Politics & Policy

The Other U.S. Energy Crisis: Lack of R&D


BP (BP) says it's throwing its best people at stopping the Gulf of Mexico oil spill. Nevertheless, it took an outsider—Energy Secretary Steven Chu, who has a Nobel Prize in physics—to come up with the idea of peering inside the malfunctioning blowout preventer with high-energy gamma rays. BP tried Chu's idea—after a few snickers and Incredible Hulk jokes, according to the Washington Post—and lo and behold, it worked. The probe was "crucial in helping us understand what is happening inside the BOP [blowout preventer] and informing the approach moving ahead," said Jane Lubchenco, head of the National Oceanic & Atmospheric Administration.

The gamma ray incident is symptomatic of a problem that's bigger than London-based BP: Energy companies worldwide are far less science-oriented than one might expect from an industry that is heavily dependent on technology for safety and profit. In the U.S., energy companies' spending on research, development, and deployment amounts to just 0.3 percent of sales. That's barely more than a tenth what the auto industry spends as a share of sales and is dwarfed by the pharmaceutical industry, which spends nearly 19 percent of sales. (American Petroleum Institute chief economist John Felmy says R&D measures understate his industry's "overall investment for the future.")

Many economists argue that government needs to step in when the private sector isn't providing the socially optimal amount of something like research. But government R&D spending on energy has been scarce, too. It was less than 0.03 percent of U.S. gross domestic product as of 2007, about one-third the share in Japan. The dearth of investment in energy R&D helps explain why the world is still getting its energy by punching holes in the sea floor rather than from safer, renewable sources such as the sun and the wind.

In his Oval Office speech on the Gulf spill on June 15, President Barack Obama cited a rapid boost in energy R&D as one of several ideas that "have merit and deserve a fair hearing in the months ahead." That was a paler endorsement than some boosters hoped for. On June 11, the American Energy Innovation Council called for a gradual increase to $16 billion in annual federal R&D energy spending, from around $5 billion now. The seven-member council includes Microsoft (MSFT) Chairman Bill Gates, General Electric (GE) Chief Executive Officer Jeffrey Immelt, and Silicon Valley venture capitalist John Doerr.

The drive for more energy R&D is up against formidable obstacles, starting with the budget deficit. Representative Ralph Hall, the ranking Republican on the House Science & Technology Committee, tried in May to cut about $40 billion from the $86 billion sought by House Democrats for the America COMPETES Act, which funds federal research and math and science education. "We must be mindful of our spending if America is to continue to compete globally," Hall said then. The House eventually voted to reauthorize the act without Hall's cuts, while the Senate hasn't yet acted. Even if Congress agrees to authorize the full $86 billion, funding could still be cut in the appropriations process.

Money isn't the only problem. On the right, many Republicans say the federal government should be involved only in basic science, not steps toward commercialization. On the left, many Democrats hope to kick-start research and investment in green energy via measures such as carbon caps that would make coal and oil more expensive.

Hanging in the balance are initiatives such as ARPA-E, a 20-employee Energy Dept. program that funds what Director Arun Majumdar calls "really high-risk, high-reward, disruptive technologies." ARPA-E is modeled on DARPA, the Pentagon's Defense Advanced Research Projects Agency, which helped launch the Internet and the global positioning satellite system. Like DARPA, the Energy program is free from civil service hiring rules, so it can bring in top scientists and engineers for short stints. It began operations last year with a two-year allocation of $400 million in stimulus funds. The Obama Administration is seeking $300 million for ARPA-E for the fiscal year beginning Oct. 1.

Defying bureaucratic convention, ARPA-E is funding an unorthodox technique for producing fuel from plant matter even though it competes with another project of the Energy Dept., the Joint BioEnergy Institute. "That's the kind of environment we want," Majumdar said in a June 14 interview. "I'd rather have the competition inside the U.S. than outside the U.S."

What looks like fruitful competition to Majumdar can look like wasteful redundancy to a Congress that's worried about deficits. He says that's a problem. "Frankly we haven't done a good enough job of explaining what we're about. It's a new model."

The American Energy Innovation Council argues that ARPA-E merits $1 billion a year. Majumdar says he'd be happy just getting the requested $300 million given the big budget deficit. On the other hand, Energy's Chu testified last year that China is spending $9 billion a month on clean energy investments. Says Energy Under Secretary Kristina Johnson: "We're competing with some very fierce competitors that are throwing everything they have behind being successful in this clean energy economy."

The bottom line Lack of R&D is limiting development of new energy technologies, and prospects for a big increase remain cloudy.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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