Energy industry leaders gathered in Houston yesterday to discuss the state of energy in the United States and the discussion immediately turned to economics. With regard to energy there is, according to John Hofmeister, CEO of Shell Oil, a fundamental law of human society that cannot be denied: the Law of Suppy and Demand.
Gas prices, he says, do not rise at the pump because oil companies are greedily bleeding consumers dry. Rather, they rise primarily because of increased demand.
Americans of all classes are energy-hungry people. Gasoline and electricity are essential to our way of life. Yet the price of gas is the same for the poorest American as it is for Bill Gates. Now demand from China and Industry is increasing along with our own.
I hesitate to even write this, but short of an energy subsidy welfare program, the fundamental fact that energy costs will increase for all Americans will not change. It cannot. Hofmeister says that the way to provide social justice for Americans who cannot afford their energy needs is to increase the supply, an act that would drive down – or at least stabilize – prices.
(Industry Side-note: Short-term in the energy industry is a 10 year period, Mid-term is 20-40 years, and Long-term is 40+ years.)
America’s focus on homeland security since 9/11 has improved the safety of this country. Yet how much safer we are is debatable, as is the question of what else can be done without damaging civil liberties guaranteed by the Constitution. Hofmeister says that securing and ensuring our sources of energy is an essential feature of homeland security, one that cannot be ignored. To increase energy security in the short-term, Hofmeister says, it is essential for America to open up new sources of energy.
Robert Mosbacher knows something about this point. The former Bush (41) administration Secretary of Commerce notes that America imports over 70% of the oil it consumes from foreign sources. He also called the multi-month disruption in domestic production caused by Hurricanes Rita and Katrina frightening because of the vulnerability that was exposed in our short-term supply lines. Recalling the oil industry’s definition of short-term makes Mosbacher’s term more apt.
One fundamental problem is that world-wide oil production levels have either peaked or will do so in the next 5-10 years, making this supply issue a current or short-term one, depending on who you talk to. Obviously the highly volatile nature of many oil-producing nations – witness Venezuela’s 30+% decline in production during Hugo Chavez’s reign – makes relying on them a risk to energy seurity.
On the domestic front, Mosbacher says that while the energy industry is highly innovative at exploiting existing our oil resources, these are becoming less productive. We must, he says, open up existing resources such as Anwar, Alaska to drilling as well diversify our portfolio, with an emphasis on nuclear power.
Nuclear power is safe, Mosbacher says, pointing to the fact that France gets 75% of its energy from nuclear sources. "They’re not that much smarter than us!" Mosbacher jokes, then notes that he’s not denigrating the French. The days when a Chernobyl-type accident could happen are history, he says.
The bottom line, Mossbacher says, is that fossil fuels are what we have to work with in the short-term. Conservation is important and can make a difference. But with oil production near its peak at a time when China and India’s demand is still increasing, it’s clear that Americans will contine to face economic pressure with regard to energy pricing. Therefore, it’s imperative that we invest in all possible energy production opportunities to help ensure that the mid-term energy picture is more satisfactory than it is presently.
Put bluntly, this means drilling in places that have been kept off-limits for, as Mosbacher puts it, "political reasons" to-date. The truth is that America has not exploited all of our conventional available energy resources yet. It is premature to talk about these resources running out, even leaving aside the question of continued technological development in the Liquid Natural Gas and Liquified Coal product spaces.
In speaking with John Hofmeister, it was obvious that he believes in the future of hydrogen power as a consumer-level fuel that will power our homes and care. But that, he made pains to make clear, is decades away from being a reality for the mass market.
Despite President Bush’s commitment to ethanol, grain-based fuels are a stop-gap measure at best and the current energy mix of oil, LNG, and coal – along with some nuclear and hydro power plants – will continue to be used for the next decade and beyond in relatively the same proportions as today. Therefore, in this short-term timeframe it makes sense to begin drilling in Anwar, Alaska, and along the currently restricted U.S. coastline to increase amount of oil and gas produced domestically.
Increasing nuclear-powered electricity generation makes sense, too, as Bob Mosbacher stated. Nuclear power is an essential part of any ultimate conversion to the hydrogen-based energy base described by Hofmeister. Therefore, America should re-start its nuclear power program as soon as possible. This is already happening in Texas with NRG bidding to create the first new nuclear plant in the U.S. in 30 years, something that is long overdue.
Finally, as discussed by industry expoerts, there are significant possibilities for developing very large scale production of LNG and liquified coal domestically. Success with either of these fuel sources could mean decades of energy security and reduced dependence on foreign sources. More about that in a future post.