Companies and consumers continue to be concerned about volatile energy prices and unpredictable availability. The time is right for US policymakers to focus on a sound energy policy that provides a long-term solution.

With energy demand expected to grow dramatically, a cohesive long-range energy policy is needed as never before. (Images courtesy of PricewaterhouseCoopers)

While government is at the forefront, a sound and sustainable energy policy is everyone’s responsibility. At its foundation, such a policy should fully recognize four basic realities:

1. Past cycles of one-off, short-term solutions must be broken and give way to a long-term planning horizon — 30 years or more.

2. An energy policy that fosters the investment needed over the long term cannot be fully effective unless there is a clearly defined approach to carbon reduction requirements.

3. Policymakers must embrace a multi-resource mindset.

4. The public and private sectors should collaborate on initiatives that leverage technology and people to promote increased supply and reduced demand.

Breaking the cycle of short-term planning

According to the IEA outlook, while renewables will grow in importance, they will continue to contribute a relatively small percentage of the overall energy requirements.

Energy projects are hugely capital-intensive and long-term. For example, it can take decades to construct and produce energy from a nuclear facility as it evolves from planning and permitting to regulatory approvals and construction. Building a new offshore oil or gas production platform is also a lengthy undertaking.

Therefore, the foundation of any sound energy policy is the recognition that continual short-term reactions to current events are hugely damaging to a country’s energy policy. Additionally, that policy cannot succeed in the absence of tax and regulatory policies that are equally focused on the long-term goal.

Windfall profits taxes (WPTs) have been tried and have failed because of negative unintended consequences. As public finance specialist Salvatore Lazzari points out, the WPT in effect from 1980 to 1988 “reduced domestic oil production anywhere from 1.2% to 8% (320 MMbbl to 1.3 Bbbl). Dependence on imported oil grew from between 3% and 13%.”

More and higher taxes mean less capital available to foster investment that would help secure future supplies. The International Energy Agency (IEA) predicts that US $25.6 trillion will be required to meet global energy demand in the next 22 years. Some $4.9 trillion will be needed in North America alone. Investments must be made now to meet the predicted demand.

Although energy use per dollar of gross domestic product is declining, huge technological advancements will be required if significant reductions in per capita energy use are to occur.

If the US expects to achieve stability regarding energy supply and cost, then tax, regulatory, and other government policies cannot exist in a vacuum. They must work together with the private sector to support energy investment and encourage energy efficiency.

In addition, policies must recognize that energy cycles often rise and fall with economic cycles and that short-term energy prices often are driven by economic forces that energy companies cannot control. Investments to support current production levels were made at a time when prices were considerably lower.

Energy is a central part of the US economy. Continual short-term policy actions and reactions constrain the overall economy, slow the growth of US companies in every industry, and ultimately have a negative impact on consumers.

With energy demand expected to grow dramatically, a cohesive long-range energy policy that provides for consistency, continuity, and planning and is designed to deliver a robust energy infrastructure far into the future is needed as never before.

Carbon reduction

When implemented, carbon policy will have significant impact. Investors need clarity on the direction that will prevail and assurance that all companies — not just energy companies — will bear the burden of carbon legislation. While huge, long-term investments will be required to solve energy challenges, investors will be reluctant to make such investments if a cloud of uncertainty surrounds carbon policy. Moving forward quickly to promote details on direction and timing is essential to unleashing the investment required. This integrated approach is the only way companies can plan to provide for future energy needs. Solutions will likely increase the cost of energy for everyone; so it is necessary to have an approach that distributes the burden among all business sectors.

Embracing a multi-resource mindset

According to the IEA, global energy demand in 2030 will be approximately 40% higher than it is today, and oil, gas, and coal will still represent 80% of the total energy mix versus 81% today.

These numbers do not show a significant shift in the sources of supply during this time horizon. According to the IEA outlook, while renewables will grow in importance — from 11% to 12% — they will continue to contribute a relatively small percentage of overall energy requirements.

The investment cycle for these sources of energy is very long-term, and it is difficult to plan on new sources of energy based on short-term policy mandates.

Further, investment in alternative sources of energy cannot take place fast enough to displace the significant contribution that hydrocarbons represent. Hydrocarbons will be a bridge to a future when investments in alternative sources will have more impact. For now, though, exploiting domestic hydrocarbons offers our best chance of reducing dependence on unpredictable foreign sources of energy.

A substantially increased investment in nuclear power production must be a part of a long-term energy solution. With about 19% of its domestic power production derived from nuclear power plants, the US has demonstrated for decades that it can safely produce commercially viable nuclear energy.

Finding and developing energy sources is not the only challenge. For many new sources, the entire infrastructure has to change to support delivery of new fuel sources and end-user technology.

Leveraging technology initiatives

The energy industry is brimming with new technologies involving the development of both nontraditional forms of energy and alternatives. Advanced technology is being applied to oil shale in the US and oil sands in Canada. Technology has been developed that can convert coal and natural gas to transportation fuels such as diesel. And companies are using new technologies to experiment with carbon molecules in an attempt to convert them to useful fuels through environmentally friendly methods.

Although hydrocarbons remain plentiful, the ability to efficiently access remaining supplies is directly linked to technology. And technology provides the hope of potential breakthroughs that will result in new sources of energy to replace hydrocarbons. These might include hydrogen, new applications for nuclear, or something not yet imagined. Such innovations will be big factors in US energy security going forward, but it is important to understand that they come at a higher cost than traditional fossil fuels. Alternatives will mean prices and supply that are more predictable, but they will not mean cheaper energy.

Improved technologies also are likely to mitigate current environmental concerns about global warming. Carbon sequestration technology exists today that will enable the production of so-called “clean coal” and other hydrocarbon sources that do not damage the environment. Commercializing these technologies is essential to solving both supply issues and global warming.

Conservation is an aspect of energy policy that does not get as much attention in the US as it deserves. Energy saved through efficiency is the only “free” source of energy. Energy use per dollar of gross domestic product is declining; however, if significant reductions in per capita energy use are to occur, huge technological advancements will be required.

None of the innovation needed to secure the US energy future will occur without considerable investment, and a cohesive energy policy that considers the long-term goals and the dynamics of developing energy resources is critical. A sound energy policy encourages an environment of collaboration within and across sectors to promote discovery of new sources and the efficient use of the energy available.