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America's innovation gap, cont'd

Joshua Freed, director of Third Way's clean-energy program, e-mails to say that however bad innovation may be in the private sector as a whole, it's even worse in the energy sector:

In the U.S., the private sector barely invests in any energy research. Where U.S. industries, as a whole, spend an average of 2.6%of their revenue on R&D, the energy industry invests a paltry 0.23% of revenue on any kind of research -- clean or conventional. This includes funding for expensive research into conventional fuels, such as ultra-deep water drilling and new oil refining techniques.

This stands in stark contrast with the hyper-competitive pharmaceutical industry, where new drugs supplant old ones every year. Pharmaceutical companies spend 19% of revenues, or about $39 billion each year on R&D. Even the American automakers still invest $17.5 billion in R&D.

The American Energy Innovation Council has a graph showing the same thing:

randdenergy.jpg

By Ezra Klein  | October 6, 2010; 3:24 PM ET
Categories:  Energy  
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Comments

I wonder what the actual dollar figures are, though? I'm thinking Big Pharma doesn't make the type of money energy companies do, so energy companies might think they're doing enough R&D compared to other industries based on their actual dollars spent.

Also, I wonder if some of the disparity is intentional. Changing the status quo in energy is probably a lot scarier for energy companies than it would be for Pharma.

Posted by: Chris_ | October 6, 2010 3:48 PM | Report abuse

I'm in agreement with Chris. Aren't the big energy companies among the wealthiest companies on the planet? It would be interesting to know what the actual dollar amounts being spent on R&D are.

Also, pharmaceutical companies have to run very expensive clinical trials. I would speculate that these trials are much more costly than testing a new drilling or solar technology.

Posted by: Beagle1 | October 6, 2010 4:47 PM | Report abuse

I question whether the innovation in pharmaceuticals is wholly to be considered real innovation or is in part innovation intended merely to spur consumer demand. Take the example of hormone replacement therapy for menopausal women, which was almost universally prescribed for a time until 2002, when it was found risks outweighed benefits. One could point to dozens of other examples of drugs that become popular but are either unnecessary or found to be detrimental to health. It's hard to sort out the real innovation from the snake oil here.

Posted by: JJenkins2 | October 6, 2010 5:27 PM | Report abuse

Chris and Beagle,

The energy industry is a $3 trillion industry in the United States. Therefore, .23% of revenues would be $6-7 billion annually in energy R&D funding privately. The federal government kicks in only about an extra $3-4 billion per year.

So that's around $10 billion total.

By contrast, as noted about, pharmaceutical companies spend $39 billion per year, and the government kicks in another $30 billion through the NIH!

$69 billion vs. $10 billion.

That's quite a large innovation gap, and one of the reasons that the energy sector is one of the least innovative sectors of the economy. Major public investment in energy R&D is needed to help change the picture, as the private sector clearly won't invest on its own.

Posted by: dswezey | October 6, 2010 5:32 PM | Report abuse

Thanks, dswezey. Interesting stuff.

Still though, one's got to wonder why they don't invest more. Despite all those green-ish BP commercials/informercials over the years (the best non-environmenty one being here: http://www.everythingisterrible.com/2010/08/bp-caresabout-rapture.html), I'm thinking that energy companies would be scared to disrupt their market. I mean, if BP put their efforts into cheap, personal use solar panels or something else totally disruptive to the market, who'd buy their expensive fossil fuel-based energy? Their profits depend on their efforts not moving "Beyond Petroleum."

Posted by: Chris_ | October 6, 2010 5:47 PM | Report abuse

I guess no one feels like investing with his or her own money in the great emerging energy sector, hey, kids?

But it's such a great idea that everyone must be forced to do it, via the benevolence of the bureaucratic state.

Anyone remember when freedom was what it was all about? Think anyone will rue the day when all this spending of everyone else's money comes a cropper, and all the real innovators have departed for sites unknown?

Posted by: msoja | October 6, 2010 6:47 PM | Report abuse

If you are in a business where products change a lot you get to do a lot of R+D. When you are in a commodity business, not so much.

Posted by: MrDo64 | October 6, 2010 9:00 PM | Report abuse

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