Seven years ago, the price of crude oil was around $10 a barrel and Oregon filling stations barely needed three digits after the dollar sign to post the price of a gallon of gas.

By mid-July of this year, benchmark crude on the New York mercantile market had crested $60 a barrel — double what it was just one year ago. The average price of regular unleaded gas in Oregon was up 20% year-over-year to $2.40 a gallon, and diesel — which is used heavily in trucking, farming and forestry — was up even more, to $2.52 a gallon.

That's a steep price increase to absorb into any budget — family or business. But it could get much worse. Most oil industry analysts these days don't so much debate if crude oil will reach $100 a barrel, as when.

Several factors are behind the price rise. Global oil production is near its peak and reserves are finite. Demand is surging — China's booming economy sucked up 16% more oil in 2004 than the year before, and the United States, which uses a quarter of the world's oil, increased consumption at the fastest rate in more than two decades.

Then there's the "fear premium" — as much as $15 a barrel tacked on by terrorism in the Middle East and civil unrest in oil-producing countries such as Nigeria. Finally, global warming, and the Kyoto Protocol designed to combat it, add another premium to all fossil fuels. The right to emit carbon into the atmosphere will only cost more as companies and governments respond to melting glaciers, rising sea levels and diminishing snowpacks in coming years.

The bottom line is that we need to be ready to pay $100 a barrel for crude and $5 a gallon for gas at the pump.

But can the Oregon economy cope? After all, we need energy, and at least where transportation concerned, oil is where it's at. It's not like the average farm, trucking company or retail operation with a fleet of cars can simply flip a switch and power its vehicles using windmills or the sun.

Well, maybe not yet. But there are some promising substitutes for petroleum, such as ethanol and biodiesel, that can be made from Oregon farm and forestry byproducts. These might help dampen domestic demand for imported oil — at least enough to ease the transition to non-fossil-fuel power sources of the future, such as hydrogen fuel cells (for cars), solar panels (for buildings), biomass (for farms and factories), and wind and nuclear power (for utilities).

But the near-term alternatives to foreign oil need a jump start from government. Options currently on the table in Oregon and nationwide include:

• New low-emission vehicle (LEV II) standards, such as California has adopted for new cars, pickup trucks and SUVs beginning in the 2009 model year.
• Minimum renewable fuel-content requirements for gasoline and diesel. A bill considered by the Oregon Legislature this year would mandate 10% ethanol in gasoline and 5% biodiesel in diesel fuel by 2010.
• Tax and investment incentives for biofuels production. In Oregon, that would benefit producers of canola and mustard seed for biodiesel and, one day, producers of straw and wood waste for ethanol (current technology extracts ethanol from corn).
• More investment in public transportation.
• Urban and suburban planning that boosts population density and concentrates services, reducing fuel consumption.
• Higher gas taxes to reduce consumption.
• Carbon taxes and carbon trading regimes along the lines of the Kyoto Protocol.

This summer, some of these measures were under siege from lobbyists for the auto, oil and power industries — both in Salem and in Washington, D.C.

But the way things are going, there's no time to waste getting the economy ready for the day when oil prices double again.

"When oil hits $100 a barrel, companies and communities that have invested in energy efficiency will be positioned to get through the resource crunch," says Carsten Henningsen, chairman of Portland-based Progressive Investment Management and a leader in sustainable development. "Those who haven't planned will hit the wall."

Biodiesel keeps profits in Oregon
Biodiesel is a processed vegetable oil that can be made from canola and mustard seed, both of which grow well in Oregon. It can be used in a pure (100%) or blended form to power diesel engines — from cars and trucks, to tractors and off-road vehicles. The version that's available in Oregon right now is B-20 (20% biodiesel, 80% petroleum diesel). Biodiesel delivers a double whammy: Diesel engines get much better mileage than gasoline combustion engines (the new Volkswagen diesel cars are pushing 50 mpg), and biodiesel is renewable, reducing the amount of carbon that's pumped from deep under the ground and released into the atmosphere when it's burned in a car or truck.

Until now, virtually all the biodiesel sold in Oregon has come by rail from the Midwest, with a freight premium added for shipping. Beginning this fall, SeQuential Biodiesel (investors include Kettle Foods founder Cameron Healy and singer Willie Nelson) will produce 1 million to 4 million gallons of biodiesel a year at a new plant in Portland. "The feedstock — canola, mustard seed and used cooking oil — will be grown in Oregon, and it'll be consumed here as well," says SeQuential's Tomas Endicott, who predicts that the Oregon biodiesel market will double annually for the next several years. "This keeps money in Oregon and in the U.S.," says Endicott. "It doesn't get any more sustainable than that."

Biodiesel consumed in Oregon in 2004:	1 million gallons
Biodiesel consumed in Washington in 2004:	2 million gallons
Petroleum diesel consumed in Oregon in 2004:	502 million gallons
Gasoline consumed in Oregon in 2004:	1.48 billion gallons
Used cooking oil produced per American every year:	1 gallon
Reduction of CO2 emissions from use of 100% biodiesel fuel in cars and trucks:	70%

Sources: Oregon Department of Energy, SeQuential Biodiesel

Trouble down on the farm
Check out the Capitol Press, the agricultural newspaper for the Western United States published out of Salem, and it's not hard to pick up on the sense of desperation over fuel prices. In mid-spring, diesel fuel was selling for $2.66 a gallon in Oregon — 60 cents higher than unleaded regular gasoline — and fuel prices in the Pacific Northwest were 25% higher than in the rest of the nation. The paper's editorial called rising diesel costs "a situation that threatens the livelihoods of truckers, timber operators, farmers and ranchers who depend on economical and reliable transportation for their goods and crops."

The Capitol Press demanded a domestic energy policy that would open the Arctic National Wildlife Refuge to oil exploration. The editors also called for efforts to replace high-priced foreign oil with domestically produced renewable alternatives. That would be a win-win for Oregon farmers, who could produce feedstock for biodiesel in their fields, and then pump the fuel into their John Deere tractors, potentially reducing production costs. Minnesota and Montana are among states with incentive programs to encourage farmers to produce biofuels; Oregon is considering them as well.

Percent of total U.S. diesel consumption used in farm production:	6%
Increase in ethanol production in the U.S., 1999 to 2003:	100%
Increase in biodiesel production in the U.S., 1999 to 2003:	4,000%
Acres of canola needed to supply all the biodiesel used in Oregon in 2004:	10,000
Acres of canola currently planted in Oregon (mostly in Eastern Oregon):	3,300
Acres of canola needed to meet a 2% renewable standard for biodiesel:	150,000

Sources: Oregon Department of Agriculture, SeQuential Biodiesel, Farm Foundation, United States Department of Agriculture Office of Energy Policy and New Uses

Crowding saves energy
If you live in a densely packed urban neighborhood where you can jump on a bus or light rail to get to work, walk to shopping and get the kids to soccer practice in a five-minute car ride, you consume about 25% as much fuel for transportation as someone who lives at the suburban fringe.

Portland Metro

Charlotte, N.C.

Las Vegas

Northwest Environment Watch research director Clark Williams-Derry puts it this way: "The single best thing you can do to save gasoline is to live where you don't have to drive a lot." Gov. Kulongoski's advisory group on global warming lists smarter urban planning and more public transportation as top strategies for reducing greenhouse gas emissions. And that would deliver an extra boost to the economy, because burning less fossil fuel means buying less foreign oil. Oregonians will send about $3.9 billion overseas to pay for oil this year, roughly 3.2% of gross state product. Increased gasoline prices this year will cost American families more than they pay for a month of utility and phone service, or a year's worth of prescription drugs.

Share of urban residents in compact neighborhoods:

Multnomah County	45%		Vancouver, B.C.	64%
Benton County	28%		Las Vegas	51%
Washington County	23%		Denver	37%
Clark County	16%		Austin	26%
Lane County	15%		Seattle	24%
Clackamas County	9%		Boise	7%
Linn County	9%		Charlotte, N.C.	6%

Source: Northwest Environment Watch

Going farther on a gallon of gas
Oregon is a key battleground in the conflict over new emission standards that have been adopted by California and have been challenged in federal court by the auto industry. The so-called LEV II (low-emission vehicle) rules would mandate that cars, trucks and SUVs produce less CO2 and other greenhouse gases beginning with the 2009 model year. Since the easiest way to reduce the amount of CO2 that comes out of the tailpipe is to reduce the amount of fuel that goes into the gas tank, LEV II would effectively increase fuel efficiency — by as much as 30% by the time model-year 2030 rolls around.

Washington has already passed LEV II, but won't implement it unless Oregon does so as well, to create a West Coast-wide market for LEV II-compliant vehicles. Oregon's auto lobby — representing car makers and car dealers — strongly opposes LEV II; its lobbyists even got the Oregon House to pass a rule blocking state regulators from implementing the standards. That move was later reversed by the Oregon Senate.

The battle will move later this year to Gov. Kulongoski's task force on emission standards. Advocates say the governor could implement LEV II without legislative action. But Jack Cosgrove, Oregon lobbyist for the Alliance of Automobile Manufacturers, warns that would be unpopular and ill-advised. He says that if Oregon goes down the same road as California and adopts LEV II, vehicle prices will soar and consumers will have less choice in the showroom. "There are 30 models of hybrids" and other fuel-efficient vehicles on the market, he says. "Oregon consumers have, until recently, decided not to buy those. They've opted instead for heavier trucks, SUVs and minivans. They can make different choices the next time they're in the market to buy."

Gallons of gasoline consumed per person per year:

Advocates for California's LEV II (low-emission vehicle) standards say:

• New vehicle costs will rise $1,050 on average for passenger cars, pickups and SUVs by 2016 to comply with LEV II.
• Vehicles that meet LEV II will cost $23/month less to operate in 2016 due to better fuel and engine efficiency, saving $2,100 over the 200,000-mile estimated life of a vehicle.
• LEV II requires full availability of each carmaker's fleet of models, and is designed so that the biggest and least fuel-efficient ones currently on the market can meet the standards by 2009.

Opponents of California's LEV II standards say:

• Average new vehicle costs will rise by more than $3,000 by 2016.
• Diesel vehicles will not be able to meet the new LEV II standards because they have higher particulate and sulphur emissions than gasoline engines. But diesel engines are better at reducing greenhouse gas emissions because they're more fuel-efficient.
• Many popular models of SUVs and pickup trucks would not be available in Oregon because they couldn't meet LEV II standards.

Sources: California Air Resources Board, Climate Solutions, Alliance of Automobile Manufacturers, Northwest Environment Watch

Air travel still a bargain for business
Air travel seems to be the exception to the fuel-price rule, at least so far. Higher aviation fuel prices have cut into airlines' bottom line, but so far they haven't been able to pass on more than modest price increases to consumers. The major airlines hiked their prices by about $10 per ticket in June. But when they tried to boost prices by $45 or more per ticket after 9/11, the effort fell flat. Sho Dozono of Azumano Travel in Portland says that the cost of business air travel is only now catching up to where it was in 2001. "A tankful of gas has gone up 35%," says Dozono, "but consumers have been resistant to airlines adding surcharges like 35%."

Dozono's company bills about $100 million in business travel every year, and he says that rising fuel costs did send the average price of a business trip up by about $50 to $488 per trip at the end of June. But he doesn't anticipate a drop-off in business flying anytime soon. "With the economy recovering," he says, "companies have gone back to traveling for business meetings. We're not seeing companies say, 'We'll send one person instead of three to save money.'"

Resources:
www.fuelgaugereport.com — AAA Oregon/Idaho has an online tool for tracking gas prices.
www.northwestwatch.org — Northwest Environment Watch (NEW) has an annual report on energy and the environment in the region, Cascadia Scorecard.
www.autoalliance.org — The Alliance of Automobile Manufacturers is fighting against California-style low-emission vehicle (LEV II) standards.
www.oeconline.org/climate/cleancar — The Oregon Environmental Council favors LEV II for Oregon.
www.transact.org — The Surface Transportation Policy Project issued the report Driven to Spend in June 2005 on the impact of higher oil prices on consumers.
www.biofuels4oregon.com — The Oregon Biofuels Network tracks proposed biofuels legislation and new business ventures to produce and distribute biodiesel for the local market.
egov.oregon.gov/ENERGY/GBLWRM — Gov. Kulongoski's advisory group on global warming offers strategies to reduce carbon emissions.
www.farmfoundation.org — The Farm Foundation issued Agriculture as a Producer and Consumer of Energy on the potential of biodiesel and ethanol production to reduce U.S. dependence on foreign oil.

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Copyright 2005 Oregon Business magazine