John Hess, CEO of Hess Petroleum, sees a major future Energy Crisis. “The $140 per barrel oil price three years ago was not an aberration- it was a warning.”
His talk was broken in eight parts covering: introduction, oil, natural gas, coal, nuclear, renewables, climate change, and conclusion.
John Hess, Chairman and CEO of Hess Oil.
Here is a summary of his talk.
Introduction
The United States desperately needs an Energy Policy. We have 5% of the world population and 20% of the energy use. We should not wait for a crisis to develop an Energy Policy. We must act now. When President Obama took office he put Climate Change at the top of his political agenda. However to have a successful Climate Change policy you first need an Energy Policy.
Here are some of the realities we face:
- Eighty-five percent of the world’s energy comes from hydrocarbons: 35% oil, 30% coal, and 20% natural gas.
- World population is estimated to grown from 6.9 billion today to 9 billion by 2050, largely in the developing world. With a corresponding increase in living standards, hydrocarbon energy will be needed to support their economic development.
- Renewable energy does not have the scale, time frame or economics to change materially our dependence on hydrocarbons.
- An energy crisis is coming – likely to be triggered by oil. Demand is expected to grown by at least 1 million barrels per day annually, driven by world developing economies and growth in transportation as we go from 1 billion cars now to 2 billion cars in 2050. We are not investing enough to grow production capacity to keep up with demand.
As demand grows in the next decade we will not have the oil production capacity to meet demand. Supply will then have to be ration demand and prices will skyrocket-with the likely outcome of bringing the world’s economy to its knees. The $140 per barrel oil price of three years ago was not an aberration – it was a warning.
Oil
Oil – which is 37% of US Energy demand, with 71% used for transportation- our energy policy must moderate demand and increase supply. We must raise mileage performance from 35 miles to 50 miles per gallon We must increase energy efficiency. Hybrid electric cars such as the Chevy Volt and the hybrid gasoline cars will go a long way to reduce oil demand. It will take 15 years to replace our vehicle fleet of 230 million cars and light duty trucks. The change will save 3 million barrels of oil and at today’s $100 per barrel that would save over $100 billion annually in reduced energy costs.
We must increase supply. We must maintain the existing tax provisions that incentivize drilling. In 2010 the industry spent $135 billion in intangible drilling costs which are expensed in the year incurred. Over 90% of drilling is done by Independents, not major oil companies. Eliminating these IDCs will decrease domestic supply , increase foreign oil imports, hurt our balance of trade, decreasing jobs and decreasing energy security.
The Gulf of Mexico is essential to our nation’s energy security- providing 30% of our crude oil and 13% of our natural gas – most from deep water. The BOEMRE needs to provide clarity around regulations requirements and begin approving drilling permits.
Natural Gas
Natural gas is 25% of US energy, with 32% used for power generation and the balance for residential and industrial use. The US Energy Policy should focus on shale gas- a real game changer. It will be a base fuel not a bridge fuel. We should prioritize use of natural gas in electric generation due to much lower costs and higher efficiency.
To build a natural gas plant generating 1,000 megawatts it takes two years at $1 billion; for coal it takes three years at $3 billion; and for nuclear ten years at $6 billion.
We need to let states continue their successful oversight of hydraulic fracturing, a practice that has been going on safely for over 50 years. Sixty percent of US wells are hydraulically fractured. Adding duplicative regulation at the federal level would be counterproductive and economically wasteful.
Coal
In terms of coal, which is 21 % of our energy supply and generated 50% of our electricity, US Energy policy should be to reduce coal use until we have a research break through to make clean coal commercially viable. There are over 600 coal plants in the US with one third over 50 years old. These older plants can be replaced by natural gas plants. That would increase demand for natural gas 40% and decrease CO2 emissions substantially.
Nuclear
We have about 104 nuclear power plants which produce 20% of our electricity- the number is unlikely to grow in the future because of the high cost of a new plant, the long lead time to build one; difficulties in permitting; and challenge to dispose of nuclear waste now Yucca Mountain is unavailable.
Renewables
Wind is currently 2% of our electricity generation. While wind generation is estimated to grow at 7% per year, in ten years it will provide 4% of our electricity. Wind is intermittent and operates at a 30% capacity and it is a higher cost than natural gas. Solar power has been a dream for decades. It is intermittent and cannot be stored for long periods. Regarding biofuels we provide a $6 billion subsidy to encourage farmers to convert food to fuel. This is bad policy. We should limit the use of corn ethanol to no more than 10% of our gasoline.
Climate Change
We need to set targets that will sustain economic growth as well as protect our environment. Recent proposals to reduce the world’s carbon emissions by 80% by 2050 are simply not achievable. We have to be realistic about the targets we set and also make sure in the process we do not put our economy into reverse. Developing nations will need increasing amounts of hydrocarbon energy to grow their economies – jeopardizing any meaningful reduction in carbon emissions in the US and developing countries.
We need to get serious about climate change once our economy recovers and people get back to work. There are those who say we should then consider a $1 per gallon gasoline tax for transportation and a $10 per ton carbon tax for electric generation. They would generate over $200 billion per year. Eighty percent could be used to reduce our public debt, provided the additional revenue is coupled with spending cuts.
The remaining 20% could be dedicated to research in alternative energy such as batteries, biofuels, CCS, infrastructure projects, and the hydrogen economy.
Conclusion
Energy and climate change have been called the greatest challenge we face in the 21st Century. We can no longer pursue narrow, short term political agendas. We all must collaborate-Democrats and Republicans, government and industry, and the US with the rest of the world for the common good. The US needs an Energy Policy that lowers demand for oil, encourages more drilling, emphasizes natural gas for electricity generation, invests in research for new forms of energy and sets realistic goals for carbon emissions reductions. If we do all of these things, we will finally get on the right track. We will conserve over 3 million barrels per day, save over $100 billion per years and reduce our carbon footprint- as well as our nation’s financial deficit. Our country needs leadership- from both the government and industry.
Together we can create an Energy Policy that secures our economic growth for future generations.
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