PETROLEUM INDUSTRY LEADER urges better understanding by elected officials and public
16 January 2008
Red Cavaney
Red Cavaney, president and chief executive officer of the American Petroleum Institute (API), today called for better understanding of the energy industry by elected officials and the public.
Cavaney prepared the remarks for the Fourth Annual United Energy Association (USEA) hosted at the Washington, DC Press Club.
Complete remarks follow:
I am honored to be included in this 4th Annual USEA State of the Energy Industry Forum. This Forum has become the indispensable introduction to the energy year here in Washington, and Barry Worthington and his colleagues deserve great credit for this development.
API represents an industry employing one and a half million Americans who work 24/7 to ensure that U.S. consumers have the energy they need to continue to improve their quality of life, to further enhance U.S. job creation and to keep our economy growing. These companies are owned by tens of millions of Americans, who have invested their hard-earned savings on the expectation of a reasonable return on their investment risk.
I’d like to share with you some thoughts about our industry and the role of oil and natural gas, both today and in coming decades. I’ll begin with crude oil prices and their impact on gasoline prices.
There are a number of fundamental factors that are contributing to the run-up in crude oil prices. These include: strong global oil demand; tight spare production capacity; rising geopolitical tensions; falling U.S. crude oil inventories; a weak U.S. dollar; domestic strife in Nigeria that has lowered production; and declines in worldwide production. According to the U.S. Energy Information Administration (EIA), the cost of the raw material used to produce gasoline - crude oil - alone makes up 68 percent of gasoline’s retail pump price.
Crude oil and gasoline prices underscore a major obstacle to addressing our nation’s energy challenges: the public’s lack of understanding about energy, particularly oil and natural gas. People are understandably concerned about energy prices. Unfortunately, however, they do not understand that price volatility is actually a symptom of the energy problems confronting our nation. We have massive energy resources here in the United States and worldwide; we have a wealth of energy information and analysis; and we have a wide array of energy studies and research. What we don’t have is public awareness and opinion-leader understanding of the need for energy and what it takes to find, develop and deliver affordable fuels reliably to customers.
Our challenge is to do more than just produce enough oil and natural gas to meet ever-growing demand. We must also educate people on the energy realities we face. Elected and appointed government officials and public opinion leaders have a responsibility as well. They need to fully understand the field over which they have legislative, regulatory or public policy oversight before weighing in. Uninformed actions, regardless of intent, can do more harm than good in a long lead-time business.
API has been fully aware of the public’s lack of knowledge regarding energy for some time. In trying to validate such, we asked the public-opinion research firm of Harris Interactive to undertake a comprehensive survey to measure the public’s “Energy IQ.” The findings confirmed our instincts: most U.S. adults have a fundamental lack of knowledge regarding energy supply and demand, particularly the role of America’s oil and natural gas companies. In fact, when presented with 20 multiple choice questions, on average, more than 25 percent of the respondents said they were “not sure” of the answer. In many cases, people chose the response farthest from the correct answer.
Let me cite several examples:
– Only eight percent correctly said that less than 15 percent of the oil the U.S. consumes is imported from Persian Gulf countries; just over one-quarter of the respondents thought the figure was between 46 and 60 percent;
– When asked which country was the largest supplier of oil to the U.S., nearly 60 percent chose Saudi Arabia. Only one in 10 people correctly identified Canada as the largest supplier to the U.S.; and
– On technology, only 7 percent correctly estimated that U.S. oil and natural gas companies invested nearly $100 billion in emerging energy technologies in North America alone between 2000 and 2005. More than one-third estimated less than $25 billion, the lowest possible choice.
Clearly, our industry has its educational work cut out for itself. Despite repeated entreaties for well over a decade by the energy industry, the federal government has not been as committed to informing the American public about our nation’s energy challenges, as has EPA in informing the public about its environmental challenges. Absent an educational campaign by government, API has embarked on a broad-based educational advocacy effort to inform people about the basic facts regarding the energy challenges we face. I hope you have seen evidence of some of our work. We recognize we have a long educational journey ahead, but we are pleased with the early results.
Concern about crude oil and gasoline prices underscores the link between energy and the economy. Anyone who thinks we can continue to grow our economy without an increased energy supply understands neither the economy nor energy. Most energy analysts agree that sustaining even modest economic growth worldwide for the next several decades will require massive new investments in oil and natural gas.
Recent forecasts by the U.S. Department of Energy estimate that sustaining a 4.1 percent rate of annual growth in the global economy to 2030 will require an expansion of 35 million barrels per day in global oil supplies. That’s an increase of 42 percent. The growth in demand for natural gas worldwide is expected to be even larger, increasing by 64 percent by 2030. The EIA also projects that the U.S. will consume 19 percent more oil and 7 percent more natural gas in 2030 than was consumed in 2006.
These realities are underscored by the National Petroleum Council’s (NPC) recent report, Facing the Hard Truths About Energy, which provides a comprehensive view of the role of oil and natural gas through 2030. The NPC is an oil and natural gas advisory committee to the Secretary of Energy.
The NPC points out that, as prosperity and income rise, so does demand for energy. It notes that, in the years to 2030, GDP is projected to double, with the greatest growth occurring in developing countries, particularly in the Asia-Pacific region. The NPC cites projections of a 50-to-60 percent increase in world energy demand from 2005 to 2030. It says that very soon, and for the first time in history, energy demand in the developing world will exceed that of the developed countries of Europe and North America.
The NPC found that, although the share of non-fossil fuels is growing rapidly, fossil fuels — oil, natural gas and coal – will continue to play the leading roles through 2030. To quote the NPC, fossil fuels “are indispensable to satisfy demand, as global prosperity and incomes increase.”
To meet the continued, growing demand for oil and natural gas, our industry has been heavily investing. New investment in 2006 reached more than $174 billion – a 29 percent increase over the prior year. Reinvestment between 1992 and 2006 is equally impressive. During that period, the U.S. oil and natural gas industry invested more than $1.25 trillion on a total net income base of $900 billion – that’s an unprecedented reinvestment rate of 139 percent.
Our industry is making record investments in U.S. refineries, expanding their capacity and investing nearly $50 billion from 1996 to 2005, largely to produce cleaner gasoline and diesel fuels. According to the EIA, current expansion plans will boost domestic refining capacity by one million barrels per day between now and 2012, the equivalent of five new refineries.
When it comes to energy, the bottom line is clear — society needs all the economically viable, market-driven energy it can produce. We cannot afford to take any one energy source off the table, or punitively tax another, in order to grow yet another source. Such was proposed in Congress last year but reason prevailed, and punitive taxes on our industry were rejected. I’m hopeful this signals that our nation is learning from the pains of the energy policy mistakes of the 1970s and early ‘80s, when a punitive windfall profits tax resulted in dramatically less domestic oil production and huge increases in oil imports.
To understand the energy industry, generally, and oil and gas, specifically, one must recognize it as an industry characterized by long lead times, massive capital requirements and returns realized only decades later in the face of very real investment risks. Significant oil and gas discoveries that are announced today often result from investments begun by companies as far back as a decade or more ago. Planning and investment cannot be turned on and off like a spigot, without entailing huge, potentially non-recoverable costs and delaying urgently needed projects.
Because the industry must plan and operate under these long lead times, it is hyper-sensitive to minimizing risk over the course of its investments. It should not be surprising for an industry that must manage such huge risks to expect that government will provide an energy policy framework that is responsive to – and not at odds with – this risk-management exposure.
It is also important to understand how the energy world has changed. Forty years ago, world oil reserves were largely the domain of the investor-owned, international oil companies, based principally in the United States. Most people today assume that international oil companies are little changed from decades ago, still sitting astride the bulk of these world oil reserves. However, that’s no longer the case. Today, world oil reserves are 80 percent owned by the national oil companies of foreign governments, many formed during the past 30 years. Only 6 percent of world-wide oil reserves are now held by investor-owned oil companies.
To quote a recent story in The Wall Street Journal:
“Thanks to several years of high prices, government-controlled oil companies have the financial muscle to bankroll their own projects. … As the state-owned giants grow more confident and self-sufficient, they have begun to compete aggressively for resources beyond their borders. Last year, Libya put some potentially oil-rich acreage out for bids. While Exxon Mobil won some of it, so too did state-controlled oil companies from Russia, India and China. More than their bank accounts, national oil companies’ strength stems from their control of resources. Exxon Mobil, with a market capitalization of around $500 billion, is one of the largest and most successful publicly traded companies ever. But there are 12 state-controlled oil companies, such as Saudi Aramco and PetroChina Co., that control more oil reserves.”
Faced with such competition, the investor-owned oil companies have scaled up within this new world — principally through mergers and acquisitions — by creating ever larger efficiencies, greater technological and project management prowess, and substantially broader competitive access to capital markets.
In this changed energy world, our nation’s energy security requires policies that do not disadvantage the investor-owned oil companies, rather enables them to be competitive in the global marketplace. Our nation needs policies that promote greater supplies of oil and natural gas, not policies that hinder our industry’s ability to provide American consumers the energy they demand and need. We have abundant volumes of oil and natural gas resources beneath federal lands and coastal waters, but the bulk of these resources have been placed off-limits to development.
For example, according to federal government estimates, there is enough oil in these areas to power more than 60 million cars and heat more than 25 million homes for 60 years. And, there is enough natural gas to heat an additional 60 million homes for another 160 years. However, more than 85 percent of the coastal waters adjacent to the lower-48 states, that extend up to 200 miles from our shores, are off-limits to oil and natural gas exploration. And, 75 percent of the most prospective, technically available U.S. onshore areas are off-limits or accessible only with significant restrictions.
Revolutionary advances in technology in recent years have dramatically increased the ability of companies to find and produce oil and natural gas and, of particular importance, to recover more from existing reservoirs. However, restricted access to oil fields, both in the U.S. and overseas, and spiraling costs impede efforts to increase production through advanced technology.
Few industries have relied so heavily on state-of-the-art technology as has the oil and natural gas industry for its operations, improved environmental safeguards and competitiveness. The intensive use of the latest, most advanced technology has transformed this century-and-a-half old industry into an innovative, visionary, and highly efficient new industry.
The industry has developed breakthrough technologies to help us find, develop and deliver energy. For example, we now have 4-Dimensional Imaging, which helps us better locate oil underground. Imagine a geoscientist watching multiple data screens of 3D visuals revealing exactly what exists below the earth’s surface – like stepping into the earth and seeing specific rock strata: sandstone, limestone, and salt domes, along with oil. Time being the fourth dimension, we can take snapshots of those underground reservoirs over time and overlay the pictures to see in which direction the oil is moving. That’s how we find oil today. It’s non-invasive and more environmentally-compatible than ever.
What is needed today are policy choices to increase, not decrease, energy production. Barriers to oil and natural gas production only contribute to volatile energy prices, slower economic growth, and lost American jobs. An economic study undertaken for API last year by CRA International found that nearly 5 million jobs could have been lost by the year 2030 had harmful energy proposals in Congress been enacted. Fortunately, most of these proposals did not survive. However, they remain very real threats this year in Congress – particularly punitive taxes.
Our nation’s past history is replete with short-term energy “fixes” and searches for “silver bullets” to solve our nation’s energy problems. Price controls, allocation schemes, limitations on natural gas, picking winners and losers among fuels, and punitive taxes have all been tried by government – and none have worked to benefit the consumer.
We should learn from the past – and take some positive steps to ensure we meet America’s energy needs in the decades ahead. As a society, we cannot remain passive to energy, nor to the environment, nor to economic growth. Each will fall short of its fullest promise, absent constructive industry/government partnerships committed to providing our nation with a workable energy security policy.
What we need is a public policy framework to ensure future energy security for our nation. We need elected and appointed officials who understand the energy challenges we face. We need a greater commitment to increased energy efficiency. We need to diversify our energy resources, drawing upon the full range of energy sources, including alternatives. We also need to increase and diversify our oil and natural gas supplies, both within this country and abroad. And, we need to enhance energy technologies, remaining on the cutting edge of advanced technology. We need to get it right on energy. Too much is at stake for our nation to do otherwise.
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