- The Washington Times - Saturday, November 27, 2004

The late economist Herbert Stein once said, if something cannot go on forever, it will stop. The time when we could count on cheap, abundant oil is clearly approaching that point. Prices are not likely to stay in the $50 range as they have in recent months. But it is even more unlikely they will retreat to late 20th-century levels as low as $10 a barrel.

The reasons are complex, but it is critical we understand them so we can move to drive volatility out of the energy markets and replace it with predictability and stability, two prerequisites for sustained economic growth.

A basic reason for price volatility is surging demand. China alone accounted for roughly 30 percent of this year’s total growth in world oil demand. Global energy demand is expected to jump 40 percent over the next two decades. It took the world 125 years to consume the first trillion barrels of oil. We’ll consume the next trillion within 35 years.

But demand is not the only factor. Supply is also an issue.

Simply put, the age of easy oil and gas is over, partly because we are seeing the convergence of geological difficulty with geopolitical instability and hard-to-reach supply with rising demand. In essence, we face a new energy equation.

Many of the world’s large oil fields outside the Organization of Petroleum Exporting Countries are maturing just as demand is growing. Increasingly, future supplies must be found in areas more difficult to access and develop, such as ultra-deep water and oil sands. Developing these new frontiers will require trillions of dollars of investment in new infrastructure and innovative technology. And the world oil increasingly comes from areas with stability concerns, such as the Middle East.

As the Bush administration heads into its second term, we need to recognize this new equation’s realities and align our policies and actions to address them. Here are four pragmatic steps we can take in the short-term to do that.

(1) We should maximize the value of the resources we have now, on both the supply and the demand side. Simply put, over the next 20 years we will need all the energy we can develop. We should allow access for responsible development of promising resource regions in the Arctic, the Rocky Mountains and offshore. In resource-rich countries in the developing world, we should promote enhanced contract sanctity and transparency, which will encourage more investment and access, while helping expand the economic and social benefits of oil production for local communities. At the same time, we need to moderate demand by pushing for more energy efficiency in everything from consumer appliances to automobiles and aircraft. In the near-term, conservation is our easiest, cheapest and most reliable “new” energy source.

(2) We need to create a regulatory climate that encourages energy production. In the U.S., some key operating rules should be revised for refineries, now operating at virtually full capacity. If the government streamlines the permit process, industry can proceed to add capacity or improve efficiency without increasing emissions. We should rationalize state and regional gasoline standards that have effectively “balkanized” gasoline supplies. We now have 18 different gasoline blends in the U.S. to comply with these standards, making it difficult to move supplies around the country to even out supply disruptions and moderate pump prices. Natural gas, clean-burning and plentiful globally but in tight supply in the United States, needs to be commercialized sensibly but aggressively. The United States has only four terminals capable of receiving liquefied natural gas, while most forecasts estimate a need for 10 to 14 new import terminals by 2015 to meet projected demand.

(3) We should increase investments in viable alternative energy sources for the future. Renewable sources like solar, wind and water will continue playing a greater role, growing to about 7 percent of our total energy needs by the year 2020. We need to continue investing in renewables and, at the same time, invest in understanding the potential of new alternative sources such as hydrogen. Although hydrogen’ viability as a widely used fuel is years away, investment today will help assess its practicality and potentially accelerate its commercial viability.

(4) The U.S. business community must recognize energy as a strategic — and global — business issue. Corporate American can no longer treat energy as an expense item or solely as a domestic issue. It is time for business to act on the knowledge that access to sufficient, predictable energy supplies is a strategic issue for every company in every sector of the U.S. economy. The business community should educate the public about the indelible link between reliable energy and economic growth, while helping policymakers draft a comprehensive national energy policy to let us balance volatility with stability and increasing consumption with greater efficiency.

Moreover, U.S. energy policy in the 21st century cannot stop at the water’s edge. It must reflect our interdependence with producing countries and encourage bilateral relationships that recognize the importance of energy development and promote the flow of capital and investment.

Sensible, pragmatic development of new energy supplies is not just a business issue. Energy development is ultimately a fundamental element of human progress, particularly in the developing world whose population is expected to grow more than 1.5 billion in the next 15 to 20 years. Access to energy, like employment and education, is a building block of stable and prosperous societies. It is our collective responsibility to provide that access.

The end of easy energy may mean the end of easy choices. But recognizing the new energy equation is a strong first step toward resolving it in our favor.

David J. O’Reilly is chairman and chief executive officer of ChevronTexaco Corp.

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