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Why are energy prices so high?

We often hear that energy is the lifeblood of our economy and that is quite true. Our economic growth and our economic and social well-being depend on safe, affordable and dependable supplies of energy. Fortunately, we have had that, for the most part, throughout the history of our nation. It's a major reason for America's success through the years. And as leaders of the energy sector we have a tremendous responsibility to see that it continues. But we cannot make sure it continues by doing things the way we have always done them. The status quo clearly is not working.

A dominant theme in today's headlines is high energy prices, especially for gasoline and other transportation fuels. High energy prices are straining family budgets and the profits of many companies and keeping businesses from creating as many new jobs.

So, the big question these days, if you're the Secretary of Energy, is, "What are we doing about the problem of high energy prices?" Well, I submit that high energy prices are not the problem. High energy prices are a symptom of the problem. The real problem is very large, very complex, and has been years in the making.

A simple explanation of this very complex problem is that we're using energy faster than we're producing it. Economies and populations around the world are increasing rapidly and the demand for energy is rising accordingly. This is why we are working to develop new sources of energy and pursuing energy-efficiency and conservation measures as major components of our energy policies. But despite our efforts so far, demand continues to grow and our means of energy production are having an ever-harder time keeping up. This is especially true with the oil supply. Petroleum, because it is virtually the only fuel for the rapidly expanding transportation sector, is the world's most critical energy resource. It is also the most vulnerable.

Up through the 1960s, the United States produced all the oil it needed and exported large amounts to other countries, which helped fuel our nation's economic growth. But, since U.S. oil production peaked in the 1960s, we began depending more and more on imports. We import 56 percent of our oil today and it's projected that we'll be importing 68 percent by 2025.

So an increasing percentage of the oil revenue that had been coming into the U.S. economy for so many years is now flowing to other countries. And, far too often, some of those countries have unstable political climates and don't always have America's best interests at heart.

In addition, some experts say the world is running out of oil. We know we have depleted much of the known supplies here in the lower 48 states. We certainly can debate whether or not we're running out, but I think there is less disagreement over how much more inexpensive, easily accessible oil there might be.

That is why we need to increase domestic production by exploring for oil and gas in new places, such as offshore areas and on certain federal lands including a small corner of the Arctic National Wildlife Refuge (ANWR) in Alaska. Advances in exploration and drilling technology now allow us to find and extract oil and gas with much less environmental impact than ever before. This technology would allow production in ANWR, for example, to only require a tract of land no larger than a mid-sized city airport.

Closely related to the oil situation is the challenge of adequate natural gas supplies. As a primary home heating and industrial fuel source, as well as an industrial feedstock, natural gas is critically important. But, over the last few years, we have seen supplies tighten largely because it has become the fuel of choice for new power plants.

From the viewpoint of a chemical engineer, which is my area of training, natural gas is a truly wonderful substance; pure methane that occurs naturally, is easily extracted from the ground, and needs no refining process like other petroleum products. From a chemist's point of view, it's almost a shame to use so much of such a unique and valuable compound to make electricity, which can be made in so many other ways.

Someone once said that using natural gas to make base-load electricity is like using good scotch to wash the dishes. There's a lot of truth to that, but it's an economic and policy decision that we have collectively made. And it's one large factor in the natural gas supply problem and in the symptom of the problem, which is high prices.

Like oil, the United States once produced all its gas domestically, but we now must import substantial quantities. This has prompted increasing calls for exploration in new areas, for building new processing and transportation infrastructure, and for boosting our capacity to import liquefied natural gas. The recent approval of the Cheniere Sabine Pass LNG terminal in Louisiana is an example of the Federal Energy Regulatory Commission's continued commitment to expedite the permitting process in order to bring much-needed LNG into this country.

Although we need to import much of our oil and gas, the United States is, as you know, abundant in coal; the reliable, affordable fuel that makes more than half of our electricity. But coal, to a greater extent than other fossil fuels, has environmental problems that must be addressed if we are to continue taking advantage of its abundance. We have made good progress with coal; mining it and burning it with much less environmental impact. Under the President's clean coal technology programs, we are working with industry to develop ways to burn coal even more efficiently while removing pollutants and greenhouse gas emissions.

We are exploring carbon sequestration to remove carbon dioxide from coal or the coal-combustion process, and store it underground where it can't get into the atmosphere. We are developing important bridge technologies such as coal gasification, which can make power production cleaner and more efficient and our FutureGen project is pursuing development of coal-fueled plants that can make electricity, as well as products like hydrogen fuel, with no emissions whatsoever.

We also are pursuing ways to make electricity and transportation fuel without fossil fuels to help reduce emissions, reduce our dependence on foreign oil, and keep more of our energy dollars here at home. These include renewable motor fuels such as ethanol, bio-diesel and clean diesel. Already there are eight models of clean diesel vehicles and more than 20 models of ethanol-compatible vehicles available to U.S. consumers. We also are working to develop hydrogen-powered cars and to make greater use of renewable electricity sources such as wind and solar power. And we are pursuing research into long-term energy solutions such as the potential for nuclear fusion.

Another important way to meet our growing energy needs without depending on fossil fuels is expanding our use of nuclear power, which already produces about 20 percent of America's electricity. The United States hasn't started construction of a new nuclear plant since the 1970s even though nuclear energy is the only technology we currently have to reliably produce large amounts of electricity with no pollution or greenhouse gas emissions at all.

We need to start building again which is why this Administration has several initiatives under way to expand the use of safe nuclear energy, including the Generation IV program to develop the next generation of nuclear reactors. We also are pursuing plans to build a permanent repository for commercial nuclear waste which the government has been promising the utility industry for years.

But as we pursue all these new forms and sources of energy it's important to keep in mind that our most accessible source of new energy might be the energy we currently waste. The average American home loses between 10 and 50 percent of its energy through inefficient lighting and appliances and inadequate insulation. Schools, stores, factories, and office buildings don't do much better.

That's why we must enhance our efforts to promote energy efficiency, by encouraging homeowners to choose Energy Star rated homes and appliances, by encouraging consumers to choose more fuel efficient vehicles, and by helping plant managers to understand how new technologies and process improvements on the factory floor can save energy while improving the company balance sheet.

The fact is we have a variety of energy saving technologies that are ready for the market. More efficient homes, vehicles and technologies are there for the asking. Some suggest that we need to push these technologies into the market with new regulations, codes and standards. Others say we should simply encourage consumer behavior to pull these technologies into the market. The fact is, we need to do some of both, and we will seek to strike the proper balance as we seek to reduce energy demand, improve the environment, and help all sectors of the economy save money on energy.

And, this is not an effort that can be borne by the federal government alone. State and local governments are playing a key role in the efforts to reduce energy use, to promote new supply, and to address the urgent needs of our energy infrastructure.

We all know that investment in our critical energy infrastructure has fallen woefully behind. We need more pipeline capacity, we need an expanded and more reliable electric grid, we need new power plants in many areas, and we definitely need more oil refining capacity.

We haven't built a new refinery in this country in about 30 years, and over the past 10 years, about 50 refineries have shut down. The growing demand for gasoline and other refinery products is straining our refining capacity to its limits.

But regulatory hurdles and unpredictable rule changes make siting and building new refineries and power lines and generation plants costly, complicated and time-consuming. Political opposition makes it even worse. All this creates investment risk driving the already-high cost of capital for these very capital-intensive projects even higher.

In addition to state and local governments, there is also the international arena. Our Department has numerous bilateral and multilateral agreements with international partners on energy issues. I look forward to expanding these partnerships to address the global energy and environmental challenges that do not recognize political borders.

And, then there is the private sector. The key to our long-term energy future may rest with a young engineer, chemist, or even biologist, pursuing scientific research that will yield new or better energy sources not yet discovered, or even imagined today. This is why so many Department of Energy research efforts are conducted in cooperation with major research universities and private industry. We are working with major automakers in the development of hybrid and hydrogen vehicles with the private sector providing much of the funding for many projects.

We are working with oil and gas companies in the development of new fuels to cut pollution and reduce our dependence on imported energy. We are working with appliance and industrial equipment manufacturers to develop more energy-efficient machinery for homes and businesses. The Department of Energy's National Laboratories, often working closely with the private sector, have garnered more than 80 Nobel Prizes through the years--a testament, I think, to the effectiveness of public-private partnerships.

So, I believe one of the contributions my Department can make is to do even more to help foster scientific discovery and facilitate the commercialization of promising new projects. All the things I have mentioned are crucial to meeting our energy challenges. But we cannot fully succeed without one more essential element: Congress must pass comprehensive energy legislation.

One of the things I learned as an engineer is the law that every action must have a reaction. The corollary is that there can be no reaction, no outcome, unless there is first action. Every effect must have a cause. We cannot have stable, reliable and affordable supplies of energy for the 21st century unless we are willing to invest in the means to that end: the power generating plants, the LNG infrastructure, the oil refineries, the upgraded electricity grid, the research to develop new and more-efficient energy sources.

Congress simply cannot delay any longer. The President has laid out a broad, sensible plan: promoting conservation and efficiency, increasing domestic production, diversifying supply, and modernizing our infrastructure, while upholding our responsibility to be good stewards of the environment.

As leaders of the energy sector, and as leaders of our communities and of this nation, one of our most solemn responsibilities is ensuring the security of future generations. This is one of the President's key beliefs, which is demonstrated in this Administration's energy policies, as well as other policies and initiatives, such as reforming the Social Security system. In both situations, we see the symptoms of major problems to come, problems that could have dire consequences unless we begin working to correct them now.

Samuel W. Bodman

Samuel Wright Bodman was sworn in as the 11th Secretary of Energy on February 1, 2005, after the United States Senate unanimously confirmed him on January 31, 2005. He leads the Department of Energy with a budget in excess of $23 billion and over 100,000 federal and contractor employees.

Previously, Secretary Bodman served as Deputy Secretary of the Treasury beginning in February 2004. He also served the Bush Administration as the Deputy Secretary of the Department of Commerce beginning in 2001. A financier and executive by trade, with three decades of experience in the private sector, Secretary Bodman was well suited to manage the day-to-day operations of both of these cabinet agencies.

Born in 1938 in Chicago, he graduated in 1961 with a B.S. in Chemical Engineering from Cornell University. In 1965, he completed his Sc.D. at Massachusetts Institute of Technology. For the next six years, he served as an Associate Professor of Chemical Engineering at MIT and began his work in the financial sector as Technical Director of the American Research and Development Corporation, a pioneer venture capital firm. He and his colleagues provided financial and managerial support to scores of new business enterprises located throughout the United States.

From there, Secretary Bodman went to Fidelity Venture Associates, a division of Fidelity Investments. In 1983, he was named President and Chief Operating Officer of Fidelity Investments and a Director of the Fidelity Group of Mutual Funds. In 1987, he joined Cabot Corporation, a Boston-based Fortune 300 company with global business activities in specialty chemicals and materials, where he served as Chairman, CEO, and a Director. Over the years, he has been a director of many other publicly-owned corporations.

Secretary Bodman has also been active in public service. He is a former Director of MIT's School of Engineering Practice and a former member of the MIT Commission on Education. He also served as a member of the Executive and Investment Committees at MIT, a member of the American Academy of Arts & Sciences, and a Trustee of the Isabella Stewart Gardner Museum and the New England Aquarium.
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Author:Bodman, Samuel W.
Publication:Business Perspectives
Date:Mar 22, 2005
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