Our energy wealth – past and future decades of bounty!

mEMOS TO THE FUTURE

BUsiness Horizon Quarterly

OUR ENERGY WEALTH –

PAST AND FUTURE DECADES OF BOUNTY! Energy Policy in an Era of Abundance

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ver the past few years new oil and natural gas discoveries have been made in places like Ohio, Pennsylvania, and North Dakota. In just a few years, North Dakota has become the second largest oil producing state in the United States, behind only Texas. Pennsylvania is becoming a leading natural gas

producing state. What does this mean for U.S. energy policy?

For nearly 40 years, U.S. energy policy has been contemplated in an atmosphere of scarcity. Fear of rising energy costs. Fear of relying on imported oil. Fear of running out of energy. Policy created in an air of fear, shortage, and scarcity is an atmosphere that limits options. We have created a lottery energy policy mentality seeking the next big payoff, the silver bullet.

That is not the history of our country. We are a country of abundance. Natural abundance endowed by our creator and abundance enabled through innovation, such as the current shale oil and gas revolution. Perhaps the greatest opportunity offered by recent shale oil and gas production is that we can envision our future from the prism of wealth, plenty, and abundance. Energy policy developed in an atmosphere of abundance is developed on optimism, growth, and a bountiful future.

!"#$#B U S I N E S S H O R I Z O N Q U A R T E R L Y // F A L L 2 0 1 2

!"!#$% The first oil well was drilled in America in 1859 by

It is difficult to find a precedent for this type of

Edwin Drake. From that time, the United States has

change in U.S. energy outlooks. Clearly, we are in an era

always been a leading petroleum producer. It might

of abundance in natural gas resources while also having

surprise many Americans that the United States supplied

growing oil production.

more than 85% of the oil for the Allied armies during World War II. Based on the hand wringing over energy policy of

In energy, there is always a close linkage between abundance and innovation. Current estimates of production are based on technically recoverable resources,

the past 40 years, one would think the United States is

so as technology improves, a greater amount of the

running out of energy. The facts are: the United States is

resource can be produced. Technology doesn’t just involve

the largest natural gas producer, the second largest coal

production capability, but also how we use energy. To

producer, the number three oil producer, and the largest

illustrate this, in May 1857, Scientific American stated:

geothermal energy producer in the WORLD! In addition to the actual energy produced in the

“We believe that no particular use is made of the fluid petroleum, from the ‘tar springs’ of California, except

United States, we are leaders in energy technology.

as a lotion for bruises and rheumatic affections. It has

This technology capability has been instrumental in

a pungent odor, and although it can be made to burn

continuing to grow our energy supply, both the actual

with a pretty good light, its smell is offensive.”

volume of energy and the improvements in efficiency which allow us to gain more productive capacity from every BTU of energy.

There have been many times when our society has been concerned that we would be able to meet our energy needs. Every time, when markets were allowed to work, innovation and new technology unlocked

Energy policy developed in an atmosphere of abundance, and has developed on optimism, growth, and a bountiful future.

new energy production. The latest such technology breakthrough has been the oil and gas production from shale, which applied the technology innovations of horizontal drilling with multi-stage hydraulic fracturing.

To illustrate the magnitude of this impact, we only need to look at five years of energy projections from the Energy Information Administration (EIA). In 2007, EIA projected that by 2030, the United States would be importing more than 20% of our natural gas supplies.

In 2012, EIA is now projecting that by 2022, the United States will be a net natural gas exporter.

Two years after this assessment, Edwin Drake successfully drilled the first well in Titusville, Pennsylvania. For the first 50 years or so of oil production, the primary use was for lighting. Henry Ford’s mass production of cars and Thomas Edison’s innovation with electric lighting changed the direction and use of oil for the next 100 years—innovations that had nothing to do with oil production.

We don’t know what the next innovations will be that will change our history or dramatically alter energy use.

// E N E R G Y P O L I C Y I N A N E R A O F A B U N D A N C E !"!#$

mEMOS TO THE FUTURE

BUsiness Horizon Quarterly

Viewing the United States and the world through

solar. When market forces have been allowed to work,

the lens of abundance, we can craft an energy policy

high prices and perceived shortages have been turned into

that allows business and entrepreneurs to discover the

surpluses and abundance. Relying on markets as a key

technologies that will add value and transform our society—

energy policy principle will result in the highest value for

raising standards of living around the world. To accomplish

the country and individuals. The value for Americans is

that, we need an energy policy that maximizes the value of

realized by maximizing the value of the nation’s resources,

our resources today and enables innovation to prosper.

avoiding imprudent expenditures of taxpayer dollars, and providing consumers with the lowest energy cost.

The complexity of the global energy market and the inability to predict technology advances or even transformations requires a reliance on markets to make investment decisions.

2) Straightforward and consistent tax policy; no preferential or punitive treatment Energy investment decisions are complex and have very long time frames. New energy developments and energy facilities typically have lead times of five to ten years and a life expectancy of 20 years or more. A decision today impacts corporate finances for up to 30

The energy policy to lead the United States to abundance must be based on a stable foundation. This foundation can best be achieved by establishing a set of principles which can be applied universally, regardless of the type or source of energy. This will result in maximizing the value of our current energy sources and allowing the market to develop energy technology that adds future value to society. The core government principles for energy policy are: 1) Trust the market, maximize value for Americans The complexity of the global energy market and the inability to predict technology advances or even transformations requires a reliance on markets to make investment decisions. The government must avoid preferential treatment of any energy source or the desire to choose winners. Over the past 40 years there are many examples of failed government decisions to support uneconomic energy projects from coal gasification to

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years. To ensure investments are made in all aspects of the energy value chain, from research to exploration/testing to operation, the nation’s tax and fiscal policy must be clear and consistent. Difficult to interpret, preferential or uncertain tax policy is a key inhibitor to investment throughout the energy industry. Tax policy that is designed to encourage one form of energy over another creates unintended consequences and results in inefficiencies.

3) Clear and transparent regulatory policy and processes Stewardship of our environment and protection of public health and safety are essential. Regulations are required to ensure this goal. It is in the interest of the government, industry, and citizens that regulation be accomplished efficiently, without duplication or unnecessary burdens. Unnecessary requirements not only increase costs for consumers, but also allocate resources away from higher threats. Unnecessary regulations also discourage, slow, or limit investment; increasing the

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costs of future energy. Two important practices to ensure regulations are effective and efficient are implementing regulations at a state/region level and use of performance

Conclusion The five principles of the outlined national energy

based practices, rather than prescriptive requirements.

strategy are not a policy that advocates the development

4) Communicate in factual and informative terms

principles, we will maximize the value of our resource

with the public The government has a role to be an honest broker of information. Too many times, interest groups have their objectives represented by government. Government’s role is to be objective, honest, and fact based. This also requires listening to the public and helping understand the real issues underlying concerns. Facts need to outweigh rhetoric to understand the realities and potential of what can be achieved through energy development and distribution, as well as the risks these operations pose.

Only then can effective and informed decisions be made.

5) Invest in long term research, not short term applied research The U.S. government has a fundamental role in long term research whereas companies need to focus on applied research with near term commercial opportunities.

Government, in partnership with universities and research

of a specific energy source. If the country follows these endowment that we as Americans possess. Removing the focus on which energy sources are better or preferred will benefit businesses and consumers. Using an approach of fundamental principles for developing our energy policy will enable the country and our citizens to re-establish key priorities for our future. We are a country with a very rich resource endowment and an unmatched capacity for innovation. We should carry that abundance, opportunity, and optimism into our energy policy.

By doing so, we will produce more oil, gas, coal, and other energy sources. We will also create a consistent, stable, and predictable investment environment resulting in alternative energy technologies that we have not yet imagined. In the near term our nation will produce more energy and lower consumer energy costs. This means more competitive U.S. industries; improved energy security; and more jobs and greater economic growth to power another American century. Q

institutions, also has a unique role to advance the science

James Slutz is a Fellow at the National Chamber

and engineering that provides the foundation for future

Foundation and is the President and Managing

breakthroughs. Research planning should be done with a long-term perspective and the government should commit to the term of the research. Cases where the

Director of Global Energy Strategies LLC, focusing on energy project development and technology commercialization, primarily with oil and gas environmental applications. He serves on the

government has changed course or been unable to meet

Advisory Boards of Hart Energy Publishing, the Canada Institute

multiyear research funding commitments is not effective

of the Woodrow Wilson International Centre for Scholars, and the

for accomplishing research goals or serving as a reliable partner with universities and institutions. Research should

University of Southern California’s Center for Geothermal Studies.

Slutz is also a Distinguished Associate of FACTS Global Energy. Prior to founding Global Energy Strategies, Slutz served in roles as the

not be an avenue for short-term political objectives. For

Assistant Secretary of Energy in the United States as well as as the

effective energy policy, research goals should be looking

Indiana Oil and Gas Director. Read his full biography on page 62.

ten or more years in the future and have the resource stability to fulfill those goals.

// E N E R G Y P O L I C Y I N A N E R A O F A B U N D A N C E !"!#$