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Prepared by the
Institute for the Analysis of Global Security

July 12, 2004
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Energy Security Current Issue

China and US should set up a strategic dialogue on energy issues
Interview with Dr. Gal Luft of the Institute for the Analysis of Global Security, originally published by 21st Century Business Herald in Chinese.

A crude threat
The terrorist campaign against Iraq's pipelines demonstrates that pipeline attacks are no longer a tactic but part of a sustained, orchestrated effort that can deliver a significant strategic gain. They can also cause significant damage to the global oil market.
Next in line to emulate the insurgents in Iraq could well be Islamist terrorist groups operating in Central Asia, among them Chechen separatists and the Islamic Party of Liberation, a group that seeks to carry out a holy war against the West and is a suspect in the recent wave of deadly attacks in Uzbekistan.

Chilly response to U.S. plan to deploy forces in the Strait of Malacca
Whether something is profoundly wrong in the dialogue between the U.S. and the two Asian powers is an important question in itself, but the real issue is what is the best mechanism to secure the world's most important shipping corridor, through which one quarter of world trade and half of the world's oil and two thirds of liquefied natural gas move each day.

North Sea oil is declining
Since the 1970s North Sea oil has not only been a major source of wealth for both the British and Norwegian economies but also a way for Europe to cut its dependence on Middle East oil. Now many of the major fields in the North Sea are in decline and the North Sea is about to lose its prominent role as one of the world's leading oil domains.

Terror's Big Prize
Since September 11, pipelines, tankers, refineries and oil terminals have been attacked frequently. Except for a sharp increase in maritime insurance premiums in these regions these attacks had marginal strategic consequences. But in at least two cases oil terrorism could have rattled the world.

Libya: changing its spots?
Libyan crude oil is particularly attractive due to its very low sulphur content, which requires much less refining than higher sulphur oil. It is extremely high quality crude, whose characteristics are not easily found elsewhere. Despite its unique treasure, Libya's production capacity is relatively small, standing on 1.5 mbd of crude, or 2% of world supplies.
Since the 1988 Lockerbie bombing Libya had been under U.S. and UN sanctions which hindered its ability to generate enough investment to develop its oil sector. Libya's decision to embark on a rapprochement with the U.S came at unsurprisingly perfect timing, just as concessions for major U.S. oil companies were about to expire.

On the technology front

Fuel Cell power plant installed at NJ College
The fuel cell will provide 250 kilowatts of electric power as well as heat, to several buildings on the campus.

Biomass-to-Ethanol Progress
The enzyme costs of converting cellulosic biomass into sugars for fuel ethanol production have been reduced approximately twenty-fold with technology developed by the National Renewable Energy Laboratory (NREL) and Denmark based Novozymes, biotech-based leader in enzymes and microorganisms.

EU study: Methanol from biomass - competitive with gasoline
A study of a new patented Swedish technology concluded that the alchohol fuel methanol can be produced from biomass via black liquor gasification at a cost competitive with that of gasoline and diesel.


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Back Issues

Distance Based Auto Insurance: a Tool for our Times

Distance Based Auto Insurance is an idea whose time has come. Also known as Per Mile Auto insurance, Mile Based Car insurance, Per Mile premiums, or Pay as you drive insurance, the plan proposes to convert a large fixed cost of auto ownership into a variable cost of automobile use. Large fixed costs and low marginal costs create an incentive to drive more. If insurance costs the same whether 10,000 miles are driven or 20,000, then that insurance costs half as much per mile if one drives the 20,000 miles. On the other hand, high variable costs provide a financial incentive to reduce total miles driven.

Currently most insurance policies provide a tiny reduction in rates for people who claim to drive fewer miles. Since they don't verify these claims, they don't provide more than a couple percentage points off premiums. Per Mile insurance offers a new paradigm. Instead of buying 6 months worth of insurance, you buy 10,000 miles worth. Under the current system, your insurance runs out in 6 months. Under the per mile system, you don't buy more insurance till you have driven 10,000 miles, whether that takes 6 months or 6 years.

Such a system requires a means to verify the number of miles a car is driven. This can be done through odometer checks, use of Global Positioning System (GPS) transponders or through other means specifically developed for the purpose.

Giving people the ability to save significantly on insurance costs by driving less would cause many people to choose to drive less. The Victoria Transport Policy Institute has estimated that if everyone had per mile auto insurance, vehicle miles driven would fall by around 10%. Per Mile would reduce traffic more in areas with a stronger transit alternative and less where there are few options other than driving.

For years per mile insurance was just an idea in waiting. Then in 2002, Texas passed a law authorizing this form of insurance. Embarrassed by the notion that Texas could now claim to be a more progressive state, Oregon passed its own version, titled Pay as you drive or PAYD, in 2003. Both these laws allow rather than require distance-based insurance. At least one company is now offering per mile insurance, though it is limited to cars that have GPS.

Requiring that insurance be charged by the mile would face stiff resistance from those who currently enjoy subsidy under the current system, as well as from those resistant to having their odometer checked. But merely allowing the option for people to purchase per mile insurance should be a much easier sell. Over time, the free choice model could result in substantial improvement.

Change has been slow in coming, but may have tremendous impact over time. Any car owner who drives significantly less than average is likely to pay less for insurance under a per mile system. When these drivers choose to move to distance based insurance, they will stop subsidizing the other drivers. When the remaining drivers experience a rate hike due to the loss of subsidy, some average distance drivers will switch to per mile and work to reduce the miles they drive. Eventually, those who drive less than average will switch to per mile and long distance drivers will experience higher rates whether they switch to per mile or not. Thus the public at large could experience a greater incentive to drive fewer miles even through a voluntary per mile insurance system.

Per mile insurance is a more fair way to charge for insurance since risks match more closely to miles driven than to the passage of time. Higher rates for higher risk drivers and lower rates for safer drivers can be retained under a per mile system since the rate charged per mile can still vary based on driver risk factors.

Per Mile insurance isn't poised to breakthrough to the mainstream quite yet. It faces opposition from insurance companies who fear this system will reduce their profits, and from long distance drivers who enjoy subsidy under the current system.

But if we are serious about reducing oil consumption, pollution and traffic, per mile insurance is a powerful tool for progress.

Carl Henn, Rockville, MD

More info:
Distance-Based Pricing: Mileage-Based Insurance, Registration and Taxes
Cents Per Mile
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