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The U.S. Energy Challenge

Authors: Michael A. Levi, Senior Fellow for Energy and the Environment, Council on Foreign Relations Shirley Ann Jackson, President, Rensselaer Polytechnic Institute Jim Noe, Senior Vice President, General Counsel and Chief Compliance Officer of Hercules Offshore, Inc. Dale Bryk, Director, Air and Energy Program, Natural Resources Defense Council Timothy J. Richards, Managing Director, International Energy Policy, GE Energy
Interviewer(s): Toni Johnson
July 18, 2011

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[Editor's Note: This is part of CFR's Renewing America initiative, which examines how domestic policies will influence U.S. economic and military strength and its ability to act in the world.]

Volatile oil markets, environmental concerns, and a skittish economic recovery loom large in debates over energy policy in the United States. Experts see current opportunities for addressing these issues, but there is strong debate over how to prioritize energy policy. CFR's Michael Levi says a successful U.S. energy policy must transform the way Americans consume energy but also recognize that there are no silver bullets. "The United States will occasionally need to pursue policies that help in one dimension while making others worse," he notes.

Shirley Ann Jackson, former head of the Nuclear Regulatory Commission, says U.S. policy priorities should include diversifying sources, improving the way energy markets function, and creating an intelligent electricity infrastructure. Oil executive James Noe calls for improving production of domestic oil resources while the country transitions "to a blended energy portfolio geared toward next-generation, sustainable energy sources." Dale Bryk of the Natural Resources Defense Council wants a focus on boosting energy efficiency, increasing the market share for renewable energy, and cleaning up or phasing out the dirtiest and worst-performing technologies and fuels. Timothy Richards of GE Energy says the United States must clearly define its energy objectives in order to develop a long-term policy that addresses environmental goals, health concerns, and the risk of supply disruption.

Michael A. Levi, Senior Fellow for Energy and the Environment, Council on Foreign Relations

Americans will inevitably disagree over the greatest energy challenge facing the country. Some will point to security matters, others to economic problems, and still others to climate change and the environment. This is natural: Disagreements over what matters most when it comes to energy are as much about values as they are about facts and analysis. Wise leaders should attempt to advance policies that do something for each constituency rather than trying to win all people over to one overriding priority.

Some will accept this advice but respond by searching for so-called win-win-win policies that claim to solve all of America's energy problems at once. For many Democrats, this means a push for renewable energy technology; for many Republicans, the answer is to get government off of energy producers' backs. Alas, there is no silver bullet for America's energy problems. Indeed, the United States will occasionally need to pursue policies that help in one dimension while making others worse: It should, for example, encourage expanded domestic oil production to help its economy even though that might marginally exacerbate climate change; it will need to constrain fossil fuel consumption to combat climate change even though that might make energy slightly more expensive.

So long as the United States consumes as much oil and coal as it does today, it will be unable to properly address its security and climate challenges.

That said, one can identify a handful of elements that a successful energy strategy must contain. At its core must be an overhaul of the way the United States consumes energy. As long as the United States consumes as much oil and coal as it does today, it will be unable to properly address its security and climate challenges. The smoothest way to curb consumption would be to make people and companies pay more for the coal and oil they consume, either through taxes or through flexible regulation; done right, that could help address the U.S. budget deficit too. Government support for long-term technological development, particularly through R&D, will be essential too, if policies that "pull" the right technology into the market are to become more affordable over time.

Demand-side policies, though, are insufficient. Policies that promote energy supplies have too often been seen as in fundamental conflict with policies that encourage reduced demand. This is incorrect. The United States consumes far more oil than it produces; there is ample room for increased production in parallel with less consumption. Government support for increased production should ensure there is prudent environmental regulation that protects industry from itself: Overly onerous regulation can stifle development, but too lax rules can backfire.

U.S. policymakers should also remember that energy policy is not only about domestic law. Energy markets are global, and energy policy must be too. Recent haggling over the right response to lost Libyan oil production has been a reminder that international diplomacy and coordination are essential elements of a coherent energy policy. That lesson applies much more broadly. The right domestic foundation for U.S. energy policy is essential--but energy policy must not end at the water's edge.

Shirley Ann Jackson, President, Rensselaer Polytechnic Institute

Energy security is the greatest challenge of our time, but our persistent failure to focus on it prevents us from meeting that challenge. What will it take for the United States to wake up to our need to develop, enact, and implement a comprehensive energy security plan?

Certainly the headlines of recent years--the war in Iraq, revolutions in the Middle East and North Africa, the devastating earthquake and tsunami in Japan, the oil spill in the Gulf--have provided opportunities to capture the nation's attention and initiate change. Periodic price spikes at the pump have provided glaring evidence of the economic impact of U.S. energy insecurity on the average American household. Each of these has created debate; together, they have revealed dramatic, intersecting vulnerabilities in the energy sector.

It is said that the United States is addicted to oil. We also are addicted to simple solutions. We must end our addiction to both. The energy challenge cannot be solved with quick fixes or simple answers.

The response to these types of events has been consistent for forty years, but not in a way that has led to solutions. Each of these has resulted in a short-term intense focus, usually on one energy source, but then public attention has turned elsewhere, with no sustained commitment to action on energy. This is a cycle we must work together collectively to break--across sectors and across party lines.

It is said that the United States is addicted to oil. We also are addicted to simple solutions. We must end our addiction to both. The energy challenge cannot be solved with quick fixes or simple answers. At its core, a comprehensive energy security road map should adhere to seven basic principles:

  • Redundancy of supply (increasing the number of suppliers of a particular type of energy to guard against supply disruptions).
  • Development of diverse energy sources.
  • Support for well-functioning energy markets.
  • Investment in smart infrastructure for energy generation, transmission, and distribution.
  • Commitment to environmental sustainability and energy conservation, with calculation of the full lifecycle costs of energy sources, systems, and devices.
  • Adoption of policies that ensure consistent regulation and transparent price signals.
  • Strategic thinking about how each sector is matched to the supply source that will be the most efficient, cost-effective, sustainable, and reliable.

It also is important for our choices to be driven by what technologies and/or energy sources can be deployed first, and in what realistic time frame. The path forward requires an intensive focus on scientific discovery and technological innovation; strong collaboration across the business, government, and academic sectors; and a vibrant innovation ecosystem that nurtures ideas from creation to implementation. But the fundamental ingredient is a sustained commitment, one that does not fluctuate with the price at the pump. With that, we could fuel our economy for generations.

Jim Noe, Senior Vice President, General Counsel and Chief Compliance Officer of Hercules Offshore, Inc.

The fundamental energy challenge facing the United States is how to ensure our country's energy independence as we transition to a blended portfolio geared toward next-generation, sustainable energy sources. Cleaner fuels like natural gas are key to facilitating this transition. Unfortunately, the Obama administration's still incoherent offshore drilling policy is quietly placing long-term constraints on our ability to supply fossil fuels from domestic resources while we undertake that transition.

Currently, we're experiencing an historic loss of drilling rigs in domestic waters that jeopardizes the nation's ability to explore and produce domestic oil and gas. Since 2001, seventy-eight jack-up drilling rigs have left the Gulf of Mexico, leaving the current available fleet at forty-two. Since President Obama's moratorium on offshore drilling following the BP Macondo blowout in April 2010, thirteen drilling rigs have left the Gulf. The high-tech equipment needed to produce oil and gas in the mature basin of the Gulf is expensive, whether in deeper waters or in shallow waters where new technology is needed to extract remaining resources. Each rig costs hundreds of millions of dollars, and over a billion dollars for a new deepwater drill ship.

Until tomorrow's diverse U.S. energy portfolio is up and running in earnest, discouraging today's domestic energy production serves little more than short-term politicking.

It is difficult to commit this level of capital in a regulatory environment that varies from uncertain to hostile for the oil and gas industry. Instead, this investment is heading overseas to the Middle East, West Africa, and Brazil. It's a zero-sum game in the global oil and gas business: if investment and equipment doesn't come here, it heads somewhere else, leaving us unable to develop our own resources when we eventually regain the will to do so.

Discovery Offshore, where I am a director, provides an example of how the current U.S. political and regulatory environment affects real-world business decisions. Discovery is building two top-of-the-line rigs at over $200 million each. They are being built in Singapore and marketed to clients worldwide, but will more than likely end up in the North Sea, adjacent to some of the most environmentally sophisticated countries in the world, or in the Far East. Discovery would have never built those rigs if its target market was the United States, where constantly wavering regulatory policies simply make it unfeasible.

What this means for the United States is not just more of the same, but an ever greater increase in reliance on foreign oil suppliers, limited future policy choices, and no back-up plan for the next series of overseas political and social developments over which we have no control. Until tomorrow's diverse U.S. energy portfolio is up and running in earnest, discouraging today's domestic energy production serves little more than short-term politicking.

Dale Bryk, Director, Air and Energy Program, Natural Resources Defense Council

With two grueling wars and ongoing turmoil in the Middle East, oil spills everywhere from the Gulf of Mexico to Montana to Michigan, and skyrocketing gas prices, it's clear that America can't drill its way to energy independence. The biggest energy challenge of our time is twofold: getting our country off of oil, and building a clean energy economy necessary to support that switch.

The biggest energy challenge of our time is twofold: getting our country off of oil, and building a clean-energy economy necessary to support that switch.

To tackle these twin challenges, there are three things we must do: boost energy efficiency, increase market share for renewable energy, and clean up or phase out the dirtiest and worst-performing technologies and fuels.

Here's how we do it:

  • Fast-track fuel-efficient & electric vehicles: The single most important step this country can take to reduce our dependence on oil is for the federal government to set a 60 mpg standard for cars and light trucks. Similarly, the market needs a push from the administration to scale up electric vehicles quickly enough to provide a real alternative to oil before gasoline hits $6/gallon.
  • Promote clean alternative fuels: Performance-based pollution standards can transition the United States away from oil toward homegrown, sustainable biofuels and electric vehicles. To fully transform the market, we need to set national standards for alternative fuels, and to reduce market barriers to new fuels, such as the infrastructure needed for consumers to plug in or fill up our tanks with them.
  • Provide better public transit and community planning: The federal government should use our transportation dollars to increase public transportation choices, rather than simply building new roads. Additionally, we need a federal plan to shift freight transportation away from trucks, to ships or rail.
  • Boost energy efficiency everywhere: the power sector, buildings, and homes: Using energy more efficiently in the nation's power plants, buildings, appliances, electronics, and other equipment will allow us to achieve the same or better levels of comfort and performance while lowering energy bills, improving service reliability, creating jobs, and reducing pollution. To do this, we need to lift market and regulatory barriers [such as changing building codes to accommodate green building methods] standing in the way of consumers and manufacturers.
  • Expand renewable energy: To accelerate renewable energy deployment, we need to adopt policies that do three things: encourage innovation spanning a dynamic portfolio of emerging technologies; offer a clear and stable support mechanism that increases investor security and encourages low-cost financing; and gradually phase out support for technologies as they mature to force them to become commercially competitive or make room for more successful alternatives.
  • Clean up fossil fuels: When it comes to coal, that means not building power plants when efficiency or renewable energy is cheaper, implementing pollution control measures, and cleaning up mining practices. For natural gas, it means making sure it's used to phase out coal, and establishing federal regulations to protect against risks from fracking(hydraulic fracturing--injecting liquid into rock formations to push out trapped gas). And for nuclear, it means protecting against potentially catastrophic risks, from accidents to proliferation of nuclear weapons.

By taking these steps, we can tackle these twin challenges, but it will require private-sector investment as well as state and federal policies that allow new technologies to compete on a level playing field.

Timothy J. Richards, Managing Director, International Energy Policy, GE Energy

The United States needs a clear, long-term energy policy. To reach this goal, the starting point, and perhaps greatest single challenge, will be to define U.S. energy objectives.

Economic, geopolitical, and environmental forces influence this debate more today than perhaps any other time since World War II. Without signals as to how the United States will address those challenges, energy companies and investors have delayed decisions to invest in new projects that deploy cleaner and more efficient technologies and utilize domestic energy resources.

The United States should achieve the lowest long-term cost of energy, while addressing environmental goals, accounting for health concerns, and mitigating the risk of disruption to supply.

So what should the objective be? A statement based on the fundamentals may be a good starting point: The United States should achieve the lowest long-term cost of energy, while addressing environmental goals, accounting for health concerns, and mitigating the risk of disruption to supply.

By itself, leadership agreement on an objective like this will begin to establish predictability, which the private sector needs to make investment decisions. At that point, the important subsequent debate over specific measures will be framed and focused. A twenty-first century U.S. energy policy based on this statement of objectives could then:

  • Support a robust U.S. manufacturing economy. Abundant, reasonably priced energy can make a critical contribution to economic success. Moreover, as the United States invests in its own new energy economy, it will build industries capable of exporting to the rest of the world. Among other things, this implies the need for appropriate regulatory measures that achieve their goals at the lowest reasonable cost.
  • Mitigate the risk of supply disruptions or energy price spikes across the value chain--from oil imports to fuel production, power generation, transmission, and end use.
  • Protect human health and the natural environment. Critical policy and regulatory decisions over the last forty years have helped us to achieve tremendous improvement in air and water quality. New technologies will further that improvement and can also address the challenge of climate change.

A twenty-first century energy policy will contain specific solutions to each of these challenges. But the United States as a country must first agree on the debate's fundamental aspects.

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