Reflections on US energy challenges

A message from George P. Shultz

George P. Shultz    ·    December 14, 2011    ·    

Over the past four decades, the United States has been on an energy roller coaster that has landed us, unnecessarily, in a place that is dangerous to our economy, our national security, and our climate.

In 1959, President Eisenhower, concerned that overdependence on imported oil would be a threat to our national security, imposed a quota of 20% of consumption on imports. The Arab Oil Embargo in 1973 made his case. However, today we import 50% of the oil we use.

A native of New York, George P. Shultz graduated from Princeton University in 1942. After serving in the Marine Corps (1942–45), he earned a PhD in industrial economics at MIT. Shultz taught at MIT and the University of Chicago Graduate School of Business, where he became dean in 1962. He was appointed Secretary of Labor in 1969, director of the Office of Management and Budget in 1970, and Secretary of the Treasury in 1972. From 1974 to 1982, he was president of Bechtel Group, Inc. Shultz served as chairman of the President’s Economic Policy Advisory Board (1981–82) and Secretary of State (1982–89). He is chairman of the J.P. Morgan Chase International Council, Advisory Council chair of the Precourt Energy Efficiency Center at Stanford University, chairman of the MIT Energy Initiative External Advisory Board, and chairman of the Energy Task Force at the Hoover Institution, Stanford University. Since 1989, he has been a Distinguished Fellow at the Hoover Institution.

And causes for concern have increased. The economic impact of dependence on foreign oil has always been apparent as economic recessions have invariably followed significant oil price increases. President Eisenhower’s concern about national security has been greatly heightened in recent times because high prices have funneled large flows of revenue to regimes that do not wish us well. Further, our military clearly needs more energy produced at the point of use.

The issue of climate change has been added to our list of concerns. Recognition of the environmental risks created by greenhouse gases has heightened apprehensions about our heavy reliance on oil. And it has brought concerns about the use of coal, which produces much of our electricity, into the policy mix.

Now we have another chance to get it right – to construct an energy policy that meets these issues in a comprehensive way.

Along multiple dimensions, the energy industry is almost unfathomably large. Reasonable estimates indicate that demand for energy may well grow by about 35% or so by 2030. Scalability, an important attribute for any new energy development, can apply to something big, but also to something small that is readily replicable. Over time, significant change is clearly possible. Energy intensity – energy consumed per dollar of GDP – has declined by about 1% per year over the past 200 years, but in response to the oil-price shocks of the 1970s, the rate of decline in energy intensity has nearly tripled.

An effective effort to reduce carbon dioxide (CO2) emissions or reduce revenues to oil-producing countries must include the developing world. The challenge is that China, India, and other developing countries see limits on CO2 emissions as limits on economic growth, and, understandably, they will not accept such limits. Efforts to reduce oil consumption and CO2emissions must be cost-effective if they are to be adopted in the developing world. Over the long run, technology can have a great impact. Cost-effective technology will naturally be adopted by market forces, without government subsidy, on a global basis. Research into cost-effective conservation measures and clean energy therefore has the potential for significant payoffs.

Energy is a large and critical component of the economy. Getting energy policy wrong and adopting unnecessarily costly, economically inefficient policies will have a significant negative impact on our standard of living. This means that continued efforts to find and develop new sources of oil and gas are essential. And, insofar as the United States is concerned, efforts should be made to develop our own reserves, consistent with proper environmental standards.

Policy options

The United States should use policies to set conditions for the market that maximize the possibility of desirable results. The marketplace has long demonstrated its superior ability to sort out low-cost, high-quality providers of energy and other commodities, so policies should be designed to promote the operation of the market and fight against the effectiveness of anticompetitive forces such as OPEC.

At the same time, the marketplace by itself does not take into account important considerations such as the costs of pollution and climate change. These costs should be assessed in such a way that the market recognizes them. The problems of national security that arise from unreliable energy sources are an externality to the market, so ways must be devised to deal with these problems. Also, the market does not usually support basic research because market participants cannot firmly capture the benefits of the research. Commercial development, of course, is another matter. So non-market sources of support for basic research are needed, and the subtleties of interaction between research and development should be understood – and fruitful means identified – to ease that transition.

Two of these policy areas, supporting basic research and establishing a price for carbon, require more detailed consideration.

Supporting basic research on energy generously and on a sustained basis

An essential attribute when considering energy issues is the ability to think long and to think creatively. We need an energy policy that capitalizes on the traditional American strengths of ingenuity and innovation. Inventive juices, once released, will yield important contributions to solving our energy issues.

Immediate results are desirable wherever possible, but real game-changers will take some time to emerge and develop. They will most likely result from a heavy emphasis on basic scientific research related to energy.

Government and private foundations need to take primary responsibility for generous and sustained funding of basic research, which is probably the most important undertaking of any prospective energy policy. Recent efforts by major corporations that have joined together to sponsor basic research demonstrate that they understand ts fundamental importance. Sustained corporate, foundation, and government support will be an essential source of the game-changing innovations that almost surely lie in our future. MITEI stands as a key effort in the search for game-changers. During MITEI’s first five years, I have had the privilege of seeing scientists and engineers at MIT make dramatic progress. The work must continue so that we can get off the roller coaster and find ways to support our national security, economic, and environmental objectives.

A version of this article appeared in print on November 19, 2011, on pages 4 and 5 of the Autumn 2011: Energy Futures magazine with the headline: A message from George P. Shultz: Reflections on US energy challenges.

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