This data from the EIA shows that only 7.2% of the nearly 7 billion barrels of oil consumed in the United States each year is used for manufacturing that includes lubricants and plastics and asphalt among other things, while ~93% is burned and converted to energy. For natural gas, with a total of 335 billion cubic feet consumed, ~97% is burned, and only 3.3% is used for manufacturing (predominately plastics). Using more oil and gas for manufacturing uses and in general saving it for future uses is a valuable investment strategy that outperforms many alternative financial investments we could make. When we think of investment for the future, we typically imagine money sitting in an account earning interest or dividends. The idea being that that money is given to someone else in the future, that amount of money will have grown to the point where we can realize more benefit from it than we can in the immediate present. We hope to use investments like this to provide for ourselves when we are unable to work, to help our children get a good start in life with an education and possibly a wedding, perhaps to start a business, and many hope to save sufficiently after all of that to leave their children and grandchildren a modest inheritance when they die.
We can and should see oil and gas discoveries in the same light. They are currently safely stored resources that we can decide to either use in the present in one manner or another, or we can save that oil and gas to be used in the future by ourselves or our children or grandchildren. Some seem to accept that we will use as much oil and gas as we can as fast as we can until it has been depleted, and at that point, human ingenuity will lead us to the solutions that allow us to somehow continue onward with our steady technological progress and improved living standards. But, that story's upside isn't so certain, and we do, in fact, have many choices open to us as to how we treat these resources going forward.
Burned Oil and Gas is Gone Forever
Burned oil and gas is irretrievable. We can't ever get it back or use it for something better in the future. Burned oil is equivalent to money being spent. This could be spending for durable goods (energy used to create or deliver cars, for example), or for business uses that create income, or it could be used for more ephemeral uses that only satisfy us for a short time and lead to no long-lasting changes in our own or other's lives.
The biggest problem, however, is that so much of the energy content of burned oil and gas is wasted. According to the chart below, we can see that approximately 81% of the energy in oil and approximately 20-50% of the energy in gas is wasted as rejected heat depending on its use. That means that even out of what we use, most of the content of it does us no benefit whatsoever. It doesn't heat or cool our homes, and it doesn't drive our cars anywhere.
So, even if all of the oil and gas used for manufacturing and usable energy was completely and invaluably employed in increasing the well being of current and future people (i.e. productive investment), the maximum productive yield per unit of oil is only 25%, with natural gas having a maximum yield per unit of about 46%. These are not high values.
Plastics and Lubricants can be Recycled
Use of oil and gas in plastics and lubricants as opposed to burning it directly for energy means that we can recycle most of that material and achieve more than a single use from it. Overall, approximately 8% of plastics are recycled by total weight. Another 8% of plastics are burned for energy. But, given present day market conditions, only 28% of the total recyclable plastics are actually recycled. Almost all plastics are recyclable, but only certain varieties are currently possible given the amount of money paid for them, and the amounts available to collect from consumers and businesses. Still, even in current conditions, about 4 times more plastic could be recycled than is currently done. As businesses take up the challenge of recycling a wider array of plastics, there is little reason to suspect that we couldn't recycle up to 95% of the total, eventually.
Lubricants are recycled at a higher rate than plastics, nearly 44% of the total as of 2005. This quantity is probably higher now. Used lubricants can be cleaned, purified, and re-used for similar purposes. Nearly all lubricating oil is recyclable, but losses occur due to leaks or evaporation/vaporization, and during the recycling process, meaning that the most we could ever really re-use would be around 85% of the total.
[ad name="Adsense Small Horz Banner"]
If we consider our "productive yield" of oil and gas for plastics in the same way that we did for their use as energy above, we can compare them and see that while presently, plastics and lubricants usage isn't much more efficient today than oil and gas used as energy. 72% of easily recyclable plastics are thrown away after one use. But, the potential increases in recycling or the potential for achieving durable benefits from those plastics and lubricants is enormous. While water bottles, cheap toys, and motor oil may not seem all that durable to us, structural composites for cars and aircraft, asphalt for roads, plasticized lumber composites for homes and buildings can all last for decades or more. More oil and gas going to these uses can create more longer lasting contributions to our way of life than a short trip on the highway.
Unused Oil and Gas Earns Interest
Oil and gas that sits unused under the ground today is not just lost consumption that we are missing out on. For one thing, the oil and gas is not going anywhere, so leaving it "in the bank" so to speak is a very low risk saving strategy. But, that is not the whole story. Our capability to create benefits with a given amount of oil or gas increases every year. Our machines get more efficient. New technologies are created to solve current problems, and our overall capabilities increase.
To illustrate just one of these possibilities, the following chart includes historic and future projections for vehicle fuel efficiency. From 2005 to 2025, fuel efficiency in terms of distance traveled on one liter or gallon of fuel is expected to double in most places. Put another way, a unit of fuel saved (and not burned immediately) is earning interest (in terms of total miles it can transport us) at a rate of 3.6%. That may not seem very significant, but there is very little downside risk here, and a 3.6% interest rate compared to those of today's typical bond yields or average money market rates looks very good.
Another way to consider this in a broader context is the amount of energy required to create one dollar's worth of economic output. The following chart shows the energy required to create one new unit of economic output (or Gross Domestic Product, GDP). While the specifics are different for each country depending on when they industrialized, the general trends indicate that in the United States between 1950 and 2025 the amount of energy used to produce a unit of GDP declined by 75%. Or, put differently, the amount of GDP created for each unit of energy consumed increased by 300%. The annualized rate works out to approximately 2.9%.
Since these values are real, rather than nominal, that means the "efficiency yields" being discussed here of 3.6% in mileage and 2.9% in GDP are in real terms and in excess of inflation. That is a similarly performing financial investment quoted in APR would have a stated annual return of these numbers plus the anticipated inflation rate. Few alternative financial options approach this kind of stability.
A Little Financial Engineering
This isn't about credit-default-swaps or other derivatives. But, sometimes financial products can enable us to facilitate investment by more people than would otherwise be possible. For example, the stock market makes investing in large businesses possible for a much larger share of people than would be possible if we had to buy in with a 5% share. A similar kind of success in maximizing investment in conservation is feasible with the right kinds of financial products.
Many people have proposed efficiency bonds that would permit investors to help provide funds for improvements in energy efficiency in exchange for the investor earning a portion of the financial savings from reduced energy use realized. Some companies have been exploiting this potential by giving homeowners free solar panels in exchange for a return of some of the energy bill savings. Since, those who would most benefit from the energy conservation often lack the capital to purchase the necessary equipment, these bonds allow those with the available capital to apply those funds where they are needed in exchange for some of the benefits. As a whole, such investment can greatly increase energy efficiency in homes and commercial buildings.
Another potential innovation would be a financial product that would allow individual buyers to purchase rights in oil or gas intentionally left underground. Similar to futures contracts, except with undefined future delivery dates, these oil and gas certificates would convey ownership of a certain volume of oil purposely saved and kept underground as a long term investment. Firms willing to purchase and hold on to and maintain these reservoirs and have them independently audited could convey ownership of the resources contained therein to investors in exchange for present capital, while giving the potential benefit of future increased prices to the investors.
We have all heard recommendations from financial planners to save 10% - 20% of our incomes each year. This isn't an inconsequential sacrifice for many middle class families, but most of us recognize that this present day sacrifice will improve our family's financial security. For many people, this is just barely sufficient to provide for themselves through retirement, but for others it is enough to pass an inheritance on to the next generation. We should think of oil and gas conservation--holding off on a bit of current consumption--in the same way that we think of giving up a little bit of current income for a more secure future.
Our Future
It is one thing to acknowledge that oil and gas are energy-dense materials that make much of our modern lives easier and more comfortable. But, it is another thing to claim that our future selves or our grandchildren would have no better use for that oil and gas than we do today. The truth is that we know we will be able to do more with it in the future than we can do now. For some, that means that it should be acceptable to leave less of this stuff to our children than we decide to use today. This, I think, is a bit presumptuous. We don't know what kinds of challenges our descendants will face, especially in a world with 9.5 billion people. We don't know if any of our predicted next generation energy technologies will succeed the way we think.
But, if we could harness the technological and financial capabilities that exist right now, we could drastically reduce our consumption rate of oil and gas, saving more for our future selves and more for the next few generations. We could leave a better, more stable inheritance more immune from financial mismanagement than any publicly traded stocks or bonds. Beyond all the talk about environmental benefits, conserving oil and gas for future use rather than burning it in the present has compelling financial and ethical reasons to recommend it.