I want to thank my good friend Phil Schaefer for that kind introduction. There is no one in the world of investments more committed to using the power of the marketplace to help people in need.
You probably know about Phil’s good work all over the world, but one example sticks out in my mind.
At the time that South Africa was emerging from beneath the shadow of legalized segregation, it was Phil Schaefer who brought together pension fund leaders from around the US to travel to Johannesburg for the country’s first postapartheid investment conference.
My brother Michael Kennedy and Citizens Energy was a proud sponsor of that important meeting, which sought to find a way to buttress democratic reforms with economic opportunity. In the final analysis, we all know that democratization means little to people who can vote but cannot eat, who have access to ballots but not to jobs, and who have political parties but not clean water, health care, or decent housing.
The best social program has always been a job, and that’s what Phil Schaefer’s career has been about -- finding a job.
I also want to thank my fellow panelists for joining us today. It’s a great privilege to discuss energy policy with Michael Peevey and Jim Hackett, who represent the best and the brightest of talents in the utility and oil industries.
But I want to especially thank each and every one of you for taking the time to participate in today’s important discussion. What Phil is trying to accomplish here today is nothing less than to help solve the riddle of the current volatile market while still hewing to core values of what’s really important to make this country and this world a better place to live in.
As we meet here to consider energy policy in the twenty-first century, you should know that Citizens is probably the only energy company in the country that actually likes lower energy prices.
When we look at what’s coming out of Washington these days, we don’t see energy proposals that aim at long term lower prices.
President Bush’s policies emphasize increasing domestic supply, which can indeed have a short term dampening effect on prices.
But in the long run, we cannot create greater price and supply stability without decreasing our reliance on fossil fuels.
But let’s step back for a moment and ask a very basic question: How did we get here?
Basically, energy is a hot public policy potato once again because OPEC finally got its act together to sustain its production quotas over the last several years, forcing prices up as production went down.
At their core, energy prices are not set by the free market but by the OPEC cartel and a small band of other cooperating producers who manipulate the market to their advantage.
In my view, the only way to counter their influence is to use the clout of the major consuming nations to form an Organization of Petroleum Importing Countries -- an OPIC -- to negotiate an end to the volatile price fluctuations that hurt producers and consumers alike.
Producing nations have enjoyed the financial fruits of their price spikes for the last two years, but the dynamics are changing as the world’s major industrial economies continue to soften.
In fact, we have seen a significant deterioration in the Third World economies, bringing a great deal of budgetary pressures on the developing world in general, and on OPEC nations and their allies in particular -- Venezuela, Nigeria, Mexico, Saudi Arabia, and others.
The resulting financial squeeze will put even greater pressure on producers to cheat on production quotas. The loss of OPEC’s production discipline will further dampen oil prices.
So we can once again expect a replay of the boom-and-bust cycle familiar to anyone who has closely followed the energy markets over the years.
Just go back to the era of Saturday Night Fever. The oil price rises of the mid ’70s were followed by economic stagnation in consuming nations and the adoption of greater conservation measures, which had a dampening effect on prices, throwing producing nations into economic turmoil.
Those spikes and collapses in oil prices have an impact on natural gas and electricity prices as well, as we’ve seen in California.
The lesson of the Golden State electricity crisis is that if there’s a real shortage on supply, there’s no limit to what can be charged for a BTU.
Simply put, very wealthy companies and very wealthy individuals will pay whatever they have to for an essential commodity like energy, with the poor suffering the most of all.
Now what can we do to minimize such conditions and prevent a replay of these boom-and-bust cycles during the remainder of this century?
To begin with, we must make our overall systems more efficient.
In New England, for example, we will be better off with new gas pipelines coming down from Nova Scotia and the Sable Island gas fields, so that our region is no longer at the end of the pipelines from the South.
The pipeline bottlenecks to local distribution companies throughout the country should be relieved by increasing our pipeline system and capacity.
We need to upgrade and integrate the electricity grid in order to facilitate easier movement of power from generators to users throughout the nation.
These are long overdue infrastructure needs, and the Bush administration is correct in addressing such issues.
But that still leaves us the problem of overreliance on fossil fuels. For over 100 years, the price of oil was set at $1 a barrel by the Texas Railroad Commission. Oil was cheap and plentiful in the US. Up until the 1950s, in fact, we were a net exporter of oil.
We’ve gone from being a net exporter to importing 56% of our oil needs, with that figure projected to rise even higher. We cannot simply drill our way out of the problem. The vaunted reserves of the Arctic National Wildlife Refuge contain only enough oil to supply domestic consumption for six months.
With those realities in mind, the question before us today is what can you as pension fund managers and investors do to make our country more energy-efficient and less dependent on foreign oil?
In fact there are a number of new energy-efficient and renewable technologies you can invest in to strengthen and protect our economy while making money for your funds.
Here are just a few:
New dual-cycled gas-fired turbines can achieve up to 70% efficiency, compared to older models that waste 70% of the fuel burned to generate power. Systems to generate power within commercial and real estate properties themselves are known as distributed generation, which cut out the 14% of energy lost in traditional transmission from a central power facility.
In addition, distributed generation feeds surplus power onto the grid, actually adding energy to regional power systems.
There are a whole series of new developments in renewable energy technologies that deserve the close attention of investors. America gains as a whole as well when we spend petrodollars at home that would otherwise be sent into the coffers of OPEC countries. In fact, half our balance of trade deficit goes to oil purchases.
As we continue to rely on foreign oil, the European Union has set a goal of 25% renewable energy use by the year 2010. That is not just blue-sky thinking but a goal based on major advances in such renewable sources as wind power, which supplies increasing amounts of energy to consumers in Germany, Denmark, and the Netherlands.
Over the last 20 years, the cost of generating electric power from wind turbines has dropped from 30 to 40 cents a kilowatt-hour to between 4 and 6 cents a kilowatt-hour today. At this price, wind power systems are beginning to enter the marketplace, expanding from early California sites to include new projects in states like Pennsylvania, New York, Vermont, Wisconsin, Iowa, Texas, Colorado, New Mexico, and Canada.
In fact, there are 16 states, including New Mexico, with better wind potential than California, where most of the US wind development has occurred to date.
Up in the Pacific Northwest, the world’s largest wind farm is currently under development -- a 450-windmill farm along the Washington-Oregon border, whose high-tech turbines will produce enough electricity to power 70,000 homes in 13 Western states.
As another example, the first commercially available photovoltaic panels in the early 1980s produced power at a cost of $1 a kilowatt-hour. Such systems now deliver electricity for as low as 12 to 20 cents a kilowatt-hour, with costs projected to drop below a dime as research continues.
The production of ethanol is also on track for widespread domestic use at competitive prices. To compete with gasoline, biofuels technologies develop ethanol from agricultural and forest waste products as well as dedicated crops, most notably corn. In Louisiana, California, and New York, production has already begun to create ethanol from sugarcane waste, rice straw and municipal waste.
President Clinton’s Council of Advisors on Science and Technology estimated that more than 31 billion gallons of ethanol could be produced from biomass, and 12,000 megawatt-hours of electricity could be generated as a by-product of making the fuel.
This amount of ethanol would shrink US requirements for gasoline by as much as 22% and reduce US carbon dioxide emissions by 6% from today’s levels.
In the area of geothermal energy, technological advancements have reduced the cost of power from new geothermal plants from 7.5 cents a kilowatt-hour in 1985 to 4.5 cents today.
A federal report released last year estimated current generation potential of 6,520 megawatts from hydrothermal resources in the US using today’s technology, with a potential of 18,830 with further technological enhancements.
Mining the treasure trove of renewable technologies must go hand in hand with working with utilities to purchase clean power and transmit it to their customers.
You can also help enormously in the area of energy conservation.
Citizens Energy once ran the biggest energy service company in the country. Our work showed that there is essentially a stripper well on top of every energy-inefficient building in the country, pumping about 10 barrels of oil a day.
Rather than pumping oil, the installation of energy-saving technologies save a stripper well’s worth of oil every day.
A recent GAO report showed that the installation of new boilers, burners, insulation, computer-controlled heat and air conditioning systems in the federal government’s portfolio of 500,000 buildings would cut $1 billion a year in taxpayer-funded energy costs, pay for themselves in five years, and produce savings for generations to come.
You can also play a role in using your investment clout to facilitate the use of energy conservation in your real estate portfolio and make investments in energy-efficient buildings.
Finally, I would urge you to become active in efforts to protect the most vulnerable Americans from rising energy costs.
We spend billions of dollars on federal fuel assistance to help the poor. What we do spend has never been enough, but we ought to do something about the fact that so much of what we do spend gets wasted in the energy sieves that so many low income people live in.
Some 40% of the taxpayer-funded electricity, natural gas, home heating oil, and kerosene that goes to elderly and working poor households simply leaks through poorly insulated walls and drafty doors and windows or gets consumed in terribly inefficient burners.
We ought to find a way to finance the installation of energy-saving technologies that will pay for themselves through savings over time. We can make the economic model work while making us better off as a nation.