On Jan. 10, 1901, at the Spindletop oilfield near Beaumont, Texas, a deafening blast rocketed a column of oil hundreds of feet into the air, wrecking a derrick. This gusher pumped out nearly 100,000 barrels a day at first, more than the combined production of every other well on Earth. Spindletop tripled U.S. oil production overnight.
On April 20, 2010, as history will forever record, another oil fountain erupted -- this one a mile beneath the surface of the Gulf of Mexico.
To hear President Obama tell it, the old 20th century economy, fueled by more than 1 trillion barrels of easily accessible and relatively cheap oil, will be bookended by these two gushers. “The next generation will not be held hostage to energy sources from the last century,” Obama declared in a speech at Carnegie Mellon University this month. “But the only way the transition to clean energy will ultimately succeed is if the private sector is fully invested in this future -- if capital comes off the sidelines and the ingenuity of our entrepreneurs is unleashed.”
Which entrepreneurs would those be? And what capital?
Oil companies, of course, have invested heavily in marketing campaigns designed to show that they are busy thinking up ways to supply tomorrow’s cleaner energy. In addition to BP’s “Beyond petroleum” is just one of the slogans.
But no matter how much these companies say they want to find more environmentally sensitive, renewable sources of energy, their basic strategy is still to make as much money as possible by searching for more fossil fuel. Faced with a choice between oil and alternative fuels, the industry is still betting on the devil it knows. And so Big Oil is drilling deeper and finding ways to convert unconventional oil -- from sources such as oil sands, coal and oil shale -- into fuel.
These companies have little reason to do otherwise: The U.S. Geological Survey estimates that there is enough unconventional oil in the world to meet our needs for generations to come. And Big Oil’s business model is far from troubled. If oil prices shift from their old range of the past two decades of about $35 per barrel to a new plateau of $70, extracting oil is going to continue to be exceedingly profitable.
Professor Peter Odell of Erasmus University, winner of the 2006 OPEC Award from the International Association for Energy Economics, suggests that the oil industry of 2100 will be larger than that of 2000, but up to 90 percent dependent on unconventional oil. And, its advertising to the contrary, the industry isn’t shy about making such estimates itself: ExxonMobil forecasts that fossil fuels will account for the same 80 percent share of world energy used in 2030 as they do today.
There is, of course, another option available to Big Oil. It involves replacing petroleum with hydrogen fuels and biofuels made from nonfood sources, and producing electricity from wind, solar, biomass and other renewable energy sources. And the industry is investing in these alternatives: ExxonMobil has committed $600 million to algae-based biofuel research and development, and BP has pledged $500 million to biofuel researchers at the University of California at Berkeley, Lawrence Berkeley National Laboratory and the University of Illinois.
But while these dollar amounts surpass what the U.S. government and other industries are spending on biofuels research, they represent a minuscule investment for the largest oil companies, which each generate at least $150 billion per year in revenue and $10 billion or more in profit. ExxonMobil’s multiyear algae investment amounts to one-half of 1 percent of its petroleum capital and exploration expenditures over the past five years. By contrast, consider that Shell has partnered with Qatar on an $18 billion project to convert natural gas into liquid.
The oil industry’s involvement in biofuels is best characterized as a fallback plan in case the world’s governments implement aggressive climate policies or OPEC and other oil-rich nations -- where state-owned oil companies reign supreme -- further restrict foreign access to oil.
Big Oil is fundamentally mismatched to the project of developing alternative fuels. The corporate culture and core competence of oil companies favor large, centralized investments; these conglomerates are skilled at building massive structures and investing enormous amounts of capital in pursuit of oil.
Biofuels, by contrast, depend on vast amounts of land and relatively small, labor-intensive production facilities that differ fundamentally from the engineering-dominated oil business. Even the largest corn ethanol plants are a fraction of the size of fossil-energy facilities, for the simple reason that the resource is dispersed and expensive to collect in one large central location. That’s not the case with coal or oil or natural gas.
For the same reasons, other forms of renewable energy -- those derived from the sun, wind and water -- are equally unsuited to Big Oil’s talents.
So oil companies are investing the equivalent of pennies in biofuels and other alternative energies, compared with dollars in unconventional oil prospects. But while they are behaving logically in economic terms, they aren’t serving the public interest. Drilling in uncharted territory is dangerous, as we have seen, and unconventional oil extraction carries the potential for any number of environmental disasters.
If the major energy companies don’t embrace alternative energy, where will the hundreds of billions of dollars come from to develop and launch renewable fuels? The venture capital community is investing heavily in biofuel technology, but those sums are still tiny compared with what’s needed -- and compared with the resources available to oil companies.
No matter what, Big Oil will be investing enormous amounts of money in energy production and infrastructure in the years ahead, up to an estimated $1 trillion over the next decade. If these investments continue to go disproportionately toward unconventional oil, the consequences will be both dirty and dangerous.
Deborah Gordon, a former chemical engineer with Chevron, is a transportation policy consultant. Daniel Sperling is director of the Institute of Transportation Studies at the University of California at Davis. They are the authors of “Two Billion Cars: Driving Toward Sustainability.” This column first appeared in the Washington Post.