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Facing the Hard Truths about Energy [Rush Transcript; Federal News Service]

Speaker: Lee R. Raymond, Chairman, National Petroleum Council
Presider: John Deutch, Institute Professor, Massachusetts Institute of Technology
September 17, 2007
Council on Foreign Relations

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(Note:  This event was fed in progress due to technical difficulties.)

LEE RAYMOND:  (In progress) -- for this kind of meeting -- (audio break) -- like to spend more time trying to deal with the questions that each of you might have, rather than my talking.

Let me just make a couple comments at the beginning.  First of all, I suspect that most of you have no idea who the National Petroleum Council is.  So let me just take a couple of minutes to talk a second about the National Petroleum Council.

The National Petroleum Council is an outgrowth of World War II.  At the beginning of World War II, the Roosevelt administration quickly concluded, in then the Department of War, that one of the key elements of managing the Second World War was going to be to manage petroleum, from both sides of the equation.  By that I mean making sure that the Allied forces had enough petroleum and that there were adequate petroleum supplies here at home to sustain the war effort, and also to prevent the Axis powers access to petroleum.

In order to do that, they quickly concluded that they, the Department of War, did not have the expertise in how to manage petroleum, and went to the industry and asked the industry to help them organize and staff the management of petroleum, which the industry did.  They set up an organization.  There were people from the Department of War and the Department of Interior involved in the organization.  And for each person from the government, there was a counterpart from -- somebody from the industry.  And those people were paid a dollar a year by the government.  The industry basically paid for all those people.

At the end of the war, of course, everybody went home, and President Truman said, "I'm not sure that's a very good idea" -- kind of foreign in the thinking in Washington these days -- but concluded that that expertise that was available from the industry should continue to be available to the secretary of Interior, which at that time is where oil and gas reported.

As a consequence, the National Petroleum Council was organized.  It's made up of about 150 or (1)60 members.  They're nominated by the National Petroleum Council and have to be approved by the secretary of Energy.  They are individuals.  They're not companies.  It's self-sustaining.  By that I mean it receives no money from the government.  And its only role in life is to respond to questions from the secretary of Energy.  It does nothing else.  It does not lobby.  It doesn't take positions on issues.  It's to respond to queries that come from the secretary of Energy.  And over the years -- I would say about every two years -- there seems to be some reason to get the National Petroleum Council involved in a study.

And that's the background on this study.  We're coming up to just about two years ago, when the secretary of Energy asked us to do this study that we're going to talk about today.

And the last comment I'd make about it is, I've learned -- having been involved in many of these studies over a long period of time, I learned early on that one of the keys was to organize it and get agreement with the secretary of Energy as to exactly what is this study supposed to do, not what is the answer but what is the form of the answer that you want. 

And that becomes critical, because that lets you define the timeline.  And when you can define the timeline, then you can go to the kind of people that John mentioned, who are involved in this study, and get them to contribute some of their best people to work on the study.  If you have a defined timeline and a very clear idea of what you want to get done, good people will show up to work on it.  If it's open-ended, seldom will people put forth the kind of individuals that you really want to have involved.

That's what we did here.  I think everybody who's involved in the study, as they look back on it, is even more enthusiastic at the end than they were at the beginning, which is very odd for a study like this.

I would make two other comments that I think are overarching as you look back on the study, that flavor everything that's in the study.  Number one is the timeline that's involved in doing anything that significantly changes the energy outlook, and number two, the magnitude of the energy system.  It's almost inconceivable for anybody to get their head around the size of the energy system and the complexity of the energy system.

The comment I make -- I'll just make this last comment to try and put some physical dimensions on it -- we consume in this country about 150 billion gallons of motor fuel every year.  Now, I am absolutely certain that there's nobody in this room that has any idea of what 150 billion gallons looks like. 

When I was growing up, I used to have to mow the lawn.  That's a whole separate subject, but I can't -- (soft laughter) -- I don't believe I -- I was not in a good negotiating position is the way I would say it.  (Soft laughter.)  And you used to have to go down to the service station and buy gasoline in a can.  Now, if you're my age, you can remember what that can looks like; it's about a foot high, it's rectangular, and it had a spout that was upside down, and whenever you took the spout out, you spilled a lot of gasoline.  And the cork never sealed, because the cork was always dry.

If you took that can and you laid 150 billion of them end on end, that's what this country consumes in a year.  It would form a line that goes around the Earth a thousand times.  Now, you might say you'd like to be in the can business -- (laughter) -- and you'd do very well, but put -- it's hard to put physical dimensions on the magnitude of the issues we're dealing with here.

And the other side of it is, therefore, that if you want to make a significant change in how the energy system functions, it's going to take an enormous effort and a long period of time.

With that, John --

JOHN DEUTCH:  Thank you very much, Lee.  What he didn't tell you is that he grew up in South Dakota, and his lawn was 3,000 acres.  (Laughter.)

I would like to ask, really, a few questions to I think frame some aspects of this report, which made a particular impression on me.  The first one has to deal with the following.  The report assembles estimates of what future consumption of oil will be, and it says that today we consume 80 million barrels of oil per day globally, and the projections are, from industry and from the government agencies, that we will consume 100 million barrels of oil per day in the year 2020 and 125 (million barrels) in the year 2030.

Now my first question to you is, being an old warhorse in this business, do you think that those numbers will be achieved or will in fact the globe have to adjust to significantly lower numbers?

RAYMOND:  Well, there are a lot of dimensions to that problem.  But the first comment I would make is I think most people are reasonably comfortable that the resources are in the ground to be able to do that and to be able to do it reasonably efficiently -- and by that, I mean at costs that are not totally incompatible with the kind of cost structure that the industry has now.

The question becomes more as to whether or not we will be able to do it on a timely fashion.  Part of that is related to technology; part of that is just related to the enormous amount of investment -- we're talking trillions of dollars to be able to do that kind of thing.  And of course as we're seeing now as what's happened in the last three or four years as the oil prices have run up is what I call the dark side of high oil prices, which we have seen periodically over the last 30 or 40 years.  And when we get into very high price structures, it turns out that we also unleash, so to speak, other aspects that become geopolitical in nature that are driven by the high oil prices and as I say have a very dark side to them.  And we all read the newspapers, and -- whether it's Venezuela or Iran or Russia, I mean, you just have to ask yourself -- and the answer is, I think, pretty straightforward -- and that is if the price of oil were $20 today, would a lot of these things that we're seeing happening, would they be happening?  And I think the answer is obviously no.

So I think the point, John, is I think the fundamental resource is available in the ground, so to speak; whether or not we're going to be able to get it all above ground in a timely fashion is one of the concerns that's expressed in the report.

DEUTCH:  Well, my second question actually tries to focus in on aspects of these projections, which are that the Persian Gulf still remains a(n) enormously important -- in fact, a growing source of this oil supply during this period, and that means that we have to have sharply increased oil production from Iran, Iraq, Kuwait and Saudi Arabia.  And again, I would ask you, over the next couple of decades, is that plausible that political stability, given the helpful guiding hand of the United States and others, will in fact lead to the political stability there that is necessary for these investments to be made and for production to go up?

RAYMOND:  Well, you know, in a sense, that's the $64,000 question in the sense that, certainly in the case of Saudi Arabia -- not only do they have the reserves and the resources to be developed, but they also have a mechanism in the sense of a vehicle, Saudi Aramco, that would be able to carry that out.  I suspect the same could be said of Kuwait if they saw the pressure to do it.  Iran is a different issue, and Iraq, of course, at this point is a totally different issue. 

But I would also make the point on Iraq that there really has been no significant exploration done in Iraq since about 1971, when Saddam Hussein threw out the consortium at that time that operated in Iraq.  It was made up of Exxon and Mobil and BP and Shell and Total.  And that consortium, which had operated in the country for a long time, had the whole country, but once Saddam Hussein threw everybody out, to our knowledge -- and I think it's pretty accurate -- there really has been no exploration done.  And the potential there is enormous.  The potential is enormous.

DEUTCH:  Your report also addresses the shift in the presence of national oil companies relative to investor-owned oil companies and the large global companies such as your own over the last few years.  And if that shift continues, will the kind of efficiency that we need to get this production continue?  And will they manage that market in a transparent way or will it become more politically motivated?

RAYMOND:  Well, that, I think -- that's a significant risk.  Let me just make the comment that this movement, if you will, towards national oil companies from IOCs really started in -- after the crisis in 1973.  So it ebbs and flows.  In fact, the point I made about higher oil prices, there seems to be a lot of interest in the government's trying to manage the resource when prices are high, and when prices are low they don't seem to have a lot of interest in doing that.  So, consequently, the first nationalizations were in the early '70s in Saudi Arabia, that actually took until about 1981 or '82 to have that completed.  And then we went through a period of kind of benign neglect -- I guess I would say it -- to the point actually where some of the countries, like Venezuela, had the reopening in the early '90s.  And now we're going to go through another cycle. 

But the gradual movement of course over time has been for those countries to try and be more involved in the managing of the natural resources.  Facts still are of course that in many of these cases as time has gone on, the access to technology becomes very important.  And the ability to implement the technology in many of these places is beyond the scope of the national oil companies.  And that's the role of the industry as we see it today. 

DEUTCH:  Another really quite striking aspect of this study has to do with your emphasis on the demand side.  And the study concludes, if I have this more or less right, that the United States must increase the efficiency of energy use throughout all the activities in the economy.  It's quite a well-argued and strong aspect of the report.  My question to you is, is realization of improved efficiency in the U.S. economy possible without sharply increased energy prices, both for electricity and motor gasoline? 

RAYMOND:  Well, you know, that's an interesting point.  I've had -- friends of mine have commented -- if I go back four or five years, used to comment that well, you know, the answer to all these issues is just to put a dollar a gallon tax on gasoline.  Well, in the last few years, we've in essence seen the equivalent of a dollar a gallon tax on gasoline.  We've seen a $2 a gallon tax on gasoline.  It's not obvious that it's had any particular impact on demand. 

Now, I mean, it probably has in the sense that we're asking the question, what would it have been had we not had the higher price?  And I suspect when we look back at the data we see, it says that the demand doesn't appear to have really been impacted.  In fact, it probably has been.  It's less than it would have been, but we really don't know what it would have been, kind of thing. 

But it has not had a major impact at this point, which comes back, I think, to the point I was trying to make at the outset.  And that is, to have a significant impact on energy demand or the structure of the energy markets, it's going to take a massive change and it's going to take a long period of time to do it.  If we want to become more efficient in the use of energy, for example, in transportation, which after all uses about 50 percent of the energy in the country, it takes years.  It takes 18 years to turn over the vehicle fleet. 

And people don't talk about what I always comment is the dirty little secret.  And that is, every time in the past when we have become more efficient in how the vehicles operate, the result has been, people drive farther.  So what happens is, we kind of run in place. 

Now, how to move the ball there is a difficult, difficult political problem.  But the reality is, the technology to have much more efficient vehicles or advanced internal combustion engines is already available.  It's there.  It's not technology that has to be developed.  It's there.  The question is, how do we get it into the marketplace and get it into the marketplace efficiently? 

DEUTCH:  So there was another really quite interesting aspect, quite unusual that a report from the National Petroleum Council.  It was the only aspect of the report that I found personally hurtful.  (Laughter.)  And that was, when you mentioned that the technical workforce in the United States is aging and deteriorating, and --

RAYMOND:  Well, it's not deteriorating, John.  (Laughter.) 

DEUTCH:  Okay, thank you.  Thank you for that. 

And you then go on and say that the United States should take initiatives to revitalize the -- a workforce dedicated to energy generally but oil and gas in particular.  I thought that was a very interesting observation and unusual from an industry group.  But I wondered, in your own mind, what actual measures are possible there and why, as an international oil company, you would distinguish between the U.S. workforce and the global workforce from the point of view of working in oil and gas. 

RAYMOND:  Well, it isn't meant to distinguish in that sense.  In the National Petroleum Council, we're looking largely at the U.S. 

And I think a lot of the comments that were made in the report that relate to the workforce really build on the report that was put out earlier last year by the national academies called "The Gathering Storm," where it was clear that the United States continues to fall behind some of our major competitors in the world marketplace in terms of engineering and what I'll call hard science people, and China graduates what, 10 times more engineers these days than we do, kind of thing.

And I think the point is, if you start with that broader view of "The Gathering Storm" -- and I was a member of that group, too -- and now you try and reflect just on the oil and gas/petroleum energy industry, you really see it start to come home.  And "The Gathering Storm," I'll call it -- it was kind of an overarching set of clouds kind of thing.  But when you look at the oil and gas industry, which is, as they would say, where the rubber meets the road, so to speak -- is you really start to see the impact of not having access to the kinds of technical and hard science people that we need. 

Now, in terms of ExxonMobil, it recruits around the world and, in a sense, is somewhat insulated from this, because two-thirds of the people that work in the company are not U.S. citizens.  We recruit more people from outside the country than we do from inside the country these days just simply because of the geographic dispersion we have.  So in that sense, it has more access to those supplies of people, if you will, than if you were just a U.S. company. 

But that doesn't mean it's not a serious issue.  It is a serious issue.  And the industry as a whole is going to have to -- in order to take on just the kind of question you asked at the beginning, can we bring on these resources in a timely fashion, you have to have the people to do it. And the facts are, right now, the industry, as you look down the road, isn't going to have enough people to be able to do that.

DEUTCH:  And now for my last question, then, before we turn to our discussion with those of you who are here.  And that has to do with the role of technology.  You make -- the report makes a compelling case about the role of technology, both on the demand side and on the supply side, and both historically and prospectively how important it is.

Then you go on to make recommendations about strengthening federal performance in supporting R&D. I won't make any editorial comments about how easy that is to do, but I thought it was quite noticeable that you didn't say anything about what industry should do on R&D in the report, and the fact that the oil industry generally is -- my knowledge of this is -- is spending a significantly lower percentage of its revenues over time than it has historically, partially because its revenues are going up so high.  But I would like to know what initiatives you think the oil industry should be doing -- and gas, I should say, and natural gas, of course -- to help in this technology matter which is so important to the future.

RAYMOND:  Well, I think the -- part of the problem with the industry is that the industry over, you know, 40, 50 years goes through periodic cycles of feast and famine, so to speak.  And every time it goes through one of those cycles when it finds itself in a position of having to manage costs, some people conclude that one way to do that is to cut back on technology development. 

For those of you who know much about me, that has never been the case in Exxon or ExxonMobil.  We had a different view, and that was that technology is the lifeblood of what we do, and the one thing we cannot do is sacrifice the future, if you take a long-term view of this, like cutting back on your commitment to the development of new technology.  With the exception of Royal Dutch Shell, all the other companies in the last cycle basically got out of the technology development. 

And what that leads to, of course, is -- and I've felt this for a long time -- eventually, if you pursue that strategy long enough -- by that I mean commitment to technology -- you will end up with a proprietary set of technology that gives you a competitive advantage.

The assumption that people made was that you could always buy the technology.  And the answer to that is probably not, because all that's going to happen is that you're not going to have a competitive advantage, and everybody's going to buy the same technology, and that's not going to lead to the kind of developments that the industry needs to have.

So I think my comment, John, is that -- and you read a lot these days about it -- and that is, people are now trying to reassert that they are interested in technology, but that's a long-term game, and you can't say, "Gee, today I'm now interested in technology."  You've got to say that continuously for 20, 30 years to really have that kind of commitment and the staying power that you need to have. 

And I guess I could make the same comment -- and you alluded to it -- about the government too.  Sometimes it's an up and down kind of thing, instead of more of a steady course, in how we manage this over a long period of time. 

But technology is the absolute lifeblood of the energy industry.  And very few people understand the complexity -- and I'll call it the leading edge -- that the energy industry is at when it comes to technology.  I mean, they are way out there on the far reaches.

I had -- years ago somebody at NOAA made the comment the oil industry -- and we were talking about deepwater technology -- they said the oil industry is the NASA of the oceans.  And that's right, because we're the only people that try and operate in 5,000 feet of water and all the technology that goes along with that.

So you know, I'm a huge supporter of technology, a huge supporter of technology development. 

And I'll just make one other comment that is kind of overarching on all of this, some perspective.  Most companies in the industry do like a 20-year outlook, and it's a rolling five years, so it's, you know, 18, 19, 21, and then you roll it over kind of thing.

And I can recall the last time we were rolling that over, which was something like about 2002 or 2003, for the next 20 years.  Before they started on that, I asked a question.  I said:  Well, if you go back and look at 20 years ago, what did we say in 1980 about the year 2000, you know? 

Now, of course, everybody immediately thought I was trying to just give them a hard time.  I said:  No, no.  No, I'm -- you know. that's not my point.  What I want to do is just look back and understand -- try to understand what did we get right and what didn't we get right, and why.

Interestingly enough, in 1980, the company forecast worldwide energy demand in the 2000 within 1 percent, which is remarkable.  The mix was a little different -- nuclear versus coal versus oil and gas -- but not significant. 

The area that we totally missed was technology.  Technology moved much, much faster than we even envisioned in 1980, 20 years out.  And I'll make the comment that we're sitting here today -- the technology that will be in place or can be put in place at the end of this study period in 2030, nobody in this room can even visualize what it'll be.

Thank you, sir.

DEUTCH:  We'll now turn this open as a conversation with the audience.  I want to remind everybody that this meeting is on the record.  I would ask each of you to -- when you have a comment to make, wait for the microphone to come to you, to identify your name and your affiliation, speak directly into the microphone, and ask one question of Lee Raymond.  And I hope that we have a lively conversation on this report and all aspects of oil and gas. 

So with that, the meeting is open.  Yes, please.

QUESTIONER:  Thank you.  Dan Rosen, China Strategic Advisory.  The Chinese national oil companies are very pragmatic around the world.  Are they operating pretty much the same way you would run one of them, or is there some significant difference?

RAYMOND:  Well -- (pause) -- there are, you know, three or four aspects to the operation if you look at a major oil company.  The -- I'll call it the internal part of it, and the internal market in China that is refining and marketing I would describe as probably where this country was 25 years ago in terms of the use of refining technology, the skills and managing it efficiently.  And the marketing aspect is a little bit confused; by that, I mean the demand for petroleum is growing so rapidly that it's difficult to have the way we would define it as a very efficient set of service stations and services.  And there is a contest inside the country between PetroChina and Sinopec in terms of who will be the leading marketer.

I find it somewhat strange in this -- and that's why I allude back to this country -- they're debating market share, but neither one of them make any money on doing it anyway, so you kind of wonder why you want to have a competition for market share for something that you don't make any money on, but that's -- perhaps tells you something else about how they're managed.

In terms of competing in the worldwide marketplace in exploration, of course they really have relatively little experience being in the exploration world, and so I would say they are challenged at this point to be able to compete effectively.

On the other hand, they have a clear national policy of access to resources both inside the country and outside the country, and as you would suspect as time goes on, they will manage that more effectively.

In terms of how they manage their whole business, they have excellent people, which would come as no surprise to you; probably a few too many, which also would come as no surprise to you; and a reasonably clear vision of where they want to take it into the future.  The biggest problem they have internally, when you start to get involved, for example, with the joint venture and refining, is they have enormous staffing; where we would a thousand people in a refinery, they might have 10,000 or 15,000 kind of thing.

DEUTCH:  Other questions, comments?  Please.

QUESTIONER:  I'm Tony Holmes.  I do Africa here at the council.  Staying on the same subject of China, clearly there's a belief in China that there's an advantage to physical control of petroleum-producing assets.  There seems to be somewhat the same belief in the United States, at least if you measure our reaction to the possible Chinese takeover of Unocal several years ago.  So drawing on your experience at Exxon, I wonder, given this tremendously complex, globally integrated physical control of resources and an equally complex but more limited commodities-financial trading aspect for buying and selling and marketing petroleum, what is the advantage of physical control of production assets, and is this something we're just reacting to out of xenophobia or is there really something there?

RAYMOND:  Well, there -- there is value in physical control.  It's only in periods in times of shortages.  If there is adequacy in terms of overall supply into the world marketplace, there is no particular value or advantage to having physical control, because the market clears it, so to speak, and you might get yourself in, say, a little bit of inefficiency in a huge market, but it would be almost de minimis.  If you believe that the world will be short -- we can talk about what short means, but if you believe that the world will be short, then there is advantage -- you can perceive advantage to physical control. 

Now, back on the question of the Unocal, I think at the time I made the comment that I think it was a mistaken notion that this country should get into the argument that it did, because in fact when it comes to oil and gas -- and actually other commodities, not limited to oil and gas.  I mean, I can make the same comment about copper and platinum and palladium and chrome and all kinds of resources, which basically the American public doesn't understand we import all those things, too.  It's kind of like nobody has ever told them.  The fact is, we're a huge importing nation of important commodities, and the expectation that this country has is that we will be able to -- this country, through companies -- will be able to go out onto the world market and access those resources.  Now, we have the expectation that other countries will not do what we try to do.  So, you know, kind of for internal political reasons, I think we lost sight of the bigger picture, is the way I would say it.

DEUTCH:  Yes?

QUESTIONER:  Hi.  Rick Newman with U.S. News and World Report.  I wonder if you could characterize what you believe to be the strategic interests of the oil companies with regard to non-carbon energy forms, whether it's hydrogen or biomass.  On one hand, you know, oil companies generally control the -- or, you know, have infrastructure in place for the distribution -- service stations and so forth -- but those are not necessarily core competencies of oil companies right now.  So where do -- how do oil companies strategize for that?

RAYMOND:  Well, I mean, I think the -- you talk about oil companies, but oil companies are in the oil and gas business.  Whether or not -- whether it's biofuels or wind or solar or whatever the alternative may be, whether or not those are attractive investments, my comment would be they have to stand on their own bottom.  You have to look at the investment, see whether or not it's attractive, and I would also say see whether or not you bring anything special to the party. 

If all you're going to do is, for example, go buy a windmill from GE and install it somewhere, there are a lot of people who can do that.  In other words, you don't bring anything unique to that.  And as a matter of fact, what you ought, I think -- ought to do is ask yourself do you bring any unique technology, because if you don't bring unique technology, you're going to have an average project and just be like everybody else. 

The other comment I would make, particularly for the oil and gas companies in the kind of current environment that we're in, everybody acknowledges that wind, solar, ethanol, for them to be competitive, they have to have subsidies.  Is an oil and a gas company going to get a check from Washington these days?

DEUTCH:  Yes, back here.

QUESTIONER:  (Name inaudible) -- from Saudi Petroleum.  Of course, our relationship with ExxonMobil goes back many years that I can care to say here, but my question to you is, we're facing technological challenges, geopolitical challenges, environmental challenges; we want to attract the best and the brightest; how can we do that when our image has plummeted?  Where did we go wrong as an industry?  How can we attract the best people.  The informed discussions are becoming rarer and rarer about energy.  It's usually politically charged and the facts are not known or ignored.  So, what can we do as an industry to reverse that trend?

RAYMOND:  Well, that's a question that I'm afraid doesn't have an easy answer and hasn't had an easy answer for a long, long time.  The comment I will make -- and I can only speak from what I can remember, so to speak -- is that while all this has been going on over even periods -- you know, if I go back and look at the '90s and the collapse of oil prices in 1998 and 1999, all through these periods Exxon and ExxonMobil has been able to hire all the people we needed of ever-increasing capability all over the world.

Now, whether that's unique or not, I can't answer.  But I can say, when it comes to hiring the kind of hard science, hard engineering people that you need, a lot is made -- and as a matter of fact, if you read the report in detail, when we discussed this issue, when it was originally drafted, they talked about the enrollment in petroleum engineering.  And I don't have to tell you I made them change the report.  They said the source of most of the people in the industry is not petroleum engineering; it never has been.  The primary source of people in this industry -- and John and I will agree -- is chemical engineering.  And that's always been true. 

So the question isn't to look at enrollment in petroleum engineering as a surrogate for how many people are available to the industry.  The broader issue is access to engineering talent, primarily chemical, to some degree electrical and civil engineering, which are really what make up the workforce that the industry has.  And those people continue to be attracted to the industry.

DEUTCH:  Yes, sir?

QUESTIONER:  Gerald Pollack.  My question goes back to a subject that has already been touched on.  It's the use of pricing as a deterrent to consumption.  Now, Mr. Raymond, you did say that at current levels, there isn't very much evidence that people are cutting back on their usage.  But at current levels, prices, if inflation-adjusted, are not all that high relative to where they had once been.

In Europe and in Australia, where I was a recent visitor, it costs about $4 to $5 for a gallon of gasoline.  I believe fuel efficiency is greater there. 

In yesterday's paper, Tom Friedman outlined several things that ought to be done to free us from our involvement with Iraq.  One of the things he suggested was a hefty tariff on imported oil, which would make imported oil more expensive and raise domestic prices as well.  If oil were selling for $5 or $6 a gallon in the United States, would you think that would be a desirable way of cutting back on consumption, or an effective way as well?

RAYMOND:  Well, I've often -- there are several points that you raise.  The first is that in fact, if you go back to the last time the industry went through -- or the country, not only the industry, went through a run-up in price, it was when the shah had to leave Iran.  And you inflation-adjust that, I think the price would now be like 101 (dollars).  So you're right in the sense that in real terms, the price of oil and gas have not gone up.

As a matter of fact, there are two points to that that I think are important.  Number one, alternatives have been fighting a losing battle ever since 1980, because the real price of oil and gas has gone down, which means that the alternatives have a tougher and tougher hurdle to try and get over to make them economic, which of course, if you look at the dynamics, that's exactly what's going on. 

The second comment I would make to you is, if over this period the price of oil and gas had gone up with inflation, would we have the kind of conversation in this country that we're having today?  And the answer to that, I believe, is no.  You know, if the price of bread goes up two cents a loaf for every year for 15 years, we don't have riots in the street about bread.  You might have it about pasta in Italy and tortillas in Mexico, but you don't have it here, and that's the point. 

The point is that in a sense, the industry was too efficient because it provided for a real price that went down all the time.  Matter of fact, a couple years ago, we had a study done inside the company in terms of how much the real -- the decline in the real price of energy had helped GDP in this country.  And it turned out about one percentage point of GDP growth from 1980 to before this latest runup was related to the ever-declining real price of energy. 

Now, come to the other side of the question.  And that is, would a significant increase in the price of energy -- would that be a good thing?  My first comment would be to you that if it were done through a tax, whoever passed that tax in Washington wouldn't be there the next term.  That's the reality.  I'm not judging whether that's right or wrong.  That's a different question.  But the politician that went to the American people and said, we're going to put a $5 a gallon tax on gasoline probably wouldn't be able to make a political speech for very long. 

Now, the question of what should -- I'll call it -- the price of energy be?  If you could do it -- I mean, you'd have to have a -- just the economy itself probably couldn't tolerate a huge one-step change kind of thing.  Then you get into the question, if you do it as they have done it in Europe.  And that is, Europe has significant taxes on transportation fuels now.  But they started off very, very modestly back -- after the crisis in 1970.  And they've raised the taxes four, five, six percent every year, partially on the basis that this is good for the environment, although we can debate whether that's true or not.  And now it has become a significant portion of their total revenue. 

And the question I can recall years ago at a meeting where somebody from Germany made the comment about how the United States needed to have an increase in the taxes on petroleum, because that would -- because not to do it was in essence not being responsible.  And the question went back the other way.  And that is, if you didn't have those taxes in Germany, think how much more economic growth you'd have. 

And that's one of the points in this study -- that when you get all done, the total energy -- add up what you're going to do -- you ultimately have to have a cost of energy that's competitive in the world marketplace.  The country can't afford to have a headwind in the cost of energy.  The competitors our there are going to have a cost.  We can't have one here that's significantly higher.  If we do, we're giving ourselves a headwind that's going to be very, very difficult to deal with. 

Bob. 

QUESTIONER:  Bob Belfer, Belfer Management. 

While there's been some indirect allusion, I haven't heard two words: global warming.  I'd like to take -- get your take as to both the politics and the reality of it.  Thank you. 

RAYMOND:  Well, I'm not going to go down that road.  (Laughter.)  But there is -- we try and deal with that to a degree in the study.  We were not commissioned to arbitrate the global warming debate.  But the reality is that so long as people are thinking about policies that relate to global warming, we concluded that we should make some comments in terms of how those policies, if enacted, could affect the energy mix.  And that's what's dealt with in this report.

One of the items that that's of a -- under a lot of discussion is carbon sequestration as a way to deal with part of the global warming issue.  Most people -- and again, it's amazing to me, but over half of the electricity generated in this country comes from coal, and as time goes on, that percentage is likely to increase.  Hopefully nuclear can get back in the mix, which in essence bypasses the global warming issue.  But carbon sequestration is something that the oil and gas industry has done for a long time.  They do it to reinject it into reservoirs to improve the recovery that you can get from traditional, conventional oil and gas fields.

But if you're going to pursue carbon sequestration as a way of trying to control the CO2 emissions from a power plant, that is a huge task.  A gigawatt power plant, which is kind of a standard issue these days -- carbon sequestration would require you to inject into the ground 150,000 barrels a day of supercritical CO2.  If you were to do that for all of the CO2 that comes out of coal-fired power plants, I think the number is something in the order of 12 (million barrels) to 13 million barrels a day of supercritical CO2, which is more volume than the oil and gas industry currently produces in this country.  Most people don't realize, when you produce crude oil, you also produce a lot of water.  So if we're producing in this country something on the order of 5 1/2 million barrels a day of crude oil, in terms of total liquids, we're producing about 13 million barrels a day of total liquids.  The rest is water that's treated and generally reinjected.

There is no regulatory framework in this country to deal with the injection of CO2 into the ground.  There is no regulatory framework for the transportation of this kind of volume.  The costs would be significant.

An interesting question I'll ask all of you -- we've talked about it -- if I ask you what the price of gasoline is, you'd all within a few cents.  If I ask you what's the price per kilowatt hour in your electricity bill, who here knows what it is?  (Slight pause.)  Four or five people raised their hand?  You spend more money on your electricity bill than you do on gasoline.  And let me make the comment -- that number is going to go up.  And to the extent we have to deal with these kinds of issues, it's going to go up very substantially.

DEUTCH:  I regret that we are coming near our -- the end of our time.  I'm going to take one last question from you, ma'am.  Who you -- you had a question.  Please.  Please.

QUESTIONER:  Yeah.

DEUTCH:  She had a question.

QUESTIONER:  I was wondering if you could speak on how independent the commission was and whether it was really influenced by industry or the government in driving the results, or whether you think it's more of a hard scientist kind of look at a problem.

RAYMOND:  Well, I -- it's -- that's a good question.  I'm glad you asked it, really.  There were about 350 people who were -- I'll call it fundamentally involved in the study.  There were in total -- in terms of access to people, there were about a thousand people who participated, but I'll call it the hard-core -- there was about 350 people.  About 35 percent of those were from the oil and gas industry, and 65 percent were not from the oil and gas industry.

They were largely from the academic world.   They were from other industries.  For example, General Electric had people.  The automobile people had -- any comment we made in the report about transportation had -- the transportation companies were involved.  So it was a very, very broad cross-section.  And the reason it was is so I could answer exactly the question which you have asked. 

We were clear -- and John mentioned at the beginning we had other people involved, and the demand side was Dan Yergin; the political side was CSIS -- we wanted to make sure that this wasn't just perceived or was just the oil and gas industry or the petroleum industry taking a look at this.  We had a lot of people involved from utilities.

The objective of the exercise was to look broadly at energy from every prism that you could look at it.  And I -- whether we were able to accomplish that, you have to form your own judgment.  But I can tell you that we had no preconceived notion when we started, and I think if you were to interview everybody who was involved in the study, they would tell you at the end a couple of things. 

One, they learned more than they ever imagined that they could have learned by participating in the study.  And secondly, everybody in a way changed their views on nearly every subject.

DEUTCH:  Well, I regret we don't have time for more discussion here, if we could stick to the schedule.  So what I would like to do is give Lee an opportunity to make any couple of remarks you want to make.   Then I would like to make a couple of remarks.  With that, we'll be adjourned.

RAYMOND:  Yeah.  Let me just make one other broad comment that we have not touched on here today that's in the report.  And if someone were to ask me the question, "What did you learn out of this study," the comment I will make to you is that we have a significant infrastructure problem in this country.  Much of the infrastructure that's related to the oil and gas industry and the energy industry is old, whether that's power grids -- when you have a blackout here -- for example, since the last blackout, basically nothing's been done to the power grid.  I know that will make you feel good, but I mean, nothing basically has happened to the power grid.  The pipelines in the country are old.  Nearly everything in the infrastructure needs to have a lot of investment.  Anything that people look at in terms of alternatives to the current system will require massive investment in infrastructure.  And I mean massive investment in infrastructure. 

So it's not enough to just look at solar cells or windmills or whatever you want to look at.  You also have to get your head around the infrastructure that's required to have those things be effective and involved in the energy system.  It's huge, physically, without even debating where things can be built.  It's huge financially, and it takes a long time. 

And if I leave you only with that point, that it's huge and it takes time, we all commented at the end of the study:  if we could have Washington understand that, we would have made a significant contribution. 

Which means the last comment:  if we decide to do something, you have to stick with it for a long, long period of time.

DEUTCH:  Well, your moderator wants to end with three brief editorial comments and then a thanks to both Lee Raymond and to the audience. 

My first comment has to do with the treatment of carbon emissions in this National Petroleum Council report.  I think I would recommend all of you read what the report says about controlling carbon emissions and global warming, not because I think it's important whether you agree or not agree with what is in there, but you will see a very realistic and sober statement about this, which I think is one of the aspects of this particular report that adds such credibility to it -- that they did not shrink from addressing the issue in quite the straightforward manner.  And so that's the first point.  It's quite a hallmark of the report. 

The second has to do with taxes.  I think that that -- I'm not recommending to my Democratic candidate friends that they propose a $5 per-gallon tax -- (laughter) -- but I must say that I do think that over time, increasing the taxes in this country is important.  And a lot of it has to do with what you do with the revenue.  That's an important aspect of it.  And I will remind you that we did have a time when we did a windfall profits tax --

RAYMOND:  Correct.

DEUTCH:  -- (inaudible).  That may not be a happy memory, but I do think that's a critical issue about how we deal with these energy problems.

And finally, these oil and gas problems have foreign policy implications, touched on in the issue of Africa, but generally speaking that's the heart of what the council's about and should continue to capture our attention as an organization.

I want to thank you, Lee Raymond, and thank you for your participation here this morning.  And thank you for leading the study.  You've been informative and straightforward this morning.  I thank you for that, and everybody else.  And I thank the audience so much for having been here.  (Applause.)  Thank you.

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