Economic Club of Minnesota Remarks by John S. Watson
By John S. Watson, Chairman and CEO
Remarks at the Economic Club of Minnesota
Minneapolis, Minn., September 16, 2014
Thank you, Steve, for the kind introduction … I’m pleased to be here today.
Minnesota is home to so many great companies … 3M, Target, General Mills, Cargill and others that play a very important role in our country’s economic growth.
These companies, and the other members of the Economic Club of Minnesota, are providing jobs and opportunity for this community – and serving as an example of leadership for the entire Midwest.
There’s no doubt that it is a turbulent time in the world – with horrifying violence in the Middle East, conflict in the Ukraine and the Ebola outbreak in Africa.
When you take a look at the news in the morning it’s really easy to be both saddened and depressed about man’s prospects.
Despite these headlines and many challenges, I’m actually optimistic about the world’s future – because viewed over time, and supported by what I see in my travels, I also see some very positive trends.
At a very basic level, over the last 150 years, we’ve seen the greatest advancements in living standards in recorded history … advances that have brought light, heat, mobility, mechanized agriculture, modern communications and other benefits to billions of people around the world.
And as more of the world moves toward market economies and trade expands … particularly in countries across Asia … the spread of wealth is helping move more people into the middle class and realize these same benefits.
In fact, in the past ten years the world has added three-quarters of a billion people to the middle class.
For more than two centuries the United States has helped lead many of these advancements … by spreading our ideals of free markets, free trade, rule-of-law, and limited state involvement that allow private initiative to innovate and drive advances.
Despite some struggles of our own, the United States business and economic system remains the envy of the world. And we’re viewed as being blessed with abundant natural resources – fertile land, oil, gas, coal and timber and much more.
We’re the second largest energy producer in the world. Oil and related liquids production is now on a par with Saudi Arabia and Russia. Our natural gas production is booming and leading the world. We’re part of a North America oil and gas system that has 25 percent of the world’s resources. Coal, nuclear and renewables also contribute significantly to America’s energy mix.
We’ve built the greatest economy on earth by enabling the development of our country’s natural resources to help ensure our citizens and businesses have access to affordable, reliable energy.
Every modern necessity and convenience – from the food we eat, to the clothing we wear, to the handheld devices we communicate with, and including the heat to stay warm during a cold Minnesota winter – are dependent on today’s natural resource-based energy system.
This link is often forgotten and is regularly taken for granted, just as fossil fuels are sometimes shrugged off as yesterday’s resource … because people mistakenly think they can easily be replaced.
Here, we can hop into a car or bus to get to our homes and offices, flip on a light switch, and power up our laptops and TVs … without thinking much about the energy and infrastructure these modern conveniences depend on.
But, the flow of energy supporting these conveniences can be negatively impacted by flawed government policy. There are plenty of examples of government interventions into the energy marketplace that hurt consumers and business.
We’ve had complicated systems of production and price controls that have caused artificial shortages in the past. And today we face a new generation of mandates, quotas and infrastructure constraints that will similarly fail the consumer if we don’t address them.
While most of the developed world has enjoyed the benefits of an affordable and reliable supply of diverse energy sources, in many of the developing nations I travel to, people have a very different experience.
Approximately 1.4 billion people have no access to electricity and a billion more only have access to unreliable electricity networks.
2.6 billion people still burn solid fuels, like wood, crop residue and dung to cook their food, often indoors, jeopardizing their health.
That’s why it’s so essential that while we work toward discovering and developing the fuels of the future, we should also ensure our policies and regulations aren’t stifling progress in developing and improving existing forms of energy at home and abroad.
We need to have policies that help us take advantage of existing resources using the technological innovations that have changed America’s energy conversation over the past decade … moving us from discussions about energy scarcity to energy abundance.
These policies center on three fundamental objectives:
The first, and most important, is to have affordable energy … because economies won’t stay great and living standards won’t be maintained without fuels that households and business can fit in the budget.
The second objective is to have secure and reliable energy … which comes from having ready access to diverse sources that are scalable with demand.
And finally, we require energy that meets a variety of well-understood and prioritized environmental expectations.
In today’s discussions about energy policy, there’s a tendency to look at these three objectives separately, as if you could pursue any one of them without affecting the other two…
But effective policy should be tested and balanced against all three objectives together before implementation.
So how do we accomplish this?
First, by creating policies that allow markets to work effectively … because free markets with only well-considered regulations help us advance all three objectives.
Market-based solutions keep fuels affordable for consumers and ensure buyers and sellers can price the needed reliability characteristics – such as availability for peak demand seasons or specific quality requirements – into their transactions.
Free markets support our environmental objectives by keeping our economy strong. Strong economies are better able to fund environmental priorities.
Free markets also help ensure a predictable basis on which new sources can compete. Sustained success of new products is seldom aided by mandates and unpredictable regulator discretion.
Second, override free-markets only in extreme circumstances. I can think of few cases where American consumers have been well served by usurping markets.
Across the energy sector, producers are striving to develop and deliver the fuels necessary to meet global demand.
Energy demand is expected to increase by about 40 percent over the next 20 years.
And to meet the world’s growing demand, we will need all forms of energy – including oil, natural gas, coal, nuclear, renewable and alternative fuels.
Virtually all credible forecasts show oil, gas and coal will continue to represent 75 to 80 percent of the world’s energy mix in 2035.
Today’s energy mix already includes renewables that have proven to be economic – such as geothermal and hydro – and in some cases, wind, solar and biofuels.
There has been some good progress in developing renewable sources.
But progress here is a relative term…
Even aggressive predictions expect renewables to account for no more than about 25 percent of the global energy mix a generation from now.
This is because finding affordable alternative forms of energy that are scalable is challenging, and takes significant investment in research and development.
My company has spent decades building one of the largest geothermal businesses in the world in Indonesia and the Philippines.
We’ve spent significant sums researching nonfood feedstocks and conversion technologies to develop advanced biofuels at a commercial scale – partnering with national labs, universities and other companies – evaluating more than 100 feedstocks and 50 conversion technologies.
But the smartest minds in my company and others haven’t yet cracked the code on pairing the right feedstock, conversion technology and logistics in an economic and scalable package.
I’m optimistic that with continued research, those focused on addressing this challenge will be able to identify and develop the new energy sources of the future…
A recent study, commissioned by former Secretary of Energy Chu, found that the U.S. transportation sector could develop new, economically competitive fuel-vehicle systems … if we can overcome technology and infrastructure hurdles in key areas such as biofuels, battery technology and combustion optimization.
But we need to understand that the current system took many decades to evolve. With patience, and over time, the best of these new sources will reach the point of commercial scale – and the market will do the rest.
Too often we’re seeing the desire to force alternatives into the system by means of subsidies and mandates instead of trusting free markets to drive change. We should learn from others’ mistakes with this approach.
Consider Western Europe, where many countries have implemented policies focused on forcing expensive wind and solar power into the system.
Because of these regulations, electricity prices in Denmark and Germany have jumped dramatically – affecting both businesses and consumers. Consumer electricity prices are basically triple those of the U.S.
The German Economy Minister says the renewable energy law could lead to “de-industrialization of Germany.”
And in Spain, where the government has helped shield consumers from rising costs through subsidies, there is now a “subsidy deficit” of $34 billion, which, according to the New York Times, has made the renewables industry an “unwanted extravagance.”
Here in the United States, we’re making some of the same mistakes…
Across this country we’re seeing federal and state mandates for wind, solar and biofuels that will raise prices and risk the reliability of the energy system – with only negligible impact on environmental outcomes.
Now, I know I’m in farm country, but I’d like to offer some comments about the renewable fuels standard. Let me preface my remarks by telling you I actually come from a family with a farming background.
We used to own what my grandfather called an almond ranch in Dixon, California … and I have an undergraduate degree in Agricultural Economics from U.C. Davis…So, I like farmers.
But, is it really good energy or land use policy to have 40 percent of our corn crop effectively mandated for fuel use?
Is it really sensible to mandate the use of advanced biofuels that don’t exist at economic or commercial scale, and charge penalties for being unable to deliver them?
Is it really wise to dictate the nation’s gasoline composition by annual regulator discretion instead of letting free markets work?
I don’t believe forcing technology or non-market-based solutions make for good policy.
What government can do is remove barriers to responsible development of the vast resources that this country has been blessed with.
On that topic, I’d like to take a moment to talk about shale and so called tight oil and natural gas resources.
The U.S. has experienced a fundamental shift in the energy landscape in the past 10 years that many have called an “energy revolution.”
This revolution has the potential to keep energy affordable, drive economic growth in other sectors and lower GHG emissions over the coming decades.
By combining two long-used technologies – horizontal drilling and hydraulic fracturing – our industry cracked this code for economically producing natural gas and oil from shale and other tight formations, and doing so safely – a subject I’ll come back to.
The benefits of the revolution are being felt by millions of workers employed in the energy industry – including some not very far from here – and thousands of other workers in manufacturing that benefit from lower energy prices and feedstock costs.
Since 2008, the price of natural gas in the United States has fallen by almost half… and it is projected to remain below 2008 price levels through 2035.
Lower prices have reinvigorated manufacturing…
In fact, the American Chemistry Council says that natural gas and natural gas liquids from shale formations can be directly linked to nearly 150 new manufacturing projects by the chemical industry – investments that could create over 600,000 real jobs over the next decade.
We’re a part of one of these projects… a $6 billion petrochemical complex under construction in Texas that will produce ethylene and polyethylene, building blocks for plastics and other products.
Low prices have put more money in the wallets of consumers across the country…
A recent report estimates that thanks to lower prices brought on by new low-cost supplies from hydraulic fracturing, each household in the U.S. is saving between 425 and 725 dollars per year. That’s total consumer savings that could reach roughly 80 billion dollars annually.
Surging U.S. oil production from shale and tight formations has helped offset world supplies lost from instability in the Middle East and North Africa, preventing another rapid run-up in prices that would have occurred otherwise.
There is also environmental serendipity – because the natural gas boom is helping to achieve one of our environmental objectives…
Low-cost natural gas is displacing coal in electricity generation, reducing greenhouse gas emissions.
However, sustaining the natural gas and oil boom both onshore and offshore depends on good policy in four critical areas: access, infrastructure, tax and environmental. Let me comment on each.
It might surprise many of you to hear that while oil and natural gas production is rising on private lands in the United States, it is falling on public lands – and the government controls a lot of land.
While I’m encouraged by the government’s lease sale last month in the Gulf of Mexico, currently more than 85 percent of the U.S. Outer Continental Shelf is off limits to the energy industry. We should accelerate and expand these sales and match nearby private land development in onshore areas.
Next, we need policies that support investments in infrastructure – pipelines and transmission systems. We have more than 2.5 million miles of oil and gas pipelines in this country. Pipelines are unquestionably the safest form of product movement.
Whether it is moving oil from Canada or natural gas into New York, we need to permit these lines if we’re going to efficiently and reliably meet customer demand.
I won’t belabor tax policy, other than to say I support tax reform that will lower marginal rates, reduce tax preferences and subsidies… and do so evenhandedly across all energy and non-energy sectors.
Singling out my industry for punitive treatment, as has been repeatedly advocated by some, is not consistent with our ideals, nor the way to produce more energy.
Finally, when considering policies that are meant to advance environmental objectives, we need our leaders and agencies to perform real, unbiased cost-benefit analysis.
To be sure, my industry needs to do its part when it comes to the environment.
We all expect safe operations, clean air and water, and minimum intrusion on wildlife, agriculture and communities.
There have been many concerns voiced about the risks in my industry…some have been valid and need to be addressed to ensure confidence in our business practices.
I’m proud that my company has among the lowest industrial injury and oil spill rate in our industry. We continue looking for ways to reduce injuries and potential negative impacts on our communities. A few examples…
When we build an onshore well-pad site, we carefully assess and plan the location, access roads and facilities to minimize interference with local populations, surface water, wildlife, scenic views and agriculture.
Our wells are designed to protect groundwater for the life of the well.
In the Marcellus shale in Pennsylvania, we’re reusing nearly 100 percent of the water that returns to surface in hydraulic fracturing.
And we’re also leading an industry group that has recommended practices to help ensure responsible resource development from all operators.
You might not know it by the current debate, but our country has made great strides across the spectrum of environmental outcomes. Our air and water is demonstrably cleaner.
Today’s cars are 98 percent cleaner than they were in 1970, emitting far fewer smog-forming pollutants.
And here in Minnesota, the number of days with good air quality has nearly doubled since 2003.
That is the kind of progress we can all be proud of.
But when it comes to regulatory policy, in some ways we’re reaching diminishing returns…
For example, later this year, the EPA will decide whether it will tighten the air-quality standard for ground-level ozone.
A recent study shows that if it chooses to implement a stricter regulation, lowering acceptable levels from the current standard to 60 parts per billion, approaching background levels, a large majority of the country, including national parks, and most of the counties in Minnesota, would be in “nonattainment.”
This means manufacturers wouldn’t be able to expand unless other businesses in the area shut down. Federal highway funds could freeze and economic growth could grind to a halt…costing thousands of jobs.
The objectives of many proposed regulations are noble, but they can be complex and have unintended consequences. We need to be sure we evaluate new proposals thoroughly and transparently.
I said in my opening that I am optimistic about the future. And I’m proud of the role the energy industry plays in driving economic growth and social progress around the world.
I also believe we need to play to our strengths, particularly when it comes to energy…
We can do this by advancing policies that meet the three fundamental objectives I described earlier, ensuring that America’s citizens and businesses have the affordable, reliable energy they depend on, while helping to advance our environmental priorities.
We can achieve these three objectives in concert, by letting the market system – a system that has historically enabled U.S. economic growth and progress – work.
Published: September 2014