Out of Fuel: Why Hasn’t Innovation Provided a Reliable Alternative to Oil?

Since popular unrest in the Arab world took root, followed by international armed intervention in Libya, a predictable outcome has been a steep rise in oil prices. Brent crude for May reached US$118.70 a barrel, its highest since August 2008, and in late February, it reached a two-and-a-half-year high of US$119.79. U.S. Crude followed a similar pattern.

Another predictable outcome has been a call to end reliance on oil and to replace it with new, sustainable alternative energy sources. In his recent weekly address, U.S. President Barack Obama again promoted a national plan to cut oil imports. “Real energy security can only come if we find ways to use less oil,” he stated, “If we invest in cleaner fuels and greater efficiency.”

That demand has been heard repeatedly since the oil crises of the 1970s, with little to show for it. Medicine, computing and communications are just some examples of fields that have seen major innovations in the last three decades. No solution has been found, however, that provides modern society with a practical alternative to fossil fuels.

The reasons, Wharton professors and others note, are many. Fossil fuels have been in use for decades, a reality that makes a switch to another energy source very difficult, they point out. Oil as an energy source is not only practical, it has an entire infrastructure built around its use, they note. Politics has played a varied role too, sometimes helping energy innovation, but often hindering it, they add. But by far the biggest hurdle to alternative energy innovation is that oil wins as a simple matter of cost.

“Innovation consists of matching a solution to a need,” says Wharton professor of operations and information management Christian Terwiesch. “As it stands right now, the sad reality in the U.S. is there is simply little need for alternative energy from the mass markets. Energy is too cheap. You might look at US$4 a gallon and disagree, but in countries that are moving faster on the alternative energy side, gas is taxed at much higher rates. Cheap traditional energy makes innovation in alternative energy simply less profitable.” 

U.S. Energy Progress Lags

The twin oil crises of the 1970s forced governments around the world to implement legislation aimed at increasing fuel efficiency, and support research into alternative energy sources. One of the notable acts of U.S. Congress was to pass a law forcing the automotive industry to nearly double fuel efficiency of the cars it produced in less than a decade.

Beyond the political realm, the oil crises of the 1970s also spurred private and public efforts — such as the utilization of nuclear power and other readily available energy resources, and greater energy conservation, says Louis Besland, head of A.T. Kearney Middle East’s energy practice, and also head of its European and Middle East sustainability practice.

In the years that followed, though, little was done to build on the momentum these initial efforts provided, largely because the ‘oil glut’ of the 1980s saw oil prices fall nearly 50%. David Gordon Wilson, emeritus professor of mechanical engineering at the Massachusetts Institute of Technology, wrote in the Christian Science Monitor that at that time, he was consulting for various companies working on energy innovations. “Around 1981 the price of oil collapsed,” he wrote. “Most of the companies working on solutions to the energy problems were either closed down or severely cut back.”

Besland says the public was quick to ignore the need to conserve as well. “This is the best alternative, but it has received less attention. We pay attention now that we consume too much. But [in the last three decades] we didn’t maintain this reduction. We forgot to do it. Only in the recent years has the issue come back with global warming and [carbon emissions].”

The sudden halt in innovation and conservation efforts, scholars and oil analysts agree, is because of the easing of oil price pressures on the public and businesses. In addition, even though oil prices have spiked repeatedly in the last decade because of conflicts in the Middle East, global economies do not come to a near standstill as they did in the 1970s. That is because of the adoption of other energy sources, such as natural gas, electricity and even solar, for a number of domestic and business needs.

“We do rely on oil far less than we did in the 1970’s,” says Maurice Schweitzer, professor of operations and information management at Wharton. “This is one reason why high fuel costs have had a much smaller impact on the world economy. Still, our energy progress lags far behind what it should be. Private companies and governments have been rather complacent about energy research. In short, low oil prices have enabled people to direct their focus elsewhere.”

According to a study done by the Pacific Northwest National Laboratory for the U.S. Department of Energy, the U.S. government spent nearly US$4 trillion on research and development (R&D) from 1961 to 2008. Of that amount, energy technology development received nearly US$172 billion. But the bulk of that spending was done during the oil crises; since the mid-1990s, the study found, energy R&D has accounted for only 1% of all federal investment.  

The convenience of oil makes it hard to stop using it, says Dermot Gately, professor of economics at New York University, who studies the global oil economy and oil usage. “Fossil fuels are 85% of world energy for a good reason: They are cheap and abundant,” he says.

“For some applications like transportation, nothing comes close to it,” Gately adds. “We’ve already done the easy switching already in many applications — electricity generation, space heating, water heating — but I’m not optimistic we’ll ever get away from oil in transportation.”

Consider this: U.S. drivers alone consume roughly 9 million barrels worth of gasoline a day, according to the U.S. Energy Information Administration. The difficulties are not all related to the scale of oil’s usage, though: The same legislation passed in the 1970s to force increased fuel efficiency, for instance, has brought no new innovation to U.S. vehicle fuel consumption in two decades, according to a 2010 study by Pew Charitable Trusts.

And according to Tim Krueger, a policy fellow at the non-profit Americans for Energy Leadership, though passenger cars now sold in the U.S. must achieve at least 30.2 miles per gallon, other countries, such as China, already have higher efficiency standards. “The impending challenge lies in creating high fuel economy cars and — more daunting yet — trucks that Americans will buy,” he noted in an essay on fuel efficiency. “We are … not logistically or technologically prepared to manufacture and sell fuel-efficient cars to Americans.”

Innovation Versus Mother Nature

One of the challenges facing energy innovators in creating an alternative to oil is that Mother Nature’s version is hard to beat. “Oil is attractive as an energy source,” Gately says. “It is abundant, easy and cheap to produce, store, transport and convert to many usable forms of energy.”

“No single solution is able to replace oil,” agrees A.T. Kearney’s Besland. “One liter of oil gives more energy than any other resource. Oil is denser. It is also easier to transport and to stock … so nothing will be found which can be comparable to oil. It should be a combination, a mix of alternative energy solutions.”

Even that combination has proven difficult, Schweitzer says. “Alternative sources are not as competitive. Nuclear reactors are politically difficult, and storage of spent fuel rods remains an intractable problem. Coal is very important for the U.S. and China, but less abundant in many parts of the world. Clean energy, such as solar, wind, and water power are difficult to scale and present environmental problems of their own, such as through the creation of dams.”

The recent Japanese earthquake and tsunami, which destabilized a key nuclear power plant, has already slowed the adoption of nuclear energy, he adds, as a number of countries now review plans to implement nuclear plants.

“I am sure the impact of the Japanese experience as it unfolds will have a devastating impact on nuclear power plant construction throughout the world,” he notes. “The impact of this disaster on other energy development, however, is unclear. The best-case scenario is that this experience spurs investment in technology to develop alternative energy sources.”

Another issue alternative energy innovators say they face is the intense pressure to quickly prove their work can become commercially viable. Entrepreneurs in ‘clean tech’ say convincing investors to make long-term commitments to fund their work is an uphill battle, though this problem is not unique to their field.

That pressure has translated into questions about the energy sector’s lack of ‘eureka’ moments that result in big innovations. Alternative energy solutions with even the potential to address consumption concerns, such as the Bloom Energy Servers [fuel cell generators based on solid oxide technology] receive dollops of media attention as cure-alls. Wharton’s Terwiesch says waiting for the breakthrough energy innovation is the wrong stance to take. 

“We have seen major breakthroughs in the digital world; however, we still have not found a cure for cancer,” Terwiesch says. “That is the nature of technological evolution. It simply is a stochastic process. So we should not wait for that eureka moment. We could achieve dramatic improvements by applying the technology that exists right now. We have to achieve more output with less input — lean is going to be the keyword for the energy sector in the future.”

Schweitzer says the difficulties in energy innovation are also a technological challenge. “There are stories out there, but none have scaled-up well. I’m optimistic that we will have a ‘eureka’ moment, but we are under-investing in the science that could bring this moment closer.”

And there is, of course, the cost of oil. According to the U.S. Energy Information Administration, the U.S. city average price for regular grade gasoline is US$3.25 a gallon, just a little more than the average U.S. price of a gallon of bottled water.

“The speed of innovation has been linked to the price of oil,” Besland says. “Maybe over the last years, the price of oil was too low. There are changes now. For instance, solar panel technology is cheaper now in some countries. The photovoltaic price production will continue to decrease over the next 10 years. Before the green trend, alternative energies were less in fashion, and it could have hampered innovation in the sector. But it is really now a question of economic viability.”

Technological innovation will have a key role to play in solving energy’s cost conundrum, Schweitzer adds. “Cost is the primary challenge, but the advance of technology may enable independent developers to identify something effective,” he says. “There is an existing infrastructure in place for oil. For example, the first cars used coal engines, but gasoline engines proved more effective. Today, it would be quite difficult to switch the automotive industry to another fuel. Still, anything is possible. If something were inexpensive enough, people would switch. If some alternative were better for the environment (and close in cost), people and governments would switch.”

Fixing The Innovation Problem

Besland believes solar and natural gas are alternatives with the best potential for future development. “Gas pockets are discovered continuously,” he says.  “Amazingly, it is not developed in the Gulf region because gas resources have been sold on long term export contracts. Biomass energy faces a concurrency issue with food. However research on seaweed and used oil are in development. It would take 10 or 15 years for these to reach maturity.”

Additionally, Besland says, reducing plastic consumption and increasing recycling are both significant leverages to reduce oil usage. “For instance, plastic material is 10% to 15% of oil consumption. It has to be considered as an available stock that needs to be recycled.”

Research by NYU’s Gately points out that non-Western nations now consume 39% of the world’s oil, and their "rapid growth will drive demand — an extra 20 million barrels a day in rest-of-world demand by 2030 – roughly twice the current production of Saudi Arabia. Such rapid demand growth is unlikely to be supplied by conventional oil resources.”

To go beyond technologies and alternative sources currently being developed, and to foster energy innovation, an environment for development that is supported by government support, argues Richard Lester, professor and head of the Department of Nuclear Science and Engineering at the Massachusetts Institute of Technology, in his working paper titled, America’s Energy Innovation Problem (and How to Fix It).

“Most of the low-carbon energy technologies available today are either too costly or otherwise unable to compete in the marketplace against today’s incumbent fossil fuel technologies … Achieving these cost reductions will require a continuing flow of innovations in many different fields of application over a period of decades. If this is left solely to market forces the pace of innovation will be too slow, because the main impetus for it comes from outside the marketplace. Government actions will be needed to accelerate the process.”

What the U.S. government should do, Lester suggests, is not only place a price on carbon emissions, but also help create an “energy innovation system” through additional financial and institutional support. Such a suggestion, though, brings mixed reactions.

"Politics have attempted to facilitate lessening our dependence, and sometimes the subsidies have helped,” Gately notes. “But too often when Congress tries to pick winners in the technology race, we get saddled with expensive losers like corn-based ethanol.”

“The energy sector has always been a complex mix between politics and business,” Terwiesch says. “Local utility companies, regional regulations and oversight, it just is a very complex system that is hard to change. But I don’t want to say that it is politics that got in the way [of innovation]. In democratic countries, politicians quickly adjust to what is popular among the people. The behavior that we see in the U.S. is thus as much driven by politics as by popular opinion.”

Schweitzer says a mandated innovation system would help bring about the will to pursue energy innovation. “Developing an alternative energy source is not easy, cheap, or fast. Government resources would significantly speed this process,” he says, but adding, “Politics probably haven’t hampered innovation. They simply haven’t helped much.”

Terwiesch adds neither the government nor the energy industry bears sole responsibility to encourage energy innovation. “We have to create a popular culture that makes wasting energy socially unacceptable,” he says. “In most of Europe, it is socially not acceptable to drive a big car, even if you have the money to pay for it. No politician would want to be seen in an SUV. American consumers simply close their eyes. They cry ‘foul’ when the oil companies report their earnings or when disasters such as the [Gulf] oil spill happen — and then they turn around and drive their SUV back to the pump.”

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