In yesterday's Financial Times (subscription required for full text) Daniel Yergin suggested that the current oil price spike is creating a historical "break point" for petroleum that will result in the loss of oil's dominance in the global transportation fuels market. The commentary by Mr. Yergin, the Chairman of Cambridge Energy Research Associates articulated a shift that has become increasingly apparent to careful observers of the industry. His conclusion that oil will "share the transport market with other sources as never before" is almost certainly correct, even if oil prices were to revert to $60 per barrel next week. There is an important corollary to Mr. Yergin's analysis that he didn't explore in his FT op-ed: At the same time that gasoline and diesel will have to share the market with other fuels, the primary sources of transportation energy will also become much more diverse, as well. That has important implications for both national energy policy and corporate strategies.

Consider the supply chain for petroleum products. Oil is extracted from underground reservoirs and transported to refineries that separate it into its familiar product categories, while transforming low value portions of the barrel into high-quality fuels and removing sulfur and other impurities along the way. A modern refinery is a complex, expensive set of hardware, but its functions would still be recognizable to an oilman from the 1930s. Even ethanol has retained this model, with corn going in one end of an ethanol plant and ethanol and its byproducts coming out the other end. The new transportation energy market that Mr. Yergin hints at will shatter this model. Oil and its products--and corn and its fuel products--will play an important role for decades to come, but they will compete with synthetic diesel and jet fuel from natural gas, coal and biomass; biodiesel, ethanol and other alcohols from a wide variety of feedstocks and technologies; and electricity and hydrogen from a multitude of conventional and renewable sources, both centralized and distributed.

This new model will break three effective monopolies: of spark-ignition and compression-ignition internal combustion engines, of gasoline and diesel fuel as the dominant energy carriers for delivering transportation energy--and note that ethanol has so far only piggy-backed on gasoline's monopoly, rather than breaking it--and of petroleum as the source of primary energy for most forms of transportation. While the market shares of all three of these monopolies are in the high 90%'s today, the signposts of change are all around us. Biotechnology promises to break down the cellulosic material that gives plants their rigid structure and turn it into ethanol and other fuels, but it could eventually give us plants that excrete market-ready fuels. Better batteries will give consumers the choice between plugging in and filling up, but they could also facilitate the much wider adoption of renewable electricity from intermittent sources such as wind and solar power. And fuel cells running on hydrogen might yet provide a practical and more efficient way to turn chemical energy into useful work onboard the vehicle, powering electric motors that will become increasingly ubiquitous on all ground vehicles.

A decade ago, this scenario was just that, one possible future outcome of a number of competing trends and uncertainties. Now, thanks to the combination of concerns about climate change and energy security, and the practical problems of $130 oil, some version of it seems more plausible than the unchallenged continuation of those three "natural monopolies" for another generation. Whatever its other faults, the "farm bill" just passed by the Congress over the President's veto takes a step in that direction, by reducing the subsidy for corn ethanol, the so-called Blenders' Credit, from $0.51 per gallon to $0.45 and using the savings to fund a $1.01/gal. direct subsidy for producers of cellulosic biofuel.

As Mr. Yergin points out, oil "is not going to fade away soon." It will take time to turn over car fleets and move new fuel processes out of the laboratory, through demonstration-scale testing, and into full commercial production. But as frustrating as the wait for these new technologies and fuels may seem, while Americans pay $4 at the pump and Europeans pay the equivalent of $8 per gallon, this energy crisis--unlike the one of the 1970s and early 1980s--might just put in place the means of averting all foreseeable future energy crises centered on oil, by reducing the status of oil producers to that of merely one transportation energy source among many.
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