Wednesday, October 28, 2009

How Current Energy Policy Puts the Future Prosperity and Freedom of Americans at Risk

Peter Huessy

This past Tuesday, the Chamber of Commerce, the Washington Times and the National Chamber Foundation featured remarks by the soon to be head of Chevron, Thomas Watson.He was very gracious, even as I interrupted his lunch to introduce myself. But more importantly, what he had to say was well worth listening to. In fact, it is imperative that every American take what he had to say seriously.

Our future prosperity and freedom are at risk. This is because we have a current energy policy that puts them at risk. We are also contemplating a new energy policy, commonly termed “cap and trade” which could very well push our nation’s economy of a cliff, (my conclusion, not that of Chevron). Mr. Watson started his remarks with a plea that we start with some “facts,” what President John Adams called “stubborn things.”

Over the horizon, we will need to invest some $26 trillion in energy production, transportation, and efficient utilization technology. The U.S. population is growing and so is that of the world. The U.S. and world economy also need to grow to raise the standard of living of people everywhere – to secure the “heat, light and transportation” that we all take for granted said Watson. But over eighty percent of the natural gas and petroleum reserves in the world are in the hands of governments. And 85 percent of such U.S. reserves are off limits to exploration and development.

Watson further noted the U.S. oil and gas industry is responsible for 9 million American jobs and 7.5 percent of our GDP. The challenge of providing an affordable energy supply for more than 300 million Americans is being made all the more difficult by the regulatory ambitions of the U.S. government and its growing debt. Yet most Americans want to be less dependent on foreign supplies of oil that can be manipulated to harm our economy. And they believe we need a stable but diverse energy supply. And they also want to do their responsible part for ameliorating any negative impacts on our climate and environment.

As Mr. Watson remarked, the scale of the challenge we face is simply not fully appreciated. To move away from the use of fossil fuels quickly is simply not possible. Some facts: the world uses roughly the equivalent of 245 million barrels of oil a day if all energy was converted to such a standard. Roughly one billion people live with a very high standard of living, with their heat, light and transportation a “given” fact of life. But for many billions of other people, these amenities are not guaranteed.

In my own research, I calculated that if China and India consumed energy at the per capita level of the people now living in the Republic of Korea or the Czech Republic, worldwide energy use would have to increase at least six-fold, even assuming very major advances in the efficient use of energy. As Mr. Watson noted, the U.S. had increased the efficient use of energy by 50 percent since the 1970s, while as a company, Chevron has increased its energy efficiency by fully 25 percent.

Both population growth, the growth in the world-wide labor force and the drive for improved standards of living will push future energy projected needs up 40 percent over the next 20 years. This compares to actual increases in energy use over the past 20 years of 50 percent. In that oil, gas and coal are currently 80 percent of today’s energy consumption, there is naturally a search for alternatives.

Watson explained that this often results in proposals to dramatically curtail fossil fuel use. Better gas mileage for automobiles, ethanol production, electric cars, energy from fusion or hydrogen, flex fuel vehicles and a whole host of other “energy bullets,” (my term) are often portrayed as the next answer for our energy needs. (I personally believe flex fuel vehicle standards for all cars sold in America would do much to allow such vehicles to use ethanol, methanol, gasoline, diesel, and electricity in all manners of combination that would provide the use of market forces to enhance alternative and enhanced energy production).

But Mr. Watson had a word of caution. Renewable energy resources are rapidly increasing. And Chevron is one of the leading producers of such energy. But the scale of what we need to produce for the future dwarfs what any one kind of energy can provide either in the near or far term. Renewable energies now provide roughly 5-8 percent of our current energy needs (in the industrial world) and much of that is from hydropower. Those numbers might be able to be moved toward the 20 percent benchmark over the next few decades said Watson.

Thus the current restrictions on the exploration and development for U.S.-owned fossil fuel resources make so little sense. U.S. oil production has declined by 4 million barrels a day over the past 25 years while demand has grown by exactly that amount – 4 million barrels a day. Thus, although we are the number 2 or 3 producer of coal, natural gas and oil from domestic resources, when we import 8 million barrels of oil daily, (the combined drop in production coupled with the increase in demand), it is at a cost that approached some $450 billion a year when oil hit $147 a barrel.

Yet the U.S. Geological Survey is forbidden by federal law from actually doing an accurate assessment of how much oil and gas we have off of our coasts and on Federal land. And we still propose to tax those oil and gas resources we do produce at a rate far greater than other resources. Add to that the prohibition on exploration, and it is easy to understand how oil exploration and development was pushed overseas and with it the complimentary run-up in U.S. oil imports. Reasonable estimates are that at least 30 billion barrels of oil are readily available off our shores or in places such as Anwar. While we cannot “drill for independence,” said Watson, we can and should “drill for more energy security.”

In short, the choice is not whether the U.S. produces oil and gas or renewables, such as solar, wind, geothermal and hydro. The choice is not “x” or “y” but “x” and “y.” We should focus, says Watson, on what we need under reasonable assumptions, and not let our “energy promises get out in front of our energy realities.” The massive scale of what a world approaching 7 billion people will need for energy security, plus the long lead times required to bring energy to the market, makes it imperative we understand the means and the knowhow to get the job done.

In that light, it was interesting to hear the soon-to-be Chevron CEO describe the US as an “energy powerhouse.” We are 2nd or 3rd in the production of oil, gas, coal and nuclear power he noted. Our energy security then can be a combination of: (1) enhanced production, (2) maximum conservation, (3) flexible plans, (4) equitable treatment of each energy sector, (5) transparency in what we are doing, (6) honest accounting for the costs of proposed regulations, and (7) a policy of global engagement.

The proposals for “cap and trade” simply do not live up to these principals, said Watson. They are “detached from reality.” Kyoto has seriously understated the costs and overestimated the benefits. In my own calculations, the proposed climate treaty would tax the U.S. some $22 trillion, (yes that’s $22,000,000,000,000) between now and 2100 according to sources who have seen the draft Copenhagen treaty, or roughly $248 billion a year in taxes on the U.S. energy and carbon footprint, or roughly 2 percent of GDP. This would be a “climate debt” which we would owe the developing countries of the world because of our “past fossil fuel use.” This would be for the purpose of reducing “greenhouse gases” and thus the average world temperature .2 degrees Celsius by the year 2100 according to the Environmental Protection Agency. That’s .2 degrees Celsius at a cost of $22 trillion. (Can anyone figure out what they are smoking in Denmark?)

Various proposals have called for the U.S. and the industrialized world to reduce its carbon “footprint” by 20-80 percent by 2020 or 2050. To put such proposals in perspective, Watson put it this way: if the entire transportation sector worldwide eliminated the use of fossil fuels, the carbon footprint would be reduced 15 percent, assuming absolutely no growth per capita or in overall energy demand. And if we eliminated fossil fuel use in the energy production sector, again worldwide, there would be a 25 percent reduction in the carbon footprint. But given the recent agreement between China and India not to curtail their carbon footprint, and given their total population of near 2.5 billion today, no such reductions are going to occur unless the U.S. agreed to move its carbon footprint back to pre-industrial days.

Energy facts are indeed “stubborn things.” The scale of the challenge before us, and the time it will take to move toward an energy security future, behooves all of us to understand the energy realities we face, work to harness our ingenuity and technology, and get on with bringing the American dream to all of us here in the United States. Mr. Watson’s remarks on October 27th were a very good step in that direction. Contributing Editor Peter Huessy is President of GeoStrategic Analysis, a defense consulting company in Potomac, Maryland.

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