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Fueling the Next Industrial Revolution

By Michael Mandel It doesn't seem fair. If we've entered into the "Information Economy," why is crude oil -- black and gooey -- still so darn important? After all, it's just another dirty industrial commodity, produced in far-off corners of the world. Even the name -- "crude" oil -- seems leftover from the age of smokestacks and dirty factories.

Nevertheless, like the dog being wagged by the tail, the enormous and technologically advanced American economy is regularly shaken up by events in the world oil market. Usually it's turmoil in the Middle East that sends prices soaring. Most recently, however, it was a tax dispute between the Russian oil giant, Yukos, and the Russian government that caused trouble. The result: The price of crude oil on the futures market jumped to more than $43 per barrel.

STUCK IN A RUT. But even as they complain about high prices for gasoline, most people don't realize the real reason why high-tech economies are still so dependent on a low-tech commodity. The fact is, while information technology has leapt ahead over the past 30 years, energy technology has stagnated. The internal-combustion engine was invented in the 1860s. Thomas Edison built his first commercial electric power station in 1882. Gas turbines were first used for electric power in the 1930s. The most recently invented energy technology in widespread use is nuclear power -- and there have no new nuclear plants ordered since 1978.

Thus, the current situation is the result of a profound technological failure. We still have no adequate substitute for oil as an energy source, especially for transportation. Even if we adopted far more stringent conservation measures, we would still be importing large quantities of oil from volatile areas such as the Middle East and Russia. There's simply no way to significantly change the energy equation without the widespread adoption of new technologies.

To underscore the energy sector's technological stagnation, just look at how little has changed since 1973, when OPEC triggered a global energy crisis by imposing an oil embargo on the U.S. and raising prices to other customers. You'd think that the shock of long gas lines and high prices would have stimulated big changes in the energy market over the past 30 years. However, the share of energy consumption in the U.S. coming from renewable sources, including solar power, is stuck at 6% to 7% -- barely higher than it was in 1973. That's incredible.

GEOPOLITICAL IMPACT. Similarly, fossil fuels still make up 86% to 87% of all energy consumed, down only slightly from 93% in 1973. The latest data from the Energy Dept. shows that the U.S. gets roughly 15% of its oil from the volatile Persian Gulf, roughly double the percentage that it did 30 years ago.

This lack of technological progress obviously has geopolitical consequences. The heavy concentration of oil in the Middle East has influenced U.S. and European foreign policy for decades. Iraq's proximity to oil-rich Kuwait and Saudi Arabia -- and its ability to possibly fund weapons programs through oil exports -- increased the potential damage that Saddam Hussein could do. And at least a portion of Saudi Arabia's oil wealth flows into the hands of Islamic fundamentalists.

Moreover, a continuing dearth of technological breakthroughs in energy production and distribution could have major economic consequences. Already China's rapid growth is bumping up against energy constraints, at least temporarily. In the U.S., spot electricity shortages eventually could cause more widespread problems, especially if the use of fossil fuels is restricted due to fears of global warming.

R&D GAP. These ramifications suggest the only way to truly escape the geopolitical and economic consequences of oil dependence is by developing new energy technologies. Certainly, plenty of possibilities exist, ranging from solar power to fuel cells to safer approaches to nuclear power. Startup companies are working on promising new products, though none are ready for prime time yet.

That's where government policies -- and the current Presidential race -- come in. Despite the incredible need for new energy technologies, government spending on energy research and development has collapsed, dropping in half since 1990 (after adjusting for inflation). Moreover, the private sector hasn't filled the gap. Industry R&D spending on energy still is mostly devoted to fossil fuels, while venture-capital funding for new energy technologies remains relatively meager.

SKIMPING ON DOLLARS? It's time for both President George W. Bush and his challenger, Senator John Kerry, to stand up and be willing to make a commitment to technological change in energy one of their priorities. Bush's latest budget called for a reduction in inflation-adjusted dollars for energy R&D over the next five years. That needs to be changed. Kerry, too, must guarantee that he'll boost funds for R&D on new energy technologies. While that's part of his campaign platform, it runs the risk of being cut in the name of deficit reduction if Kerry is elected. Conservation, which is less costly, is essential but not enough.

All the great industrial revolutions have included a breakthrough in energy production and distribution, from the steam engine to the internal-combustion engine to electricity. Today's information revolution needs an energy breakthrough as well. Mandel is chief economist for BusinessWeek

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