U.S. Energy Chief Urges Preparing for Oil Shocks

Views rapidly growing energy demand as a major challenge

The Group of Eight (G-8) and other countries need to prepare for the possibility of oil supply disruptions by maintaining emergency oil stocks and committing to use them in times of crisis, U.S. Energy Secretary Spencer Abraham says.

Speaking at a May 2 meeting in Detroit of energy ministers from G-8 countries, he said that international cooperation in this area is essential to success.

Abraham suggested that nations that currently lack emergency oil reserves should consider establishing them to "vastly improve their resilience" against oil market troubles.

The G-8 comprises the major industrialized countries of the United States, the United Kingdom, Canada, Japan, Germany, France and Italy plus Russia.

Secretary Abraham said the leading industrialized nations and developing countries face "enormous" political and technical challenges related to the rapidly growing demand for energy.

He noted that over the next two decades energy demand in G-8 countries will rise by 33 percent and in the developing world by 100 percent.

And the infrastructure challenge is even more daunting, he added, with investment needs in the range of $2,000,000 million over the same period of time.

Abraham emphasized that the world must obtain a secure energy supply and a capable infrastructure without degrading the environment.

But he left no doubt that in the near future most countries will still have to rely, to a large degree, on traditional energy sources despite progress in developing environment-friendly technologies.

Abraham cited four broad areas: energy security, energy trade and investment, technology research and development, and international dialogue on energy matters in which, he said, G-8 and other nations can accelerate progress by working together.

Abraham said that success will depend on more open, competitive and reliable arrangements that will increase private sector participation in resource development.

And with the help of technology, he said, the international community can find ways of using energy more efficiently and protecting the environment more effectively. Abraham cited transportation as a particularly "fertile field" for improvements.

(Note: In the text "trillion" equals 1,000,000 million and "billion" equals 1,000 million.)

Following is the text of Abraham's remarks as prepared for delivery:

Remarks by Energy Secretary Spencer Abraham
Public Energy Forum
Lunch Conference of G-8 Energy Ministers
Detroit, Michigan
May 2, 2002

Thank you, Tim Statton and good afternoon. Let me begin by once again recognizing Governor Engler, my distinguished colleagues from the energy ministries of the G-8 nations and the European Commission, and Mayor Kilpatrick.

As I said this morning, this is an exciting event and a great week for Detroit, for Michigan and for the United States.

Exploring effective energy policies is one of the great challenges facing the G-8 nations -- in fact, facing every nation in the world. How well we handle these challenges will in large part determine our economic future.

We certainly recognize the importance of -- and the extent of -- the challenge here in the United States. To that end, last May President Bush laid out a roadmap to energy security for the United States with his National Energy Policy.

The policy contains 105 recommendations for action that cover the entire energy spectrum. Many of those recommendations have already been acted on, and important remaining provisions are part of an energy bill now moving toward passage in Congress.

But the National Energy Policy does not look at our energy challenges in isolation.

It recognizes that many of our challenges are also the challenges of other countries. In fact, fully one-third of our National Energy Policy's recommendations are directed at enhancing international relationships.

Especially important in that sense was the recommendation that the G-8 nations convene and discuss cooperative approaches to our energy challenges. This makes sense because there are so many similarities between us.

We are similar in the obvious sense that we are representative of the world's leading industrialized countries, generating 70 percent of the world's economic activity.

As such we are disproportionately large producers and consumers of energy. We have significant energy reserves, yet we are also the largest energy importers.

We account for 60 percent of the world's total energy use. And the G-8 nations consume nearly 40 million barrels of oil per day, over half the total world demand.

The G-8 nations produce and consume 72 percent of the world's nuclear energy, 56 percent of its electricity; 43 percent of its coal and 68 percent of its natural gas.

For these reasons, developments in our domestic markets affect the global energy balance and the global environment. Yet our economies are nevertheless vulnerable to disruptions and price instability in global energy markets.

We are also technologically advanced, and we have all acted to apply that technological prowess to reduce the effects of our activities on the environment.

Finally, we understand the importance of assisting less developed countries to develop their societies and economies, so that they and their citizens can join us in prosperity and peace.

However, just as we share similarities in our institutional arrangements and our societal achievements, we face similar energy challenges in three general areas:

-- Rapidly increasing demand

-- Inadequate infrastructure for future needs, and

-- The need to reconcile our energy growth with environmental protection.

Let's begin with demand.

-- In the United States we estimate oil consumption will increase by 33 percent, natural gas consumption by over 50 percent and electricity demand will rise by 45 percent by 2020.

-- We project that G-8 energy demand will rise by 33 percent, despite current and anticipated conservation efforts and despite the gradual trend toward declining energy intensity in G-8 economies.

G-8 demand for oil will increase by about 15 million barrels a day over the next 20 years. Developing nations will require an additional 25 million barrels of oil a day.

Overall energy demand in the developing economies of Asia, Central and South America, the Middle East and Africa will increase by an average of over 100 percent, bringing them nearly equal to G-8 consumption by 2020.

The infrastructure to transmit these increased loads of fuel and energy does not exist today. Two examples, natural gas and electricity, will serve to illustrate the extent of the challenge.

In the United States, current requirements of approximately 20 Trillion Cubic Feet of natural gas are carried through a pipeline transmission system with a capacity of 23 Trillion Cubic Feet of natural gas.

That spare capacity could soon turn into a capacity shortage as our natural gas demand increases by 50 percent, to approximately 30 Trillion Cubic Feet of natural gas by 2020.

In Europe, demand growth is similar but the challenge is different. Natural gas demand there will increase by roughly the same amount as in the United States, and that growth is spurring infrastructure projects to move gas from Russia, Algeria and the Caspian region.

Multiple pipeline routings are desirable in Europe's case for energy security reasons. They reduce vulnerability to supply disruptions from a single source.

The electricity infrastructure challenge is, if anything, even more daunting. Worldwide, the International Energy Agency has estimated that investment requirements for electric power plants and transmission lines over the next two decades will be on the order of two trillion dollars.

In the United States, as I noted, we project a 45 percent increase in electricity generating capacity over the next 20 years.

That works out to between 1,300 and 1,900 new power plants. We will have to build more than one power plant a week, and the power lines to go with them, to meet our requirements.

In Europe, 50 percent of current generating capacity will be wearing out as electricity demand increases by 50 percent. Put another way, Europe will have to build new generating capacity equivalent to its entire current electricity generating system in a short 20 years.

These are enormous political and technical challenges -- and I haven't even mentioned the challenges associated with coal, oil, nuclear, hydro and even alternative and renewable energy sources.

Yet, we must meet the challenge of ensuring a secure energy supply and a capable infrastructure, and we must do it in an environmentally responsible manner.

One inescapable element of every energy resource -- even the cleanest -- is its effect on the environment.

Clearly, in striking the right balance between energy security and environmental performance, we must aim to make the environmental cost negligible and the energy-for-growth benefit significant.

And this environmental challenge will not go away, because the energy sources that we rely on will not go away, at least not anytime soon.

This is true even though we are making enormous progress in developing new technologies to address our environmental concerns.

These challenges of demand, infrastructure and environment for the G-8, and for the world, are enormous. The question that faces us here today is: What can we do together, today and in the future, to meet them.

As a practical matter, each nation will address dozens of detailed national energy system challenges on a case-by-case basis.

On specific issues, it goes without saying that what the United States needs to do to resolve individual energy issues may be different from what Russia, or Japan, need to do.

But it strikes me as obvious that there are several broad areas where working together will accelerate our progress in overcoming our energy challenges and ensuring future economic growth and prosperity.

First, I believe we must put greater emphasis on energy security and, in particular, on improved emergency preparedness to assure adequate supplies in the event of disruptions.

Second, we must work to open up and expand energy trade and investment.

The third area where increased cooperation will pay large dividends is Technology Research and Development, and,

Finally, we must increase and intensify international dialogue between nations on energy matters.

Let me talk about each one of these promising areas for cooperation in turn.

Energy security is a term that includes virtually everything we will be talking about during this conference.

But I want to talk particularly today about the importance to energy security of smoothly functioning international markets and about our emergency preparedness to react quickly and effectively to any sudden disruption in supply.

We are living in a world that has changed greatly since the last meeting of the G-8 energy ministers four years ago. We have greater reason than ever before to focus on emergency preparedness for any serious disruption in our energy supply.

The United States recognizes that international oil markets are, under normal circumstances, the most efficient regulators of price, and that the most important factor in the smooth functioning of any market is information.

And the best way to get good information is to share it. This is a natural area for increased international cooperation.

In furtherance of that end, the United States has endorsed the creation of an informal Secretariat for the International Energy Forum. We are hopeful that proposals for cooperative efforts to improve the timeliness, quality, compatibility and sharing of oil market data will be advanced at the IEF meeting in Osaka later this year.

In addition to improving the quality of market information, we need also to prepare for the possibility of oil supply disruptions. The best immediate preparation is the maintenance of emergency oil stocks and the collective commitment to use them during disruptions. On this, of course, International cooperation is fundamental to success.

Countries that do not now maintain emergency oil stocks and whose consumption of oil is increasing rapidly, will vastly improve their resilience in the event of oil supply disruptions by building oil stocks of their own. And we look forward to discussing this issue at these meetings and in the months ahead.

The second of the four promising broad areas for cooperation is energy trade and investment.

Free trade and liberalized government policies for private investment will be essential to meet growing worldwide demand for energy.

The world needs new and diversified sources of supply, especially for oil and natural gas, if we are to meet our long-range energy needs.

Success in meeting these needs will depend on new approaches to resource development that emphasize more open, competitive and reliable arrangements that allow more private sector participation.

Fortunately, we are entering a welcome period, as Dan Yergin [chairman of Cambridge Energy Research Associates (CERA)] explained so well this morning, when all the momentum is in the direction of greater openness, greater cooperation, more sharing -- instant sharing -- of information, more transparent capital markets, more room for entrepreneurial innovation within and across borders, freer trade, and freer operation of international markets.

New resource development could and should serve as dramatic proof that in free and open markets the pie does get bigger and everyone has a chance to grow.

Just as energy was the foundation on which the G-8 nations built their national economies in the 20th century, energy will be the foundation on which developing nations build theirs in the 21st century.

The results of this great opening of opportunity will be increasing prosperity not only for the people of the G-8 nations but for all the people of the world.

The importance of technology research and development was brought home to me with renewed force yesterday when I toured the New Technology Expo here in the hotel.

I was reminded once again that it is the work of the scientists and engineers of our G-8 countries and other countries around the world that will ultimately help us to overcome our energy challenges in years to come.

Without the amazing work on the drawing boards, on the laboratory tables and in the minds of our scientific thinkers, we would face grim prospects indeed.

Human ingenuity, combined with unprecedented levels of international openness and cooperation, will lead us to success. We will invent the processes and equipment we need and think our way through our problems.

By cooperating more closely we will achieve success more quickly and efficiently, with less wasteful duplication of effort.

It is hard to believe that the 20th century's stunning technological advances can be bested, but with increased international cooperation the twenty-first century promises to do just that.

The G-8 nations today account for over 70 percent of global R&D investment. We invest over 432 billion dollars a year on research and development. And yet we need more research and more breakthroughs.

We need the advanced research and development programs to create the technology that will help us to use energy more efficiently and to better protect the environment.

Energy efficiency is a well-understood way to reduce consumption without curtailing economic activity. In the United States, we have enjoyed great success with energy efficiency programs over the years.

In fact, thanks in large part to energy efficiency programs, energy consumption in the U.S. has grown by only 26 percent since 1973, while the economy has grown by 126 percent. I know many of the G-8 nations have experienced similar successes.

We have also made great strides in environmental performance in the United States, as have our friends in the G-8.

Consider these startling statistics: Since 1970, U.S. Gross Domestic Product has grown by nearly 150 percent; coal consumption has doubled; and vehicle miles traveled are up 150 percent, while key emissions including sulfur dioxide and nitrogen oxides are down 31 percent.

But we must do more.

Transportation is a fertile field for both efficiency and environmental improvements and we are pursuing them on many fronts.

That is why I was so delighted earlier today to announce an International Conference on Future Energy Technologies for Transportation, to be held right here in Michigan later this year.

The participants in that Conference, together with G-8 members, will examine transportation issues raised at our meetings today and tomorrow.

The possibilities are nothing short of fantastic for reduced energy resource consumption, increased efficiency and environmental benefit, through international cooperation on technology and transportation issues.

And the need for progress in this respect cannot be over-estimated. Just consider what we expect to happen if we do not improve on the transportation front.

Over the next two decades, world oil consumption, about one-half of it for transportation, is projected to increase from about 75 million barrels per day in 1999 to about 120 million barrels per day in 2020.

This rapid oil consumption growth raises concerns about global energy security, the risk of oil price shocks to the global economy, and local, regional, and global environmental quality.

We can allay those concerns if we pool our intellectual, technological and other resources to address the issues on the agenda of the international transportation technology conference. They include:

-- Energy-efficient vehicles including advanced engines, engine-hybrid vehicles, electric vehicles, and others

-- The FreedomCAR program, our Administration's initiative announced earlier this year to leap forward to a future of hydrogen fuel cell-powered cars and light trucks

-- The use of alternative fuels such as those already in use in Brazil and in Argentina, as well as biomass-derived fuels

-- Alternatives to the low-efficiency, high-emissions two-stroke internal combustion engines on two- and three-wheel vehicles that are so prevalent in the urban areas of developing countries

-- Urban traffic congestion relief and the potential contribution of public transport

-- And more.

In addition to the transportation arena, there are many other areas for both efficiency and environmental advances. Advances in clean-coal technology and superconductivity for electricity transmission, for example, will have powerful impacts on our entire energy system.

And there is one existing source of power that presents no emissions challenge at all.

Nuclear power supplies 20 percent of the electric power in the U.S.; 30 percent in the United Kingdom, Germany and Japan; and 80 percent in France.

While nuclear power is the cleanest and most efficient element in our energy mix, there is room for further improvement -- and room for further cooperation.

Today, the United States, France, Japan and others are working together to develop a Generation IV nuclear reactor with enhanced passive safety features and a simpler, more economical design.

The new generation reactor will attempt to address the two principal objections to nuclear power: the danger of the release of radioactive materials, and the high initial capital investment required for construction of new plants.

Advanced technology, and the contributions of science, play a critical role in our future energy plans. Along with promising innovations such as hydrogen fuel cells, the President is anxious to accelerate fusion power as a realistic source of energy.

We are now engaged in serious consultation here in the United States and around the world on how best to pursue a fusion program.

President Bush is particularly interested in the potential of the international effort know as ITER and has asked us to seriously consider American participation.

This major international effort will answer a critical scientific question: Can a fusion reaction -- the kind of reaction that powers the sun -- be harnessed here on earth for the benefit of all mankind?

As for our final challenge, increased international dialogue, this conference is the latest proof of the importance this Administration places on forging closer international relationships to guarantee mutually beneficial energy policies and outcomes.

There are many areas where we are already working closely with various international partners to address these challenges, and there are many more potential areas for cooperation.

To develop new and diversified sources of supply, the United States, for example, has launched, with Canada and Mexico, the North American Energy Working Group, which is reviewing ways to further integrate the North American energy market and make it more effective.

We have also placed greater focus on the Western Hemisphere Energy Initiative with our other partners in the rest of the Americas.

We, along with our hemispheric partners, aim to create opportunities for new investment and the development of new energy resources.

And, of course, this Conference is a welcome step in the direction of closer consultation, information sharing and cooperation as we move ahead with this complex, cooperative campaign for energy security.

Our meeting here in Detroit is only the second G-8 energy ministerial meeting ever held. It is one of several meetings being held in the United States and Canada by G-8 ministers in advance of the G-8 Summit this summer.

The national leaders who gather at the Summit will focus on three priorities: strengthening global economic growth, building a new partnership for Africa's development, and fighting terrorism.

By ensuring energy security, stimulating more open and expanded energy trade and investment, and improving emergency preparedness, we in the energy sector have significant contributions to make in each of these areas.

Your participation in today's energy forum, and the ideas that come out of it, will influence not only tomorrow's ministerial meetings but, ultimately, the G-8 Summit itself.

Thanks to increased international cooperation, the turn to market-based economies, and amazing technological advances, we are entering a world of almost limitless possibility.

We face great challenges in fashioning our energy future -- but at the same time we are making satisfying progress toward solutions that offer the promise of a better future for all the world's people.

If all of us do our jobs right -- and I believe we will -- energy will be a key to a more closely integrated world, a more prosperous world, and a cleaner and healthier world in the coming decades.