The Energy Problem Henry Lee Director Environment and Natural Resources Program John F. Kennedy School of Government Harvard University National Energy Symposium Los Angeles, California June 15, 2006 University of Southern California

Dimensions of the Energy Problem : international economic and strategic problem : international economic and strategic problem 1970s: security problem: Arab Embargo and the Iranian Revolution 1970s: security problem: Arab Embargo and the Iranian Revolution 1990s: environmental problem: acid rain, coal burning, climate change 1990s: environmental problem: acid rain, coal burning, climate change

The Issue Today is Changing 1. Security concerns more pronounced 2. Concern about climate and the environment more global and more urgent

Some Factors Are Not Changing Laws of supply and demand still apply Laws of supply and demand still apply Oil supplies are not about to run out – although the cost of production will increase two to three-fold as the supply of cheap oil disappears Oil supplies are not about to run out – although the cost of production will increase two to three-fold as the supply of cheap oil disappears There is one world oil market and thus complete independence is an unattainable goal There is one world oil market and thus complete independence is an unattainable goal The US has 250 years of coal, but limited reserves of oil and conventional gas The US has 250 years of coal, but limited reserves of oil and conventional gas Approximately 75% of the world’s oil reserves are located in the Middle East and 42% of the world’s gas is in Russia and Iran Approximately 75% of the world’s oil reserves are located in the Middle East and 42% of the world’s gas is in Russia and Iran Prices of energy commodities are extremely volatile Prices of energy commodities are extremely volatile

But Others Are Changing Technologies for oil and gas production have improved immensely in the last twenty years Technologies for oil and gas production have improved immensely in the last twenty years Governments, not the major oil companies, own the vast majority of the world’s oil Governments, not the major oil companies, own the vast majority of the world’s oil China, and to a lesser extent, India are becoming major players in all aspects of the energy market China, and to a lesser extent, India are becoming major players in all aspects of the energy market Natural gas is emerging as an internationally traded commodity Natural gas is emerging as an internationally traded commodity

The Energy Security Problem Do you believe that over the next twenty years the Middle east will be more or less stable than over the previous twenty years? Do you believe that over the next twenty years the Middle east will be more or less stable than over the previous twenty years? Do you believe that alternative providers of oil, such as Nigeria, Central Asia states, Russia, and Venezuela, are significantly more dependable? Do you believe that alternative providers of oil, such as Nigeria, Central Asia states, Russia, and Venezuela, are significantly more dependable? If world oil demand is to increase from 84 m/b/d to 110 m/b/d over the next twenty five years, where will the additional 26 m/b/d come from? If world oil demand is to increase from 84 m/b/d to 110 m/b/d over the next twenty five years, where will the additional 26 m/b/d come from?

The Environmental Problems: Two Views Some worry about the environmental effects of energy sources: air pollution from burning fossil fuels, accidents and proliferation from nuclear power plants, land use from hydroelectric facilities and renewable sources Some worry about the environmental effects of energy sources: air pollution from burning fossil fuels, accidents and proliferation from nuclear power plants, land use from hydroelectric facilities and renewable sources Others worry that environment constraints – both regulatory and political – are limiting our energy options: moratoria on oil and gas exploration and production; siting issues; and air, water, wetland, waste, and antiquities regulations Others worry that environment constraints – both regulatory and political – are limiting our energy options: moratoria on oil and gas exploration and production; siting issues; and air, water, wetland, waste, and antiquities regulations

Alternatives – No Silver Bullet OPTION OPTIONOil Natural gas Coal CHALLENGE Must find ways to use oil more efficiently, especially in the transportation sectors Will require investment in an unstable economic environment (Russia) or in unstable geopolitical environments (Iran, West Africa, and the Middle East) Will require new technologies to reduce conventional and unconventional air emissions

Alternatives (con) Renewable Energy Options Renewable Energy Options Must identify sufficient land, sites and locations Must integrate into the existing electricity network (wind and solar) Must develop a complex infrastructure and new more efficient production processes (biomass, ethanol, and biodiesel)

Alternatives (con) Nuclear Nuclear Energy Efficiency Energy Efficiency Hydrogen Hydrogen Must develop public trust Must reduce market failures and barriers and convince millions of households and businesses to make investments Must design production technologies that require less energy Source: John Holdren, adapted by author

Challenges Historically, it has taken about 50 years to significantly change energy systems Historically, it has taken about 50 years to significantly change energy systems This time around the task is more complicated. There are more people in the world, there are more economies competing for energy sources and the value of the existing investment in existing infrastructure is much larger This time around the task is more complicated. There are more people in the world, there are more economies competing for energy sources and the value of the existing investment in existing infrastructure is much larger This transformation will occur in a world in which the availability of options will be constrained by the threat of climate change This transformation will occur in a world in which the availability of options will be constrained by the threat of climate change

Six Questions 1. How do you attract sufficient investment in a market characterized by extremely volatile fuel prices? 2. Investments in improved energy efficiency have three attractive characteristics – they are the least expensive, they have enormous potential, and they enjoy political popularity. Why have we done such a poor job in capturing this potential? What might be done going forward? 3. Given concerns about the environment, nuclear proliferation, and energy security, is reconsideration of nuclear power a realistic option? Is it reasonable to expect that 100 new nuclear power generating stations will be build by 2026?

Questions (con) 4. To reduce the US’s reliance on imported oil, motor vehicle efficiency must improve significantly and substantial amounts of substitute fuel must be developed and commercialized. What is the potential for achieving either over the next twenty years, and what new infrastructure will be needed to process, transport and deliver these substitutes? 5. Energy projects have environmental footprints, some more than others. Is the balance between meeting our energy needs and protecting our environment being met? Is government, the media or business doing an adequate job of objectively communicating the environmental, safety and economic risks surrounding energy policies and projects?

Questions (con) 6. Many people believe that designing and implementing a new energy vision will require political leadership – one willing to take political risks. In today’s world of multi- year campaigns, ideological polarization and large budget deficits, is such leadership likely to emerge? What conditions are necessary for this to occur?