Henry Lee

Dimensions of the Energy Problem

No alternative energy source can yet provide a reliable substitute for oil and gas
“There is one world oil market, and thus complete energy independence is an unattainable goal,” he said. “Even if the imported only 20 percent of its oil rather than 65 percent, if there was a disruption in the world oil market, our prices would still go up.

“You cannot isolate yourself from world oil market. It’s just impossible – despite all of the rhetoric about energy independence.”

The call for energy independence lessened somewhat in the 1980s following the resolution of the Iranian hostage crisis and a sharp reduction in oil prices.

“Since 1983, we have had almost 20 years of cheap oil,” Lee said.

In the 1990s, environmental issues like pollution from coal, acid rain, and global climate change captured the public attention. Today, energy security and climate change are paramount public issues.

A thirsty world

World oil suppliers have a capacity to produce about 84 million barrels a day, while the world demands about 83.6 million barrels a day. (See Lee's Power Point Presentation.) The world is consuming oil about as fast as it can pump it out of the ground.

“As long as demand is equal or close to supply, prices will be high,” Lee said. “This is not due to a conspiracy. The reality is, we have high demand and low supply.”

But with high prices, suppliers and investors have an incentive to increase investment in production. Lee predicts that by 2008, there will be a “significant onslaught” of new supply, thus bringing down prices – but not down too far. “Low prices will be a lot higher than they used to be, and high prices are going to be higher,” he said.

In addition to oil, natural gas has become an international trading commodity. For most of energy history, natural gas has been a domestic commodity supplied from gas-producing states such as Texas, Oklahoma and Wyoming . Now natural gas is an international fuel transported through international pipelines and in liquefied form on tankers.

With the emergence of and as major world economies, their demand for oil and gas will significantly impact world energy markets.

Tapping out?

Calculating the remaining world oil reserves is a moving target. Based on 1998 consumption rates, oil reserves could last anywhere from 40-78 years.

But oil will become more difficult find; locations will become more remote; drilling will be deeper; and correspondingly, prices will rise – thus reducing demand.

“Despite all of the rhetoric about peak oil, oil supplies are not about to run out,” Lee said. “But the cost of production will increase two to threefold as the supply of cheap oil disappears.”

Even if the oil supply were to run out, the has vast reserves of coal, at least 250 years worth, which can be converted to fuel.

Meanwhile, oil exploration will continue and technology for oil and gas production will improve, as they have significantly for past 20 years, Lee noted. “This allows access to supplies that haven’t been available before, such as the tar sands in .”

Energy insecurity

About 75 percent of the world’s oil supplies are located in the Middle East, and 42 percent of the world’s gas supplies are located in and . “This fact will ensure that security issues will remain paramount in the energy debate,” Lee said.

“When you look at the Middle East , do you believe it will be more stable or less stable in the next 20 years?” Lee asked. “Most people believe it will be less stable.”

So if world oil demand increases from 84 million barrels a day to 110 million barrels over the next 25 years, as the Department of Energy projects, where do supplies come from?

Alternative suppliers such as , the “stan” states in Central Asia, , and all suffer from stability problems.

This is coupled with a trend toward the nationalization of oil businesses. Governments, not oil companies, own the vast majority of the world’s oil reserves. This was not the case in the 1970s. Today, 86 percent of the world oil reserves are owned by national governments. This means that countries hostile to the , such as most of the OPEC countries, can negatively impact the economy by tinkering with supply.

Energy conservation is the first step toward reducing this problem, Lee said.

“Investment in improved energy efficiency has three attractive characteristics: It is the least expensive; it has enormous potential; and efficiency enjoys political popularity,” he said.

“To reduce the ’s reliance on imported oil, motor vehicle efficiency must improve significantly, and substantial amounts of substitute fuel must be developed and commercialized,” Lee said.

Roller coaster market

Adding to the problem of supply insecurity is the fact that oil prices are highly volatile. Over last seven years, the price of oil has been as low as $9 a barrel and as high as $73.

“If I’m an investor looking six years out, and oil could be as high as $100 a barrel or as low as $30, how do I make that choice?” Lee said. “There is an enormous incentive to under-invest in energy.”

High oil prices do create an incentive to invest in alternative energy sources, with the federal government usually joining in with subsidies for alternative energy producers.

“When energy prices are high, government is my friend: They will give subsidies; they will put up import barriers; they will make people buy my products; I’m a favorite son.” Lee said. “But when energy prices go down, the subsidies go away. There are carcasses of bankrupt energy companies whose subsidies disappeared in the 1980s.”

Since subsidies are usually linked to prices, which are volatile, subsidies are volatile, thus making investment in the renewable energy industry risky business, even with government assistance.

Green and red

Those in the energy debate generally fall into two categories:

One group worries about the environmental effects of energy consumption from burning fossil fuels, air pollution, global warming, accidents from nuclear power plants, land use issues involved in hydro-electric plants and wind farms, Lee said.

“The other side worries about energy constraints – both environmental and political,” he said. “They point to limiting our energy options by limiting offshore production, moratoriums, siting problems, wetlands, the inability to get the nuclear industry off the ground.”

The environmental position is bolstered by melting glaciers in Greenland and the shrinking of the Arctic ice cap, which is allowing to develop shipping lanes in its northern waters from Murmansk to Vladivostock.

No silver bullet

Every energy option has major drawbacks and challenges:


Renewable energy sources also pose a number of major challenges:

The cost of alternative energy sources is a major barrier: In order to produce electricity, natural gas costs about 2.3 to 5 cents per kilowatt hour; wind costs 5 to 7 cents per kilowatt hour; and solar power skyrockets from 25 to 50 cents per kilowatt hour.

“Wind is pretty close to being economic, but wind doesn’t blow all the time,” Lee said. And electricity cannot be stored in large amounts.

The future

“The challenges going forward are multiple,” Lee said. “Historically it takes about 50 years to significantly change energy systems. Now it is even more complicated with a greater world population and more economies competing for energy sources.

“The availability of options will be constrained by the threat of climate change. Whether you are skeptical or you believe in it, politically, this issue is beginning to move.”

Lee predicts that in next the next years, Congress will pass some kind of mandatory CO2 restriction.

“This issue will not go away. So we have to figure a way to integrate energy policy with a climate policy.