Remarks by
Robert S. Kripowicz
Acting Assistant Secretary for Fossil Energy
U.S. Department of Energy
to the
United States Association for Energy Economics
April 5, 2001

Secretary Abraham sends his regrets for also not being able to be here today. The Secretary, I have found, is an extremely quick study and would have enjoyed the interplay that takes place at this conference. Unfortunately, he also had to be in other places, but when he asked me to fill in today, he said " Bob, go over there, give it to them straight, tell them what we're doing, but DON'T make any news."

Well, that's difficult to do these days. Energy is back in the news - almost daily - and Americans once again are understanding how energy is woven throughout virtually every thread of their daily lives.

Many Americans are also now understanding a little more about the economics of energy - and how fluctuating energy prices affect jobs, a company's competitiveness, whether a factory expands or shuts down, and in many cases, whether or not a family can keep its household budget in balance.

Daniel Yergen made a perceptive comment a few months back when he said that of all the numbers we deal with daily in modern society, there is one figure that virtually everyone in America knows without hesitation - the current price of gasoline. I suspect for many people in California, another is the current price of a kilowatt-hour of electricity.

The National Association of Manufacturers estimated that higher fuel prices between 1999 and 2000 cost the U.S. economy more than $115 billion. The increase in energy prices shaved a full percentage point off our Gross Domestic Product. When the Association surveyed its 5,500 members three months ago, it found that nearly one quarter of them were forced to curtail operations largely because of energy prices.

The Food and Agricultural Policy Institute reports that farmers are likely to see their income drop 20 percent over the next two years due to higher energy costs.

The nation's last three recessions have all been tied to rising energy prices - and there is strong evidence that today's energy problems are already having a negative effect.

Energy is indeed back in the news - and unfortunately, the news is pretty sobering. We may well be heading into the worst summer that we have ever seen - in terms of energy - certainly worse than any summer in last 25 years. The gas lines of the '70s likely won't materialize, but Americans could be hit by rising prices at the pump -- especially if something unforeseen happens, such a refinery going down or a pipeline being taken out of service. And at the same time, many will face the growing prospects of rolling power outages.

America's energy problems are not confined to California. In New York City last summer, temperatures were cooler than normal. Yet, wholesale power rates soared 30 percent. New plants are planned, but it will be 2 years or more before they come on line. For many large gas-fired turbines, there is a four-year backlog of orders.

America's energy problems are NOT confined to one region, they are NOT temporary, and they will NOT fix themselves. But America's energy problems ARE fixable. It won't happen overnight, and if we - as a Nation - continue holding out hope for that ONE magic solution, America will never solve its energy problems.

Many of you have been in the energy business for a long time. You have seen how the pendulum has swung - first to government rationing, then to deregulation....in some years toward massive new industries, such as synfuels, in others toward conserving our way out of energy problems.

If you were in the energy sector, you were either " in" or " out," one of the " good guys" or one of the " bad," depending upon the mood of the times. The pendulum always seemed to be in motion, side-to-side, but never it seemed, moving forward.

President Bush has sent a very clear message to his Administration and to the people of this country. It is time to bring balance to our energy policy. We will neither conserve nor produce our way out of our energy problems - not if our strategy focuses solely on one and ignores the other.

I represent the fossil fuels part of the Department - and some will say the fact that I am standing up here today is evidence that there is a new emphasis on our traditional energy resources. And some will say that this means the Administration is deemphasizing energy efficiency and renewable energy resources. That is not correct.

I'm not going to say a single bad thing about renewable energy or about the need to become more energy efficient. And no one else in this Administration will either. Because this nation has to move beyond the debate over who is today's favored energy child.

As the former head of the National Mining Association - who before that, was one of America's highest ranking generals and who holds America's interests first above everything else - once said, " There is no bad domestic energy resource."

And that is what is driving the task force Vice President Cheney is leading - the clear direction from the President that it is time to see America for what it is - a nation still rich in energy resources...one that still believes in the wisdom of free markets and the power of innovation...a nation where both government and industry work toward a common, well-defined, and consistent set of goals...a nation that is tired of swinging from side-to-side on energy and ready instead to move forward.

The path that the President wants this nation to follow will not be completely laid out until the Vice President's task force finishes its recommendations, probably around the end of this month. There is a rigorous ongoing internal debate on various policy options, and there has been continuing input from those outside the government.

The course is still being charted, but there are some directions that are already evident. And here I'm going to talk about those I know best.

First, coal. The President has made it very clear that this country is not going to turn its back on coal. You simply don't walk away from a resource that supplies more than half your electricity and is largely responsible for keeping our electricity rates among the lowest of any free-market economy.

The Administration is not going to regulate coal out of existence....but neither will it retreat from the progress that has been made to reduce coal's impact on the environment. Coal-fired power plants have already been called upon to make broad reductions in air emissions. The Bush Administration supports those efforts. The Administration recognizes that more can be done to make our air cleaner and healthier - but it is neither economically efficient nor particularly effective to impose air regulations in a shotgun manner. It is much better to give industry a comprehensive set of emission goals - incorporating all regulated pollutants - so that industry can spend its resources, and those of the ratepayers, wisely.

Remarkable progress has already been made - and I often think that this fact is overlooked. In the last 30 years, the United States has doubled its use of coal - yet at the same time, emissions of sulfur pollutants from power plants have dropped by 70 percent while nitrogen oxide emissions have declined by 40 percent.

There is probably no better case that can be made for the benefits of advanced coal technology than those figures. Except perhaps when you consider that one of the nation's largest coal-burning utilities recently calculated the benefits to the national economy because of new clean coal technology, and arrived at a conservative figure of $100 billion. That includes costs avoided by having lower cost, more effective controls for regulated pollutants like sulfur and nitrogen....as well as for those pollutants about to be regulated, like mercury....and by deploying new ways to burn coal such as fluidized bed combustors.

Even those who aren't economists recognize the value of a hundred billion dollars to the economic growth and competitiveness of this nation.

But at the same time, there is more we can do - beyond simply cleaning up legacy plants. We still generate power from coal using about a third of its energy and throwing away two-thirds. When we talk about becoming a more energy-efficient economy, we often overlook the " front-end" of the process - the fuel efficiency of our power generators.

In fact, if we could boost the average power efficiency of our nation's coal-fired power plants from today's 33 to 35 percent to, say, 50 percent, the energy savings would be equivalent to weatherizing every house in this country....five times over.

Efficiency and emissions reductions and the cost of power all go hand-in-hand. That's why the President has already signaled his commitment to a new clean coal technology program - one that will invest $2 billion over the next 10 years -- an amount that must be matched by industry -- to boost the power output of existing plants, continue to reduce emissions, and pave the way for a new fleet of even cleaner, more efficient plants in the future. There will be a $150 million downpayment on that commitment in the FY 2002 budget to be released next week.

Let me turn to oil - The United States consumes nearly 20 million barrels of oil daily and demand could grow by a third in the next 20 years. Oil is both the lifeblood and a liability for America - with over 50 percent of our oil now imported, a dependency that could grow to 64 percent in the next 15 years.

Yet, no energy resource is probably more misunderstood by most Americans. America's petroleum industry is burdened by two prevailing myths - one, that America's oil wealth has been exhausted, and two, that America remains the land of " Big Oil." Neither are true.

America is a mature oil-producing province, but for every barrel of oil produced in this country, two barrels have been left in the ground. A full 50 percent of the remaining U.S. oil resource lies beneath Federal land, and much of that is off-limits to exploration and production.

Americans have a deep-rooted commitment to being good stewards of our land and water, but good stewardship and responsible development CAN co-exist. Today, drilling operations that required 65 acres in the 1970s need only 10 acres. Technology exists today that can send seismic signals deep into the earth and pinpoint oil- or gas-bearing deposits with an accuracy 10 times better than a decade or so ago - and that means fewer dry holes. Drilling systems can descend vertically, then veer horizontally to a target as far away as 6 miles. That's like sinking a well on Capitol Hill and hitting paydirt in Bethesda (although I would do it the other way around) -- without disturbing any of the ground in between.

We will need this technology and more to achieve America's full oil potential, but it will be more than a question of WHAT technology can we develop. It will also be a question of WHO will use it.

In the past, new exploration and production technologies were home-grown in the petroleum engineering labs of the major oil companies. They could afford the " hits-and-misses" of trying new innovations in difficult geologic settings. But today's domestic oil industry is increasingly dominated by smaller companies who often work on the financial edge of solvency, not the cutting edge of technology.

Small businesses drill 85 percent of the nation's wells; they produce 50 percent of the oil in the lower-48 states, and two-thirds of all of the nation's natural gas. And two-thirds of them have less than 20 employees - virtually none have the words " research and development" in their job titles.

Yet, we see example after example of where new technology can benefit these smaller companies - and in turn, how the country benefits from them staying in business.

Take, for example, a " success story" that Secretary Abraham announced last week. An oil lease in the Midway-Sunset field near Bakersfield, California, had been abandoned in 1985. Prior to that, it had been producing for nearly 80 years, but production had slowed to less than 10 barrels per day by the mid-80s, and the owner shut down the lease.

In 1995, the petroleum engineering department of the University of Utah examined the geologic record and became convinced that modern advances in technology could bring the lease back into production. They applied for federal cost-sharing to try the new technologies and were selected for funding. The lease reopened in 1995, and last week, Secretary Abraham announced that new production from that -- quote -- " depleted" lease had topped 1 million barrels. That is half as much in 5 years as the lease produced in its first 80 years.

America remains an oil-rich nation, and while it is unlikely that we can ever become completely oil independent, we can certainly reduce the decline in domestic production and slow our growing dependence on foreign sources.

Now before I leave the subject of oil, let me make one final point. That small oil lease I just described in California - about 40 acres - produced a million barrels that, otherwise, would have been left behind. Now some people would say, " a million barrels - that's about an hour of consumption in the United States. Not worth bothering about." That's the same argument being used against opening ANWR - it will provide less than a year and a half of oil demand. Why bother?

But what if we applied the same argument to America's largest farm? Would we come to the same conclusion?

The entire output of our nation's largest farm over decades of planting and harvesting, I suspect, would feed the world's population for, what, perhaps one meal? Probably a lot less. Does that mean we shouldn't bother? Does that mean our largest farm -- and by extension, the tens of thousands of smaller farms -- are all insignificant? Of course not.

Drilling in ANWR -- an area the size of South Carolina -- and impacting a total footprint less than half the size of Dulles Airport could produce the equivalent of 20 years of imports from Saudi Arabia, or 75 years of imports from Kuwait. That is not insignificant.

Let me turn to natural gas for a moment. Natural gas, it seems, is one of those bipartisan fuels - everyone seems to like it. And for good reason. But natural gas, by itself, is not the silver bullet of America's energy future, and we make a serious mistake if we believe that.

If the Department's projections are right, the United States will need as much as 50 to 60 percent more natural gas by 2020 than it consumes today.

To meet that demand, we will have to double the number of wells drilled annually in this country. The number of active rigs will have to increase by 80 percent. Very few onshore drilling rigs have been built since the mid-1980s, yet between now and 2015, we may have to build as many as 1,900 new onshore rigs.

Building and working those rigs is still a labor-intensive effort, but the industry lost nearly 55,000 workers - 17 percent of its workforce - during the 1998 to 1999 decline in oil and gas prices. Many of those workers found jobs in other sectors of the then-booming economy, so they aren't coming back to the oil or gas business.

And it is important also to recognize that, like oil, many of the nation's most promising gas resources are either closed to exploration or covered by severe restrictions. For example, as much as 40 percent of potential gas resources in the Rocky Mountains have some type of access restriction. Another 20 percent is off-limits in the Gulf of Mexico. Even if we can find and produce the new supplies, moving that gas to market will require an additional 38,000 miles of transmission pipeline and 255,000 miles of distribution lines. That's equivalent of building a pipeline from here to the moon. And at an estimated cost of $120 to $150 billion.

This Administration is bullish on natural gas. Yet, we recognize that you cannot place great expectations on natural gas while at the same time, maintaining severe restrictions on exploration. America's gas future is bright, but it is not preordained.

That's why the national energy policy being developed by the White House is not going to be a policy of " winners and losers." It will be a comprehensive energy policy - founded on America's true energy strengths.

It will recognize that a broad mix of energy options - from coal to wind turbines, from nuclear to natural gas - will help protect consumers against future price spikes and supply disruptions.

It will recognize that we must conserve, through efficiency, as well as produce.

It will be a balanced energy policy. As Secretary Abraham told the U.S. Chamber of Commerce a couple of weeks ago, it will reject the notion that there is no middle ground between environmental protection, regardless of the cost, and energy exploration, regardless of the impact.

The Administration's national energy policy will set a framework for cooperation that extends beyond our borders. It will be based on the understanding that our policy cannot stand in isolation from our global neighbors, particularly those who are our immediate neighbors in North America.

It will be an energy policy that encourages innovation - directing federal funding toward those areas where a federal role is beneficial, but recognizing that capital is best allocated through the workings of the market. It will establish clear and consistent goals. Then it will help foster the skill and imagination of the private sector to achieve them.

Finally, it will be a policy that address short-term problems but recognizes that most of the solutions must be long-term. We didn't get into the current energy situation overnight, and we can't get out of it quickly either.

Yet, America CAN emerge from its current energy problems a stronger, more competitive and more energy secure nation. It will take clear direction, farsighted leadership, and solid resolve. And it will take a commitment from all of us to stop swinging from side to side and begin moving forward.

Thank you for your attention.