technology vehicles.

…

The main virtue of higher gasoline taxes would be in reducing miles driven afterthe car is bought. 724 This effect, though weak, is clearly observable; but we’ll propose alternative ways to achieve that goal too, without increasing net cashflow to the Treasury. So without denying the sound economic principle of proper pricing, we think there are more creative, politically palatable, and effective ways to signal the value of efficient vehicles—especially at the point of purchase where that decision is focused. We’ll return to the most important such option—feebates—as soon as we’ve argued that efficiency standards, too, are no longer the best policy choice for America.

19: How feebates work:
Feebates lower the prices of efficient vehicles, so people buy more of them, and raise the prices of inefficient vehicles, so people buy fewer of them. Each year, the fees pay for the rebates (plus the minor administrative costs 747). Consider, for example, a feebate of $1,000 per 0.01 gpm, with a pivot point of 23 miles per gallon (0.043 gpm) for the midsized SUV class. A Nissan Pathfindergetting 18 miles per gallon (1/18 mpg = 0.056 gpm), is 0.013 gpm worse than this benchmark value or “pivot point,” so Pathfinder incurs a $1,300 fee. Ford’s new Escapehybrid SUV gets (let’s suppose) 36 miles per gallon, or 0.028 gpm—0.015 gpm better than the pivot point—so it would earn a $1,500 rebate. These changes in the vehicles’ retail prices are typically smaller than the sales incentives that most automakers now offer out of their own profit margins, and are economically about equivalent to the hybrid tax credits offered by some states such as Colorado. In this example, the feebate would be revenue-neutral if slightly more Pathfinders than Escape hybrids were sold.

There is a great deal of fairly involved modeling and analysis of the feebate concept from p. 186 on - deeper water than I can swim in at the moment. (p. 179 warns "CAUTION: ENTERING THE CALCULATIONAL THICKET"). Thereafter we get into lots of nice charts…