Oil is a unique and finite commodity. Every person in the world is affected by oil and it plays a vital role within modern society. It has also been associated with conflict since the First World War. The importance of oil is such that nationals and ethnic groups are prepared to go to war for this commodity if necessary. As such, a unique set of economic circumstances and policy issues surround oil. These include oil’s links to industrialization, economic growth, the distribution of wealth, and global warming. Oil is vital to the functioning of the economy of individual countries as well as the global economy. It plays an essential role in transport systems (ground, air and sea), agriculture, chemicals, and the military. Thousands of products are made using oil including plastics, pesticides, paints, inks, synthetic fibers, solvents, medicines, and other vital everyday use products. The reality is that oil is all around us, even when it is not being used in vehicle or other transport engines.
Since oil is a finite commodity, concerns about when the supply of oil will decline and run out is of paramount importance and concern. The world’s supply of readily accessible oil is declining simply because more oil is being extracted than being discovered. New technologies that gain access to reservoirs previously hard to access may extend the life of these reserves. However, demand for oil in developed countries such as the United States, Europe, Japan and China are greater than ever before. India, another populous nation with a growing economy will further escalate the demand for oil. As such, geo-political issues exist, primarily due to the uneven distribution of oil deposits around the globe.
The size and scope of the oil industry is global and has clearly defined players; there are countries that consume most of the oil production and countries that produce most of the oil. Natural petroleum, or oil, is highly concentrated in a few large reservoirs around the world. The largest of these is located in the Persian Gulf area which is comprised of Saudi Arabia, Iran, Iraq, Kuwait, Qatar, and the United Arab Emirates. Large reservoirs can also be found in the North Sea basin (Norway and the United Kingdom), Russia, Azerbaijan, Kazakhstan, Algeria, Angola, Libya, Nigeria, China, Indonesia, Venezuela, Columbia, Mexico, Canada, and the United States. Together, more than 90 percent of the world’s oil reserves can be found in these 22 countries. The US, Europe, China, Japan, and India are the biggest consumers of oil; and the biggest importers.
The major oil producing countries created the Organization of the Petroleum Exporting Countries (OPEC) as a way to have power and influence the price of oil. To represent their interests, and as a counter measure to OPEC, the major consumers of oil created the International Energy Agency (IEA). Currently, the EU imports approximately 40% of its oil from OPEC and the US imports approximately 35%. The US Energy Information Administration (EIA) projects that the demand for oil in the US, EU and China will continue to grow. The EIA approximates that by 2025, the US will need an extra 4.4mbd, the EU an extra 2.7mbd, and China will require an extra 7mbd of oil.
The US is the world’s largest oil importer, even though it is also a top producer. Domestic production of oil in the US cannot handle the demand, thus the heavy reliance on imported oil. President George W. Bush stated in his 2006 State of the Union Address: “Keeping America competitive requires affordable energy. And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world.” Due to this addiction, the US policy in regards to oil is to ensure the viability of global energy supplies and minimize the disruption of international supplies. One can easily argue that the recent war in Iraq was conducted primarily to obtain and secure oil. Currently, the US imports the bulk of its oil from Mexico, Canada, Venezuela, Nigeria, and the Middle East. Similarly, the EU is highly dependent on oil imports; even though European consumption is more efficient compared to the US. The EU imports most of its oil from OPEC, Norway, and Russia. By 2025, it is expected that 80% of the EU oil consumption will be imported, mostly from the Middle East.
The US and EU share common interests and concerns in regards to the Middle East. The political instability and economic stagnation in addition to the threat of terrorism emanating from the region lead to a shared interest in socio-economic and political reform in the area. These have led to joint US and EU reform initiatives in the region with varying success; the assumption being that reforms would prevent instability and lead to the subsiding of terrorism. It is also important to note that both the US and EU bring different assets and liabilities in how they deal with the Middle East beyond the basic differences in their foreign policies. As such, the US and EU have adopted very different approaches to managing their relationships with OPEC and other oil producing countries of the world.
The US has primarily relied on diplomatic, economic, and military power to ensure its current and future oil needs. This is accomplished by the use of rhetoric and propaganda, sanctions and censure, and military force when needed. Both an asset and liability, the US foreign policy is dominated by political appointees, which are typically replaced every four years. This allows the US to modify its approach quickly to changing circumstances; however the US has had difficulty following a consistent course over time. This may partially explain the strained economic and political relationship between the US and OPEC; and also between the US and other major oil producers of the world. Historical events have also played a significant role in the strained relationship between the US and OPEC. This is primarily due to the US military strength and power, which is also both an asset as it cannot be ignored, and a liability due to the US support of Israel in the Middle East. However, the current administration is seeking more of a dialog with OPEC to mend this relationship as it seeks enhanced energy interdependency with them and other oil producing nations.
In comparison, the EU currently does not have the military strength to follow a similar US strategy. The EU approach is driven to a much larger extent by diplomatic and bureaucratic practices. They are much better equipped to implement long-term strategies, but are slow to adapt. In general, the EU relies heavily on treaties and agreements to guarantee their oil needs. Since 2003, the EU has recognized that having a strained relationship with OPEC was not to its benefit; as such the EU changed its political and economic oil strategy. In 2004, the EU and OPEC enhanced their producer-consumer relationship. Since then, the EU has been seeking to develop better relations with all oil producing nations since they recognize the importance of energy interdependence.
Biofuels
Biofuels are manufactured from biomass, which are wastes and residues of biological origin and energy crops. First generation biofuels are made from sugar crops (sugarcane, etc.), starch crops (corn, etc.), oilseed crops (soybean, etc.) and animal fats. Second generation (advanced biofuels or cellulosic biofuels) are produced from non-food crops and waste biomass such as corn, straw, wood, and feedstock such as algae. In general, advanced biofuels are still under development and require further research and development. However, the US and several European nations have made significant progress and are scaling up production of second generation biofuels.
First generation biofuels from sugar and starch crops are converted to bio-alcohols such as ethanol, butanol, and propanol. Oils and animal fats are processed into biodiesel. The most widely used bio-alcohol fuel is ethanol. In general, biofuel production has increased rapidly since 2000. The transport industry remains the primary consumer of first generation biofuels which accounted for 3.7% of the total road transport fuel used in 2011. Vehicles can use gasoline-ethanol blends containing 10 percent ethanol by volume. In addition, flex-fuel vehicles can use gasoline-ethanol blends containing up to 85 percent ethanol by volume (E85).
Due to the increasing global demands of oil and the interdependency issues associated with it, both the US and EU have enacted and implemented policies in regards to biofuels. Implementation of biofuel policies are complex due to the diversity of interests and concerns; however they typically have common goals in supporting the development and economic growth of the biofuel industry as well as the added benefits of protecting the environment and increasing energy security.
The EU adopted a directive in April 2009 to promote the use of biofuels primarily in the transport industry. Each member state of the EU is required to take the necessary measures and implement legislation to ensure that biofuels account for a minimum 10% proportion of the fuel sold by 2020. In contract, in the US, the Environmental Protection Agency (EPA) released revisions in May 2009 to the Renewable Fuel Standards program. The requirements established specific volume standards for biofuels to achieve 36 billion US gallons by 2022, compared to the 5.4 billion US gallons that were produced in 2008. Of the 36 billion gallons, 21 billion must come from cellulosic or advanced biofuels derived from feedstocks other than cornstarch. The US has also implemented a variety of economic incentives including grants, income tax credits, subsidies, and loans to promote biofuel research and development.
It is apparent that the US and EU have taken very different paths in the design and implementation of biofuel policies. In the EU, the mandatory targets have been approved voluntarily by several member states; however these targets are individual national initiatives and not an obligation from the EU. The US approach has specified targets and the implementation is through a mandate which should ensure compliance. These contrasting paths taken by the US and EU are partly due to the differences in policy priorities. The EU policy was driven by a need to meet the commitments made under the Kyoto protocol and pressure from the EU population to address environmental issues. In the US, the policy was motivated by a variety of interests including the desire to reduce its addiction to fossil fuels, to reduce greenhouse gas (GHG) emissions, and to increase demand for US farm commodities.
As mentioned earlier, oil’s primary use is in the transport industry. As such, there has and will continue to be tremendous pressure on the auto industry. Several countries, especially the US, have placed a technology and innovation burden on the auto industry due to the global challenges of energy interdependency, GHG emissions, petroleum costs, and the ever increasing need for more efficient vehicles. In regards to US energy policy, President-elect Barack Obama had pledged during campaigns to significantly reduce oil consumption which included measures mandating all new vehicles have E85 flex fuel capabilities by the end of 2013.
Biofuels have provided the auto industry an opportunity to be partners in addressing these global challenges. Biofuels used in vehicles are now mainly mixed with fossil fuels. Most vehicles in the US today can run on fuel blends of up to 10% ethanol. Several other countries such as China, India, Thailand, Canada, and those in Europe have mandated ethanol blended fuels to varying degrees. In addition, US Auto manufacturers such as Ford, Chrysler, and GM, are already producing vehicles designed to run on much higher ethanol blends (Flex-Fuel vehicles). These vehicles run on E85 fuel which is 85 percent ethanol by volume. By 2008, there were an estimated seven million E85 compatible vehicles on US roads. However, challenges to expand the market for these vehicles exist, primarily due to a lack of sufficient infrastructure. According to the US Department of Energy, there are only 2300 fueling stations located in the US that provide E85 ethanol biofuel, which are primarily located in the “Corn Belt” or Midwestern United States. Several states in the US do not even have E85 fueling stations.
It is clear that biofuel production and proliferation of its use in vehicles alone will not address future global oil concerns. Automakers have realized this and incorporated other new technologies and innovations to increase fuel efficiency and address GHG emissions. This has led to the introduction of smaller turbocharged engines such as the Ford EcoBoost technology. Mazda has introduced the concept of SkyActiv technology and Honda has introduced Earth Dreams technology. All of these concepts increase fuel efficiency and reduce GHG emissions without compromising performance. Yet, the most important innovation by automakers has been the introduction of Hybrid (electric and fuel) and full Electric Vehicles (EVs). These vehicles provide astounding fuel efficiency with minimal or little GHG emissions. However, these vehicles can lack in performance and have limited range; except for the Fisker Karma and Tesla Model S which are both cost prohibitive to the main stream public. Future innovations in battery technology will increase the popularity of both hybrid and EV vehicles as range is increased and costs are decreased. It is clear that tomorrow’s automotive industry will probably provide a myriad of technology and vehicle choices, from green (EV and hybrid) to biofuel (E85) to fossil fuel based.
