Oil price swings should not delay U.S. energy strategy.

• Author: Farrell, Jr., Lawrence P.
• Position: PRESIDENT'S PERSPECTIVE

On Oct. 13, the former investment bank Goldman Sachs, now a bank holding company, slashed its year-end crude oil target to $70 a barrel, down from previous projections of $115 a barrel. Crude has plummeted 44 percent since it reached a peak of $147 in mid-July.

Goldman warned that oil might even fall to $50 per barrel by year's end if the current economic slowdown takes a big bite out of demand. This abrupt switch from a bullish to a bearish outlook on oil and other commodities not only reflects the unstable and unpredictable market, but it underscores again the difficulty that such turmoil poses for alternative energy projects.

In an article in this month's edition of National Defense, John M. Manoyan and Michael G. Frodl warn alternative energy efforts that ignore or work against energy market economics usually fail in the long run. In the past, energy reforms have not succeeded largely because the alternative energy sources have been unable to compete with fossil fuels without government funding or tax subsidies.

Alternative energy efforts, the authors caution, have ignored the resilience and robustness of traditional sources and have underestimated the ability of the oil industry to maintain its market share by aggressively competing on price and reliability.

This does not mean the nation can't reduce its dependence on foreign oil, rather it needs to be done in a way that leverages the oil market, and does not take it head on, ignore it, attempt to will it away or prematurely announce its imminent demise.

Wide oil price swings almost always destroy the economic assumptions undergirding the rationale for alternative energy projects. If current projections for further drops in oil prices turn out to be accurate, only the economically strongest alternative energy projects will survive--and even they will need substantial government support for several years.

In an upcoming article, Manoyan and Frodl outline what they describe as a "defense energy strategy" that would help the nation move forward as it tries to become less dependent on oil. The idea is to diversify energy sources, including shifts in demand to alternative energies (solar, wind, nuclear and clean coal) and new energy technologies (hybrid vehicles).

The strategy also calls for the diversification of our sources of traditional energy (oil, natural gas and coal), while making sure that changes are achieved without an increase in environmental and climate costs when possible.

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