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On World Energy Day, Applauding an Energy Breakthrough: Innovation Strategy Drives Stronger Productivity

Christopher Colford's picture

At a moment when good economic news is in short supply, this week’s observance of World Energy Day provides a chance to celebrate some positive news – positive, at least, from the viewpoint of the world's developed economies, which have lately been struggling to recover from prolonged stagnation.

The recent plunge in global energy prices was a major factor informing a World Energy Day forum on “The Green Side of Energy Security” – convened in Washington on Wednesday by the European Union Delegation to the United States. The plummeting cost of energy, thanks in part to vast increases in oil and natural-gas supplies, is now poised to give advanced economies a much-needed additional stimulus. That's helping dispel some of the gloom that pervaded the economic forecasts at the recent Annual Meetings of the World Bank Group and International Monetary Fund. 

Moreover, the current global glut of oil and natural gas also highlights the success of a far-sighted innovation program that has helped strengthen productivity in the energy sector. The success of the 40-year-long U.S. program to create more effective methods of oil and natural-gas production has has transformed the global energy landscape. If those new production methods can be responsibly carried out, in compliance with strict environmental safeguards – and, granted, that’s a big “if” – then the economy will buy some extra time as it seeks to make the transition away from fossil fuels and toward cleaner, greener, more sustainable sources of energy.  

The initiative's technological breakthrough epitomizes the creativity that public-private cooperation can unleash when governments and industries, working together, patiently invest to strengthen productivity in specifically targeted industries and sectors.

The worldwide price of crude oil has fallen about 25 percent – from more than $110 a barrel in midsummer to about $80 a barrel this week – thanks to a combination of reduced demand (due to sluggish economic activity in many industrialized countries) and vastly increased oil and natural-gas production. Despite the geopolitical tensions now afflicting several major oil-producing regions, large new supplies of oil and natural gas are projected to continue arriving on the market, maintaining downward pressure on energy prices.

Much of the increased supply has its origin in North America – where “the revolution in American shale gas and ‘tight oil’ is real,” according to energy-policy scholar and historian Daniel Yergin. Writing in the Financial Times this week, Yergin noted that “U.S. crude-oil output is up almost 80 percent since 2008, supplying an extra 3.9 million barrels a day. . . . Canadian oil sands have added another 1 million barrels a day to North American supply over the same period.”

The energy revolution is poised to deliver a powerful, positive economic impact: As industries and consumers pay less for oil and natural gas, they’ll receive the equivalent of a tax cut – with Yergin estimating its benefit at about $160 billion a year, just for the U.S. economy. Such a stimulus, if it helps buoy economic activity in Europe as well, will boost economies that have been mired in what threatens to become long-term “secular stagnation.”

For motorists who are now paying less at the gasoline pump – and for home-heating-oil and natural-gas consumers who are awaiting their first chilly-season heating bills – the oil-price plunge and natural-gas glut may seem like an economic deus ex machina.

Step by step, consider how this process delivered today's energy abundance.

What inspired the arrival of these new energy supplies? New technologies and techniques – “hydraulic fracturing” and “horizontal drilling” – have helped coax once-inaccessible oil and natural-gas deposits out of underground rock formations.

And how were those techniques developed? Through well-targeted innovation programs that were initially funded by government agencies. After government-funded R&D had proven the new technologies' promise, the new industrial methods were eagerly applied by innovators in the energy industry. 

Connect the dots: This revolution was brought to you by far-sighted, government-inspired investment initiatives that helped a strategically-chosen sector of the economy promote competitive industries and innovation.

OK: Let's come right out and say it: This marks a triumph of industrial policy.

Granted, that always-ambiguous term has fallen out of political favor nowadays. And, true, such public-private investment programs can be very difficult to design and sustain: In this case, it took about 40 years of experimentation and evolution to achieve the program's goals. Yet, when this initiative was launched in the energy-starved 1970s, various approaches to industrial policy were being pursued by many economies, large and small. (Yes, even in the United States, and even under conservative governments, as illustrated by the Ford Administration's pursuit of this program.) Put in its historical context, this example of 1970s-style industrial policy delivered, at last, its long-promised payoff in productivity.     

Piloted during the Ford Administration and ramped-up during the Carter Administration, this effort hailed from an era when repeated oil shocks were raising fears that the industrialized world would be threatened by oil-rich countries’ production cuts and price increases. Pragmatic R&D efforts on alternative oil-production methods were methodically pursued by the U.S. Department of Energy (DOE) and the U.S. Bureau of Mines, drawing on crucial technological insights from the taxpayer-supported network of national research laboratories.

Once that initial government-funded research had laid the foundation for new technologies and techniques, the private sector stepped in and played its indispensable part. A public-private partnership through the Gas Research Institute helped perfect the new techniques, while pro-innovation tax policies granted favorable federal tax treatment for investors’ R&D commitment to the energy sector. A champion of the new technologies, George P. Mitchell, evangelized for hydraulic fracturing and horizontal drilling, even when skeptics scoffed. Researchers at the Breakthrough Institute assert: “Where Mitchell proved invaluable was [in] engaging the work of government researchers and piecing together different federally-developed technologies to develop a commercial product.” 

Developing local industries connected to the gas value chain: What can Tanzania learn from Malaysia?

Cecile Fruman's picture
Joining with our World Bank Group teams in the field in Kenya, Rwanda and Tanzania, I was pleased to recently see first-hand evidence of the strong impact that our Global Practice on Trade and Competitiveness is having on economic development throughout East Africa. Our projects are currently helping our clients improve their business environment, increase the competitiveness of firms in key sectors, and develop trade flows.

Think Finance, Think Access, Think Equal!

Sri Mulyani Indrawati's picture

Read it in Chinese.

Read in French.

 

I am often invited to pose as an example of how far women can go. And I am typically asked how I feel about my career having worked in positions that were often exclusively held by men. I am of course proud of my achievement, fully aware that at no time in my upbringing was I told that I could not do certain things because I was female. But I am also aware that many women around the world face barriers and challenges that prevent them from succeeding in politics, from earning a living, from looking after their families, from running successful businesses or even from opening a bank account.

I “googled” the words “women and barriers” and I got 48,500,000 results. The World Development Report 2012 on Gender Equality and Development says clearly: Gender equality is smart economics. So leveling the playing field is not only about doing the right thing, it will help economies to develop. Our work on development should help us aspire to get less hits when we search for “women and barriers” on the web.  Removing barriers to access to finance for women and making finance equal is not a small weapon in this battle.

On the Front Line of Climate Change....Buildings!

David Lawrence's picture

Efforts to fight climate change tend to focus on emissions, usually dirty ones, like vehicle exhaust or the toxic belching of coal-fired power plants. A blast of diesel fumes in your face is a good reminder that these things are bad for both people and the planet. So it’s no surprise that we zero in on cheerful, clean solutions, like solar power and zippy electric cars.

Geothermal energy: an under tapped, climate-friendly resource

David Lawrence's picture

A few years ago I had the pleasure of swimming in a big, heated pool. Outdoors. In winter. It sounds like an unaffordable luxury, and in most places, it is. But in Iceland, you can swim all year round in geothermal swimming pools. Iceland sits on the boundary of the Eurasian and North American tectonic plates, which are slowly pulling apart, giving it extraordinary geothermal resources. Besides year-round outdoor swimming, this renewable resource provides heat, hot water, and electricity.

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