End of the Oil Age

Bill Reinert, an innovator of Toyota's gasoline-saving Prius, says carmakers aren't moving fast enough to cope with global warming and $100-a-barrel crude. Hybrids, plug-ins and electric-only vehicles must take center stage to help the planet avoid environmental and economic disaster.

By John Lippert and Alan Ohnsman
Bloomberg Markets March 2008

Bill Reinert, who helped design Toyota Motor Corp.'s Prius hybrid, hovers in a helicopter 1,000 feet over Fort McMurray, Alberta. On this clear November morning, he's craning for a look at one of the world's largest petroleum reserves where there's not an oil well in sight. Instead, in a 2-mile-wide pit below, trucks head to refineries with loads of sand weighing more than Boeing 747s. Yellow flames shoot skyward as 900-degree-Fahrenheit (482-degree- Celsius) heat liquefies any embedded petroleum. Floating scarecrows and propane-powered cannons do their best to chase migrating birds from lethal wastewater ponds. Eventually, nuclear reactors may surround the crater 270 miles (435 kilometers) northeast of Edmonton, Alberta, delivering the power required to wring oil from sand.

"This is what the end of the age of oil means," says Reinert, 60, who plans the vehicles Toyota will make in a quarter century as national manager for advanced technology at the U.S. sales unit in Torrance, California. "The car-based culture, the business-as- usual of building cars and trucks, is going to change dramatically."

Since Henry Ford introduced the moving assembly line in 1913, the world's automakers have relied on a single source of power--the gasoline-dependent internal combustion engine. Today, the twin threats of $100-a-barrel oil and global warming are convulsing an industry addicted to cheap, abundant petroleum. Auto companies, already hurt in 2007 by the lowest U.S. demand in a decade, are struggling to perfect cars that run on ethanol, diesel, natural gas, hydrogen and household electricity. They're under the gun from California and more than a dozen other states to cut carbon exhaust by 2020 with vehicles that must get 44 miles per gallon (19 kilometers per liter) of gasoline, about double today's average. On Dec. 19, President George W. Bush signed a law that mandates fuel-efficiency of 35 mpg nationwide by that year.

Reinert says automakers are endangering themselves by basing sales and profits on the big, fast cars that many U.S. customers say they want in 2008. In five years, as oil shortages and global warming intensify, car companies may be out of step with drivers' demands for fuel-efficient vehicles. Even worse, degrading stretches of the planet like Fort McMurray will only delay--not prevent--the time when the world must function in a post-peak- petroleum economy.

Canada's oil sands region may eventually provide a quarter of U.S. crude oil demand, currently at 21.3 million barrels per day, Reinert says. "At that point, the environmental impacts are totally irreversible," he says. "You turn this area into an ecological sacrifice zone."

Toyota investors, whose shares tumbled 27 percent to 5,630 yen in the 12 months ended on Jan. 11, say the company's priority must be weathering a weak U.S. market, not chasing breakthroughs in green technology. Last year, U.S. sales declined 2.5 percent to 16.1 million vehicles industrywide. "There's cake, and there's frosting," says Jeffrey Scharf, president of Santa Cruz, California-based Scharf Investments, a fund firm that owns Toyota stock among its $700 million in assets. "Hybrids are more into the area of frosting."

Shareholder ambivalence about clean cars is only one hurdle to surviving the end of easy oil. Reinert, a former Navy submariner who stands 6 feet 1 inch (1.85 meters) tall, says he lies awake at 2:30 a.m. wondering whether he's making the right recommendations for the future of Toyota--and the planet. His suggestions run from building lightweight compacts and plug-in hybrids to redesigning smog and people-choked cities and populating them with electric- only cars.

Reinert says nobody can say for sure how the separate tailpipe emission, fuel economy and manufacturing regulations promulgated worldwide by multiple levels of government will affect the environment. There's no blueprint for the impact of increasingly scarce oil on a U.S. economy already laboring with a mortgage crisis and a dropping dollar. Add industrialization in China and India, and the number of cars and trucks worldwide may double to 2.1 billion by 2030, according to the Paris-based International Energy Agency.

"We don't have a past, a history or a database that allows us to explore the simultaneous impact of recessions, disruptions to the energy supply and climate change," says Reinert, who spent six years in the 1980s maintaining solar and wind-powered telephone towers in Colorado's Rocky Mountains. "We don't have the legislative, regulatory, financial or product planning tools." Toyota is making excuses for not moving faster on fuel-efficiency, says Daniel Becker, a Washington lawyer and former head of global warming programs at environmental group Sierra Club. Since Toyota's 2003 hit with the second-generation Prius, which gets as much as 45 mpg in city driving, the company has slid backwards, he says. In early 2004, Toyota and other carmakers refused to negotiate with state legislators before California developed its carbon restrictions. In December 2004, they sued to strip California of its ability to enact its own limits, prompting counterclaims that may end up in the U.S. Supreme Court. "People like Bill Reinert understand the issues," Becker says. "That hasn't stopped the company from turning to large trucks and SUVs to boost sales."

Reinert defends toyota's need for sport utility vehicles, minivans and pickups, which contributed 42 percent of its 2.6 million U.S. vehicle sales in 2007. The company earns about $6,000 before taxes in the U.S. on an SUV. That compares with a $1,000 profit on a Corolla and a small loss on a Prius, says David Healy, an analyst at New York-based Burnham Securities Inc. The Toyota City, Japan-based company made ?450.9 billion ($4.1 billion) in the three months ended on Sept. 30 compared with ?405.7 billion a year earlier. Sales rose 11.3 percent to ?6.49 trillion.

"Without these profits, where does the investment capital come from for our research on plug-ins or fuel cells?" Reinert asks. Yet he fears Toyota and other carmakers may be too bureaucratic and profit driven to prepare for the energy-constrained future. Toyota's U.S. sales headquarters employed 400 people when Reinert was hired in 1990; today, 8,000 work there, and the U.S. is Toyota's most profitable market.

"There's a tension between pickups and hybrids within Toyota," says David Schearer, chief scientist for California Environmental Associates and a consultant on the Prius. "They want to do the right thing, but the Prius is a relatively small piece in terms of overall sales volume." Prius sales totaled 181,221 in the U.S. last year compared with 30,000 in Toyota's original forecast when the car went on sale in 1997.

Toyota may have become the world's largest automaker in 2007, building 9.51 million cars and trucks versus an estimated 9.26 million for General Motors Corp. The U.S. automaker planned to announce final results on Jan. 23. Given Toyota's craving for growth and profits, Reinert says he feels like a 21st-century Cassandra, endowed with the gift of prophecy about the oil-related crises to come but fated not to be believed.

The environmental desecration at Fort McMurray and the dangers in petroleum-rich countries such as Iraq and Saudi Arabia show why it's foolish to brush off warnings about an energy-depleted future, says Jan Kreider, an engineering professor at the University of Colorado at Boulder who had Reinert as a graduate student. "We're going to have to have crisis on top of crisis before energy policies change," he says. "Americans have this shock mentality where they do what they want to do for as long as they can and then set up massive programs to fix everything in a few years."

So far, Americans are embracing small steps such as switching to fluorescent light bulbs. Meanwhile, at Fort McMurray's pit mines, it takes 2 tons of sand, 250 gallons (947 liters) of water and 1,400 cubic feet (39.6 cubic meters) of natural gas to produce one barrel of synthetic crude, says Peter Wells, director of research firm Neftex Petroleum Consultants Ltd. in Abingdon, England. That's enough water for a day's use for a U.S. family of four and enough natural gas for 5.6 days. The gas is burned to power a process that extracts a tarry substance called bitumen from the sand and then refines it into synthetic crude.

In turn, each barrel generates as much as 110 kilograms (240 pounds) of carbon dioxide equivalents, the same as refining three barrels of traditional light crude.

"When you're schlepping around two tons of sand for a barrel of crude, it shows that conventional oil is already well into depletion," says Jeffrey Rubin, chief economist at CIBC World Markets Inc. in Toronto. "Price will ultimately ration demand. People won't be able to afford to drive."

Canadian Association of Petroleum Producers Vice President Greg Stringham generally agrees with Wells's numbers. He says each barrel of synthetic crude requires only 900 cubic feet of natural gas and puts out about 96 kilograms of carbon dioxide equivalents. "It's definitely true that the era of cheap and easy oil is over,'' says Brad Bellows, spokesman for Suncor Energy Inc., which opened Fort McMurray's first commercial oil sands mine in 1967. "Industry is looking offshore and to unconventional sources like oil sands."

Oil sands facility operators are working to minimize environmental harm by recycling water faster and using the refining process to produce heat that's now generated with gas, Stringham says. They're also trying to sequester carbon dioxide emissions underground and quickly restore land to its original condition.

Wells predicts world oil production will peak at about 100 million barrels a day in about a decade. By 2030, output will fall to today's level of 87 million barrels. Declining production will collide with rising demand, which could hit 118 million barrels a day by 2030 if trends were to continue, the U.S. Energy Information Administration forecasts. "When production levels off, if the price is $200 or $300 a barrel, then that's what people will pay," Wells says.

Reinert says that although oil may drop in price because of a global recession, it's likely to gyrate between $75 and $125 a barrel for the next five years. Crude oil for February delivery traded at $92.51 a barrel on the New York Mercantile Exchange on Jan. 11. It hit $100 for the first time on Jan. 2. "Peter's scenarios for future energy are the ones I embrace," Reinert says.

Toyota's rivals are struggling with the same predictions. "The biggest risk is the risk of a recession, of a shock to the global economy," says Larry Burns, vice president of research and development at General Motors Corp. "The second risk is China.

China's growth is unbelievable, and it depends on energy. In every country that's providing China with commodities, you're seeing record years in car sales."

GM plans to sell 16 models of gas-electric hybrids in North America by 2011. One of these, a Silverado pickup, gets 40 percent better fuel economy in city driving than the gasoline version, which gets 15 mpg.

At Nissan Motor Co., 25 percent of sales in five years may come from electric cars, hybrids and clean-burning diesels,up from 5 percent today, Chief Executive Officer Carlos Ghosn says. "I don't consider climate change or oil prices as a threat," he says. "I consider it an opportunity."

In an industry first, Honda Motor Co. will start leasing its Clarity fuel-cell car in California this year. Fuel cells create electricity in a chemical process that combines hydrogen and oxygen, with water vapor as the only byproduct. The Clarity has a top speed of 100 miles an hour, a range of 270 miles and lease payments of $600 a month.

Such advances may not come soon enough, says Reinert, who counts Toyota Executive Technical Adviser Norihiko Nakamura as an ally who shares his urgency. Nakamura, one of a handful of occupants on the top floor of Toyota's Higashi Fuji Technical Center near Mt. Fuji, says he worries the world's oceans could get so hot that they'll release carbon instead of storing it--with catastrophic consequences for human life. Nakamura takes his own measurements of atmospheric pollution and is scouring the world for alternative fuels. He's targeting hydrogen, electricity or ammonia as replacements for petroleum to ensure that auto, aircraft and ship builders remain viable for another century.

"Oil and natural gas are getting scarce, and there's global warming, so we need something that's carbon free," says Nakamura, 65, whose white hair almost reaches his shoulders. "Toyota has a sense of crisis that there are only several years left to do something about this."

The United Nations' Intergovernmental Panel on Climate Change, which shared the 2007 Nobel Peace Prize with former U.S. Vice President Al Gore, says carbon emissions must peak in 2015 to avoid irreversible climate shifts. In its November 2007 report, the panel concluded that emissions of greenhouse gases at or above current rates will cause changes in the 21st century that are likely to be larger than those in the 20th century. Among them are probable increases in heat waves, heavy precipitation and cyclones; reduction in the size of areas covered by snow; and a decrease in Arctic sea ice.

Reinert says that without action, oil may become so expensive that the world would resemble the one in Blade Runner. In the 1982 film, the rich live hundreds of stories high and the poor walk dark, rain-soaked streets. Or the lack of oil may cause the breakdown of social order depicted in the 1979 movie Mad Max. Reinert says Fort McMurray provides a window into such fictional portrayals. He predicts that the clamor for energy security will trump all environmental concerns worldwide. And he forecasts that most alternatives to conventional petroleum, such as oil sands and ethanol, will make climate change and water shortages worse.

Signs of indelible change already are emerging at Fort McMurray, whose soil was saturated with petroleum when landmasses collided to form the Rocky Mountains millions of years ago. Oil-related development has displaced 330 square kilometers (127 square miles) of previously untouched forest rich with spruce trees and peat bogs. The population has doubled to 64,441 in 10 years, with another 20,000 people living in mining and construction camps. Refineries, mines and so-called in situ extraction, in which underground oil sands are melted with high-pressure steam or set afire, have drawn investments totaling 155.6 billion Canadian dollars (US$152.6 billion) since 1997.

"It's an enterprise of epic proportions, akin to building the pyramids or China's Great Wall," Canadian Prime Minister Stephen Harper said at a Canada-United Kingdom Chamber of Commerce meeting in London last year.

In total, 175 billion barrels of recoverable oil exist in an area the size of Florida, Stringham says. That compares with 259 billion barrels in Saudi Arabia. "It won't be a lack of resources that causes a shift away from oil," Stringham says. "There's lots of oil."

Daily output of oil from Fort McMurray may reach 6 million barrels by 2050, up from 1.2 million last year, Wells says. Some of the natural gas to fuel production could come from the proposed $16 billion Mackenzie Valley Pipeline running 800 miles from Alberta north to the Beaufort Sea. Today, most of Fort McMurray's oil is transformed into gasoline, diesel and jet fuel in a network of refineries stretching to Edmonton, Denver, Chicago and Houston.

Reinert says it's not too late to mitigate the environmental toll of such development. Part of the answer lies in more Corolla-style compacts with light materials and four-cylinder engines. Part lies in hybrids such as the Prius and the Camry. Governments and corporations will have to get better at setting priorities. Carbon emissions from buildings can be reduced for $50 a ton with measures like insulation. In comparison, it costs $2,000 a ton to cut carbon tailpipe emissions by redesigning cars, he says. Cities must be redesigned too. People need to rely on mass transit and live closer to where they work. "In a place like New York, there may not be a role for our traditional product--I don't mean today but 20 or 30 years from now," he says.

Right now, Reinert's main job is designing the features that will attract customers to plug-in hybrids. In the prototype stage, plug-ins resemble the Prius with a small door on their side for hooking to an electrical outlet. "The transportation sector worldwide is 95 percent dependent on liquid hydrocarbons," says Gary Kendall, a World Wildlife Fund energy analyst in Brussels. "The way to reduce this dependence is with a grid-connected vehicle." Electricity from nuclear power could be sent directly to the vehicles instead of digging up oil sands to produce liquid fuel, he says.

"I'm confident there will be an industry-leading plug-in from Toyota," Reinert says. The company plans to start leasing plug-ins to global fleet customers by 2010, he says. Plug-ins can't arrive sooner because Toyota hasn't figured out how to mass-produce lithium-ion batteries that are affordable, durable and powerful enough for cars, Toyota President Katsuaki Watanabe said in Detroit on Jan. 14.

Kendall says the company can work faster. "Toyota could bring plug-ins to market very quickly, but perhaps it'snot in their business interest," he says. "They're milking the technological edge they have now with the Prius."

The delay in consumer sales until after 2010 means Toyota must endure taunts from GM Vice Chairman Robert Lutz. He told reporters at the Los Angeles auto show in November that his company will test-drive plug-ins in March 2008 and mass-produce them in November 2010. "We'll find out who is right--and whose credibility takes a serious dent," Lutz said.

Menahem anderman, president of Advanced Automotive Batteries, a consulting firm in Oregon House, California, predicts Toyota will introduce plug-ins first. Toyota spent $7.7 billion on research and development in 2006, the most of any public company surveyed worldwide by Booz Allen Hamilton Inc., a New York-based management consulting firm. To move beyond automakers' lead-acid and nickel- metal batteries, Toyota has as many as 300 in-house engineers studying the chemistry of lithium batteries, Anderman says. GM has no in-house researchers for lithium chemistry, relying instead on suppliers, according to Joseph LoGrasso, GM's engineering group manager for plug-ins. GM spent $6.6 billion on research in 2006.

For all of the recent research, the Prius may still be the world's cleanest car. During its lifetime, it emits 110,000 pounds of carbon dioxide equivalents, including the amount put out during manufacturing, says Kreider, the Colorado professor. That compares with 180,000 pounds for a Camry and 310,000 pounds for a Tundra pickup.

"Toyota's leading position in the hybrid arena remains one of their key competitive advantages, especially given the recent high-oil-price environment," says Wendy Trevisani, who manages Santa Fe, New Mexico-based Thornburg Investment Management Inc.'s $17.4 billion International Value Fund. As of July, the fund held 8 million Toyota shares.

Some new Toyota vehicles are less friendly to the environment. The 2009 Corolla with a 1.8-liter engine is 193 pounds heavier than its predecessor, with just a 1-mpg improvement in highway fuel economy. The Lexus RX400h hybrid SUV gets 24 mpg on the highway, 2 miles more than the gas-only version, and, at $42,689, costs 10 percent more. "We're focused on increasing our profits, and the U.S. is key," Reinert says. "This necessarily limits some of the options we might have pursued, especially as we move toward being a volume manufacturer, and especially in a down market."

If Reinert is sure of anything, it's that Toyota can't go into reverse. Since 1950, the world has been blessed with an eightfold increase in oil production. Yet the peak discoveries for new oil came in 1962, petroleum consultant Wells says. Total production outside the former Soviet Union and the Organization of Petroleum Exporting Countries topped out two years ago, he says. Oil in the former Soviet Union will reach its highest level in about five years; OPEC will peak in about 10, he says.

In the interim, nations will be more dependent on the Middle East, where getting oil is complicated by war, political turmoil and declining output from mature wells. "After a series of incidents in the Persian Gulf, or a low-level nuclear exchange that shuts off oil supplies, you wouldn't have a short-term disruption like Katrina," Reinert says. "You would have a profound one- or two- or three-year period in which economies and governments fail."

Even when he's delivering dire assessments, Reinert speaks in the easygoing tones of a popular college professor. His interest in science came in fits and starts. During the early 1950s, when he was growing up in Parcoal, West Virginia, he was poor enough to see running water and a telephone installed in his house. He moved to Kansas City, Missouri, after his mother, who'd been divorced, married a Ford Motor Co. assembly line worker. Instead of following his buddies to Vietnam after high school, Reinert joined the Navy and ran engine rooms in nuclear submarines under the polar ice cap.

Reinert says his life fell apart after the Navy. His darkest day came while he was working at the Ford plant. He was put in shackles in front of his stepfather's friends for buying $6 worth of marijuana. After three weeks in jail, he enrolled in the University of Colorado and got a bachelor's degree in biopsychology. In 1979, when the fall of Iran's Shah Mohammed Reza Pahlavi sparked an oil crisis, he joined the university's master's program in energy engineering.

Reinert graduated and was hired by Kreider. His job was to attach solar panels and windmills to microwave telephone towers that were otherwise dependent on diesel fuel airlifted into the Rockies. He became a pioneer in so-called power electronics, coordinating electricity from wind and the sun with a battery and diesel engine. He maintained the towers via helicopters based in Grand Junction, Colorado. The flights took him over the Piceance Basin, a 1,200-square-mile area atop natural gas deposits and as many as 1.1 trillion barrels of recoverable oil embedded in shale.

Reinert joined Toyota to run energy operations at the California sales headquarters in 1990. He spent eight years badgering top brass to let him use power electronics to design cars. He helped imbue the Prius with a hatchback and fold-down back seats for maximum cargo space and acceleration of 0-60 miles per hour in 10.4 seconds--4 seconds faster than its predecessor.

Reinert won the assignment of chauffeuring actress Charlize Theron in 2004 on the night she won an Oscar for Monster. He remembers how she hugged her mother when paparazzi pounded on their fuel cell-powered SUV. The Prius earned Reinert the right to speak on environmental trends inside Toyota and to outside groups. "Having a voice that may not be the company line is ultimately good for Toyota," says Jim Lentz, president of Toyota's U.S. sales unit. Reinert believes in changing individual behavior. After the oil tanker Rebecca sank off the Galápagos Islands in 2001, he, Toyota and the World Wildlife Fund joined Ecuador in a multiyear cleanup. They designed an oil delivery dock to replace the leaking structure built during World War II. They set up recycling centers for motor oil that would otherwise be dumped into the ocean and household trash that would be burned. "We could actually make a measurable difference in a geographically defined area," Reinert says.

There's evidence in his personal life that such efforts may not be enough. Reinert and his wife, Pam, can't walk their dogs around their home in Rancho Santa Margarita, California, because forest fires exacerbated by drought and global warming are driving coyotes down from the nearby Saddleback Mountains.

When reinert lies awake, he worries about the Piceance Basin, where he put his life back together after doing jail time and learned to be a hands-on scientist. Petroleum hovering around $100 a barrel is rekindling the 1970s oil shale boom. Roads and tunnels are snaking into the mesas around Grand Junction; natural gas derricks dot the horizon. Shell Oil Co. is testing ways to heat underground shale to 400 degrees Celsius and capture the melted oil inside rock frozen solid by pumped-in refrigerants. Daily output of synthetic crude from Colorado, Utah and Wyoming may reach 1 million barrels a day by 2040, Wells says.

Flying over the Piceance in a Cessna 182 in November, Reinert searches for the bald eagles, wild horses and elk he knew in his youth. He can't find any. He studies the creeks that used to feed the Colorado River from melting snowpacks and finds them dry. The river, which would nourish oil shale extraction and the growing populations in Las Vegas, Los Angeles and Phoenix, is narrower than the I-70 freeway alongside it. Strip mines cut straight down into solid rock even after 30 years of reclamation. Another oil shale boom would further deface the Piceance. "I feel an abject sense of hopelessness that I can't do anything to stop this," he says. "I feel like I've lost part of myself, like something's been amputated."

Toyota's technical triumph with the petroleum-saving Prius shows carmakers can be a force in mitigating the environmental damage Reinert worries about. He says that's only a start. As threats from the end of easy oil multiply and global warming accelerates, the desecrated forests and scarred earth at Fort McMurray may be harbingers of what's to come if automakers and politicians fail to act.

John Lippert is chief of the Detroit bureau of Bloomberg News. jlippert@bloomberg.net

Alan Ohnsman covers transportation in Los Angeles. aohnsman@bloomberg.net

With reporting by Naoko Fujimura in Tokyo, Jeff Green in Detroit and Ian McKinnon in Edmonton.

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