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National Security Consequences of U.S. Oil Dependency: Report of an Independent Task Force [Rush Transcript; Federal News Service]

Speakers: James R. Schlesinger, Senior Adviser, Lehman Brothers; Former Secretary of Defense; Former Secretary of Energy; Task Force Chair, and David G. Victor, Adjunct Senior Fellow for Science and Technology, Council on Foreign Relations; Task Force Director
Presider: John Deutch, Institute Professor, Massachusetts Institute of Technology; Former Deputy Secretary of Defense; Task Force Chair
October 12, 2006
Council on Foreign Relations The Washington Club
Washington, DC

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JOHN DEUTCH: I hope—can everyone hear me, please? You’re okay back there—in the back of the room. Welcome to this Council on Foreign Relations meeting. We are here today to discuss the release of the new report of this task force on National Security Consequences of U.S. Oil Dependence. This was an excellent task force, which has met over the past eight months and to produce a report on energy and security that we are here to discuss this morning.

Up here with me is David Victor, our able task force project leader, and James Rodney Schlesinger, former secretary of Defense, former director of Central Intelligence, former chairman of the Atomic Energy Commission, former associate director of the Bureau of Budget, and the first U.S. secretary of Energy.

And without further ado, I present you James Rodney Schlesinger.

JAMES R. SCHLESINGER: Thank you, John, for that brief and fulsome introduction.

DEUTCH: Can you—can you hear—(short pause for technical difficulties).

SCHLESINGER: Can you hear me back there?

AUDIENCE MEMBER: Yes.

SCHLESINGER: Okay. Thank you, John, for that brief and fulsome introduction. This is the Council on Foreign Relations that has sponsored this task force, and so our focus was on the burden on national security and foreign policy of energy dependency. And given the need to deal with the national security aspects, we, of course, wound up focusing on oil.

Since 1973 and the embargo of that year, we have been shadowed by our dependency, both in terms of our national security risks and in terms of the political effects here in the United States. Since 1973, we’ve had a good deal of chatter about energy independence. It has continued to be chatter. We have moved from 4 to 5 million barrels of oil a day imported to 14 million barrels a day. One of the reasons for that is the lack of sustainability of domestic policy that John will address in a moment.

Council Adjunct Senior Fellow David G. Victor with Task Force Chairs John Deutch, former deputy secretary of defense, and James R. Schlesinger, former secretary of defense and secretary of energy.

As late as 1956, the United States had sufficient shutting capacity in Texas to carry not only this country, but our West European allies through the oil crisis with the closure of the Suez Canal, and we carried them through. That has disappeared. Lately, the—we have had an increasing burden on our foreign policy from oil dependency, and that is particularly true because the resources for oil are in the Middle East. As opposed to the Cold War period, in which troubles emanated from the Soviet Union, now troubles tend to emanate from the Middle East.

All of this has been reinforced by a shrinking availability of what is called easy oil, which means conventional oil. We have had declining discoveries for the last 40 years. Production has greatly exceeded any new discoveries. Today the world depends to a large extent on old oilfields discovered 40 or 50 years ago and are beginning—some of them are beginning to play out.

We are also in a position today that we are influenced by the dominant role of the national oil companies, as opposed to, in the past, the international oil companies, the seven sisters. The national oil companies are not necessarily interested in the world supply of energy, other than avoiding kicking the world into a recession, which would be a serious problem for them.

These issues that I’ve just mentioned have been reinforced in recent years by the disappearance of spare capacity. That is no coincidence, as we used to say in Moscow. It reflects declining discoveries. It also reflects market forces, in that in the 1980s we had excess capacity of about 10 million barrels a day, which did not induce much investment in expanding capacity.

Over the decades, we are going to face a rising oil price, reflecting the growing stringency of supply, but that is not necessarily from the presently experienced high levels of oil. The price will fluctuate. We will run into recessions, we will see some restoration of spare capacity, both of which would bring down the oil prices. The rising oil price can be attributed either to falling discoveries and the stringency of supply, or alternative to some extent to the policies of the national oil companies.

Now, the high revenues—that have come from particularly in recent years as a result of the run-up in prices—have provided leeway to other nations to pursue their own strategic and political objectives to a degree that they had not before. I can mention Iran, I can mention Venezuela as glaring cases. Russia is also a prominent case in that regard. It is also true that the revenues that have been generated by these high oil prices have spilled over into—spilled over into the availability of funds for terrorist groups.

The burden on foreign policy has affected all importing nations. They are concerned about supply, and to that extent they have been inclined to accommodate exporters. If you take a look at the recent case of Georgia, in which the president has said that “we will continue to support democracy because we know we have the support of the Western world,” and we look at the European Union, which is concerned about its relations with Russia—not on oil, but on natural gas—and there is not likely to be much support for Georgia forthcoming from the European Union.

The U.S. is in a different position, to some extent, in that it has either taken on or assumed responsibilities as the world’s leader. And as a consequence, its foreign policy is more burdened, in a way, than that of other importing nations.

What to do about it? Internationally, in the light of growing questions about supply, it is the conclusion of this group—which I might point out is a very wide-ranging group, if you look at the membership of the group—to encourage production everywhere. That means production in OPEC, it means production in non-OPEC, it means production here in the United States. It is difficult for us to persuade other nations that it is of interest to the world economy to increase capacity unless we are prepared to do it. It is not that we are going to increase production immensely, but we should show that we are prepared to move in that direction.

In some places—Nigeria is the most prominent example—we assert in the report that there must be greater transparency and that local people must enjoy some of the benefits, which has not been the case. Otherwise, we will have the kinds of disruptions that we have seen to supply in Nigeria.

The conclusions? One has got to be serious about energy problems. One must speak home truths to the American people. We must move to alleviate the energy problems which will be with us for the foreseeable future. As long as we are dependent on the internal combustion engine and dependent on air transportation—both of which are growing—we are going to be dependent worldwide and here in the United States on imported petroleum.

As I mentioned, we want to alleviate some of these problems. There are domestic things that we can and should do, and John will cover them.

DEUTCH: Thank you, Jim.

Energy issues inevitably and inexorably mix international and domestic considerations. Our freedom of action internationally has limits and must be balanced against other objectives than just energy. But there’s a lot that should be and needs to be done in our domestic programs, and I want to briefly review for you task force commentary and recommendations on what needs to be done domestically to accompany our future in foreign policy and energy.

First, it is the unanimous view of this task force that greater incentives are needed to shift the American public away from oil use. A variety of mechanisms are possible: a gasoline tax, more stringent CAFE standards, combined auto fuel economy standards or tradable permits. The task force, of course, is well aware of the political difficulty of achieving these kinds of measures, but again, it’s an example of what Jim pointed to of the need for clear and sustained political leadership to accomplish this.

Why do we think that higher prices are both necessary and inevitable for petroleum? Of course, higher prices will increase supply, higher prices will moderate increases in demand, but the task force also notes the great importance that higher prices have at stimulating innovation and new technology which will help in the decades-long transition away from petroleum to other energy sources.

We do not appreciate, especially here in area code 202, the tremendous burst of energy and activity and innovation in the energy technology area. There has been a tremendous increase in activity by big companies—Dupont, Chevron, others—and especially small companies backed by venture capitalists in looking for alternatives to petroleum use, beginning the process now of a transition away from oil and gas.

I just mention two examples that are discussed in the report.

The first is biofuels based on cellulosic feedstocks, where there is enormous potential to produce over the decades, even without subsidies and competitive costs, maybe 1 (million) or 2 million barrels of oil a day.

The task force supports the use of nuclear power today, not because it substitutes immediately for petroleum, but in the long run it opens the technological opportunities of going from hybrids to plug-in hybrids ultimately to electric vehicles as a way of finding alternatives to transportation fuel.

The Department of Energy has also an enormous role to play in innovation. As I’ve mentioned, the private sector is moving very rapidly here. The view of the task force is, is that the department’s programs are too small, and too often the program of the Department of Energy is moved by projects which go up and down and projects which reflect the special interests of different constituencies.

This means that Congress has an especially important role in innovation and producing energy technologies which will lead us through to the future. They must select research, development and demonstration programs that are based on objective criteria. We need Congress’s consistent and strong support.

For example, we see no reason for a protectionist tariff on ethanol, imported ethanol, because if we import ethanol, it will to some degree substitute for petroleum, and I see no basis for that kind of protectionist measure.

I notice that Congress left for the election time here without having renewed the R&D tax credit, which is probably the single-biggest thing which industry needs to continue its innovation.

The task force addressed natural gas in North America. There is significant concern over the long term about availability of natural gas supplies. We are very interested in encouraging continued imports of gas from Canada. U.S. production of gas, including unconventional sources of gas, such as coalbed methane. And inevitably, there will be an increasing role for LNG imports. It is important for the government to do everything it can to encourage regasification facilities that will help make LNG available in the North American market.

I want to say two words about the energy infrastructure of our country. It remains very vulnerable. It remains vulnerable to natural catastrophe, such as the Katrina Hurricane, and it does remain vulnerable to terrorist attack. The task force notes the importance of working on the improvements on the protection of the energy infrastructure, whether we’re talking about the electric grid, about pipelines, petroleum facilities of one kind or another.

We have had a Strategic Petroleum Reserve since the foundation of the Department of Energy. It is time to review the criteria for the size of that Strategic Petroleum review (sic\reserve), its purpose, and the rules for its use.

These are some of the recommendations that are made on the domestic side. And I would just like to say that it is always inviting for a task force to make grand recommendations about government reorganization. Partially, because of our age, partially because of our experience, we have eschewed that possibility. We do think that there is a reason to have a capable and dedicated, very small White House staff on energy issues that are able to assist both the domestic side and the national security side in managing energy matters as they come up. But there is no excuse for consistent attention, serious attention, and objective attention to energy issues on the domestic side as well.

Thank you very much.

David, were there any comments that you would like to add, please?

DAVID G. VICTOR: Let me just say a couple of words. This is a report about a foreign policy problem, the erosion—severe in some places in the world—of U.S. foreign policy influence. But a lot of the report is about domestic policy, because that is where we have our greatest leverage. It’s a consensus report from a task force that has an extraordinary range of views. And I just want to acknowledge four members of the task force who are with us this morning: Phil Sharp, Frank Verrastro, David Goldwyn, and Charlie DiBona. The task force as a whole is about two dozen people.

To get ready for this morning, I went back and reread the council’s task force report on energy in the year—that was reported in the year 2001, May of 2001. And I want to just highlight three things that I think are different, that are very starkly different now, when you compare what a group of people focusing on foreign policy talk about on energy today, compared with 2001.

The first one is that we are in a high-price environment compared with the situation in 2001. And a lot of the report emphasizes the danger of political attention abating as prices come down, as we’ve seen already, and as other events, like the test in North Korea, and whatever else happens tomorrow, as other events take over the spotlight. And so our recommendations, for example, on strong incentives to improve energy efficiency, those recommendations are anchored in deep concern about the difficulty in sustaining political attention in the United States government.

A second area of difference between today and the report in 2001 is the attention we give in this report to the role of state oil companies. And we’re very careful to underscore that there’s a wide range of companies, some of which are investing enormously in additional production, most notably Saudi Aramco, and others which are really not functional companies and don’t respond in ways that normal companies respond, and that’s part of the problem in the world oil market today.

The third area of difference today compared with 2001 concerns what some people call the resource curse, although we are careful in this report not to use that language. But the idea is that in some parts of the world, typically places that are already poorly governed, that the large influx of money from oil and gas exports actually makes government worse and doesn’t benefit the people that it should ultimately benefit.

This report draws considerable attention to the role of a wide range of political deals that Chinese oil companies, but now Korean and Indian and other oil companies, have been doing, notably in Africa, and expresses concern about the impact of those on the governance in the countries that already suffer from fragile government.

There aren’t any easy fixes to that problem, although we draw attention to something that the British government has spearheaded, the EITI, Extractive Industries Transparency Initiative, not because it’s enormously influential, but because, as John and Jim emphasized, one has to do something to help improve the transparency in flow of the oil revenues, oil and gas revenues, in these countries so that we don’t suffer this resource curse over the long haul.

Thank you.

DEUTCH: With that, we will throw the floor open to questions or comments. We again thank you for being here, and we hope you’ll read this report.

Please. Yes, sir. Please identify yourself.

QUESTIONER: Is this plugged in? Hello, anybody. Am I being heard?

MR. : Yes.

QUESTIONER: (Name off mike)—with Bloomberg Radio. Would you explain to somebody stuck in traffic on the Long Island Expressway what you mean by tradeable permits, how they work, how they impact somebody in his SUV this afternoon? And to what extent are they a substitute for the other two key recommendations, which are being cordially ignored?

DEUTCH: Briefly, the idea of tradeable permits is that individuals in the United States get a certain amount of chits to purchase gasoline, and they can trade these permits, buy and sell them, to acquire the number they need for their own personal use in transportation.

Let me remind you that on this panel we have experts from a wide variety of different disciplines and they all have very strong views about which one of these mechanisms would work best in economic theory, which one of these would work best politically, would have most possibility. I think the panel, though, is of the view that a mixture of these measures would be of benefit to the American consumer, the American person, over the long haul. So we don’t have a specific recommendation among them, but they’re all mechanisms that should be considered. And we have strong advocates and critics of each one on the task force.

QUESTIONER: How would I buy chits? How does it work?

DEUTCH: You would be—you would have—you would be given—you would have—an apportionment would be to you and every citizen who, according to certain rules, would be given a certain allocation. You could—you could use them, buy them, sell them, in order to provide for your needs.

Yes, sir?

QUESTIONER: Bill Loveless, Platts Inside Energy. As I read the report, those three options you offered—the tradeable chits and the other two—were options that the task force itself couldn’t agree upon in terms of a recommendation. Doesn’t that reflect some of the problems there’s been in enacting energy policy over the years?

DEUTCH: I think—I would not—I would disagree with that. My—and Jim has got even more experience than I—my experience is that Congress of either party will reject any—any—measure that would increase in a sensible way energy prices. Our task force is unanimous in the need to do so, and the only question is what is the right and best timing and mixture of tools to do it. So there’s a fundamental difference. I think the panelists really were given the—certainly if Jim was given the responsibility of tailoring a specific proposal, it would have been possible to do. We didn’t go into it in tremendous depth.

SCHLESINGER: I’m more inclined to agree with the questioner. (Laughter.)

DEUTCH: This happens from time to time.

SCHLESINGER: The history of the gasoline tax does indeed indicate what the difficulties have been over the course of the last 30-odd years.

DEUTCH: Yes, sir?

SCHLESINGER: The reason we have CAFE standards, by the way, is that that seems not to penalize in an overt way the consumer or the voter.

DEUTCH: It hides it.

Please.

QUESTIONER: Thank you. Nestor Ikeda, an Associated Press reporter for Latin America. I have a question for Mr. Schlesinger. In your report finding, you mention as a big concern in the Western Hemisphere the policies that Venezuela’s government is adopting against the U.S. So what would you suggest for the U.S. to do with Venezuela?

SCHLESINGER: In the first place, I don’t think the report or I feel that there is a big concern about what Chavez is doing. And secondly, the general rule would be to ignore Chavez. We have probably paid too much attention to him in the past.

DEUTCH: Yes, sir?

QUESTIONER: I’m Skip Bowman, president of the Nuclear Energy Institute. Dr. Deutch, you noted as your second unanimous conclusion of the task force a unanimous support for nuclear power today. Yet there’s not a mention of nuclear power in the press release, other than the concern of nuclear proliferation.

DEUTCH: I don’t think that’s—

QUESTIONER: I was wondering if that was intentional or accidental.

DEUTCH: No, it’s—in fact, I don’t think that’s right. I think that the press—

QUESTIONER: I’ll read it again.

DEUTCH: Yeah. I—but we—I think everybody in the task force says if you could have economical, safe, proliferation-resistant nuclear power, it will be good for this country from the point of view of the consumer and from the point of view of avoiding too much use of petroleum.

QUESTIONER: Thank you.

DEUTCH: Go ahead, please.

VICTOR: Let me just briefly say I think it’s important that this part of the report not be misreported, if you like. Nuclear power generates with the current technologies electricity, and much of the report is about oil and oil dependency.

And therefore, there’s a set of recommendations in here—as you can imagine, there are lots of detail that we’ve not been able to cover in our brief summary. There’s a set of recommendations in here about the need for innovation in electric-based transportation, such as the so-called pluggable hybrids or pure electric vehicles. And the reason that that is so important is because if we are—have success on that front, then that creates some fungibility between oil, which really has a lock on the service of transportation, and other forms of energy. And that’s extremely important, because that not only allows you to manage the consumption of oil but also puts some more discipline on the oil market that doesn’t exist to such a great degree right now, because when the price of oil goes up or supplies—people feel they’re insecure, you don’t have much in the way of an option for powering your vehicle or your aircraft.

QUESTIONER: So you’re agreeing; it’s not in the press release.

VICTOR: I’m not going in there. It is in the press release.

DEUTCH: Please.

QUESTIONER: Gal Luft from the Institute for the Analysis of Global Security. A question about coal. Since we have 25 percent of the world’s coal reserves, do you see a role for coal in the transportation sector, particularly because synthetic fuel from coal is the only alternative to jet fuel currently available?

The other thing is, you mentioned the reduction of the tariff, the removal of a tariff on imported ethanol. That is a very good idea, but it has to be also complemented by a policy that will increase investment in developing countries, so they can produce more sugar cane, since they have enormous availability of arable land. And that could also bring more fuel to the consuming countries.

DEUTCH: The report does mention the possibility of synthetic oil or synthetic gas from shale or coal. The report also notices that if you have large-scale deployment of those technologies, there’s a question of their cost, but also there’s a concern about what to do about their carbon dioxide emissions. So that would have to be addressed at the time that such a large-scale deployment took place.

Yes.

SCHLESINGER: That incidentally goes back to the question earlier about the difficulties of overcoming political obstacles. Not only do we have the sugar beet farmers and the defense of the local industry, but now we have a burgeoning ethanol industry based upon corn, which would be decimated in the event that we allowed free flow of cheap ethanol to come in from Brazil and elsewhere. And those special-interest groups will be counted on to fight against any reduction in the tariff.

DEUTCH: David—

QUESTIONER: Bill Nitze.

DEUTCH: Sorry.

QUESTIONER: Our major allies, including Canada, the United Kingdom, Japan, much of Western Europe, even our own Defense Department, regard global climate changes as an emerging national security issue.

Now, I haven’t had a chance to read this report, but leafing through it I don’t see much mention of that issue, and where it has led other countries is that we need to reduce dependence on fossil fuels for environmental reasons almost independent of the social and economic impact of current problems in energy markets. And I wonder if you would like to comment.

DEUTCH: I will be happy to comment. Jim may want to add to it. The report is very clear about the agenda that we set for ourselves. We did not address the very considerable significant issue of global warming and of foreign policy implications. We also, for example—and particularly pertinent to mention that today—did not address the issues of nuclear proliferation in any great detail.

So we didn’t cover everything. We focused and tried to do so in what we think is an essential not the only essential energy problem, which is the issue of oil and gas dependence broadly in the United States and around the world.

So we do note, as I just did, in the case of synthetic fuels where a(n) issue of CO2 emissions might become relevant in a policy discussion, but we did not address the issue of global warming. It is certainly an important one for the country and an important one for the council to undertake. We did not do so in this report.

SCHLESINGER: As indicated, our concern with the vulnerabilities to national security and foreign policy over the decades of dependency, particularly, on imported oil. That was our central focus. Some members of the task force would have liked to discuss global warming at great length, but that was not the objective that we had set for ourselves. We mention it, we put it aside.

DEUTCH: Yes, sir.

QUESTIONER: Edwin Williamson, Sullivan & Cromwell. Just sort of very quick of leafing through the report, mainly looking at the pictures, I don’t see anything on the consumption figures. I mean, where—I mean, what percentage do automobiles account for our petroleum consumption? How much does commercial aviation? How much does private aviation? How much does manufacturing? It seems to me that those are some issues that would have to be addressed not only from a political standpoint, but also in designing any trading system.

DEUTCH: There is—

SCHLESINGER: Eighty-five, 90 percent of petroleum is engaged in transportation. Something on the order of 60 percent of total petroleum uses is for automobiles.

DEUTCH: David.

QUESTIONER: Thanks. David Goldwyn, member of the task force. First, I would say it was a privilege to serve with such distinguished leadership, and both John and Jim and David’s able writing of this and our colleagues. Michael Granoff and I offered an additional view because we agreed with everything that was in the report, but there were some things that we thought would have been if we could have gone even farther. And I think there were sort of five areas where we thought policymakers ought to think about other steps that could be taken.

One is the characterization of the issue, which I think we felt was really urgent and fundamental and deserves much higher priority on the list of foreign policy steps that we do.

Second, that we sort of missed an opportunity to endorse the number one step, as the reporter said, that would really move the dial on long-term consumption, promotion of alternatives, promotion of fuels, and that’s the floor price on gasoline. And lots of members agreed with it, and we put the menu out there. But there are things that make a big difference and things that don’t, and that’s the one that really makes the biggest difference and still respects the market.

Third, one thing that—one tool that we have that we haven’t used is using reciprocity to combat monopolization on the use coercion—oil as coercion in markets, and that is whether we ought to deny or insist on reciprocity and access to U.S. markets or U.S. infrastructure with countries that don’t open their markets to us. And we can have Russia in mind and others, but whether there ought to be unlimited asymmetry, and we thought that there should not.

A fourth thing that we thought was important to consider was asymmetrical power. We’re not in the battle for oil supplies. We’re in a battle for influence, for protection of our way of life, democracy, our values, our market system, but we can’t fight that battle with cheap oil, and we can’t fight it with coercion. So we have to use other things; that might be power and infrastructure, it might education and development. But if we’re going to fight for influence in Africa and in Latin America with countries that are using energy as a tool, we have to use asymmetrical means in order to combat them.

And I think those are things that we thought are just important to consider in the mix.

Thanks.

DEUTCH: Yes? Yes, ma’am.

QUESTIONER: Thank you. My name is Hannah Schott (ph) with—(name inaudible)—Magazine of Panama and the European Broadcasting System. I would like to know from a political point of view and going back to the nuclear issue what kind of reaction do you expect from other countries that are pursuing the same goal, to hear that the United States wants to endorse or to improve or to develop more nuclear power? Thank you. Considering that in Latin America, it is now—it’s raising the same debate.

Thank you.

DEUTCH: There are many reasons to consider nuclear power and think that it may be of importance.

It avoids, in some places, oil or gas use for electricity, not oil use in the United States so much. It avoids some environmental issues. It also brings some environmental concerns. And as was mentioned—and the report stresses—in the long run, it is an opportunity for electricity as an alternative for transportation services.

I think that there’s a broad understanding in the environmental community, in the utility community in the United States. I’ve just come back from Europe on a trip—I hear it there, too—about the need to consider the possibilities of nuclear power, if it is economical, if it is safe and if it does not create proliferation concerns.

Yes, sir.

QUESTIONER: Odeh Aburdene, OAI Advisors. The last four price spikes occurred because of political reasons—‘73, because of Arab-Israeli War; ‘79, because of the Iranian Revolution; 1991 because of the invasion of Kuwait; and in the past three years because of the Iraq war. So there’s a political connection here. What policy should the U.S. pursue to make sure these political eruptions don’t occur so we don’t have to worry about energy security every five or 10 years?

VICTOR (?): Go ahead, Jimbo.

SCHLESINGER: Well, regrettably, I see no way of assuring that there will be no political eruptions over the next 10 years, over the next 20 years, over the next 30 years. We’re likely to have turbulence as long as the human being is around.

DEUTCH: I would have another point I would make to you.

If you do not look at the spikes, but you look at the shape of that curve, that curve is going up in cost price. And the point that I think that is good about this report, it says over time we should expect that there are going to be increases in the real costs and therefore the price over time because we are using up available low-cost oil around the world, and we have to begin to plan for that and adjust for it now.

So it is not the spikes that I draw your attention to exclusively—although they have tremendous foreign policy concern—it is the inevitable trend of higher prices for a resource that we are depleting as we increase our use, as Jim said, for 10 (million), 20 (million), 70 (million), 100 million barrels of oil, 80 million barrels of oil today around the globe.

SCHLESINGER: Point back to the past, we have had these spikes because of political eruptions, particularly in the Middle East. In recent years, we have had the first demand-driven oil price spike. Prior to that, we had seen only supply interruptions driving up the price of oil, and it is a reflection of the growing stringency of supply and the difficulty of finding new sources of petroleum.

DEUTCH: Yes, sir.

QUESTIONER: Fadi Kabboul, Embassy of Venezuela. Last Sunday, there was a Washington Post editorial about energy policy, and it mentions that the solution to make the price of oil low but at the same time having incentives to alternative energy is through taxation—taxation on gasoline and carbon taxation. So I wonder if your report covers this and what’s your opinion on that.

VICTOR (?): What was that? Venezuela?

DEUTCH: Yeah. I think that I tried to address that, that the report does advocate measures, whether it’s CAFE or taxes or tradable permits which would fall on motor gasoline and help to moderate increases in demand, help to encourage supply and most of all to stimulate the transition to new technologies.

Yes. Yes, ma’am.

QUESTIONER: Thank you. Paula Stern, The Stern Group, Inc. Question about biofuels and subsidies and U.S. policy. Would you elaborate on that? I know you mentioned it in passing, John.

DEUTCH: Well, as you know, there is a significant subsidy for ethanol production in the U.S. today. I think it’s 5.5 cents per gallon of gasohol, which represents 55—that’s federal subsidy—55 cents per gallon of ethanol. And there are state subsidies in addition.

It is, of course, today in the United States almost exclusively corn-based ethanol. And because the growing of corn and the fermentation and production of the ethanol takes so much energy in an industrialized, it’s not a hugely advantageous way of displacing petroleum.

On the other hand, the prospects—as President Bush said in his January 31 st State of the Union message, the prospects for cellulosic-based biofuels—ethanols from cellulosic biomass—are really extremely promising. However, they’re yet to be proven. They will take time to develop. They will not cost less for the consumer; they will be costly.

But I do—I personally believe—and I’ve actually looked at it fairly carefully—that over the long haul there is considerable prospects for cellulosic-based biofuels in this country. How much? My estimate is always 2 million barrels of oil a day. But I remind you that we are producing 20 million barrels of oil a day. So we still have, for the foreseeable future, the need to understand that we are going to be dependent on and use lots of petroleum, and that’s an important priority for us too.

Yes, sir?

QUESTIONER: I’m Brian Wingfield with the Energy Daily. Just looking through the report, it talks a little bit about offshore drilling in California and the Gulf, and also in ANWR, and it says, “Opening some of these areas could reduce the decline of U.S. production.” But it also says, “Taken together, the potential increase in domestic conventional oil production would only make a modest contribution to U.S. oil supply.”

So I guess I’m looking just for a little bit more clarity. Are you in favor of opening some of these areas, such as ANWR, and lifting the moratorium on the Coast? And if so, how much would that really help increase our production?

Thank you.

SCHLESINGER: I will handle that, John. (Laughter.)

I have been in favor of opening up ANWR now for 28 years or thereabouts. It will not change our dependency on foreign sources of supply. As I indicated in my opening remarks, we are urging we should be encouraging other countries—OPEC, non-OPEC, ourselves, countries that have fuel substitutes—to increase production to meet what is burgeoning demand. And we will be less effective in persuading others to increase capacity if we do not practice what we preach. We need to show that we are not different from others in that we, too, recognize the rising problem of dependency on oil.

You sometimes hear, by the way, that the age of oil will come to an end. It will not come to an end. What will likely come, decades out, is that we will reach a plateau in which we are no longer able to increase production to meet demand. And for that reason, we need to encourage, over time, others to, if not maximize production, increase their capacity. And we are in a position in which we must practice what we preach.

DEUTCH: I want to say that there are individual members of the panel who may favor production in ANWR; there are individual members of the panel who may not favor increased production in ANWR. The important point is that the panel is unanimous, the task force is unanimous, that some increase in production must—should take place in the United States and should be sought. That’s where the panel—the task force is, a unanimous view that there’s got to be some effort to increase our production in the United States, rather than choosing among specific areas.

Yes?

QUESTIONER: Yes, good morning. Liliana Ferrer from the Embassy of Mexico. I’d just like to hear your views. You know that we have a new administration coming in December 1 st. What would be the ideal policy for the new administration regarding the restructurization and modernization of the petroleum industry in Mexico?

SCHLESINGER: What we think would be the rational policy for Mexico is different from what we expect will happen.

DEUTCH: That’s true in the United States too. (Light laughter.)

SCHLESINGER: That, as you know, ever since the nationalization in 1938, the national patrimony has protected PEMEX from foreign intrusion, and we do not expect that to change. We think it would be good for Mexico as well as the international energy economy if that were to change. I think that it is important for Mexico, however, particularly with the decline in its largest oil field, which is ongoing, to bring in foreign technology in order to exploit a lot of the deep sea deposits in the Gulf of Mexico.

VICTOR: Let me just briefly comment on this. The new administration knows extremely well what the problems are there. It also doesn’t have the votes for any fundamental reform and certainly not the constitutional reform that would be needed for a large-scale change in the structure of PEMEX. I think there’s a danger that Americans looking at this situation have too quickly leapt on the idea that PEMEX ought to be privatized or restructured in some way that is politically inconceivable inside Mexico today and for the foreseeable future.

All that said, there are things that they can do, for example, giving PEMEX more control over its capital budget, so that they can invest to address some of the issues that Jim mentioned. All of that is within the Mexican constitution right now, and I think there actually is some growing consensus about those kinds of fiscal reforms inside the Mexican budget, rather than these much hyped, but totally unrealistic broad-scale reforms that, at least north of the border, people like to talk about, but aren’t going to happen.

QUESTIONER: Thank you. Jessica Matthews from the Carnegie Endowment. To me—and on a quick read the report seems notable for what it was unable to reach a recommendation on. Nothing on improving energy efficiency in the recommendations, only on reducing subsidies. Nothing on when to begin the transition to less reliance on petroleum. No recommendation on what trend in consumption that we should aim for. No judgment on the relative contribution of production and efficiency improvements. And as was noted, nothing on climate change, which, given the state of the science, I think is a bit like writing a report on English literature and deciding not to mention Shakespeare because he didn’t write novels.

I have to agree with the earlier questioner that said that perhaps this report is sort of a mirror of Congress’s inability or Washington’s inability to have an energy policy. And I wondered whether you, having gone through this experience, have any thoughts on how to break the political gridlock.

SCHLESINGER: Well, we’re stuck with the separation of powers, let’s face it. In a parliamentary democracy, and you have a parliamentary majority, you can do what you want. We have the separation of powers. And the Congress, to a large extent, is every man for himself and his own district. And the consequence is that getting the Congress to agree on a policy is an uphill fight.

One point that should be kept in mind is that, because of the political role, this is an illusion—I’ll repeat, an illusion—in this country that finding substitutes for imported oil will reduce the price of energy in this country. It will not. The reason that we import oil is that it is the cheapest and most effective way of generating energy.

I missed, partly because of the noise back there, what the other things that we did not cover. But I think that our purpose was less to lay down a prescription of specific recommendations than it was, once again, to point to the generic problem, which is growing larger partly because of the growing stringencies with regard to the production of petroleum and the impact that this is having on our ability to conduct foreign policy.

I might add to that, we sometimes hear about the need to achieve energy security; we are not going to achieve energy security in any meaningful sense. What we are going to do is to minimize the problem of energy insecurity since we will not be ending energy dependency.

DEUTCH: I would like to say something if I may. I think that one of the problems with this report is that it’s not amenable to a quick read. I think it deserves a little bit more of your attention.

For example, I think the report is extremely clear that we think a transition away from oil has to begin today. If you don’t make the investments today, you won’t be able to move away from it tomorrow. But we also try to be extremely realistic about the pace in which that substitution will take place, that transition will take place, and the need, therefore, to be careful and pay attention and respect the continued reliance that we are going to have on imported petroleum, whether it’s us or our allies. So it’s very clear that the transition must begin today.

And when you speak about energy efficiency targets, this is not a report about domestic energy policy, this is a report about energy, and in particular, oil and gas and foreign policy. So we were not here laying out a map for what domestic energy policy should be.

I will end with one personal note on this. In 1979, as a result of my boss’s behavior, I had to go and stand in the Rose Garden and hear Jimmy Carter say that we were going to have 20 percent renewable energy by the year 2000. It is here 2006 and we are far from that goal. It is more important that the American people understand the actual character of this oil and gas problem than to search for immediate or quick fixes that may get us out of it. Efficiency improvements will not do it. Increases in costs will.

Please.

SCHLESINGER: It is far better, John, that you explained how we were going to reach 20 percent on solar energy (than that ?) I explained it.

DEUTCH: I recall. (Laughter.)

Yes, back here.

QUESTIONER: (Off mike.)

DEUTCH: What’s that?

QUESTIONER: I hear what you’re saying—

DEUTCH: I think if you’ll look at Chapter 3, you’ll find it in there very clearly.

Yes?

QUESTIONER: Garry Mitchell from The Mitchell Report. And I wanted to begin with an observation stemming from Jessica Mathews’ question. That it occurs to me that one goes to the policy wars with the Congress you have, not necessarily the Congress you want. (Laughter.)

As you suggest, as we take the time to read this report, it would be interesting to know something about the composition of the people in the room. And the question that I’m really after is, how would you or the other members of the panel characterize the balance between those for whom solutions are production and those that are conservation in nature? What was the balance like in the room on those perspectives about this issue?

DEUTCH: My view is I actually respect the composition of this panel. If you look at it, it’s a very, to my mind, broadly based group of people. And I would say if you look at them, all of them are knowledgeable enough so that you can’t characterize them so simply as being for demand or for supply. Most of them, whether their backgrounds are in the environment or in the oil industry, understand that you need to look at both sides of that equation. So I could not characterize it and wouldn’t characterize either the individuals or the panel itself as being biased on one side or the other.

SCHLESINGER: Unless we enthusiastically pursue conservation, conservation will be forced upon us. (Off mike.)

DEUTCH: Okay. I’m sorry. I’ll take a couple more questions. Yes, sir?

QUESTIONER: Julian Braithwaite from the British Embassy. Your report mentions the Extractive Industries Transparency Initiative as one of the best ways of dealing with the nexus of problems around what we might call the resource curse. And I was wondering if the task force considered what else the U.S. government could do to support the initiative. Thank you.

DEUTCH: Why don’t you answer that briefly.

VICTOR: It could start by supporting the initiative. (Laughter.) The U.S. government has been extraordinarily slow to be even receptive to this idea, has come along belatedly. Let me just—one more word on this point, which is we’re not arguing this is the best game in town, but I think this is an area like, in a previous exchange with Jessica Mathews, where we have to be realistic about what is achievable and not set unrealistic targets, because if we do that, we’re going to come up against this problem and have no effect whatsoever.

DEUTCH: There was a question here. Yes, ma’am.

QUESTIONER: Hi. Pamela Bates, Department of State, Office of Science and Technology Cooperation. My question for you related to the number of market distortions or incentives that are in the report in terms of recommendations to change energy usage, I guess, internationally.

My question would be in relation to other oil-importing nations. Are you recommending that the U.S. press them to adopt policies that would change the energy market in those countries? And if so, what are the priorities? And how does that relate to our traditional policies of pressing them to liberalize their markets?

DEUTCH: I believe that the report speaks to this in two ways. The first is, it advocates that all countries allow oil and gas prices to move to world market levels. There are certainly particularities in each country that will adjust how they do that, but in general, those countries which aren’t at world market levels should be there. There may need to be compensation for elderly or impacted people, but in general move to world market.

But the more important recommendation on this report is to find a mechanism where the IEA can bring in the large developing, rapidly growing economies who are big importers—India, China, Indonesia, Mexico—into their discussions of the IEA, so there is a common basis for seeing the problems that the importing countries have and the common interest in having a stable and transparent and open oil market. So there’s a very strong plea of finding a mechanism for doing that and reinvigorating the IEA or some adjusted mechanism, to include the importing countries.

I think we’ve come to the end of our time. I’m told that we should end promptly. I want to thank everybody very much for being here. I urge you read this report. It’s an interesting report, and we hope you enjoy it. Thank you so much for coming here this morning. (Applause.)

 

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