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Meeting Emerging Challenges of Global Energy Security and the Environment

Reuben Jeffery III, Under Secretary for Economic, Energy and Agricultural Affairs
Address to the National Academies Summit on America's Energy Future
NAS Building, Washington, DC
March 13, 2008

As prepared for delivery

Introduction

Thank you, Dr. Cicerone for that kind introduction. I’m very honored to be here and thank you for the opportunity to address this prestigious gathering.  It was truly a carbon neutral trip for me to walk across C Street to join you.

There is a lot of expertise in this room on many aspects of energy security policy. Energy presents a significant set of issues, involving domestic policy, technological challenges and economics. I make no claim or effort to address the totality of that set of issues. Rather, I’ll try to keep my comments focused on some of those aspects of energy policy with which the State Department is involved.

The foreign policy implications of energy security cut a wide swath involving international economic, security and environmental policies.

Energy market dynamics

Let’s start with the obvious point that world energy prices, particularly for oil, are at historically high levels. In part this is due to rapidly growing demand. As globalization succeeds, and so many emerging economies develop, their demand for energy has increased dramatically. Meanwhile, supplies of traditional sources of energy have not kept up with rising demand. The math is very simple.

Between 2001 and 2006, petroleum supply has grown about 8.9 percent per year, while demand has increased 9.6 percent. This differential is expected to increase over time. There are several reasons for this disparity. Accessing oil and gas in the ground is increasingly costly, as the so called “easy oil” has become scarcer. The business environment and political situation in some energy producing countries deters investment, as does the rise of resource nationalism and the use of energy resources as a political tool.

Government control of energy resources is on the rise. Over 75 percent of the world's oil reserves now lie in the hands of national oil companies. While not all national energy entities operate in the same manner, it is often true that state-run ventures lead to less efficient production and less stringent environmental standards. Transporting supplies to market is also problematic, as much of the world's oil passes through a series of chokepoints that leave energy consumers vulnerable to supply disruptions.

About 35 percent of all oil shipped – or 17 million barrels per day –passes through the Strait of Hormuz..  Another 34 percent passes through the Straits of Malacca, delivering oil to China, Japan and other destinations in Asia.  And about 8 percent passes through the Bab el-Mandeb, which connects the Red Sea to the Gulf of Aden.

Over-reliance on a small number of transit routes leaves world oil supplies open to the possibility of a sudden disruption – whether man-made or by a natural disaster. This is, of course, one reason why consumer countries participate in the International Energy Agency. IEA members commit to build a 90 day supply of oil. In the U.S., it takes the form of the Strategic Petroleum Reserve. In fact, the IEA itself is a product of State Department energy diplomacy. It was launched by Secretary Kissinger at the Washington Energy Conference 25 years ago.

If the supply side of the international energy equation is not challenging enough, the demand side is even more daunting. The United States, Europe and industrialized Asian countries consume a lot of energy. But their consumption is relatively stable. What is new is the dramatic growth of energy consumption in rapidly developing countries such as China and India. As recently as the early 1990s, China supplied its own energy resources. In less than two decades, China's oil consumption and its GDP have tripled, resulting in the importation of well over 3 million barrels of oil per day, and that number is growing rapidly.

We need to be mindful, however, that the growth in demand for energy is associated with economic development and poverty reduction. Economic growth in China, for example, has lifted hundreds of millions of people out of poverty. Broad-based economic growth in China and elsewhere brings hope and opportunity to a new generation in the developing world. The United States vigorously supports this growth and is leading efforts to find ways of limiting the scale of energy use and environmental impacts that accompany development.

The IEA projects that the world's energy needs will grow 55 percent by 2030, with 74 percent of that increase coming from developing countries. Meeting these needs will require over $20 trillion of new investment by 2030 – a staggering amount. These trends – constraints on energy supply, transit chokepoints, combined with ever-escalating demand – are the sobering realities of the global energy picture. They set the framework for the high prices we now experience and are likely to see for some time to come.

The economic effects of high prices

High oil prices have a significant impact on energy consuming countries, starting with the hardship they cause to individual consumers in this country and elsewhere. High prices also have a macroeconomic impact. The American balance of payments is dramatically affected by the price of oil. We import twelve million barrels per day of crude oil and petroleum products.

The difference between 30 dollar and 100 dollar oil means extra payments of roughly 840 million dollars per day. That adds up to over 300 billion dollars per year added to our current account deficit. This is money that we have to borrow from abroad so we can pay foreign oil producers. And this is not just a problem for the United States. Many of the poorest and most vulnerable countries in the world are oil importers, facing even more severe domestic economic hardship and balance of payments challenges.

In many of those countries, the outflow of funds to pay for oil imports risks diverting resources from crucial tasks such as public services and economic development programs. We should not forget that the so-called petrodollar recycling of the 1970s contributed to the developing countries’ debt crisis of the 1980s. This brings up another dimension of high oil prices – really the mirror image. Oil exporters are accumulating huge financial surpluses.

We are witnessing a transfer of wealth from consuming to producing nations of unprecedented historic proportions. This is currently manifested in part by the proliferation of sovereign wealth funds – large pools of money that countries, rather than private entities, invest.

The U.S. and other countries are working with the IMF and the OECD to identify best practices to encourage greater transparency and to help ensure that investments pursued by sovereign wealth funds are based on market principles. President Bush firmly supports policies that keep the U.S. open to investments from abroad, strengthen economic growth and ensure that national security is not threatened.

Taking action to improve energy security and the environment

I can see you saying to yourselves, “Ok, gas prices are high and apt to stay so; U.S. wealth is being exported to the oil producers; and many emerging economies are suffering – so where is the good news? And what are we doing to shape our own destiny?” One bit of good news is that the world’s energy needs and our environmental responsibilities converge toward a shared solution set.

Good old-fashioned conservation remains an important part of that solution set. We can and must continue our efforts to reduce the amount of energy we consume in relation to our economic production. The United States has a solid record on reducing its so-called energy intensity, and we have to build on that. We must relentlessly pursue and deploy energy efficiency-enhancing technologies. It is also largely good news that, while America may be oil dependent, we are, at least for the moment, electricity independent. Americans derive nearly all of their electricity from domestic coal, natural gas, nuclear and hydro, with small but increasing shares going to renewables like solar and wind.

While reliance on coal for nearly half of our electric power is positive for energy security, it does pose a climate challenge. Since 2001, the United States has committed more than $2.5 billion to research and develop clean coal technology. This investment by U.S. taxpayers is leading the way to develop cost-effective carbon capture and storage technologies. Tax incentives and partnerships with the private sector are accelerating the development of these technologies within the United States.

Indeed, the primary solution to these challenges of energy security and environmental preservation is energy diversification. Policymakers, private companies, scientists and researchers must all work toward this end. Greater diversity of energy types, sources and distribution networks can help improve the security and reliability of energy supplies, mitigate the economic consequences of high oil prices and promote responsible environmental stewardship.

This effort, perhaps like no other before it, is truly international in scope and purpose. That's why the U.S. government and the State Department are deeply engaged on energy security and the environment. Looking at it from the perspective of international relations and economics, it is clear that diversification away from hydrocarbons, over the medium and long term, is vital. Technological innovations are enabling the move to clean alternatives such as renewables.

Solar, wind, geothermal and biomass energy sources are already growing significantly in the marketplace. But we need to develop these resources even faster to make them significant elements of world energy supply.  Last week the U.S. sponsored the Washington International Renewable Energy Conference to highlight the importance of renewable and alternative energy technologies to increasing America's energy security and addressing the long-term challenge of global climate change. The United States has built a credible record on renewables. Since 2001, ethanol production has quadrupled from 1.6 billion gallons to an estimated 6.4 billion gallons in 2007.

Significant research into cellulosic ethanol has led to a projected cost of the fuel to drop by more than 60 percent since 2001. This research also brings hope that sustainability issues will be satisfactorily addressed. Biodiesel production is up 80 percent from 2006, wind energy production has increased by more than 300 percent from three years ago and solar capacity has doubled in the past several years. The shift to cleaner technologies and fuel types like wind, solar or biofuel is one that needs to be hastened for the sake of the environment, as well as for the goal of diversifying energy sources

Global diplomacy: building a more secure and clean energy future

Much of this work crosses borders. It is our charge at the State Department to help open the way for governments, private companies and researchers to come together to forge a path forward towards our collective energy future. Let me give a few concrete examples of this work.

The U.S.-Brazil biofuels partnership is helping to intensify collaborative research that has the potential to speed the commercialization of the next generation of biofuels and catalyze sustainable biofuels production in countries in this hemisphere. Related to these efforts, we are developing compatible biofuels standards in the Western Hemisphere and in Europe, a necessary step for this alternative source to become a global commodity.

That is just one of numerous examples of our diplomatic effort to promote renewable energy. Significantly, President Bush has also announced a $2 billion commitment to a new Clean Technology Fund. This fund will be administered by the World Bank and is supported by Japan, the U.K. and other partners. The fund aims to bring the best available clean energy technologies to emerging markets.

Research is critical to hastening technological innovation. Since 2001, this Administration has dedicated – and the American taxpayer has invested -- $37 billion on science and technology research related to climate change, including $18 billion for the development and promotion of clean energy technology.

Emissions-free nuclear power is a key part of diversifying fuel types. International partnerships initiated or led by the United States promise to bring the benefits of clean, safe civilian nuclear power to developing countries. These partnerships will increase the security of energy supplies, allow countries to become less dependent on foreign oil and gas and limit the spread of potentially dangerous weapons technologies.

Many of these efforts are taking place multilaterally. In 2006, at the St. Petersburg summit, the Group of Eight industrialized nations – the G8 – agreed to seven principles that address energy security, investment in the energy sector, sustainable development and climate change. Then, in 2007, leaders of the G8 countries meeting in Heiligendamm, Germany asked the International Energy Agency (IEA) to assist G8 countries and others in adhering to these principles.

These principles are very much in keeping with U.S. domestic goals. They include: support for open, transparent, efficient and competitive energy markets; diversification of energy sources and routes; and environmentally sound development and use of energy. We look forward to getting national reports at the 2008 G8 summit in Tokyo, Japan in July.

In Eurasia, the United States is working with regional partners and private companies to encourage increased energy production and greater diversity in transit routes to bring these products to market.  In Asia, the United States is partnering with Asian countries through the Asia Pacific Economic Cooperation organization – known as APEC – to improve energy intensity rates, reforestation and cooperation in green technology.

The United States is engaged in a formal Strategic Economic Dialogue with China —and in broader energy dialogues with China and other emerging economies – aimed at encouraging the adoption of market friendly energy policies, the rapid uptake of clean energy technologies and a responsible approach to the development of upstream oil resources.

The United States has also launched other multilateral energy technology initiatives, such as the International Partnership for the Hydrogen Economy, which explores the advancement of hydrogen and the Carbon Sequestration Leadership Forum which works to improve the technology to capture carbon dioxide and store it safely underground in geological formations.

One of our partnerships with the most near-term greenhouse gas abatement results is the Methane to Markets Partnership, which seeks to capture and use the potent greenhouse gas, methane, as a fuel source instead of releasing it into the atmosphere.

To directly address global greenhouse gas emissions, the United States is committed to developing an environmentally effective and economically sustainable framework under the UN Framework Convention on Climate Change. At the UN Climate Conference in Bali last December, we helped forge consensus on a roadmap for these negotiations, which are scheduled to conclude by December 2009.

To contribute to and advance these negotiations, President Bush launched the Major Economies Process which brings together the top energy consuming countries of the world – developed and emerging economies – representing some 80% of the world’s energy use, economic growth and greenhouse gas emissions.

Through the Major Economies Process, we hope to build consensus among key players in a number of areas, including a shared long-term global emissions-reduction goal; national mid-term plans and goals; and cooperative technology strategies in key sectors. These are just a few of the examples of our international work in the area of energy security and its complement, the environment.

Conclusion

There is reason to be hopeful, if we continue to be proactive, unleash market forces and work for greater cooperation across borders. This work depends on sound government policy, coupled with the commitment of the private sector and the NGO community. The solutions to these problems require years of lead time. Accordingly, we are taking action today that will improve energy security and address the challenges of global warming for years to come.

We have to address in a realistic manner our continued reliance on oil, natural gas and coal and confront the political, economic and environmental challenges that presents. This will only be possible with cooperation between governments, the continued dedication of those of you gathered at this conference. Thank you for your attention and for your participation in this critically important gathering.



Released on March 13, 2008

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