TCS Daily


A National Report on America's Energy Crisis

By Spencer Abraham - March 19, 2001 12:00 AM

Remarks by U.S. Secretary of Energy Spencer Abraham U.S. Chamber of Commerce, National Energy


I would like to congratulate the U.S. Chamber of Commerce for convening this two-day National Energy Summit and I appreciate your invitation to participate. As we all know, the topic of energy is as timely as the day's headlines. In just my first eight weeks as Energy Secretary, California has faced almost daily power alerts. Rising natural gas prices have punished consumers with bills that, in some cases, are double or triple last winter's. And forecasts for this summer suggest the possibility of rolling blackouts.

The good news is that America's energy problems can be solved. The bad news is that the situation in California is not isolated, it is not temporary, and it will not fix itself.

America faces a major energy supply crisis over the next two decades.

The failure to meet this challenge will threaten our nation's economic prosperity, compromise our national security, and literally alter the way we live our lives.

America has heard these dire warnings before - in fact, they seem to be a recurring theme in our nation's energy discussion, almost since "Colonel" Drake made the first oil strike near Titusville, Pennsylvania in 1859. "The amazing exhibition of oil," advised the State Geologist of Pennsylvania, "[is] a temporary and vanishing phenomenon -- one which young men will live to see come to its natural end." That was in 1885.

Around the same time, John Archbold -- who succeeded John D. Rockefeller as head of Standard Oil -- joked about the prospects for oil discoveries in Oklahoma: "Are you crazy?" Archbold said. "I'll drink every gallon produced west of the Mississippi."

I don't know if anyone ever called Mr. Archbold on that pledge. But for whatever reason, in 1914 the U.S. Geological Survey predicted that the U.S. would soon exhaust its available oil supplies. They issued the same warning in 1926. And again in 1939. And in 1949.

All of these warnings have proven false. Despite all these expert predictions, the world has not run out of oil or other resources. And yet here we are, faced with the most serious energy shortage since the days of oil embargoes and gas lines.

My point is, America's current energy supply crisis is not due to some inevitable neo-Malthusian depletion of resources. The United States -- and our North American and hemispheric neighbors -- are blessed with a rich abundance of natural resources. It's political leadership that has been scarce.

For the past eight years, Washington sat on the sidelines as our nation's energy needs mounted. During the 1990s, the Clinton Administration employed a policy of taxing demand, limiting supply, and ignoring the rapidly expanding needs of the future.

Their energy strategy boiled down to: you can't find it ...you can't transport it ... and even if you get it, we don't want you to use it. Through neglect or complacency or ideology, this approach has led us to the crisis we face today.

The Bush Administration is fully prepared to respond to the broad set of challenges we inherited. But we must be candid with the American people about the magnitude of the problem -- which is what I'd like to talk about today.

America's Energy Supply Challenges

Three overriding facts starkly define the challenge of America's energy needs over the next two decades:

First, demand for energy is rising across the board, but particularly for natural gas and electricity;

Second, supplies are being limited by a regulatory structure that, in many respects, has failed to keep pace with advances in technology and an uncertain political environment that often discourages investment in desperately needed facilities;

And third, our energy infrastructure - that network of the generators, transmission lines, refineries and pipelines that convert raw resources into usable fuel - is woefully antiquated and inadequate to meet our future needs.

Unless these challenges are addressed, America's energy supply will be continually at risk ... our citizens will encounter blackouts and other lifestyle-altering disruptions ... and our economy will be hobbled by rising energy prices. Let me briefly outline some of the major issues on the horizon:

Oil: Rising Consumption, Accelerating Dependence

In the next 20 years, according to estimates by the Energy Information Administration, America's demand for oil is projected to increase by 33 percent. Yet as consumption surges, U.S. production continues to drop precipitously. We now produce 39 percent less oil than we did in 1970, losing nearly 4 million barrels a day in the process. And unless energy policy is changed, production will slip further -- to just 5.1 million barrels per day by 2020 - down from a high of 9.4 million a day 30 years ago.

This widening gap between demand and domestic supply will make us increasingly dependent upon foreign imports. Back in 1973 -- at the height of the oil crisis -- America imported just 36 percent of its oil from abroad. Today, we import 54 percent. And, if we allow this trend to continue, we will soon be forced to look abroad for some 64 percent of our oil. This will put more power in the hands of foreign suppliers - power they are not reluctant to use, as we just saw when the OPEC cartel decided to reduce oil output by one million barrels a day.

While this administration does not agree with OPEC's decision, that decision demonstrates the importance of increasing America's production of oil. Securing an affordable, reliable and adequate supply of crude is a critical challenge. But it is only half the oil story.

Since 1980, the number of American refineries has been cut in half. There hasn't been a new refinery built in the United States in over 25 years. New regulatory interpretations limit the ability of existing refineries to expand capacity. Add to that regulations that require the production of more than 15 different types of gasoline - and you have a refining industry strained to capacity, leaving us dangerously vulnerable to regional supply disruptions and price spikes.

Refineries are so constrained that when President Clinton made the politically symbolic gesture of releasing 30 million barrels of oil from the Strategic Petroleum Reserve last fall, that oil had to be shipped overseas to be refined.

Natural Gas: Rapidly Rising Demand; Constraints on Supply

Many of the same issues confront the future of natural gas. America's demand for natural gas is projected to rise even more rapidly than oil. If Department of Energy projections are correct, by 2020 Americans will consume 62 percent more natural gas than we do today. More than 9 out of 10 of the announced new electric generating plants will be fired by natural gas.

This approaching wave of new demand begs the question: Do we have an energy policy and a regulatory structure capable of meeting our natural gas needs? Consider just a few constraints in this market.

Right now, an estimated 40 percent of potential gas resources in the United States are on federal lands that are either closed to exploration or covered by severe restrictions. The last lease sale in the some areas of the Gulf of Mexico was more than a decade ago. New discoveries of natural gas in the United States have fallen for three straight years, creating increasing pressure for more imports.

The notion that we can rely so heavily on natural gas ... maintain severe restrictions on exploration ... and still enjoy low prices is a dangerous assumption.

Even if we find the supplies, moving that gas to market will require an additional 38,000 miles of transmission pipeline and 255,000 miles of distribution lines - at an estimated cost of $120-$150 billion.

Today's pipeline system can hardly handle the supplies we know exist. Alaska's Prudhoe Bay, for example, produces about 8 billion cubic feet of natural gas a day - approximately 13 percent of America's daily consumption. But that gas never reaches the market. Instead, it is just pumped back into the ground, waiting until a pipeline is built to connect the Alaska fields to the U.S./Canada distribution system.

Electricity: Powering the Information Economy

As everyone knows, we also face a real challenge in generating enough electricity to light out homes and run our businesses. Over the next 20 years, the Department of Energy estimates that electricity demand in the United States will increase by 45 percent. That rising growth rate will require the construction of over 1,300 new power plants -- about 65 every year. Yet, the last time we added that much power was 1985.

Furthermore, there is reason to believe that this could turn out to be a conservative estimate. During the 1990s, electricity consumption far outstripped projections, driven by the energy-hungry information economy. Some experts calculate that the demands of the Internet already consume some 8-13 percent of electricity. If demand grows at just the same pace as during the last decade, we'll need nearly 1,900 new plants by 2020 -- or more than 90 every year -- just to keep pace.

Hundreds of new generating plants will place even greater pressure on our already strained and aging power grid. America's network of transmission lines, substations and transformers was built when utilities were tightly regulated monopolies providing service to assigned regions. Interconnections between suppliers were strictly an emergency backup measure to guard against rare service interruptions. The system was simply not designed for long-haul swapping of power in a highly competitive market.

Consumers are already feeling the impact of a transmission systems stressed by rising demand. Transmission bottlenecks contributed to the blackouts that have swept through California and to price spikes in New York City last summer that cost consumers an estimated $100 million.

Coal, Nuclear, and Hydro-Electric Power

Coal has historically been American's number one source for affordable electricity; it currently powers half of America's electricity generators. And at today's recovery rates, our nation has enough coal to keep those plants running for the next 250 years.

Coal generators have already been called upon to make broad reductions in emissions. The Bush Administration supports those efforts - and we will back it up with greater incentives for investment in clean coal technology.

But the administration will not regulate coal out of existence ... and we will not support measures that will threaten electricity supplies and significantly raise electricity prices. President Bush made the right decision last week not to impose new federal mandates on the emissions of carbon dioxide. If America is to have reliable electricity over the next 20 years, coal must continue to play a major role.

But, coal is not the only energy source facing an uncertain future. There hasn't been a new nuclear power plant permit granted since 1979. Many of the 103 existing nuclear plants are not even expected to file for a renewal of their licenses as they expire over the next 15 years.

Even hydroelectric power generation is expected to fall sharply. Re-licensing a hydro facility can take a decade or more and cost millions. And now, even though consumers are faced with potential blackouts and chronic electricity shortages in the West, activists and some political leaders want to breach one or more of the four federal dams on the Snake River to help young salmon, on their trek to the sea.

The Dangers of Complacency

What are the dangers of complacency in light of these challenges? How does it all add up for our economy and our citizens?

This nation's last three recessions have all been tied to rising energy prices - and there is strong evidence that the latest crisis is already having a negative effect.

The National Association of Manufacturers estimates that soaring fuel prices between 1999 and 2000 cost the U.S. economy more than $115 billion -- shaving a full percentage point off our Gross Domestic Product. A January survey of its 5,500 members reveals that nearly one quarter were forced to curtail operations.

During a two-week period this past January, Californians lost an estimated $2.3 billion in wages, sales and productivity. Layoffs are already hitting workers in the West as companies shift production to states with more reliable energy sources. Then there are the jobs that will never be created. Intel's CEO Craig Barrett announced that the world's leading chipmaker won't be expanding in California: "As long as California is a Third World country," Barrett said, " we won't build $2 billion manufacturing plants here."

The Food and Agricultural Policy Institute reports that farmers are likely to see their income drop 20 percent over the next two years due to higher energy costs.

Rising energy costs are hitting every family's checkbook, primarily affecting those who can afford it least. Gas bills for many homeowners in the Washington, DC area more than tripled this year. Some residents are reporting that their heating bills are higher than their food bills this winter.

The power crisis isn't just pinching our wallets, it's changing the way we live our lives. In California, power outages have shut down traffic lights, darkened schools and closed businesses. The governor has ordered local police to patrol the streets - not for criminals, but to make sure businesses keep their lights dimmed.

But California is not the only state facing a mismatch between supply and demand. With electricity shortages predicted for New York City and Long Island this summer ... low capacity margins threatening electricity reliability in the Midwest, Southeast and Northern Plains states ... and strained refinery capacity in the Midwest, Americans across the nation are feeling the energy squeeze.

The Need For A National Energy Policy

Rising demand ... tightening supplies ... an aging power infrastructure ... a decade of neglect from Washington: These are the trends that define America's emerging energy needs.

President Bush has committed this administration to meeting these challenges - a job that begins with the urgent task of developing and implementing a long-term national energy policy.

To accomplish this, President Bush created an Energy Task Force headed by Vice President Cheney. He has asked us to define a clear strategy - a strategy that will allow environmentally responsible exploration and recovery of our domestic resources ... enhance our commitment to conservation and energy efficiency ... and encourage investment in new technology to further the development of renewable energy sources.

I wish I could say that the energy crisis now sweeping the nation has shocked the political system into action. But like other political discussions in recent years, the debate over energy seems as deeply polarized as ever.

On one end of the spectrum, some activists propose what amounts to a "zero tolerance" policy toward exploration and cling to the quixotic idea that new, undiscovered sources will somehow allow us to meet our energy needs. On the other end, some advocates place an almost limitless faith in special tax breaks for this favored activity or subsidies for that preferred industry.

The two extremes in our energy debate are founded on several enduring myths - myths that today conspire to block any true advance toward a rational and stable energy policy in the United States. Here are a few of the more prominent ones.

Myth Number 1: It is impossible to balance energy exploration and environmental protection.

Advances in technology have brought us a long way from the days when wildcatters punched holes in the ground based on the hunch they might hit a gusher. But from a regulatory standpoint, our view of oil and gas exploration hasn't changed much since we saw Jed Clampett strike "black gold" and split for Beverly Hills.

Today, satellites and computers are the tools of choice in the exploration business. Geologists can bounce acoustic and electrical vibrations off the earth's inner depths, gather the resulting mass of data into powerful computers and then create three dimensional and even four dimensional maps of resource fields miles below the surface.

Armed with these pinpoint accurate images, companies employ advanced equipment to drill vertically, horizontally and around corners -- allowing us to access supplies from previously unimaginable depths, up to six miles away.

The marriage of oil and gas exploration with cutting-edge technology means fewer rigs, fewer roads and fewer pipelines. Drilling operations that required 65 acres in the 1970s need only 10 acres today. Technological improvements in just the past 15 years have generated success rate increases of 50 percent. America's national energy policy must reflect these staggering advances that have revolutionized the way we develop our resources.

Myth Number 2: All our current problems are due to an energy industry that is engaged in a massive conspiracy to gouge consumers by limiting supply to drive up prices.

This myth has been punctuated by calls for investigations into everything from last summer's Midwest gasoline price spikes, to recent allegations that power generators in the West have been withholding electricity. We have a fair and objective process for judging these claims - and action will be taken when it is merited. Over the past two weeks, for example, the Federal Energy Regulatory Commission ordered power companies to rebate some $124 million to California utilities. Meanwhile, the Federal Trade Commission recently cleared gasoline suppliers of all charges relating to last summer's price increases.

But charges of price gouging largely miss the point. There is no magic source of supply; no hidden pool of energy that can be turned on and off like a faucet. California - and other power-strapped states - will never solve the power crises they confront until they resolve the conflict between demand and supply.

Earlier this year, one company proposed building a $400 million power plant in California that would have provided enough additional electricity to light 600,000 homes in energy-starved Silicon Valley. The company pledged to plant 800 new trees to beautify the area. They proposed cloaking the power station in a brick facade to make it essentially indistinguishable from a high-rent office complex. They even promised to help maintain the local habitat for the endangered bay checkerspoon butterfly.

Their environmentally-sensitive plans won the support of the Sierra Club, the American Lung Association and the NAACP. But city officials voted unanimously -- 11-0 -- to reject the plan. In an editorial, the local paper called this move "Dumb and Dumber."

Meanwhile, further south, plans to build a 550-megawatt gas-fired generator in a Los Angeles suburb were scrapped after residents voted 2:1 against the project. The local mayor added a much-needed dose of reason and maturity to the debate - by launching a hunger strike in opposition to the plant.

In California, workers are being laid off, companies are leaving the state, farmers and small businesses are losing millions, consumers are threatened with rolling blackouts, but local officials reject power plants with little regard for the consequences. Is it really any mystery why there hasn't been a single new power plant built in California in the last decade?

Myth Number 3: The Bush energy plan is focused almost exclusively on opening the Arctic National Wildlife Refuge (ANWR) to exploration - a move that would buy us only about 6 months worth of American consumption while destroying a pristine natural wilderness, not to mention disrupting the breeding ground of the Porcupine Caribou.

Let's separate fact from fiction when it comes to ANWR.

First, according to estimates by the U.S. Geological Survey, ANWR holds between 5.7 to 16 billion barrels of recoverable reserves - with a mean estimate of 10.4 billion barrels. And that assumes the use of drilling technology now nearly a decade old. This represents more than 300 times the amount of the oil President Clinton released from the Strategic Petroleum Reserve last fall. And based on December 2000 figures, it would free us from about 54 years of oil imports from Saddam Hussein and Iraq.

Second, exploration would impact only about 2,000 acres out of more than 19 million. To put that in perspective, the massive Arctic National Wildlife Refuge is about the same size as the entire State of South Carolina; the two thousand acres that would be affected is less than half the size of Dulles airport.

And as for the caribou, the herd in the Prudhoe Bay area grew more than 9-fold over the past 20 years to an estimated 28,000 in 2000 - seemingly irrefutable evidence that caribou mating and oil exploration can peacefully coexist.

The decision to open a small portion of ANWR should be made on the merits. But it should not be made on the mistaken assumption that opening ANWR will allow us to produce our way to full energy independence.

America first became a net importer of energy in the 1950s - and our economy will continue to depend, in part, on imported oil. However, closing off virtually every available new source of domestic supply, enhances the leverage and power of an oil cartel that cannot be relied on to put America's interests first. While the resources of ANWR won't make us energy independent, they will help increase America's energy security by ensuring a more diverse supply of oil.

Myth Number 4: Government subsidies and tax breaks are the best way to encourage new exploration and production of energy.

This administration will continue to support funding for energy research and development initiatives. But capital is best allocated to its highest uses through the workings of the free market, not manipulations of the tax code. Government regulatory policy should not be aimed at picking winners and losers in any market, including energy. Neither should tax policy.

Myth Number 5: We can forego traditional sources and instead meet rising energy demand by harnessing wind, geothermal, solar and other forms of renewable power.

Excluding hydro-power, renewable sources currently generate about 2 percent of America's electricity. Billions have been invested in developing renewable energy - and will continue to be invested under the Bush Administration. But renewables have yet to overcome the economic advantages of conventional energy sources.

Even with promising advances in research and development, renewables will only provide, according to Energy Information Administration estimates, about 6 percent of our total electricity consumption by 2020. Even if renewables exceed our most optimistic expectations, they would still supply only a fraction of our needs over the next 20 years.

Myth Number 6: Price controls are the answer to today's energy crisis.

Memories are short, aren't they. So let me remind everyone. America imposed price controls on oil and gas in the 1970s. They were an utter failure. They led to shortages and rationing and the idea that America was gripped by malaise.

Let me be clear: The Bush Administration does not support price controls. Price controls on electricity will lead to more blackouts. Price controls on gasoline will lead to gas lines. Price controls will deepen America's energy crisis, because they won't reduce demand, but they will cripple incentives for desperately needed new investments in energy supply.

Charting a New Policy Course

The challenges are formidable ... the warning signs are obvious ... but I am optimistic because I know this administration's commitment is equal to the task.

Our national energy policy will be comprehensive. It will reach across every department that touches the energy marketplace - from the Interior Department and the EPA to the Transportation Department and the DOE.

Our national energy policy will be hemispheric. It will be based on the understanding that our policy cannot stand in isolation from our neighbors throughout the Americas.

Our national energy policy will stress the need to diversify America's energy supply. It will be founded on the understanding that diversity of supply means security of supply ... and that a broad mix of supply options - from coal to windmills, nuclear to natural gas -- will help protect consumers against price spikes and supply disruptions.

And our national energy policy will be balanced. It will leapfrog the myths that stifle change -- rejecting the notion that there is no middle ground between environmental protection, regardless of the cost and energy exploration, regardless of the impact.

Soon we will deliver our recommendations to President Bush. Later, we will introduce legislation aimed at winning bipartisan support for a national energy policy that matches the magnitude of the challenge. I am hopeful that men and women of good will -- from both ends of the political spectrum ... from environmental organizations to industry groups -- will then come together and transcend the stale debate that has characterized energy policy in recent years.

About 150 years ago, America faced a vastly different energy crisis. Supplies of whale oil were becoming more and more scarce. Few could afford to pay for the luxury of this or other costly methods of illumination. Sure, crude oil was available. In those days it was soaked up with rags, wrung out into small vials, and then sold as a treatment for toothaches ... until an entrepreneur lined up an investor and a chemist and launched an energy revolution that would light the world.

In America, resources become scarce only when our imagination languishes. By engaging that imagination, I am confident we can meet the challenges of today. If complacency yields to action. If we resolve to strike a rational balance between our energy needs and our environmental concerns. And if a national energy policy becomes an urgent priority.

Thank you.
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