Demand's Role in Obama's Energy Plan

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.

Big auto companies such as Ford (NYSE: F  ) and GM (NYSE: GM  ) have taken steps to make more efficient vehicles, but I'm sure they'll fight a 42 MPG standard, so progress may be slow for efficiency.

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.

Fool contributor Travis Hoium is hoping to own a Tesla Model S someday soon and in the meantime does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

General Motors is a Motley Fool Inside Value selection. Ford Motor is a Motley Fool Stock Advisor pick. The Fool owns shares of Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2011, at 2:57 PM, funfundvierzig wrote:

    DuPont has been using corn (food) as an industrial raw material to manufacture corn clothes, corn carpets, corn aircraft deicers, and even corn auto parts from corn-based resins.

    Trouble is the FOOD-to-FUEL & FABRICS business paradigm of the DuPont leadership is critically flawed insofar as it contributes to the global shortages of food, and intensifies soaring food price inflation. Importantly it's not likely to make much, if any money for DuPont shareholders.

    In our opinion, DuPont Management's "Sustainability" strategy is largely a colossal public relations stunt to help sanitise DuPont's long sordid history as a massive toxic polluter across world.

    Merely the opinion of one investor...funfun..

  • Report this Comment On April 05, 2011, at 3:07 PM, jumperky wrote:

    Why are we not trying to reduce the 20% of oil we import from the mid-east to zero? Increase imports from Canada, reduce consumption and tax breaks for electric and LNG.

    If we would eliminate the tariff on bio-gas we could reduce food prices too.

  • Report this Comment On April 05, 2011, at 3:39 PM, pokeys1969 wrote:

    it seems to me that the best chance for success to an energy policy for america ls to convert to natural gas for vehicles and new power plants .

    it will provide cheaper, cleaner and most of all domestic energy . it will stop the flow of american dollars to opec enemies and lead to job production and future prosperity.

  • Report this Comment On April 05, 2011, at 4:10 PM, collinskcaolcom wrote:

    Rather than having a comment, I have a question for any other fool out there....

    Is it true that we have a huge oil preserve out west, located somewhere below the mountains out there....?

    If so, who is preventing oil companies from drilling for the oil...? I was under the impression that there was a hundred or more years of oil laying in the ground below the mountain ranges out west...

    I don't mean to be redundant, but do we have oil in the ground in this country or do or do we not,..?

  • Report this Comment On April 05, 2011, at 4:22 PM, mjtri wrote:

    A good chunk of this goal should be accomplished without the President lifting a finger given that gasoline usage has already peaked in this country, but it's still a good goal. I'd expect that we don't meet the goal within 10 years, but we meet it within 15 years. Regardless, we should increase production or at least keep it from decreasing (i.e., we need to drill more) and further decrease demand in a logical, progressive manner. Upping the gas mileage for cars, trucks, buses, etc. is probably the best method. Gas taxes could help, but the general public isn't too keen on increased gas taxes.

  • Report this Comment On April 05, 2011, at 4:41 PM, mtf00l wrote:

    California already had electric cars. From Ford, Honda, Toyota and GM. If you haven't seen one it's because they were shredded, yes, shredded before they could be purchased.

  • Report this Comment On April 06, 2011, at 10:43 AM, Epinephrine wrote:

    I'm glad the author, Travis, remembered to include the point about plastics being a significant use of oil. As @funfundvierzig points out, there are alternative plastic materials out there, but the feasibility of continuous production of them is questionable and this does nothing for eliminating our dependence on oil.

    To Travis' point about transportation, I don't think it's the government's job to fix all of our problems for us, but that we can do something ourselves. I think proper driving training is important. If kids were required to learn how to drive from a paid instructor, perhaps they could also learn to drive more efficiently. My Nissan Sentra was rated at getting 35mpg on the highway, and with this car I was able to average 45mpg. Furthermore and not to sound too hippyish, but the idea behind "Buy Local, Be Local" really would do a LOT to reduce oil consumtion for transportation in that much of the need for extremely inefficient tractor trailors could be reduced since stuff wouldn't need to be trucked from LA to Florida. As for his point about going to electric cars, this is a great idea but it removes consumption of fuel from the car and places the burden on a power plant to produce the fuel. The trouble is, most power plants in America burn fossil fuels. That being said, I would support Travis if he had actually rec'd TSLA.

    @pockeys1969 comment, I think exchanging dependence on oil for dependence on natural gas is not a solution at all. At best, it could only be an interim step to the real solution. As a frequenter of Fool.com, I imagine you're a long-term thinking investor, so it should follow that energy consumption ideals should include long-term solutions. A dependence on anything coming from the earth is inherently finite and therefore a short-term solution. From an power plant perspective, I personally favor nuclear because it's the industry I work in and know the most about, but I will admit that it is also not the best solution nor is it a long-term solution as it also uses a finite fuel provided by the earth. The reason I favor it over anything else is because it has an enormous energy capacity in an extremely small size and can be harnessed in a very safe way. Since fission was discovered and a way to harness the energy was developed, scientists and engineers have had plant designs which were safer and more efficient than the standard water-based nuclear reactor that the world has adopted. Maybe now that there has been a 2nd radiation leak since nuclear power's inception (Chernoble and Fukushima - TMI had no elevated radiation levels outside the reactor), politicians will take the time to choose their reactors a little more wisely. And hopefully companies will offer new designs to customers. BWC is a company that is doing this to some extent.

    Finally, and back to the original point of not relying on the government to fix all of our problems for us, as consumers we need to accept responsibility for our actions and realize that there are unforeseen consequences to wasteful energy consumption. If we all became more efficient users of electricity that would also have a huge impact on the demand.

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