EBF 200
Introduction to Energy and Earth Sciences Economics


Replacing Oil


In the previous two sections, I have spoken of two reasons why we might wish to replace oil with some other alternative:

  1. Scarcity: we will eventually run out of oil.
  2. Security: we want to reduce consumption of oil because of the many external costs associated with it.

I will you remind you that there is no meaningful indicator that we are anywhere near "running out" of oil, and we mentioned in the previous section that many of the externalities from consuming oil have been partially internalized. The public at large has shown little interest in internalizing the remaining externalities, instead being content to deal with the public-goods issues by taxation methods.

However, it is possible that one or both of these issues will change in the near future. What if we have to replace oil with something, what will it be?

There are five immediate options that I can think of:

1. Efficiency

This means using less of an input for a given amount of output. In the context of oil, it means using less oil for the same amount and type of transportation. This has been the primary method that has been employed since the 1970s, and is likely to be the most immediate one used in the near future. The major program that has been use is the Corporate Average Fuel Economy program, known by the acronym "CAFE".

In brief, CAFE led to the increase in the average fuel economy of passenger cars from about 14 miles per gallon in 1974 to about 27 MPG by 1985. After several years at the same level, new standards were announced in 2010, with the intent of raising the fuel economy to 34 MPG by 2016 (visit Bureau of Transportation Statistics for the more recent data). Also, for the first time, trucks, buses and other heavy equipment will be subject to fuel economy rules.

Recommended Reading

You can read all about the proposed rule at the National Highway Traffic Safety Administration CAFE web page (this is for your information only, not required reading).

2. Conservation

This is not the same as efficiency, which means using less fuel for the same amount and type of transportation. Instead, this means consuming less transportation or changing the mode of transportation. It can have several manifestations:

  • Walking instead of driving.
  • Bicycling instead of driving.
  • Car-pooling instead of driving alone.
  • Tele-commuting instead of physical commuting.
  • Web-conferencing instead of travelling to meetings.
  • Vacationing close to home instead of flying to Europe or Asia or Hawaii.
  • Consuming only locally-produced goods (that do not have to be transported long distances).
  • Consuming virtual goods (books, music, movies, education(?!?)) over the computer, instead of traveling to purchase physical alternatives.
  • Moving closer to work/school/shopping.
  • Mass transit- buses, rail, ferries, etc.

Many of these involve substituting travel with non-travel. If we assume that a person derives positive utility from traveling, then replacing travel with non-travel will necessarily result in a reduction of wealth, with the possible exception of the replacement of physical consumption with virtual, electronic consumption. Needless to say, it is difficult to get people to willingly perform actions that will make them less wealthy.

3. Natural Gas

This is perhaps the most obvious alternative. Natural gas is already used in millions of vehicles in South America and Asia. It does not require any major technical alterations to the engines that are currently used to burn gasoline. Another advantage of natural gas is that there are large volumes of it available at very low prices in the US - currently, crude oil costs about three to four times as much as natural gas in the US on an energy basis, that is, \$/Btu of heating energy.

So, the question arises: natural gas is cheap, abundant, domestic, technically feasible, and in use in many other parts of the world. Why aren't we using it? A couple of hurdles: natural gas vehicles either have to have large tanks or short range, and there is not a large infrastructure for refueling. There is also a belief that natural gas vehicles have less performance than equivalent gasoline-fueled vehicles. There are several instances where these issues are not important. For example, all of the buses that run in State College are fueled by compressed natural gas. Taxi fleets, UPS trucks, garbage trucks and school buses are other applications that have seen significant natural gas penetration. The biggest obstacle that people cite is the cost of converting an existing vehicle to natural gas, which is currently on the order of \$1,500-$2,500 per car.

Recommended Reading

The following website is that of the Natural Gas Vehicle Coalition, which is a lobbying group for the adoption of natural gas-fueled vehicles. If you are interested in this issue, there is some good information here, although you should be aware that this website is giving you only one side of the story - that of the boosters of natural gas for vehicles.

A slightly more balanced overview can be found here: Harris, William. "How Natural-gas Vehicles Work," How Stuff Works.

An update: April 6, 2011 saw the introduction of the NAT GAS Act, which is an acronym for The New Alternative Transportation to Give Americans Solutions Act. As you can see, it is very important in today's Washington that every new act have either a catchy name or a cute acronym. No matter. This is an act that largely follows the recommendations of the Pickens Plan, as mentioned above, with the goal of putting something like 250,000 natural gas fueled commercial vehicles on the road, and reducing the amount of diesel fuel (and, by extension, imported crude oil) burned every day. This bill contains a variety of tax incentives designed to grow the tiny natural gas fleet. I should note that the immediate aims are quite modest - currently, natural gas vehicles use about the equivalent of 25,000 barrels of oil per day, or about 0.12% of the oil consumed in the country. This bill would increase that number by 4 or 5 fold, that is, displacing about half a percent of oil consumption.

4. Electricity

Replacing gasoline with electricity has two major components: battery-powered vehicles, and long-distance rail powered by electric power-lines.

Recommended Reading

We are seeing a bit of a boom in electric vehicles at this moment, with about 11 different models available now or in the near future, as listed at the following Department of Energy's web page, New & Upcoming All-Electric Vehicles:

Since almost all electricity is generated by domestically sourced natural gas, coal or renewables (hydroelectricity, wind, ... ), or by uranium that is imported from nations like Canada and Australia, this type of vehicle has the capability to drastically reduce oil imports. There are several reasons why the widespread adoption of electric vehicles may be a bit far out into the future. The first is range: many of these vehicles have a limited range, and will take a long time to recharge. Thus, they will be impractical for long-distance travel. Government data indicate that over 90% of the vehicle trips taken are less than 40 mile round trips, so much of our driving could be replaced by electrics, but people would still need another vehicle for whenever they wanted to drive more than 100 miles in one day. Another issue is cost: an electric vehicle is currently costs more than a corresponding gasoline-powered vehicle, and the payback period extends beyond the life of many cars. The availability of sufficient lithium and problems with battery life are other issues that are yet to be fully surmounted. Nonetheless, as I mentioned above, we are currently in a bit of a boom for this market segment.

5. Biofuels and Biogases


Instead of digging our fuel up from the ground, why do we not grow it from the ground? Ethanol, which is created by fermenting a biomass such as corn or sugar cane, and biodiesel, which is made from soybeans, are two types of biologically-sourced fuels that are currently in use in the US. While biofuels are also basically 100% domestic, there are a couple of large issues that may hamper their broad-scale adoption. Firstly, the process of tilling, seeding, fertilizing, harvesting, transporting, processing, fermenting, and distilling ethanol is very energy intensive. The second issue is that corn and soybeans used to make biofuels are corn and soybeans that are not used to make food products. As such, it has effects on the price and availability of food.


Methane derived from the anaerobic decomposition of organic materials. Landfills, wastewater treatment plants, and animal farms (manure) all have the opportunity to capture and utilize this naturally occurring methane. While much of the methane currently captured is being used to power electrical generators, increasingly the biogas is finding applications in the transportation sector. Some large waste-hauling firms such as Waste Management are powering garbage trucks with methane collected at the landfill. In these types of applications, the biogas resembles Natural Gas (see above), and has many of the same benefits and hurdles- conversion costs and distance constraints, for example.


As we can see, there are a variety of options that are currently available to replace crude oil as a transport fuel if we have to. However, as in the case of the automobile that solved the "intractable problem" of horse manure in New York, it is most likely that crude oil will be replaced by some technology, or combination of technologies, that has yet to be invented.