MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE: Can we easily end our oil addiction?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

In this year's State of the Union address, President Bush challenged the country to end its addiction to oil, particularly foreign oil. Oil supplies 40 percent of the nation's energy needs, and foreign oil accounts for 60 percent of all our oil usage, up from 33 percent 20 years ago. A significant part of foreign-supplied oil is from regions with political and security issues.

Yet remember the well-used phrase, “If it was so easy, it would already have happened.” Unfortunately, this comment applies directly to our oil usage. There are no other fuels readily available today that provide the versatility and cost advantages of oil. Simply put, oil and its derivatives have no immediate viable alternatives.

But wait, wait: What about fuels like ethanol, battery packs and solar power? It's technically possible to power a significant part of our economy with these sources. So why can't we begin to move away from oil and gasoline toward these homegrown fuels?

We probably will, in small steps. But don't look for the alternatives to supplant a major share of the petroleum market for one basic reason: economics. Even with hefty public subsidies and today's oil and gas prices, when we consider up-front as well as operating costs, the alternatives still aren't cheaper for the large majority of consumers. One study estimated that ethanol only becomes competitive when gas hits $3.50 a gallon and stays there.

Advocates of energy alternatives don't take this analysis lying down. They say alternatives do measure up, in “dollars and sense,” when we consider oil's full costs. Specifically, they make the forceful argument that oil and gasoline are under-priced on two counts.

First is the cost associated with pollution. For example, although vehicle emission standards have improved, some air pollution is created every time a gas-powered car or truck is driven, and the cost of this pollution is not reflected in gasoline prices.

Second is the claim that some of the country's military and foreign aid expenditures are directly related to ensuring foreign oil supplies from unstable regions, and these costs are also not included in the price of oil-based products.

When these two costs are estimated — and, I must quickly add, several important assumptions make the calculations open to debate — they suggest gasoline may be under-priced by as much as $1 to $1.50 per gallon. In other words, the full cost of gasoline, including both pollution and national security issues, would today be between $3.25 and $3.75 a gallon!

Obviously, if gas were consistently priced between $3.25 and $3.75 a gallon, energy alternatives would look very appealing. Drivers wouldn't have to be encouraged by public service announcements to use mass transit, purchase hybrids or consider alternative fuels; they'd do these things naturally to save money. However, research shows these changes would result in only a 15 percent oil-use reduction.

This leaves an unpleasant realization. Barring some technological breakthrough, we will not achieve independence from foreign oil quickly and without cost. We can tax gasoline substantially more to motivate people to use non-oil alternatives, but in the interim this would significantly increase the cost of gas and create stress on family budgets.

Or we can heavily subsidize energy alternatives through government grants and programs so that the price consumers pay for the alternatives is in line with the price of oil-based fuels. However, the costs of these government efforts are ultimately borne by either today's or tomorrow's taxpayers.

There is a happier third option that I hinted at: technology. Somewhere, someday in a remote laboratory, a scientist may develop a new engine or new fuel that is cheap and doesn't use oil. To dream further, let's say existing engines could be easily adapted to accommodate the new product. This would be the end of our energy worries.

But until that happy day comes — if ever — we have to face facts. Oil, including supplies from foreign producers, will likely be with us for a long while. Reducing our dependence on oil will mean costs. We'll just have to decide what kind.

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html