"The New Consensus"

David J. O'Reilly

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

Metropolitan Club

Washington, D.C., September 17, 2008

Good afternoon.

Before I get started, I want to take a moment to express my concerns for the many people of the Gulf Coast who were affected by hurricanes Gustav and Ike.  I'm sure I speak for everyone in the room when I say that our thoughts are with those individuals and communities affected by these devastating storms. As we meet here today, let me assure you the men and women of Chevron — and indeed the entire industry — are working hard to restore energy to the impacted areas.

This club has been an important meeting place since it was founded during the Civil War and Abraham Lincoln was leading the struggle to keep this great country intact. The club has had many distinguished members. One can only imagine the conversations that have occurred here: about the reconstruction of our country; about the pathway out of the Great Depression; and about the role America should play in the world.

Ideas that have shaped this country have been tested here. They have solidified into important decisions made just steps away in the White House. Teddy Roosevelt, who was a club member, captured the spirit of this place when he said, "In a moment of decision ... the worst thing you can do is nothing."

I appreciate your willingness to hear from an out-of-towner in the midst of a presidential election — an important moment of decision for our entire country. For me, it's a bit like speaking to a gathering of play-by-play analysts on the eve of the Super Bowl. What can I tell a roomful of political pros about this election that you don't already know?

I'll give it a try.

Energy will be an important, vote-determining issue in this election. Polls show that voters consistently rank gasoline prices as their No. 2 concern, second only to the economy. The two are inextricably linked. High energy prices drive inflation and squeeze family budgets. And the availability of affordable energy is a cornerstone of our prosperity.

Americans are now linking the country's energy challenges with national security and foreign policy concerns. A poll earlier this year noted that reducing dependence on foreign sources of energy was seen as the top strategy for enhancing national security, ahead of improving our intelligence operations.

Public concern over prices hasn't been this high since the oil shocks of the 1970s – and with good reason. The global energy market has been reshaped in ways that are deeply affecting our economy – and those effects are intensifying.

This renewed 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 over five years, informed observers have seen this situation coming and offered solutions. The bad news is public policy has not kept pace. Our political system doesn't deal easily with complex problems requiring long-term solutions. Our political system moves – and was designed to move – when people demand movement. And therein lays the opportunity.

Right now, Americans want answers. They want action. They are seeking reliable, affordable and abundant energy – they are seeking energy security. The worst thing we can do is nothing. We have already lost time. The urgency is clear. There have been steady, inexorable changes occurring in the global energy system. It is being stressed by growing global demand, and all of us are being affected.

We have reached a 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."

This election is an opportunity to make comprehensive and realistic changes to our approach to energy. The time is now for the presidential candidates to put forward real energy plans, not just campaign slogans. And, it's time for a real debate.

The questions I get asked more than any other usually start with the word, "Why?"

"Why are we paying so much to fill up our tanks?"

"Why have energy prices risen so far, so fast?"

"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 per barrel. Sometimes the price dipped, sometimes it rose. But the effects weren't overly negative and they had no detrimental affects on the economy. Quite the opposite, in fact: consistently low energy prices were a major factor in the economic expansions of the 1980s and 1990s.

In the 21st century, that's changed. Oil prices have climbed steadily. And the magnitude of the rise has been stunning. Instead of prices in the $20-per-barrel range, recently we've seen oil prices in the $100-per-barrel range.

The answer to the question "why" is a concept I called the "New Energy Equation." I raised this idea over four years ago here in Washington, 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 of a growing middle class around the world 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 – no electricity, no safe water, living on less than $2 per day. In the middle are billions who aspire to our standard of living. The good news is that each year many are beginning to achieve it. But the consequences of this trend are increasing demands for food, 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 domestic resources and exclude foreign investment. As prices increase, these geopolitical dynamics intensify.

Third, new supplies of oil resources are challenging to find and extract. Since we started using oil, most of the easy-to-reach, inexpensive supplies have been used. 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 production has fallen by nearly 4 million barrels of oil per day – this is the equivalent of taking a major oil-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. World oil production barely increased. Last year, seven of the top 15 oil-producing countries experienced flat to declining production compared to 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. The fundamentals underlying the global energy market have changed. And they aren't going to change back.

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 GDP compared to 40 years ago.

So where does this energy come from? Almost 40 percent is oil; about 23 percent each from natural gas and coal; 8 percent is generated from nuclear. Renewables make up 7 percent — of that hydro-power contributes about half. Less than one half of one 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 power. 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 we will need 50 percent more.

Now I want to make one important point and that point is "scale." The scale of the global energy system is simply 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 profit" 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 timeframe that some suggest.

Our energy system has required massive investment over many decades. To supply the daily needs of 300 million people here in the United States with new energy sources requires time and money – lots of both. And it's unrealistic to think major parts of it can be replaced in just a decade.

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 always 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 over 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 renewable energy.

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 – slogans, really – and focus on our primary objective – energy security. The reality is that there are no silver bullets, no quick and 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." It's not a choice between coal or wind. It's not a choice between nuclear or solar. We need it all. We need greater efficiency and more renewables. We need nuclear and clean coal. We need wind and oil and natural gas. Our path to energy security cannot rely on just one option – it 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 go 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 to meet these new challenges.
  • And fifth, address greenhouse gases through a transparent, predictable carbon policy.

Let me say a little bit more about this last point, because I know how much it is discussed today. One of the largest contributors to greenhouse gas concentrations in the atmosphere is fossil fuels. There is no doubt that carbon dioxide concentrations in the atmosphere have increased. And although there is uncertainty about the future impacts on climate, most people agree that it's not a good idea to continue unrestricted hydrocarbon combustion. And I agree.

But how should we reduce emissions in a realistic timeframe given the scale of the energy system and the growing demand? Once again, many proposals are being discussed. Some talk about reducing emissions by 20 percent by 2020. It sounds good, "20 by 20." Others talk about reducing emissions by 50, 60 or even 70 percent by 2050.

Even with the best of intentions, it will be challenging. If we were to shutdown the entire global transportation system today – all cars, trucks, buses, trains, planes and ships – we would reduce greenhouse gas emissions by about 15 percent. That's one-five percent.

And meaningful reductions will be expensive to achieve.

The International Energy Agency predicts that the real costs to meet greenhouse gas reduction targets will be $45 trillion dollars. That's above and beyond the investments necessary to meet future energy demand. It's a cost every one of us in this room needs to understand. Not just a cost on business, it is a cost on society – one that you and I will pay.

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.

When you look at this momentum, it's easy to see the new consensus building in America about energy. That's important because we need collaboration to achieve real progress. Businesses and consumers need affordable energy. Young and old want renewable energy. Republicans and Democrats seek reduced emissions.

But we need leadership to achieve results. This election – this moment of decision – is a time for the presidential candidates to explain how they will lead. Next week, when they meet at the University of Mississippi, the candidates must clarify their positions. They need to reconcile campaign promises with tangible actions:

  • What are their plans for making our economy more energy efficient?
  • Do they have concrete actions to grow all forms of domestic energy – nuclear, natural gas, renewables, oil and coal?
  • How will they de-carbonize the world's largest economy without undermining energy security or threatening our prosperity?
  • What's the cost, and who will pay, for their proposed plans?

We need to hear the debate. And we all need to judge the integrity of their proposals.

On the eve of the Civil War, Abraham Lincoln observed: "Public sentiment is everything. With public sentiment, nothing can fail; without it, nothing can succeed."

Today, public sentiment supports action on energy policy. That action should lead to a future of greater energy efficiency, enhanced supplies of all forms of energy and reduced emissions.

While I am concerned about the urgency of the situation today, I'm also optimistic. I believe that, by the time my grandchildren are my age, our energy system will look much different. But we must get started now. Our standard of living and our nation's security will be shaped by the energy policy of our next president. Our new consensus on energy has a common goal – for America to be secure. We need to work together to achieve it.

Thank you.

Published: September 2008