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 Winning
the Oil Endgame offers a coherent strategy for ending oil
dependence, starting with the United States but 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, not dictated by government for reasons
of ideology. This roadmap is independent, peer-reviewed, written
for business and military leaders, and co-funded by the Pentagon.
It combines innovative technologies and new business models
with uncommon public policies: market-oriented without taxes,
innovation-driven without mandates, not dependent on major (if
any) national legislation, and designed to support, not distort,
business logic.
Two centuries ago, the first industrial revolution made people a
hundred times more productive, harnessed fossil energy for transport
and production, and nurtured the young U.S. economy. Then, over the
past 145 years, the Age of Oil brought unprecedented mobility,
globe-spanning military power, and amazing synthetic products.
But at what cost? Oil, which created the sinews of our strength, is now
becoming an even greater source of weakness: its volatile price erodes
prosperity; its vulnerabilities undermine security; its emissions
destabilize climate. Moreover the quest to attain oil creates dangerous
new rivalries and tarnishes America's moral standing. All these costs
are rising. And their root causes—most of all, inefficient light trucks
and cars—also threaten the competitiveness of U.S. automaking and other
key industrial sectors.
The cornerstone of the next industrial revolution is therefore winning the Oil Endgame. And surprisingly, it will cost less to displace all of the oil that the United States now uses than it will cost to buy
that oil. Oil's current market price leaves out its true costs to the
economy, national security, and the environment. But even without
including these now "externalized" costs, it would still be profitable
to displace oil completely over the next few decades. In fact, by 2025,
the annual economic benefit of that displacement would be $130
billion gross (or $70 billion net of the displacement's costs). To
achieve this does not require a revolution, but merely consolidating
and accelerating trends already in place: the amount of oil the economy
uses for each dollar of GDP produced, and the fuel efficiency of light
vehicles, would need only to improve about three-fifths as quickly as
they did in response to previous oil shocks.
Saving
half the oil America uses, and substituting cheaper alternatives for
the other half, requires four integrated steps:
- Double the efficiency of using oil.
The U.S. today wrings twice as much work from each barrel of oil as it
did in 1975; with the latest proven efficiency technologies, it can
double oil efficiency all over again. The investments needed to save each
barrel of oil will cost only $12 (in 2000 $), less than half the
officially forecast $26 price of that barrel in the world oil market.
The most important enabling technology is ultralight vehicle design.
Advanced composite or lightweight-steel materials can nearly double the
efficiency of today's popular hybrid-electric cars and light trucks
while improving safety and performance. The vehicle's total extra cost
is repaid from fuel savings in about three years; the ultralighting is
approximately free. Through emerging manufacturing techniques, such
vehicles are becoming practical and profitable; the factories to
produce them will also be cheaper and smaller.
- Apply creative business models and public policies
to speed the profitable adoption of superefficient light vehicles,
heavy trucks, and airplanes. Combined with more efficient buildings and
factories, these efficient vehicles can cut the official forecast of
oil use by 29% in 2025 and another 23% soon thereafter—52% in all.
Enabled by a new industrial cluster focusing on lightweight materials,
such as carbon-fiber composites, such advanced-technology vehicles can
revitalize these three strategic sectors and create important new
industries.
- Provide another one-fourth of U.S. oil needs by a major domestic biofuels industry.
Recent advances in biotechnology and cellulose-to-ethanol conversion
can double previous techniques' yield, yet cost less in both capital
and energy. Replacing fossil-fuel hydrocarbons with plant-derived
carbohydrates will strengthen rural America, boost net farm income by
tens of billions of dollars a year, and create more than 750,000 new
jobs. Convergence between the energy, chemical, and agricultural value
chains will also let versatile new classes of biomaterials replace
petrochemicals.
- Use well established, highly profitable efficiency techniques to save half the projected 2025 use of natural gas,
making it again abundant and affordable, then substitute part of the
saved gas for oil. If desired, the leftover saved natural gas could be
used even more profitably and effectively by converting it to hydrogen,
displacing most of the remaining oil use—and all of the oil use if
modestly augmented by competitive renewable energy.
These four
shifts are fundamentally disruptive to current business models. They
are what economist Joseph Schumpeter called "creative destruction,"
where innovations destroy obsolete technologies, only to be overthrown
in turn by ever newer, more efficient rivals. In The Innovator's Dilemma,
Harvard Business School professor Clayton Christensen explained why
industry leaders often get blindsided by disruptive
innovations—technological gamechangers—because they focus too much on
today's most profitable customers and businesses, ignoring the needs of
the future. Firms that are quick to adopt innovative technologies and
business models will be the winners of the 21st century; those that
deny and resist change will join the dead from the last millennium. In
the 108-year history of the Dow Jones Industrial Average, only one of
12 original companies remains a corporate entity today—General
Electric. The others perished or became fodder for their competitors.
What policies are needed?
American companies can be among the quick leaders in the 21st century,
but it will take a cohesive strategy-based transformation, bold
business and military leadership, and supportive government policies at
a federal or at least a state level. Winning the Oil Endgame charts these practical steppingstones to an oil-free America:
- 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.
- A
scrap-and-replace program can lease or sell superefficent cars to
low-income Americans—on terms and with fuel bills they can afford—while
scrapping clunkers. This makes personal mobility affordable to all,
creates a new million-car-a-year market for the new efficiency
technologies, and helps clean our cities' air.
-
Military needs for agility, rapid deployment, and streamlined logistics
can drive Pentagon leadership in developing key technologies.
- Implementing smart government
procurement and targeted technology acquisition (the "Golden Carrot")
for aggregated buyers will accelerate manufacturers' conversion, while
a government-sponsored $1-billion prize for success in the marketplace,
the "Platinum Carrot," will speed development of even more advanced
vehicles.
- To support U.S. automakers'
and suppliers' need to invest about $70 billion to make advanced
technology vehicles, federal loan guarantees can help finance initial
retooling where needed; the investments should earn a handsome return,
with big spin-off benefits.
- Similar
but simpler policies—loan guarantees for buying efficient new airplanes
(while scrapping inefficient parked ones), and better information for
heavy truck buyers to spur market demand for doubled-efficiency
trucks—can speed these oil-saving innovations from concept to market.
- Other policies can hasten
competitive evolution of next-generation biofuels and biomaterials
industries, substituting durable revenues for dwindling agricultural
subsidies, and encouraging practices that protect both topsoil and
climate.
What happens to the oil industry?
The transition beyond oil is already starting to transform oil
companies like Shell and BP into energy companies. Done right, this
shift can profitably redeploy their skills and assets rather than lose
market share. Biofuels are already becoming a new product line that
leverages existing retail and distribution infrastructure and can
attract another $90 billion in biofuels and biorefining investments. By
following this roadmap, the U.S. would set the stage by 2025 for the
checkmate move in the Oil Endgame—the optional but advantageous
transition to a hydrogen economy and the complete and permanent
displacement of oil as a direct fuel. Oil may, however, retain or even
gain value as one of the competing sources of hydrogen.
How big is the prize?
Investing $180 billion over the next decade to eliminate oil dependence
and revitalize strategic industries can save $130 billion gross, or $70
billion net, every year by 2025. This saving, equivalent to a
large tax cut, can replace today's $10-billion-a-month oil imports with
reinvestments in ourselves: $40 billion would pay farmers for biofuels,
while the rest could return to our communities, businesses, and
children. Several million automotive and other transportation-equipment
jobs now at risk can be saved, and one million net new jobs can be
added across all sectors. U.S. automotive, trucking, and aircraft
production can again lead the world, underpinned by 21st century
advanced-materials and fuel-cell industries. A more efficient and
deployable military could refocus on its core mission—protecting
American citizens rather than foreign supply lines—while supporting and
deploying the innovations that eliminate oil as a cause of conflict.
Carbon dioxide emissions will shrink by one-fourth with no additional
cost or effort. The rich-poor divide can be drastically narrowed at
home by increased access to affordable personal mobility, shrinking the
welfare rolls, and abroad by leapfrogging over oil-dependent
development patterns. The U.S. could treat oil-rich countries the same
as countries with no oil. Being no longer suspected of seeking oil in
all that it does in the world would help to restore U.S. moral
leadership and clarity of purpose.
While the
$180-billion investment needed is significant, the United States'
economy already pays that much, with zero return, every time the oil
price spikes up as it has done in 2004. (And that money goes into
OPEC's coffers instead of building infrastructure at home.) Just by
2015, the early steps in this proposed transition will have saved as
much oil as the U.S. gets from the Persian Gulf. By 2040, oil imports
could be gone. By 2050, the U.S. economy should be flourishing with no
oil at all.
How do we get started?
Every sector of society can contribute to this national project. Astute
business leaders will align their corporate strategies and reorganize
their firms and processes to turn innovation from a threat to a friend.
Military leaders will speed military transformation by promptly laying
its foundation in superefficient platforms and lean logistics.
Political leaders will craft policies that stimulate demand for
efficient vehicles, reduce R&D and manufacturing investment risks,
support the creation of secure domestic fuel supplies, and eliminate
perverse subsidies and regulatory obstacles. Lastly, we, the people,
must play a role—a big role—because our individual choices guide the
markets, enforce accountability, and create social innovation.
Our energy future is choice, not fate. Oil dependence is a problem we
need no longer have—and it's cheaper not to. U.S. oil dependence can be
eliminated by proven and attractive technologies that create wealth,
enhance choice, and strengthen common security. This could be achieved
only about as far in the future as the 1973 Arab oil embargo is in the
past. When the U.S. last paid attention to oil, in 1977–85, it cut its
oil use 17% while GDP grew 27%. Oil imports fell 50%, and imports from
the Persian Gulf by 87% in just eight years. That exercise of dominant
market power—from the demand side—broke OPEC's ability to set world oil
prices for a decade. Today we can rerun that play, only better. The
obstacles are less important than the opportunities if we replace
ignorance with insight, inattention with foresight, and inaction with
mobilization. American business can lead the nation and the world into
the post-petroleum era, a vibrant economy, and lasting security—if we
just realize that we are the people we have been waiting for.
Together we can end oil dependence forever.
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