A New Energy Mandate

David J. O'Reilly

By David J. O'Reilly, Chairman and CEO
Chevron Corporation

Council on Foreign Relations

New York City, Nov. 12, 2008

As a person in an industry so often misunderstood, I welcome the opportunity to speak about the future of energy, which is vital to our prosperity.

And as a new member of the Council on Foreign Relations, I am honored to address this distinguished audience. I'm looking forward to participating in debates about the important policy issues that define our times — a role for which the council is deservedly known.

And in this extraordinary year, it's a role that has never been more important. We've elected a new president. We've felt shocking developments in the financial markets. We've experienced a dramatic slowdown of our economy. And we've seen a dramatic rise and fall in commodity prices.

The early agenda of the new administration will be dominated by fixing the economy. But energy cannot be far behind because of how closely intertwined the two are. The financial and energy markets are enormous in their scale and global reach. Both markets touch every sector of our economy and are key pillars of our competitiveness. The world's financial markets are interconnected, as are the world's energy markets.

The energy sector — oil, gas, coal, nuclear power and renewables — drives human progress. However, the global energy market has been reshaped in ways that are deeply affecting our economy, and those effects are intensifying.

Polls show that the public consistently rank gasoline prices as their No. 2 concern, second only to the economy. The two are inextricably linked. High energy prices drive inflation, squeeze family budgets and cause ripples throughout the economy. The availability of affordable energy is a cornerstone of our prosperity.

This public concern presents an opportunity.

W. Edwards Deming — one of America's respected business thinkers — once said: "It is not enough to do your best; you must know what to do, and then do your best."

The good news is, we know what to do. For many years, informed observers have seen this situation coming and have offered solutions. The bad news is, public policy has not kept pace.

Therein lies the opportunity. Right now, Americans want action. They are seeking reliable, affordable and abundant energy — they are seeking energy security.

Energy security is essential for economic stability. Reliable, affordable and abundant energy helped drive the prosperous years of the 1980s and 1990s. Energy supports every local economy. It affects the budget of every household and business sector. It directly and indirectly provides millions of U.S. jobs and enhances the standard of living of every American.

But to have meaningful impact, we must address our energy and economic challenges in a coordinated way so that the outcome is greater energy security and greater economic security.

And this is the time. We are at a critical moment of decision when it comes to energy policy.

In his new book, Hot, Flat and Crowded, Tom Friedman framed the need for change, saying, "It will be the biggest single peacetime project humankind will have ever undertaken. Rare is the political leader anywhere in the world who will talk straight about the true size of this challenge."

The new administration has an opportunity to make realistic changes to our approach to energy and to create a comprehensive energy policy. The American people are looking for solutions to the energy challenges we face. They want answers.

The questions I am asked most often usually start with the word "why." "Why are energy prices so volatile?" "Why don't you think oil prices will return to $20 per barrel anytime soon?"

For 20 years, oil traded in a relatively narrow band, fluctuating between $15 and $25 a barrel. Sometimes the price dipped; sometimes it rose. The impacts were modest, and they had no detrimental effects on our economy.

In the 21st century, that's changed. Oil prices have increased significantly. Instead of prices in the $20-per-barrel range, we've seen oil prices exceed $100 per barrel, before recently falling back to around $60 per barrel.

The answer to the question "Why?" is a concept I called the New Energy Equation. I raised this idea four years ago, and today its implications are more acute than I expected.

There are four reasons that explain why prices have gone up and why they are likely to remain relatively high.

First is the emergence around the world of a growing middle class that is driving energy demand. There are more than 6 billion people on Earth. Everyone in this room is among the so-called Golden Billion, enjoying a standard of living that many can only dream of.

At the other end of the scale are 2 billion people who have essentially nothing: they have no electricity, have no safe water and are living on less than $2 a day. In the middle are billions who aspire to our standard of living.

And the good news is that each year many are beginning to achieve it. But the consequences of this trend are increasing demands for goods, services and commodities of all kinds.

Second, geopolitical dynamics continue to put upward pressure on prices. I don't just mean conflict in the Middle East, although that certainly plays a role. The situation is far more complicated. We are seeing a resurgence of resource nationalism — the impulse by governments to tightly control their resources and limit foreign investment.

Third, new supplies of oil resources are challenging to find and extract. Most of the easy-to-reach, inexpensive supplies have been used. And what's left is harder to find, more difficult to drill and more expensive to produce.

And fourth, we have deliberately constrained our own supply by placing limitations on domestic exploration and drilling.

In the past 20 years, America's oil production has fallen by nearly 4 million barrels a day. This is the equivalent of taking a major producing country's supply off the world market.

And over the same period, U.S. demand grew by more than 4 million barrels per day. Less supply in a time of rising demand means higher prices. Last year, global production barely exceeded demand. Spare capacity stood at just over 2 million barrels per day. And world oil production barely increased.

Seven of the top 15 oil-producing countries experienced flat to declining production compared with 2006. Among them were Mexico, Venezuela, Norway and Nigeria. Although in recent months the supply and demand balance has improved, there are accumulating risks to the supply of reliable, affordable energy in the future.

But there are solutions. And the necessary actions we must take become apparent when people understand the realities of energy.

Let me provide you with some information about our energy system.

Americans are the largest consumers of energy in the world. And we have benefitted greatly from it. We generate about a quarter of the world's gross domestic product and consume a quarter of the world's energy.

We are becoming more efficient in our use of energy. Today, we use half of the energy per unit of gross domestic product compared with 40 years ago.

So where does this energy come from?

Almost 40 percent is oil, about 23 percent each from natural gas and coal, and 8 percent is nuclear power. Renewables make up 7 percent, and of that, hydro power contributes about half. Less than one-half of 1 percent comes from wind. Solar is even smaller than that.

We import about two-thirds of our oil and 15 percent of our natural gas. All of the rest of our energy — coal, nuclear, renewables — is produced here at home.

Let me dispel one myth. The United States is not an energy weakling. Our country is an energy powerhouse.

America is the No. 1 producer of nuclear power and ethanol. We're the No. 2 producer of coal, natural gas and wind. And we're the No. 3 producer of oil.

When looking at the energy system from a global perspective, the picture is very similar. Like America, 85 percent of the global economy is powered by oil, natural gas and coal. And by 2030, experts predict that the world will need 40 percent more energy than we consume today.

Now I want to make one important point — and that point is scale. The scale of the global energy system is enormous and destined to get much larger. Today, the world consumes from all energy sources the equivalent of 10 million barrels of oil each and every hour. That's about 120,000 gallons per second.

These are key facts about energy. And facts are the antidote to all the myths, half-truths and impossible contradictions, which too often pass for energy "thinking."

For instance:

  • We want to decrease our reliance on foreign oil. But we restrict domestic production and call on OPEC to increase its production.
  • We want less carbon but are fearful of nuclear power, one of the few scalable sources of energy that generates no carbon.
  • We want energy companies to invest their profits to provide new supplies, but we threaten to take away those profits through "windfall profits" taxes.

Time and time again, someone tells us that he or she has found the solution to all our problems. Some are purely phony; some are real but not realistic.

Renewable energy is very real. We need it. It will be an essential part of the future I envision. But it's not realistic to suppose that it can replace conventional energy in a short time frame, as some suggest.

Our energy system has required massive investment over many decades. To supply the needs of some 300 million Americans requires time and money — lots of both.

Now I believe we will develop and implement new technologies that will move our economy toward a greater reliance on renewables and alternatives. But the development and application of new technology takes time.

Look at the computer industry. It took about 50 years from the development of the silicon chip before computers were a widespread part of everyday life.

Will energy alternatives take that long? I hope not. But we need to be realistic.

Even with the rapid growth of renewables, experts estimate that more than 80 percent of global energy consumed in 2030 will still come from oil, natural gas and coal.

These conventional energy sources will remain indispensable to meeting demand for decades to come, even as we pursue greater contributions from other sources.

The flipside to misplaced hope in alternatives is the notion that we can simply drill our way out of the problem. We can't. There aren't enough domestic reserves. And what there are will take time to develop. But more access will help.

We need to get beyond simplistic solutions and focus on our primary objective — energy security. The reality is that there are no silver bullets, no quick, no easy answers.

Massive scale, long lead times, tight spare capacity, growing demand — these are the realities we face.

There are solutions. And those solutions are not either/or. It's not a choice between more drilling or more efficiency, coal or wind, nuclear or solar. We need greater efficiency and more renewables. We need nuclear and clean coal. We need wind and oil and natural gas.

We need it all.

Our path to energy security cannot rely on just one option. We must pursue many options.

Last year, the National Petroleum Council published a study titled "Facing the Hard Truths About Energy." It laid out five essential and urgent steps to achieve energy security. Let me run through them.

  • First, moderate demand by increasing energy efficiency in all sectors of our economy.
  • Second, expand and diversify all U.S. domestic energy supplies.
  • Third, strengthen global and U.S. energy security through a renewed commitment to energy trade and investment.
  • Fourth, enhance science and engineering capabilities.
  • And fifth, address greenhouse gases through a transparent, predictable carbon policy.

We are facing a moment of decision when it comes to our energy future. And the time to act is now. I am confident we can take the right steps forward to achieve energy security. And I am not alone in my views. The American public is now engaged on energy.

We're embracing energy efficiency. We're endorsing the need to develop more of our own supplies — renewables and conventional energy. And we're striving to use energy in a more environmentally responsible manner.

The recent campaign rhetoric produced one catch phrase I like: "We need all of the above." The "all of the above" approach should be the new energy mandate for the new administration's energy policy. And we need this new energy policy to be addressed as a strategic economic priority as well as a national security priority.

President-elect Obama must deliver a national blueprint to achieve distinct goals for each of the five recommendations of the National Petroleum Council study. Above all, to properly plan for the future, these goals need to be clear, realistic and specific.

If government acts to address energy security, the benefits to our economic prosperity will be significant. Responsible and environmentally sound development of America's vast energy resources will be significant over time:

  • Add high-paying jobs across all sectors of our economy.
  • Generate billions in new tax revenues for our local, state and federal governments.
  • Reduce our dependence on imports and improve our balance of trade.

These are benefits we all desire.

In this time of economic uncertainty, our energy industry can provide renewed economic growth and greater energy security. Our energy industry can provide a stable foundation for a prosperous future.

Thank you for listening.

Published: November 2008