Last week, President Barack Obama outlined a plan to cut oil imports by one-third over the next 10 years. With natural gas and domestic supplies as the foundation of this plan, it seemed like a move to the center after talk of wind and solar energy during his campaign. But some don't think this plan is workable.
Fellow Fool David Lee Smith pointed to how much of a pipe dream he thought the plan was. Fellow Fool Isac Simon put together some reasonable supply-side sources that may help reach Obama's plan. And as a conservationist, I put my Nostradamus hat on and made a few predictions about how much cutting demand may play into cutting oil imports. Predictions that are sure to go wrong.
Efficiency standards are the first step
Transportation accounts for more than 60% of the demand for oil in the U.S., according to the Energy Information Administration, so any discussion has to start here.
If we assume no supply change in the U.S. from domestic drilling, considering we import around 50% of our oil, we would have to reduce consumption by one-sixth, or 16.7% to meet Obama's goal.
New Corporate Average Fuel Economy standards will play a part in cutting our consumption. If we just look at proposed efficiency increases from 2016 to 2020, the gains would be substantial. In 2016, the estimated standard will be 34.1 miles per gallon fleetwide, increasing to 42 miles per gallon if the strictest standards are enforced in 2020. That increase from 34.1 to 42 alone would reduce gasoline consumption 18.8% for vehicle fleets. That's a big number, and considering we have brisk sales of SUVs and weak sales of hybrids lately, we may have to count on high prices at the pump to change our habits.
I'd love to say efficiency can account for a huge cut, but I'll take a more realistic stance. If 20% of the overall fleet meets the 42 MPG standard, that could reduce overall consumption 3.8%. For the sake of this argument, let's assume a 3% drop in overall oil demand from efficiency. That's 3% down, 13.7% to go.
Alternative fuels take a bite out of demand
Consider the progress Clean Energy Fuels (Nasdaq: CLNE ) has had slowly building a natural-gas-fueling infrastructure, which may offer the most upside potential. It's conceivable that a larger number of natural gas vehicles will be on the road in 10 years. Metro buses around the country are the start, but trucks will be next, and passenger vehicles could soon follow.
Fuel Systems Solutions (Nasdaq: FSYS ) would be happy to see you convert your gas vehicle to natural gas by providing the components to make it happen. In 10 years, I don't think this conversion will be a game changer, but a modest 1% reduction in oil demand from a shift to natural gas is very feasible, with the potential for more.
And if electric vehicles like the Chevy Volt, Tesla Motors' (Nasdaq: TSLA ) Model S, and others account for 2% of vehicle sales in 10 years, as J.D. Power predicts, we may well be on our way to another dent in demand. Obama also pledged to make sure the federal government buys 100% alternative fuel, hybrid, or electric vehicles by 2015, so there's at least one big buyer out there. A significant cut in oil demand from electric vehicles may not be huge, but if we estimate 2% (with a +/- 2% error), we can shave a little more demand.
In total, I've estimated that we could reduce oil demand by 6% by improving efficiency and switching to natural gas or electric vehicles. And now we look past transportation.
Alternatives to plastic
Transportation may make up most of the oil demand, but industrial demand eats up a healthy portion as well, just under 20%. And everyone uses one of the biggest demand sources: plastic.
It will be difficult to cut our dependence on plastic, but engineers may be able to help by making plastic from sources other than oil. Two major plastic producers DuPont (NYSE: DD ) and Dow Chemical (NYSE: DOW ) both have lines of plastic resins made from nonpetroleum-based processes. Considering the progress that's been made over the last 10 years in this area, I think engineers will take more steps to cut oil use for plastic in the future.
But these alternatives have been slow to develop, and adoption has been slow as well. I wish I could say we could cut oil demand from these alternatives, but it looks like a blip on the screen to me. The industrial sector just doesn't offer a lot in the way of alternatives.
Yes we can, but it won't be easy
So we have the potential to increase domestic supply and cut demand with improved fuel efficiency standards, natural gas fueling vehicle fleets, and electric vehicles hitting the road. The 6% drop in demand over 10 years is at best a guess, but it's at least feasible.
In the end, I see Obama's goal as plausible, but it may depend more on high oil prices than anything else. If prices are high at the pump, behaviors change, and so will demand for oil imports. What do you think? Leave your thoughts in our comments section below.