Over 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.
The first oil well was drilled in America in 1859 by Edwin Drake. From that time, the United States has always been a leading petroleum producer. It might surprise many Americans that the United States supplied more than 85% of the oil for the Allied armies during World War II.
Based on the hand wringing over energy policy of the past 40 years, one would think the United States is running out of energy. The facts are: the United States is the largest natural gas producer, the second largest coal producer, the number three oil producer, and the largest geothermal energy producer in the WORLD!
In addition to the actual energy produced in the United States, we are leaders in energy technology. This technology capability has been instrumental in continuing to grow our energy supply, both the actual 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 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.
It is difficult to find a precedent for this type of change in U.S. energy outlooks. Clearly, we are in an era of abundance in natural gas resources while also having growing oil production.
In energy, there is always a close linkage between abundance and innovation. Current estimates of production are based on technically recoverable resources, so as technology improves, a greater amount of the resource can be produced. Technology doesn’t just involve production capability, but also how we use energy. To illustrate this, in May 1857, Scientific American stated:
“We believe that no particular use is made of the fluid petroleum, from the ‘tar springs’ of California, except as a lotion for bruises and rheumatic affections. It has a pungent odor, and although it can be made to burn with a pretty good light, its smell is offensive.”
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.
Viewing the United States and the world through the lens of abundance, we can craft an energy policy that allows business and entrepreneurs to discover the technologies that will add value and transform our society—raising standards of living around the world. To accomplish that, we need an energy policy that maximizes the value of our resources today and enables innovation to prosper.
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 solar. When market forces have been allowed to work, high prices and perceived shortages have been turned into surpluses and abundance. Relying on markets as a key energy policy principle will result in the highest value for the country and individuals. The value for Americans is realized by maximizing the value of the nation’s resources, avoiding imprudent expenditures of taxpayer dollars, and providing consumers with the lowest energy cost.
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 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 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 based practices, rather than prescriptive requirements.
4) Communicate in factual and informative terms 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 institutions, also has a unique role to advance the science and engineering that provides the foundation for future 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 government has changed course or been unable to meet multiyear research funding commitments is not effective for accomplishing research goals or serving as a reliable partner with universities and institutions. Research should not be an avenue for short-term political objectives. For effective energy policy, research goals should be looking ten or more years in the future and have the resource stability to fulfill those goals.
The five principles of the outlined national energy strategy are not a policy that advocates the development of a specific energy source. If the country follows these principles, we will maximize the value of our resource 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.