Former Secretary of Energy James Schlesinger

10/9/07

 
Thank you, Fred.
 
We have just heard from Deputy Secretary Clay Sell an outline of the aspirations of the Department of Energy: they are good aspirations, the question is the speed with which we may achieve them.
 
My letter of invitation from General Jim Jones states that I am supposed to lay out the challenges our nation faces-"to ensure that we have abundant, affordable, and secure supplies of energy."  I'm not sure, General Jones, whether that is "mission possible."
 
Arnold Toynbee-in his Study of History, talked about Challenge and Response and about civilizations crumbling because they could not rise to a specific challenge.  With respect to energy,  that is the challenge that we face.
 
With regard to the three goals for energy, none are attainable by historical standards.  First of all, we are not going to have energy security.  Our task will be to put in place a set of policies that mitigates energy insecurity-security being under threat for many quarters.  Will energy be affordable? Depends upon your notion of affordability. The price of energy is going to continue to rise for a variety of reasons. And what the American public and the political leaders that talk to them about affordability suggest is not going to transpire. And about the abundance of energy, we shall see in just a few moments.  I don't want to fall too much under the heading of gloom and doom, so I want to say at the outset what is the solution.  The solution, medium and long term, lies in technology, which incidentally is stimulated by the high energy prices of today.
 
Nor do I want to be a wet blanket.  Yet the political systems seem reluctant, perhaps incapable of revealing bad news. And what is my most recent indication of that? When the Democratic Congress was elected in November of last year, they charted six policy goals for '06.  I read from one such goal:
 
"ENERGY INDEPENDENCE - LOWER GAS PRICES"
Free America from dependence on foreign oil and create a cleaner environment with initiatives for energy-efficient technologies and domestic alternatives such as biofuels.  End tax giveaways to Big Oil companies and enact tough laws to stop price gouging."
 
That does not sound like the road to a secure energy future to me.
 
The Speaker wanted to achieve all this by July 4th-which you will recall is Independence Day. We were supposed to have the legislation that would ensure energy independence by that date. It did not transpire that way.  Right now she is locked in something of a duel with John Dingell, the Chairman of the Energy Committee who does not see the world precisely the same way as she does.
 
Let me spend a few moments on the question of energy independence which was touched on by Clay Sell.  This is a perennial promise in the political sphere, it is also a will o' the wisp.  In 1973, after the Arab oil embargo, President Nixon launched Energy Independence. Six months later appeared the Energy Independence Blueprint, which purportedly charted a possible course to energy self-sufficiency by the year 1980.  By that terminal year of the program, however, crude oil imports, which had started at three million barrels a day in 1973, had increased by 60 percent.  Today they have more than tripled. So if we are seeking energy independence, we are on the wrong track.
 
Bear in mind that for Presidents Nixon, Ford, and Carter, it was coal that was going to provide us with energy independence. Coal was "America's Ace in the Hole."  It was said at the time. America is the Saudi Arabia of coal. But coal, of course, is now under a cloud, as I shall discuss in a few moments.
 
We will not achieve energy independence in any meaningful way as long as we remain dependent on the internal combustion engine.  That just is a statement of reality. And the aspirations to cut our consumption of fuels of automobiles is undermined by the growth of the American population. If we have an increase through immigration at the present rate, we shall add an estimated 167 more million Americans by the year 2050.  Many of them will also acquire automobiles, many of them old and fuel-inefficient.
 
So what is the problem? The Energy Information Administration projects, as Clay mentioned, that we will be 80 percent dependent on fossil fuels in the year 2030. But fossil fuels are, in a sense, the world's capital-laid down over tens of thousands of years. We have been cruising through that capital at an accelerating rate.
 
Consider oil.  In the past oil was easy to obtain. Supply tended grossly to exceed demand, so that we had to take measures to prevent what was called waste. We had unitization of oil fields here in the United States, we had the Seven Sisters, we had the Texas Railroad Commission, we had and have OPEC-preventing waste and dealing with an excessive potential supply over demand. But that is not our problem today.  We deal with a problem of producing enough supply to meet ever burgeoning demand.
 
Some of you may know that I was recently in Cork attending the Association for the Study of Peak Oil, whose founder, Colin Campbell, has repeatedly said something that is quite profound: "in order to produce oil, one must discover it."  That seems simple enough.  But its profundity is disguised by its apparent obviousness. It happens to be true, and the reality is that over the recent decades, we have been finding only one barrel of oil for every three that we produce.  That cannot go on forever.
 
I am not going to get into all of the theological disputes about peak oil. But I point out that we are today unduly dependent upon giant and super giant oil fields that were discovered a half century ago. And some of them, many of them, are going into decline at this point.  The Burgan Oil Field in Kuwait is falling off rapidly. Cantarell in Mexico is declining at a prodigious rate, surprising even to those who operate the field. Of course, we're well aware of the decline on the North Slope and in the North Sea.  And even Ghawar, which the Saudis are doing their very best to sustain, and still produces six percent of the world's oil, is going to go into decline at some point.
 
The Geological Survey said in its year 2000 study that there are 700 million barrels of oil remaining to be discovered. Experts in the industry think it's more like 200 to 300 billion barrels of oil. Indeed, we are likely to get far more in the way of additional oil production from reserve growth and production growth in existing fields. I, like Clay Sell mentioned peak oil, I don't want to get into the discussions of the theology of that theological debate. The notion of peak oil was initially drawn from a simple geological model.  It ignores technological change.  It ignores the impact of higher prices. But suffice it to say at this point, we shall have trouble producing much over 100 million barrels a day in fuel liquids.  The peakists say that we are going to hit the peak in the next decade.
 
More importantly-or I hope more importantly-the National Petroleum Council recent study says, we will not be able to produce additional conventional oil beyond the year 2022, which is just 15 years out.  Now, the NPC does not ascribe this to a limit of resources, they ascribe this to insufficient access. But whatever the source of the limitations that we are going to face, we need to start now to go through a transition that will be very painful for the American society, very painful for members of the Chamber of Commerce.
 
Of course, we already face the limitations with regard to access, mentioned by the NPC.
Most of the world's oil is under the control of national oil companies who do not respond to market forces, some of them strongly influenced by nationalism. You have seen what has happened in Russia. The Russians have made very clear that they want to take back control of their oil and gas resources-and that they are not going to worry about the world's energy problem.  They are going to do what is best for Russia. The Caspian remains open to outside development, but as Kashagan has shown, it is a very difficult area to work and there are substantial delays and cost overruns.
 
And remember, energy is a priority target of al Qaeda.  Just over a year ago al Qaeda  targeted in Saudi Arabia, the Abqaiq processing center, which processes six million barrels a day. If successful, that would have been catastrophic. And al Qaeda has not given up.
 
Remember also China and India.  Burgeoning demand is coming from the developing countries. China, of course, and India to a lesser extent, follow American policy. Wherever we impose sanctions on a country, whether it's Sudan or Iran or Iraq, the Chinese come in to take over the resources. That will be a growing problem for us. And incidentally, we ought to be talking much more seriously to the Chinese than we have been on the question of energy.  In short, in the next couple of decades we shall not be able to increase production of oil to match what is continuously growing demand.  The consequence will be higher prices.
 
Natural gas, of course, the limits are not so immediate. We have probably reached the limitation here in North America, and we'll be obliged to turn to liquefied natural gas, and that carries some problems in that to the extent we become substantially dependent on LNG, we will be replicating our concerns about security because much of the LNG will come from the same product areas as the oil that we worry about.
 
Coal, which was once embraced as "America's Ace in the Hole," now faces greater uncertainty. The Energy Information Administration says that the production - the percentage of electric power produced will increase, produced from coal, will increase from 51 to 57 percent by the year 2030. I suspect that that is undergoing some revision as a result of the concern about global greenhouse gases.  But there will be continued and passionate discussion about coal and greenhouse gases. And remember that carbon capture and sequestration in which we're investing money is well over 20 years out. I shall come back to that in a moment.
 
We have, of course, nuclear power, which Clay Sell mentioned. But there are difficulties for nuclear power in that the industry's labor force and infrastructure have been substantially decimated.  The industry will have to be rebuilt.  Nuclear power sometimes is held out as a panacea, but we cannot construct enough new plants really to take up the burden of electric power production.  And remember that the 104 existing plants,  and even with extended licenses for an extra 20 years, will all be gone by about the year 2050. They, too, will have to replaced. Recently, there was an excellent article in the Washington Post, by the way, by Steven Mufson on the prospects and the problems of nuclear power.
 
So what is the solution to the challenges of energy supply?  I don't want to be limited to gloom and doom. Technology, as mentioned earlier, is the long-run solution.  As a result of these higher oil prices, entrepreneurial juices are flowing.  Silicon Valley, which believes it can solve problems very quickly, has now turned its principal attention to the problem of energy.  Silicon Valley is now hard at work.  We also see substantial improvements. It's not Silicon Valley alone, it's Cambridge, Massachusetts.  One of the most promising developments is in lithium-ion batteries. One of the firms in Massachusetts has developed a plug-in hybrid car that will go 150 miles. Of course, the battery costs about $10,000.  Even with government subsidies, it is not clear that that is going to appeal to a mass market.  Lithium-ion batteries are clearly part of the future. But remember that it takes roughly 20 years to turn over the auto fleet.
 
Cellulosic ethanol.  Promising, once again.  I think at some point it will provide a supplement to liquid fuels.  But it's going to take time, and it's going to take a technological breakthrough in which we produce new enzymes to attack wood products, switch grass, and the like. I think it's clear that we need much more R&D expenditures in this area. That's not a plea for the Department of Energy. Much of the government expenditures on energy R&D have not been, I'll put this delicately, particularly fruitful. It is important to get that money out-into the private sector.
 
Okay, don't count on the political process to deliver all that much. (I speak with the voice of experience.) The Constitution disperses power.  It was not designed for efficiency, it was designed to preserve liberty and independent judgment.  Remember, too, that politicians tend to think symbolically, not quantitatively. You will hear a good deal of symbolism coming from the politicians these days. The challenge that General Jones laid down is fundamentally a quantitative challenge, not one that is going to be solved by symbolism.
 
So the first reality that one must face in this area is political. This is a democratic society structured, because of King George III, to disperse power. And remember also that the transformation through which we are going to go, is going to be very painful.  Politicians do not like to bring bad news. Cassandra is not the ideal role model for politicians. They do not like to ask for sacrifice.
 
Gas taxes!  If I may reminisce, I believe I brought the last gas tax bill to the Congress.  This was in 1977, when we were serious about energy.  It was laughed out of the Senate. It was pushed in the House of Representatives, it started at 50 cents, it dropped to 25 cents, ten cents, five cents, three cents, and at that point, 35 brave members of the House of Representatives marched out to vote for it.
 
Politicians are not eager to be seen asking for sacrifice. Remember the wise words of Senator Russell Long, "The first duty of a politician is to get elected-and the second duty is to get re-elected."
 
Regarding energy policy, there's a good deal of wishful thinking, but there is no magic wand. Even when alternatives are technically promising, there is no possibility of the immediate creation or transformation of the critical infrastructure.  I mentioned that it takes 20 years to turn over the automobile fleet, even when we have an appropriate substitute for the internal combustion engine.  When we develop the technology that sequestration of carbon dioxide is still a long way off.  It will require a set of pipelines that is about two-thirds as extensive as that we use to distribute natural gas. That will take time and money to achieve.  A demonstration is only a demonstration, it is not the completed infrastructure.
 
In order to have support for the painful measures to go through this transformation, you need to have the public engaged. And the public basically has to be hit over the head by a two-by-four.  1973 was quite a shock, but that faded away; 1979 faded away. We haven't even begun to see the same reactions on the part of the public today, other than the distress over high gasoline prices, to which the public is adapting, by the way.  You also need to have a president who is prepared to invest substantial political capital in bringing about change. I believe that Jimmy Carter was the last one that was prepared to invest his political capital, and he is not regarded as a figure that politicians wish to emulate.
 
Finally, let me say a word about greenhouse gases. You hear a good deal of passionate  discussion these days about the need to cut greenhouse gas emissions.  (That usually means carbon dioxide emissions and not methane emissions)  The promise is made to cut CO₂ emission by 60 percent or 80 percent by the year 2050. The politicians who are making those statements do not expect to be in office in the year 2050.  There is no likelihood that we are going to achieve the announced objectives with regard to global warming-no likelihood-in the time frame that is being discussed. That would require cooperation by the developing countries.
 
Denmark may be producing 20 percent of its energy by windmills. However, China last year laid down 100 gigawatts of new capacity, mostly coal-fired plants, frequently two new coal-fired plants a week. China, which burns 2.3 billion tons of coal, is projected to go to 4.5 billion tons of coal by the year 2030. Greenhouse gas reduction is not the highest priority in China. Right now, they're worried about the environment, but they're worried about rivers that are poisoned and atmosphere that is polluted.  They are going to invest any environmental effort in something other than reducing greenhouse gases.  And remember that India and Indonesia are both going further towards coal burning.  It is I think recognized that whatever the Western World does, and notably what Western Europe by itself does, there is not going to be substantial change.
 
However, climate change is the passion of the moment.  You hear a great deal about it. It has been taken up by the media.  By the way, this is the fourth time in the last century and a quarter that the press has announced climate change, twice it was global cooling, twice it's been global warming.  So take it with at least a small grain of salt.  There's a great deal of lip service on this issue, but the reality is, given our inability to change the policies of China, India, Indonesia, and other high population countries, that substantially cutting greenhouse gases may also be a will o' the wisp.
 
Thank you very much.

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