U.S. Chamber Energy Institute for the 21st Century — CEO Leadership Series Washington, D.C., October 27, 2009

John S. Watson

By John S. Watson, Vice Chairman of the Board
Chevron Corporation

Remarks to the United States Chamber of Commerce

Washington, D.C., October 27, 2009

Thank you very much. I appreciate this chance to be with friends old and new here at the U.S. Chamber of Commerce.

You're especially kind to include me as part of your CEO Leadership Series, as I don't yet hold that title. Come January 1, I'll be taking the place of an individual who has set a very high standard of leadership. He has achieved greatness for our stockholders, employees and other stakeholders. When I think of the best of American business, I think of my predecessor and good friend Dave O'Reilly.

Things change and the challenges in Washington are bigger than ever. Chevron is a long-time member of the Chamber. We remain a proud member, and I believe the Chamber is sorely needed to speak for the values of businesses big and small.

All of you here this afternoon, and anyone who takes a hand in business these days, can see that we're still dealing with a tough economy. But even in these uncertain times, I'm an optimist and a believer in the strength of our free enterprise system.

It's always easy to take a downcast view, given the trauma over the last 12 months. And the picture can look even more bleak when government policies add to the troubles of a struggling economy, with debt and regulatory ambitions of a size we've never seen before.

Yet for all of that, there remain powerful economic forces at work across the world, and they are on the side of long-term prosperity. So much growth and prosperity in recent years has been driven by the dynamic economies of China, India, and yes, of course the United States as well. The productive energies of these countries are already leading the recovery today.

I've been in the energy industry for some thirty years now. And that experience tells me that the long-term stability and success of America's economy will depend, as much as anything else, on affordable energy.

Every enterprise represented by the U.S. Chamber of Commerce depends on a reliable supply of energy at an affordable cost. We're talking about a prime mover behind sustained growth in employment, productivity and wealth. Take that away, or even throw it into doubt, and in short order we'd all be on pretty shaky ground.

Energy concerns every household and supports every local economy. The oil and gas industry employment contribution to the nation's economy results in over 9 million part- and full-time jobs. A recent study found that our industry alone accounts for 7.5 percent of America's GDP.

This surprises some, because many don't think of us as a big employer. But whether exploring, producing, delivering or selling — we're part of a massive infrastructure that provides good jobs for millions of Americans.

Right now, energy prices are rising, but they are still a good deal lower than last year, mainly because of the fall-off in economic activity around the world. But it wasn't so long ago that gasoline was above $4 a gallon and oil traded over $140 a barrel.

Certainly in this city, everybody was talking about it. Congress was calling hearings, and the word "crisis" filled the air. But time passed, and the issue dropped from view. It's been like that since the 1970s: When prices decline, there's always the tendency to pay less mind to long-term energy concerns.

In my business, we don't have that luxury. We have to think decades ahead and stay focused on the fundamentals. The men and women who set policy for our country will have to do the same — because as the economy revives, as it is doing today, and prices rise with demand, we'll be in the same fix we were in a year ago.

Unless we take the long view and act on it, the U.S. will be struggling again with the same serious challenges. And for all the debates over energy use and production, there is almost universal agreement on what those challenges are.

First, we need enough affordable supply to meet the vast needs of a prosperous, productive nation of more than 300 million people — a nation that also must compete for some of those supplies in the world market.

Second, we should become less dependent on foreign sources of oil and gas. Instead of leaving ourselves to wait on far-away events and decisions, we should do more to develop a stable and diverse energy supply at home.

And third, there is still the concern that burning fossil fuels can carry a cost, including its effects on climate. So we share another objective: To reduce the impact of fuels of all types on the environment.

These are the main points we largely agree upon in energy policy. But while the goals are shared, what we often seem to lack is a common set of facts from which to proceed. A realistic strategy for meeting the world's demand for energy has to begin with an understanding of scale.

Consider this. The world uses, from all energy sources, the equivalent of 245 million barrels of oil a day. That's equal to the production of over 30 Saudi Arabias. Demand on that order is a fact, and over time it moves in one direction — which is upward.

We in the United States, and in other developed nations, have a standard of living that most of humanity is still striving to reach. We're the "golden billion" so to speak — the ones who can take for granted things like light, heat and transportation. And across the globe billions are waiting their turn for the same essentials of progress — and for a better life.

Worldwide, we use 50 percent more energy than we did only 20 years ago. And 20 years from now, demand will have risen by another 40 percent or so. How could it be otherwise, with over 6 billion people on Earth, and with all of the demand and growth that involves?

Over 80 percent of the global economy is powered by oil, natural gas and coal. And this reliance on traditional fuels is just as great here in the United States, despite all the progress we've made on renewables and other alternatives.

Renewable energy sources are being developed at a very impressive rate. Over time, we will replace some fossil fuels with cleaner, more diverse and more secure forms of energy. And smart policy can accelerate the development of new and diverse energy sources and the technology to make them feasible. That is all to the good.

Yet, if we look at the data, there is no avoiding a simple conclusion: The sheer scale of our energy needs is far beyond the capacity of any one source or technology.

If you believe that renewables have strong promise for the future, I'm with you. In the long sweep of time, they are going to meet a bigger and bigger share of global demand. But it's false to assume that renewables can replace conventional energy in the near term, as we are sometimes asked to believe.

Most experts predict that 20 years from now, renewables will meet about 20 percent of energy needs. Therefore, we will need to rely on traditional fuels for quite some time to come.

After all, the development and application of new technology tends to be a long-term proposition. Look at the computer industry. It took about 50 years from the development of the silicon chip before computers became a widespread part of everyday life.

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

Even as we move aggressively to bring other sources online, conventional energy will remain indispensable to meeting demand for decades to come. It's for us to decide where we obtain that conventional energy, in the amounts we're going to need.

And from a policy standpoint, the United States has been moving in the wrong direction for a very long time.

Although talk of energy independence has been in the air since the 1970s, one policy after another has severely limited domestic exploration and production. In just the past 25 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 25-year period, U.S. oil demand grew by nearly 4 million barrels a day. And how have we met all that extra demand? By importing still more from other countries.

Even with the most ambitious targets for fuel-efficient cars and more use of biofuels, the United States is still going to be importing nearly 8 million barrels of oil a day by 2030. And this assumes no drop-off in the amounts we use domestically — which itself will require new exploration and development at home, to offset natural field declines.

Even so, when oil and gas is discussed here in Washington, the general idea is usually to impose more taxes on producers. The result is to hinder development and leave America ever more dependent on foreign sources.

The same mindset in Washington refuses to allow even a complete and accurate measurement of America's current oil and natural gas inventory. As lawmakers debate whether to use more of our energy resources, wouldn't it make sense to at least determine how much we really have?

By rough estimates, America has vast amounts of oil and natural gas in the Outer Continental Shelf — and an estimated 30 billion barrels of it are currently unavailable for development.

We know that our methods of extracting it are the safest, most environmentally sound methods in existence. We know that the more we produce at home the less we import from others. And we know that the result will be new jobs, tax revenue and a stronger economy when more energy is produced here at home.

For me this is a matter of common sense. Yet here, too, we need a dose of realism.

If we could simply drill our way to full energy independence, I'd be the first to tell you. But we can't do that. Even if we had all the access we wanted, there still aren't enough domestic resources.

But if greater energy security is the goal, more access will clearly help.

The solutions to our energy problems are rarely a case of 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. To achieve energy security, we need it all.

That means getting beyond simplistic proposals and staying focused on energy security. There are no quick or easy answers.

Massive scale, long lead times, growing demand — these are the realities we face. And don't doubt for a moment that America has the means and the know-how to manage all these challenges.

America is not only the No. 1 producer of ethanol and wind power. We're first in nuclear energy as well. We're the No. 2 producer of coal and natural gas. And we're the world's third-largest oil producer.

It's clear that we are energy-rich and our capacity is enormous.

This country is not an energy weakling, or anything close to it. We are an energy powerhouse. We've got what it takes to keep moving forward on every front. And that is what we must do if we're going to be ready for the increase in demand that will come along when the global economy recovers.

As for the goal of managing the transition to lower-carbon energy, that too is achievable. But it'll require a long-term commitment, and again, a grasp of the true size and scale of the undertaking.

We can make this transition in ways that are smart, sensible and creative — setting our sights on ambitious and realistic goals. We need to be far-sighted — and remember that investing in future energy sources is never more important than in a down cycle.

There is a way forward on climate change. At Chevron, we see it in terms of these core principles:

Energy security — in other words, steady, affordable and reliable supplies to keep this economy functioning and competing.

Maximize conservation — because saving a gallon of fuel is like finding a gallon of fuel.

Measured and flexible approaches also are essential — so that we know whether we're meeting our goals and can make adjustments if unintended consequences start to outweigh the benefits.

A fourth principle is broad and equitable treatment — because no industry or sector should be unduly burdened with taxes, regulations, or job losses.

Next, enable technology with more public and private support for R&D — because we have no greater ally in this work than human ingenuity.

Transparency also is critical — simply stated, we need to be candid about the true costs of any policy we adopt, in terms of money spent, restrictions imposed and jobs destroyed.

The final principle is global engagement — which means that just as every nation stands to gain from reduced emissions, all must work together in realizing that objective.

Unfortunately, the cap-and-trade bills we hear so much about don't live up to these principles — especially by the standards of transparency, security and equitable treatment. Both the House and Senate bills are an example of how goals detached from reality can do far more harm than good to our economy and to American workers.

As written, these bills would lay heavy new costs on every family and business in the U.S. They would create new government bureaucracies; they lack transparency; and they would unfairly burden the petroleum sector with hidden costs on transportation fuels.

We've all heard people running for office promising to reduce carbon emissions by this or that big percentage over the next decade or two — just as these latest cap-and-trade bills propose to do. But supporters of such ideas vastly overstate how quickly those reductions can be made, and they greatly understate the cost.

Some talk about reducing emissions by 20 percent by 2020. Sounds very catchy — 20 by 20. Others talk about reducing emissions by as much as 80 percent by 2050. Even with the best of intentions and an all out effort, we will only get part of way there. Here's why:

If we were to replace today's global transportation system with a zero-carbon solution — all cars, trucks, buses, trains, planes and ships — we would reduce greenhouse gas emissions by only 15 percent. That's one-five percent. If we were to replace our entire global power generation system, we would reduce greenhouse gas emissions by only 25 percent.

So combined, that's only a 40 percent reduction. And these numbers are static – they assume no growth at all between now and 2020 or 2050.

In short, the world cannot replace its entire energy system in just a few decades. And to seek those reductions, without any realistic plan to economically replace the energy we lose, is a straight path back to a pre-industrial economy.

There are serious and systematic ways of reducing carbon emissions for the long term. But trading in false hopes and inflated numbers will get us nowhere. We need to set goals that are both challenging and realistic.

We need to willingly assume the associated costs, which we all must bear. And we need to accept that an economy free of all fossil fuels may just be beyond our reach. But we can make meaningful progress and there are actions we can take today. The most immediate and cost effective thing we can do is to maximize conservation through energy efficiency.

That's our best chance of making the biggest difference, and already our country has made great strides in that direction. In fact, we in the United States use half as much energy per unit of GDP as we did a generation ago.

And in everything we do to confront our energy challenges, it's critical to remember how much our progress will depend on economic growth — here in America, and in nations that aspire to our standard of living.

Even as we deal with the adversity of an economic recession, whole nations are shaking off ages of poverty and moving toward prosperity. We live pretty good lives here, and there are a lot of people abroad who want the same for themselves and their families. People everywhere want the benefits of heat, light and modern transportation.

The long-term trend is ever upward. And this great progress for billions of people hinges on a growing supply of energy — from sources that can be drawn on right now.

Often when I'm here in Washington, I have a chance to meet with policy makers. And my best advice to them is never to take economic growth for granted — or to forget that the strongest economies, and those on the rise, are still powered largely by fossil fuels.

Many wish it were otherwise, but it's a fact. And the danger is to let energy promises get ahead of energy realities. To the extent that oil and gas fuel economic growth, they can actually serve the goal of getting us beyond a carbon-based energy economy.

It is no coincidence that the greatest advances in alternative fuels have come in this past quarter-century — a time of incredible economic expansion. The market is working, as investment capital moves in the direction of new sources and greater efficiency.

This is a crucial point, often neglected by advocates of new controls and mandates: Alternatives depend on innovation, and innovation depends on growth and open economies. Growing economies are always better situated to make the big investments that yield the long-term payoffs.

Go to any major developed country and you'll find a petroleum-based economy. Try to change that fact overnight, with overly restrictive policies, and what you'll get is a weaker economy and all that comes with it — a fall-off in investment, a loss of optimism, and less willingness to take the long-term view.

In those conditions, making big investments in energy sources that have a distant time horizon will often be the last thing on people's minds.

Supplying the energy needs of the world requires time and money — lots of both. Indeed, the energy system we have right now is the product of more than a hundred years of investment. We have to think about the next energy system we're heading toward as another hundred years of investment.

Our responsibility now is to prepare the way — to set in motion the world's transition to new sources of energy. It's not a sudden turn, but a long arc. We will convert away from conventional fuels, but it is more than the work of years or even of decades — it is the work of generations.

In closing, I'm confident we'll succeed through technologies not yet developed nor perhaps even fully imagined. As always, when the conditions are right, there will be those moments of great genius that solve old problems and clear new paths.

The human capacity for invention, and our desire to improve life for ourselves and others, are always the prime forces of growth and progress. These traits are held high by all of us here today. They remain vibrant and powerful in the free market economies, especially in the United States of America.

And I would never bet against them.

Thank you very much.

Published: October 2009