 Good morning, we're going to start now. My name is Steve Levine, I'm a Schwartz fellow here at the New America Foundation. Future Tense is a collaboration of New America Slate Magazine and Arizona State University. Our goal in this series of events is to explore very large questions and how technology might or might not impact them. If you look at Slate this morning, you'll see a terrific series of articles digging down into today's topic. We're here today to look at one of the most important topics of all, which is how we're going to power our lifestyles, our businesses, and our economies. Our aim is to cut through the fog of politics and ideology, and our aim is to start without any preconceived notions and to explore the following question. What energy technology, if any, is going to be scaling up and challenging the towering economics of fossil fuels in the year 2030? We've got an excellent cross-cutting group of experts to dissect it. Today's event is being webcast live, so everything is on the record. If you wish to speak up, please wait for the microphone, identify yourself, and be concise. Now I'd like to introduce Bruce Everett. We're lucky to have someone of Bruce's stature as the leadoff speaker. Bruce is an associate professor at the Fletcher School at Tufts University. He teaches petroleum in the global economy. Before that he was at Exxon for 22 years, 12 of those years as an executive, one of his positions was he was Exxon's natural gas manager for the Middle East, Africa, and Latin America, and he also was vice president for Qatar. After Bruce speaks, he's going to sit down for a conversation with Steve Call, the president of New America. Bruce? Okay. Thank you. Delighted to be here this morning. I have been working in the energy industry for about 40 years now, and it continues to amaze me that we always want to ask the wrong questions. One question that gets asked more than any to my experience is, how do we get rid of oil? It seems to me before we ask that question we ought to ask the question, why do we want to get rid of oil? Let's see. There we go. The internal combustion engine fueled by oil is the only affordable high-performance form of transportation we have today. Now, there are a number of reasons for this. One is that it's inexpensive. Another one that people have talked a lot about lately is the concept of energy density, which is how much energy can you actually carry around in the tank of your vehicle? If you really want to understand the concept of energy density, have a piece of the chocolate cake we had at Smith and Walensky's at the dinner last night. As you can see, oil has a very high energy density, much better than alcohols, compressed natural gas, hydrogen, or on the right-hand side of this, which we can't see, batteries. There we go. Okay. Now, it's pretty clear that oil and the internal combustion engine are going to dominate transportation until one of two things happens. Either something better comes along and it very well might. I am a technological optimist. This is likely to happen. When it happens, we should embrace it, or alternatively, when we decide to limit oil use by policy, which is what people seem to want to do. Now I guess my question is, why do we actually want to do that? Now, traditionally, there are four arguments that get offered in terms of the urgency of getting rid of oil, and they come and go over time and disappear and come back again. The first one is that we're running out of oil. There's a resource limitation. We've got to manage this transition. Now here's a little interesting arithmetic. In 1980, we had proved reserves of conventional oil of 667 billion barrels, or about 29 years of production. Since then, we've consumed 727 billion barrels. How much do we have left? Just do a little mental arithmetic. The answer is we have twice as much as when we started in 1980. How is that possible? The answer is that we tend to focus too much on proved reserves, which is a very conservative estimate of the oil fields that we're actually producing today. If we step back and look at the overall oil resource base and the hydrocarbon resource base, we can see that it's huge. In the next 50 years, we'll probably consume somewhere between five and 10 trillion barrels of fossil fuels, and we have lots of molecules out there. We have not only conventional oil and natural gas. We have heavy oil. We have coal. We have shale. We have methane hydrates. What we've done over the last 150 years is, as oil prices go up, we bring in other parts of that resource base. We go offshore. We go deep offshore. We go up to the Canadian tar sands. Now, I'm not saying that developing these molecules doesn't involve economic, technical, and environmental problems. It does. What I am saying is that lack of molecules is not our problem. In fact, resource extraction is a race between depletion, which shrinks the resource base, and technology, which expands the resource base. Technology can win this race over very long periods of time. In the oil industry, technology has been winning for 150 years. In the copper business, technology has been winning for over 3,000 years. Argument number two is that the environmental damage is unacceptable. I can recall during the 1960s and early 1970s people saying, we are going to choke to death on smog if we don't stop driving our cars. We are all going to die. Now, if we take a look at what's happened, in the U.S., sulfur dioxide down 76%, carbon monoxide down 80%, lead down 93%. We have done a very, very fine job with some good work by Congress and the EPA dealing with these local air quality problems. And today, air pollution correlates with poverty, not oil use. The big polluted cities of the world today are not L.A. and London. It's Mumbai, Beijing, Sao Paulo, Mexico City, and Jakarta. Now, local air pollution is one thing, but of course, we've gotten concerned about a different part of this problem now, which is carbon dioxide emissions. And regardless of what you believe about this problem, the one characteristic of carbon emissions is that it doesn't matter where it comes from. It doesn't matter whether it comes from the United States or China or any place. What goes up into the atmosphere stays in the atmosphere. Now this chart shows the Energy Information Administration's projection of global CO2 emissions from energy use in the year 2035, 43 billion metric tons. And you can see a couple of things right away. First oil is a relatively modest part of the problem compared to, say, coal. And secondly, the U.S. and Europe are a relatively small part of the problem compared to China, India, and the rest of the world. So in fact, if we were to engineer a 20% cut in U.S. oil use, which would be expensive and painful, that would reduce global carbon emissions by 1%. We can't even measure global carbon emissions with that kind of accuracy. In fact, it doesn't matter very much what these people do. It only matters what the people on the right do. There was an article in Sunday's New York Times bemoaning the fact that everybody in the world is working on climate change except the United States, which is not. Ladies and gentlemen, I would submit to you that that's not true. The Europeans have certainly done a lot of things with carbon trading, carbon taxes, renewable portfolio standards, all kinds of things that they've done. What they haven't done is reduce the carbon emissions. And the reductions that have occurred have occurred through the only tool that has been effective so far, which is prolonged recession. Argument number three is that oil consumption undermines national security. Eight consecutive presidents of both parties called for energy independence. If we have that kind of bipartisan support, why are we still importing oil? Well, first of all, there's no economically viable alternative. But secondly, and I think more importantly, the US economy is critically dependent on a secure international trade system. And oil is an essential part of global trade, which the US has to protect. If we go back in our history 200 years, and we look at Thomas Jefferson's dilemma. During the Napoleonic Wars, Britain and France were impeding our trade. Napoleon said, you can't trade with the British. The British said, you can't trade with France. Both countries were taking our ships, impressing our sailors, it was really bad. President Jefferson said, we need to be independent. So he asked Congress to pass the Trade Embargo Act, which basically said the states can only trade with each other, no international trade, solve the problem. Now what happened was an economic disaster. And very shortly, Jefferson realized the United States has no choice but to engage in the world, and Congress repealed the act. The result of that, by the way, was a substantial increase in the US defense budget. Now, this is a famous picture, February 1945 on the cruiser USS Quincy, of FDR and Saudi King Ibn Saud establishing formally the US security relationship. Now, it's interesting to note that this security relationship was established before the US became an oil importer. FDR realized that even if the United States doesn't need oil, everybody else does. And if the global economy is going to be both stable and prosperous, somebody is going to have to protect the Middle East and the oil flows that come from it. In fact, as the only global military power, the US must secure the Middle East and world oil trade. Whether or not we import any oil, the idea that we can free up our foreign policy by stopping imports of oil, I think is simply not true. The last argument is, well, yeah, okay, oil is better than everything else, but doesn't have to be, we'll just create something better. We keep falling in love with one technology after another, but the relationships just never last. I remember in the 1970s, under the Ford administration, we were going to have commercial fusion power by the year 2000. It was going to solve all our problems. And all we had to do was get from the 1970s to the year 2000. Well, it didn't quite work out. We had a fling with synthetic fuels made from coal, natural gas. Way too expensive, way too environmentally intrusive. That went out in the early 1980s. We actually married corn ethanol before we discovered that it was a terrible, terrible spouse. It raises our fuel prices. It raises our food prices. It does nothing for the environment and limits the range of our cars. But if we're going to get rid of this, it's going to be a messy and expensive divorce because the farmers love it. President Bush II loved the freedom car, hydrogen fuel cells. This was going to be the answer. Turns out that the market for $100,000 vehicles using $20 a gallon fuel is quite limited. Now, here's our latest fling, the electric car. We are in love with the electric car and this time it's going to last. If you look at the Nissan Leaf, which is a pure electric car, it's not a hybrid compared to a Nissan Versa, which is an almost identical car. Let's just take a look for a second at the energy storage systems for these vehicles. Nissan Versa uses gasoline, has a gas tank. Nissan Leaf uses a lithium ion battery. The Nissan Versa can store 13.2 gallons of gasoline. The Nissan Leaf can store two-thirds of a gallon of gasoline, the thing that's an efficient car. And the fuel tank for the Nissan Versa, without any gasoline in it, cost $200. The fuel tank for the Leaf cost $18,000. Now, that may come down and there'll be other speakers who'll talk about this today. But if that's the case, what is that vehicle doing in the marketplace today? What we hear about is, well, look at all the money you can save. You can save over $1,000 a year if you buy a Nissan Leaf. Every consumer's got to love that. Well, look at the price tag, okay? The Nissan Versa, the entire car, costs about as much as the battery costs for the Nissan Leaf. And we don't know that Nissan is covering its costs by selling the vehicles at that price. If you take out a car loan at 5.5% for five years, you're gonna end up paying a whole lot more for the Nissan Leaf than you are for the Versa, even though the fuel costs less. And look at the range, okay? The EPA plugs it, pegs it at 73 miles. You'd be lucky to get that if you run your air conditioner and your headlights and your music system. This is not going to be an acceptable vehicle for most people. Now, last February, that's eight months ago, the DOE estimated 2011 Nissan Leaf sales of $25,000. That would require you to sell just under $2,100 per month. Here's what we've got so far. We're on track for about half that. And this is our pattern. Over promise, under deliver, forget about it and move on. We also have this. You'd like to test one of these. Go down to 10th and K, Tesla Roadster, $109,000 and you get $7,500 tax credit for that. We had cash for clunkers. Now we have toys for the rich, okay? Great federal program. The point I'm making here, folks, is that we focus too much on technical progress and some technologies achieve technical but not commercial viability. We've all heard the Apollo analogy. If we can send a man to the moon, we can do anything. But sending a man to the moon required $150 billion of effort, and what did we get out of it, okay? A wonderful technical achievement. How many people here have been in space? Okay, last year the United States produced 12 million cars and trucks. We produced 1,000 civilian helicopters. How many people here own a helicopter? Okay, how many people here flew here on a supersonic aircraft? How many supersonic aircraft are currently in commercial service? None, okay? We keep putting the cart before the horse, okay? We force the technology into the market, throw billions of dollars at it, and then see if we like it. Do you remember the great musical Guys and Dolls that has a song, Marry the Guy Today, Changes Ways Tomorrow? Not good advice. Seems to me, seems to me, we ought to make sure these technologies work. We have to recognize the central role of transportation in our economy and our society. What we don't wanna do is end up agreeing with the Duke of Wellington, the great hero of Waterloo, who didn't like railroads because he said they will only encourage the common people to move about needlessly. Well, guess what? The common people like to move about and they don't consider it needless. So this, in my judgment, is why oil is gonna be with us for some time to come. Thank you very much. All, and we're just here for 15 minutes. This is a very fast moving day and I'm gonna do my part to keep it moving. I added five minutes to my time. You teach these ideas at Tufts University? I do. You must be used to some resistance. Well, actually, Stephen Fairness, what I try to teach my students to do is look at the problems analytically. I don't try to make sure that they adopt my views of the problem. So I wanted to use my time to do two things. One was to talk about the arguments that you made because I thought it was a terrific, lively and highly credible sort of Supreme Court brief for the defense of oil. But of the four arguments you made, I kind of wanted to go to number three where I thought if I were on the other side of that argument, I would have bore in a little bit hard on some of the things you left out rather than the things you had in. But before we go to the argument itself, I wanna pull a string on you a little bit, which is a lot of today is about looking forward. There are a lot of common forecasts about transportation fuel use, alternative scenarios out to 2030. We've adopted the 2030 kind of target just because it's common. ExxonMobil forecasts to 2030 these days, the National Petroleum Council has done similar exercises of all the majors essentially have similar targets. And when you look at the curve of transportation fuel use that all of their economists, forecasters, technology analysts lay out, they more or less adopt the view that oil is gonna be a robust part of transportation fuels in 2030, almost no matter what. But there are some variations as to how the curve might bend depending on technologies and market factors. So here's the trick I wanted to play on you. If I were an evil dictator and you were my advisor and I was determined to ring as much oil out of the transportation fuels economy as I could by 2030. And in my evil control over you and your family or whatever you hold dear, the Boston Red Sox or anything, I was able to coerce you into submission to my evil goal of trying to bend that curve in a market economy. Let's assume not radical repricing of oil. But I said to you, your job, if you and all you hold dear wanna survive in 2030 is to tell me what I could do to reduce the percentage of oil in the transportation economy most effectively between 2030. When you came back with your white paper, what would be it? Okay, just a couple of observations on that question, Steve, which is a very interesting one. First of all, if you take price off the table, the answer is nothing, because price is the only lever that actually works. Now, if you raise the price of gasoline, for example, substantially, there seems to be a view that several people I've talked to express that, well, then we'd encourage new technologies. And if you look at Europe where the average gasoline prices are sort of 650 or 750 and they have been for 30 years, Europeans drive smaller cars fewer miles. They don't drive advanced non-oil vehicles. So if we pushed this in the United States, what would happen is you would limit people's mobility and they would drive smaller, less safe, less comfortable automobiles. But you could push some oil out of the system. Now, it's my judgment that the economic and social consequences of that would vastly outweigh anything you could gain from it. But you could do it. Is there a way of pushing a new technology and that would make the average person say, my life hasn't changed, I'm just using natural gas instead of gasoline? I don't think so. Well, I thought that you might say that and also point to a couple of areas where my impression is that even in the major oil companies, there's a sense that there are inefficiencies even in the current pricing scheme and that those are in trucking and in the internal combustion engine and that you might wanna press for the best, most efficient hybrid vehicles that you could produce and you might wanna fix the anomalies in the trucking system. Two observations. First of all, if you're going to affect oil use in the United States, the only thing that matters is private transportation. It's just too big a share of the total transportation fuel use. The second thing is the internal combustion engine has been getting dramatically efficient year after year for over a hundred years and it does it on its own. My concern is when the government steps in and says, I have a vision for what the internal combustion engine ought to look like and I'm gonna drive it in that direction, you may in fact end up with a worse result because people in Washington are very smart but nobody is that smart. Now, when we look at direct injection engines, hybrids and things like this, they're getting better and better and better and better and better and they're tested in the marketplace in terms of cost and consumer acceptance. They're not tested in the political atmosphere of Washington where you as often as not get the wrong answer. So yeah, these things are gonna make a difference but I would suggest that the Exxon Forecast and some of these others already assume that that improvement in the engine continues over time. So it sounds like your answer to my question is if you really wanna do this, you need to raise the price of gasoline. Absolutely, and live with the consequences. Right, so I may need six or seven other advisers that I can coerce similarly. Now we could stay up here all day I think and have the sort of maybe too familiar argument about some of these big picture questions that you laid out in such a lively and concise way. You essentially said let's ask why would we want to reduce our dependence on oil? You went through four arguments. Let's set aside the question of peak oil and accept your forecast that technology will at least compete in that race adequately. Let's set aside the environmental issues because there'll be much discussion about them and they're just too ideological and for 10 minutes of conversation. But let's talk about the national security argument because that's one that crosses a lot of lines and there were two elements of the typical objection to oil dependency that you didn't address. So first let me ask you to address them. One is maybe three, the extent to which oil imports distort the American balance of payments chronically and leave us in this borrowing position because if you break down, if you put a PowerPoint slide up there showing the percentage of oil and gas imports, oil imports as a percentage of our trade deficit with China in reference to China is bigger than our deficit to China. Hardly gets much attention, is that a problem? Secondly, the extent to which uncontrolled spikes in global oil prices that flow through our economy and that are beyond our control. Nigerian militants in the summer of 2008 correlate with recessions according to economists so frequently as to maybe warrant some attention. And then finally, the extent to which on that balance of payments problem we keep transferring money to producers who maybe not for moral reasons but for structural reasons in receipt of such unaccountable wealth end up making the world a much less pleasant place. Now you could, I suppose, argue that that would be true if they were receiving money from cocoa exports rather than oil, but the fact is in our global economy oil wealth is a game changer if you're a dictator or a weak state. So what are your, you didn't address any of those in your interview. Let me answer the three of them. In terms of balance of payments, there is one smart thing that the United States ought to do and that is to open our own resource base really to full development. And if we did that, it would undergo a market test for which resources make sense and which don't and we would not only end up with slightly less expensive oil but we would also end up helping the balance of payments problem. If you're not going to do that, you have to be very careful, Steve, not to fall into the old trap of import substitution as an economic policy. This is what keeps lots of third world countries poor is they basically say I have to protect myself against balance of payments and balances so I'm going to keep inefficient industries going and I'm going to drive up the costs for my consumers while the rest of the world enjoys the benefits of trade. Now in terms of the second point was, refreshment memory again? Well, let's just, I'll remember it but let's go to the third one which I do remember which is the extent to which, oh, correlations with recessions. Okay, correlations with recessions. A simple point here, the United States is an open economy. We pay the world price for oil no matter how much we import. We are a large net exporter of corn and you pay the world price for corn. Unless the United States wishes to not only reduce oil imports but to put up a huge energy tariff wall around the country, we will always be paying the world price for oil. Canadians who are large oil exporters pay the world price for oil plus a little more that their government puts on the fuels. So unless you're willing to cut your economy off from global trade, you are going to pay the world price for oil with all its spikes. Now, we have to be very careful to say, well, I don't want the price of gasoline oscillating between $3 and $5 a gallon for my consumers so I'll saddle them with $10 gallon gasoline and they won't have to worry about it. Okay, what we will do then is we will instigate a prolonged deep recession in order to protect ourselves against its risk. Now, the third point, I think what we have to be careful of is the correlation between particularly terrorism and oil wealth, which is something that people like Tom Friedman talk about a lot. You have to be careful. It costs almost nothing to commit terrorist acts. I think the 9-11 cost less than $10 million. Now, the total retail value of all the petroleum products sold in the world in 2010 was $4 trillion. So if what we're saying is we're going to try to cut this down so that we keep millions of dollars out of the hands of people who would do us harm, I think that's unlikely to be helpful. Bear in mind that two of the most difficult countries in the world are North Korea and Cuba, countries that have no money, no oil, and no resources at all. And yet they're able to commit an enormous amount of mischief on very small resources. So I'm not sure that the process of trying to deprive bad people of oil money is anything that the United States can hope to achieve. Well, but see, all right, we can argue about whether Cuba is really such a serious medicine anymore or whether or not North Korea is more containable because it lacks oil or whether Iran has a big, robust revolutionary regime is more resilient in the face of international condemnation because it has cash flow that nobody can reach. But you're saying something different from what you were arguing, which is you're saying we can't do anything about it, but we're in the realm of arguing should we want to do something about it? Well, again, I think the point is if what you're trying to do is reduce the size of the global oil market to the point where people like the Iranians can't have any money, I think that's the wrong way to look at it. If we in fact believe that Iran's oil money is a national security threat, we should stop them from exporting oil, okay? That's a different problem from saying we need to reduce our consumption to the point where nobody buys any Iranian oil. That's never going to happen. Right, so another version of the same question about the kind of volatility in global oil prices, you're saying that it's impossible to change that because if you consume a lot of oil, you will therefore be subject to the world price and you use Canada as appropriately as an example. But that's different from saying that it would be healthier in the long run for the American economy if it was not subject to volatile prices for world oil, let the Chinese deal. We will always pay the world price for oil. Right, so therefore if that price is volatile and damaging to our economy, it would be in our interest to reduce the amount of oil we're dependent upon. Well, I'm not sure that's true. If the American consumer is paying $3.50 a gallon and we're not importing any crude oil and the world price spikes to $5 a gallon, the American consumer's gonna pay that. Right, so that's another reason to get oil out of their car. Well, if you can do that in such a way that he's better off, okay, but again, I'll go back to my analogy. You don't want it to fluctuate between $3.50 and $5 so you make him pay 10, that's not gonna be a solution. Now, let me just make one point here, Steve. We talked a lot at the dinner last night which was wonderful, by the way, about technology and being a technological optimist, and I am. The time is going to come when there is going to be something better than oil and there is going to be something better than the internal combustion engine and when that comes, we ought to embrace it. My point is that we have this tendency to pretend that we have it when we actually don't and we need to wait until we actually have it before we talk about replacing it. Right, well, and last question then, I mean, in that vector, you're willing to acknowledge though you would recommend against it that the most efficient way to manage that evolution even as a technological optimist would just be to send broad price signals and let the market take its course. So, I mean, in that sense, if you were to accept my dictator's mandate, really what you would want to do would be to change the price signal and let people in garages and everywhere else fiddle. Okay, yes, but you'd have to be realistic about what you expect. And again, I want to get back to my European point. Europeans have been paying very high gasoline prices for 30 years. They don't drive advanced fuels and it's not as though Europe doesn't have an advanced automotive industry. They certainly do. They have some of the most innovative car makers in the world. So the point is, if you raise the price, you will have the adverse effects. You will, and they will be serious. Then you're hoping that behind that comes something else which you may or may not get. So I'm not sure that's a good bet. Let me put it this way. Here's another analogy. If a doctor tells you I can replace your perfectly healthy heart with a much better artificial heart, there ought to be a really high standard for accepting that. Okay, my point is that the oil market for all its problems does what it's supposed to do. It gives us affordable high performance transportation. And there are serious externalities and we deal with them. But we cannot improve our overall situation by saying in order to eliminate the externalities, I'll eliminate the product because we don't have anything to replace it with. Great. Okay. Thank you, Bruce, for all of this. Okay, thank you. And on with the show, whatever it is.