by David J. O’Reilly
Chairman and CEO
Chevron Corporation

The early agenda of President Barack Obama’s administration is dominated by fixing the economy. But energy cannot be far behind because of how closely intertwined the two are. The financial and energy markets are enormous in their scale and global reach. Both markets touch every sector of the U.S. economy and are key pillars of our competitiveness. The world’s financial markets are interconnected, as are the world’s energy markets.

The energy sector – oil, gas, coal, nuclear power and renewables – drives human progress. However, the global energy market has been reshaped in ways that are deeply affecting our domestic economy, and those effects are intensifying.

Polls show that Americans consistently rank gasoline prices as their number-two concern, second only to the economy. The two are inextricably linked. High energy prices drive inflation, squeeze family budgets and cause ripples throughout the economy. The availability of affordable energy is a cornerstone of our prosperity. This public concern presents an opportunity.

W. Edwards Deming, one of America’s most respected business thinkers, once said: “It is not enough to do your best; you must know what to do, and then do your best.”

The good news is, we know what to do. For many years, informed observers have seen this situation coming and have offered solutions. The bad news is, public policy has not kept pace.

Therein lies the opportunity. Right now, Americans want action. They are seeking reliable, affordable and abundant energy – they are seeking energy security.

Energy security is essential for economic stability. Reliable, affordable and abundant energy helped drive the prosperous years of the 1980s and 1990s. Energy supports every local economy. It affects the budget of every household and business sector. It directly and indirectly provides millions of U.S. jobs and enhances the standard of living of every American.

But to have meaningful impact, we must address our energy and economic challenges in a coordinated way so that the outcome is greater energy security and greater economic security.

And this is the time to do it. We are at a critical moment of decision when it comes to energy policy.

In his recent book, Hot, Flat and Crowded: Why We Need a Green Revolution – and How It Can Renew America, Thomas L. Friedman frames the need for change by saying: “It will be the biggest single peacetime project humankind will have ever undertaken. Rare is the political leader anywhere in the world who will talk straight about the true size of this challenge.”

The new administration has an opportunity to make realistic changes to our approach to energy and to create a comprehensive energy policy. The American people are looking for solutions to the energy challenges we face. They want answers.

The New Energy Equation

The questions I am asked most often usually start with the word “why.” “Why are energy prices so volatile?” “Why don’t you think oil prices will return to $20 per barrel anytime soon?”

For 20 years, oil traded in a relatively narrow band, fluctuating between $15 and $25 a barrel. Sometimes the price dipped; sometimes it rose. The impacts were modest, and they had no detrimental effects on our economy.

In the 21st century, that has changed. Oil prices have increased significantly. Instead of prices in the $20-per-barrel range, we have seen oil prices exceed $100 per barrel, before falling back to around $50 per barrel.

The answer to the question “Why?” is a concept I call the New Energy Equation. I raised this idea four years ago, and today its implications are more acute than I expected.

There are four reasons that explain why prices have gone up and why they are likely to remain relatively high.

First is the emergence around the world of a growing middle class that is driving energy demand. There are more than 6 billion people on Earth. We who are leading the energy industry are among the so-called Golden Billion, enjoying a standard of living that many can only dream of.

At the other end of the scale are 2 billion people who have essentially nothing: they have no electricity, have no safe water and are living on less than $2 a day. In the middle are billions who aspire to our standard of living. The good news is that each year many are beginning to achieve it. But the consequences of this trend are increasing demands for goods, services and commodities of all kinds.

Second, geopolitical dynamics continue to put upward pressure on prices. I do not just mean conflict in the Middle East, although that certainly plays a role. The situation is far more complicated. We are seeing a resurgence of resource nationalism – the impulse by governments to tightly control their resources and limit foreign investment.

Third, new supplies of oil resources are challenging to find and extract. Most of the easy-to-reach, inexpensive supplies have been used. What is left is harder to find, more difficult to drill and more expensive to produce.

And fourth, we have deliberately constrained our own supply by placing limitations on domestic exploration and drilling. In the past 20 years, America’s oil production has fallen by nearly 4 million barrels a day. This is the equivalent of taking a major producing country’s supply off the world market.

Over the same period, U.S. demand grew by more than 4 million barrels per day. Less supply in a time of rising demand means higher prices. Last year, global production barely exceeded demand. Spare capacity stood at just over 2 million barrels per day, and world oil production barely increased.

Seven of the top 15 oil-producing countries experienced flat to declining production in 2007 compared with 2006. Among them were Mexico, Venezuela, Norway and Nigeria. Although in late 2008 the supply and demand balance improved, there remain accumulating risks to the supply of reliable, affordable energy in the future.

Solutions Begin with Information

But there are solutions. Furthermore, the necessary actions we must take become apparent when people understand the realities of energy, including the following information about our energy system.

Americans are the largest consumers of energy in the world, and we have benefitted greatly from it. We generate about a quarter of the world’s gross domestic product and consume a quarter of the world’s energy.

We are becoming more efficient in our energy use. Today, we use half of the energy per unit of gross domestic product compared with 40 years ago.

So where does this energy come from?

Almost 40 percent is oil, about 23 percent each comes from natural gas and coal, and 8 percent is from nuclear power. Renewables make up 7 percent, and of that, hydro power contributes about half. Less than one-half of 1 percent comes from wind. Solar is even smaller than that.

We import about two-thirds of our oil and 15 percent of our natural gas. All of the rest of our energy – coal, nuclear and renewables – is produced here at home.

Let me dispel one myth. The United States is not an energy weakling. Our country is an energy powerhouse.

America is the number-one producer of nuclear power and ethanol. We are the number-two producer of coal, natural gas and wind. And we are the number-three producer of oil.

When looking at the energy system from a global perspective, the picture is very similar. As in America, 85 percent of the global economy is powered by oil, natural gas and coal. And experts predict that in 2030 the world will need 40 percent more energy than we consume today.

Now I want to make one important point about scale. The scale of the global energy system is enormous and destined to get much larger. Today, the world consumes from all energy sources the equivalent of 10 million barrels of oil each and every hour. That’s about 120,000 gallons per second.

Beyond Half-truths and Impossible Contradictions

I have just listed key facts about energy, and facts are the antidote to all the myths, half-truths and impossible contradictions that too often pass for energy “thinking.” Here are some of those impossible contradictions:

• We want to decrease our reliance on foreign oil, but we restrict domestic production and call on the Organization of the Petroleum Exporting Countries to increase its production.
• We want less carbon but are fearful of nuclear power, one of the few scalable sources of energy that generates no carbon.
• We want energy companies to invest their profits to provide new supplies, but we threaten to take away those profits through “windfall profits” taxes.

Time and time again, someone tells us that he or she has found the solution to all our problems. Some are purely phony; some are real but not realistic.

Renewable energy is very real. We need it, and I envision it will be an essential part of the future. But it is not realistic to suppose that it can replace conventional energy in a short time frame, as some suggest.

Our energy system has required massive investment over many decades. To supply the needs of some 300 million Americans requires time and money – lots of both. I do believe we will develop and implement new technologies that will move our economy toward a greater reliance on renewables and alternatives. But the development and application of new technology will take time.

Look at the computer industry. It took about 50 years from the development of the silicon chip before computers were a widespread part of everyday life. Will energy alternatives take that long? I hope not. But we need to be realistic.

Even with the rapid growth of renewables, experts estimate that more than 80 percent of global energy consumed in 2030 will still come from oil, natural gas and coal. These conventional energy sources will remain indispensible to meeting demand for decades to come, even as we pursue greater contributions from other sources.

The flip side to misplaced hope in alternatives is the notion that we can simply drill our way out of the problem. We cannot. There are not enough domestic reserves, and what reserves exist will take time to develop. But more access to them will help.

We need to get beyond simplistic solutions and focus on our primary objective: energy security. The reality is that there are no silver bullets, no quick or easy answers. Massive scale, long lead times, tight spare capacity, growing demand – these are the realities we face.

There are solutions, and those solutions are not either/or. It is not a choice between more drilling or more efficiency, coal or wind, nuclear or solar. We need greater efficiency and more renewables. We need nuclear and clean coal. We need wind and oil and natural gas.

We need it all. Our path to energy security cannot rely on just one option. We must pursue many options.

The Five Steps to Energy Security

In 2007, the National Petroleum Council published a study titled Facing the Hard Truths about Energy. It laid out five essential and urgent steps to achieving energy security:

1. Moderate demand by increasing energy efficiency in all sectors of our economy.
2. Expand and diversify all U.S. domestic energy supplies.
3. Strengthen global and U.S. energy security through a renewed commitment to energy trade and investment.
4. Enhance science and engineering capabilities.
5. Address greenhouse gases through a transparent, predictable carbon policy.

We are facing a moment of decision when it comes to our energy future. The time to act is now. I am confident we can take the right steps forward to achieve energy security, and I am not alone in my views. The American public is now also engaged on energy.

We are embracing energy efficiency. We are endorsing the need to develop more of our own supplies – renewables and conventional energy. We are striving to use energy in a more environmentally responsible manner.

The recent campaign rhetoric produced one catch phrase I like: “We need all of the above.” The “all of the above” approach should be the new energy mandate for the Obama administration’s energy policy. And we need this new energy policy to be addressed as a strategic economic priority as well as a national security priority.

President Obama must deliver a national blueprint to achieve distinct goals for each of the five recommendations of the National Petroleum Council study. Above all, to plan for the future properly, these goals need to be clear, realistic and specific.

If government acts to address energy security, the benefits to our economic prosperity will be significant. Responsible and environmentally sound development of America’s vast energy resources will be significant and will over time:

• Add high-paying jobs across all sectors of our economy.
• Generate billions in new tax revenues for our local, state and federal governments.
• Reduce our dependence on imports and improve our balance of trade.

These are benefits we all desire.

In this time of economic uncertainty, our energy industry can provide renewed economic growth and greater energy security. Our energy industry can provide a stable foundation for a prosperous future.

David J. O’Reilly is chairman and chief executive officer of Chevron Corporation.

A native of Dublin, Ireland, Mr. O’Reilly earned his bachelor’s degree in chemical engineering in 1968 from University College, Dublin, from which he also received an honorary doctorate in science in June 2002. Upon graduation in 1968, he began his career with Chevron Research Co. as a process engineer. After serving in positions of increasing responsibility, in 1989 Mr. O’Reilly was elected senior vice president and chief operating officer of Chevron Chemical Co. In October 1991 he was elected a vice president of Chevron Corp., responsible for strategic planning and coordination of the company’s quality-improvement activities. In September 1994 Mr. O’Reilly became president of Chevron Products Co., responsible for the company’s U.S. refining and marketing operations. From November 1998 until January 2000 he served as vice chairman of the board of Chevron Corp., responsible for Chevron’s worldwide exploration and production and corporate human resources. He was elected chairman and chief executive officer on January 1, 2000.

Mr. O’Reilly is a director and member of the Executive Committee and Policy Committee of the American Petroleum Institute. He is also a director of the Peterson Institute for International Economics and the Eisenhower Fellowships’ Board of Trustees. He is a member of the World Economic Forum’s International Business Council, the National Petroleum Council, the Business Council, the Business Roundtable, the JPMorgan Chase International Council, the King Fahd University of Petroleum & Minerals International Advisory Board, the American Society of Corporate Executives and the Trilateral Commission.

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