Our government has known for a long time that an energy crisis was approaching.

Action Plan

2001 Strategic Energy Policy Challenges for the 21st Century

Report of an Independent Task Force
Sponsored by the James A. Baker III Institute for Public Policy of Rice University and the Council on Foreign Relations
Edward L. Morse, Chair and Amy Myers Jaffe, Project Director

The Task Force recommends a two-part action plan. The first stage consists of immediate actions to establish appropriate mechanisms to manage potential supply disruptions and to buffer the economy against harm from price volatility. The second part, consisting of longer-term actions, tackles the causes of recent shortfalls and emergencies. These initiatives establish a framework for developing new supplies and ample capacities along various linked global energy supply chains, while preserving and enhancing the human habitat.

Immediate Actions

There are few options available to government to expand supply in the short run or to reduce short-term demand. Consequently, immediate actions should consider all possible means of de-bottlenecking supplies and reducing obstacles to delivery of supplies, both domestically and internationally. In addition, the short-term actions must establish permanent machinery for integrating energy policy with economic, environmental, national security, and foreign policies. To the degree that new supplies alleviate energy shortfalls in periods of peak demand, they will provide protection to consumers against price spikes.

Virtually all actions available to remove obstacles along the supply chain in the very short term involve tradeoffs with other policy objectives, including environmental, national security, and foreign policy concerns. Therefore, tradeoffs must be carefully weighed. Any supply-side relief also eliminates the only current mechanism for controlling demand: higher prices. Proper policy must consider measures that will prevent the public from keeping U.S. energy security perpetually beyond reach. For the immediate and short term, two sorts of policies need to be considered:

• Those that quickly alleviate supply bottlenecks and damp demand.
• Those that need to be adopted in a timely manner in order to have a desirable impact in the longer term, given the long lead times required in order to mobilize capital or new technologies.

Key elements of this plan are designed to:

• safeguard supply in times of accident or disruption to ensure orderly markets.
• ease and eventually eliminate constraints in the energy infrastructure.
• promote diversity of clean, fairly priced, abundant supply sources.
• enhance energy efficiency and curb unbridled growth of energy consumption.
• ensure fair competition and market solutions.
• promote restructuring of formal institutions and informal arrangements for managing international energy relations.

Steps:

1.         Deter and manage international supply shortfalls

a.         Develop a diplomatic program ensuring GCC allies remain prepared and willing to maintain stable prices for global economic growth and also to fill any unexpected supply shortfalls in times of turmoil in the oil markets, whether created by accident or by adverse political actions on the part of any producing nation.

b.         Prepare for contingencies and gain agreement on coordination in the IEA in efforts to deal with any removal of oil by adversary nations from international markets.

c.         Minimize public conflicts with OPEC and other independent oil-exporting countries but emphasize importance of market factors in setting prices.

d.         While moving to defuse tensions in the Arab-Israeli conflict through conflict resolution and negotiations, maintain energy and political issues in U.S.-Middle East relations on separate tracks.

e.         Review policies toward Iraq to lower anti-Americanism in the Middle East and elsewhere; set the groundwork to eventually ease Iraqi oil-field investment restrictions.

2.         Remove bottlenecks and other obstacles to energy supply, both domestically and internationally.

1. Streamline procedures for waiving product specifications.
2. Establish procedures to grant Jones Act waivers without adversely affecting U.S. ship owners or U.S. labor.
3. Enact legislation for federal primacy over state regulations especially with respect to

product specifications and pipeline right of way.

1. Enact legislation to facilitate regional solutions to energy challenges.
2. Investigate whether any changes in U.S. policy would rapidly facilitate higher Caspian Basin oil exports.

3.         Take a fresh approach to building and maintaining national strategic and commercial crude oil and petroleum product inventories.

a.         Review the size and financing of the SPR.

b.         Establish professional criteria for managing the SPR.

c.         Establish clear policy for use of the SPR.

d.         Review tax, accounting, and other factors affecting industry’s incentives to hold petroleum product and natural gas inventories with the intent of enhancing inventories before seasonal demand, and neutralizing any adverse impact of current rules.

e.         Encourage states to review minimum inventory for fuel switching where feasible and also fiscal incentives to industry to build inventories in advance of seasonal demand increases.

4.         Develop mechanisms for a new national approach to energy policy.

a.         Create an appropriate interagency process to articulate and promote energy security policy and integrate energy policy with overall economic, environmental, and foreign policy.

b.         Review and streamline the allocation of authorities within the federal government, especially in areas of land management and energy.

c.         Convene a national energy security summit to help develop a national consensus on energy policy objectives and means.

d.         Develop a strategic communications plan on energy security policy in order to educate the public on the difficulties of achieving short-term, unilateral solutions to the nation’s energy dilemmas.

Long-Term Policy Initiatives

1.         Review international approaches to build, maintain, and use strategic and commercial crude oil and petroleum product inventories.

A.        Enhance and modernize IEA strategic stockpile policies in light of the changed international market, taking into account situations that technically fall short of a supply disruption as well as different regulatory authorities among IEA members.

B.         Encourage key non-IEA countries (e.g., China, India, Brazil) countries to develop strategic stocks.

C.         Review IEA membership, taking into account the desirability of creating a new class of associated members who could be encouraged to hold minimum stocks and also benefit from direct participation in other IEA activities.

2.         Accelerate demand-management efforts at home and internationally.

A.        Take a proactive government position on demand management.

B.         Use federal procurement authority to promote use of alternative fuels and develop programs to introduce new efficiency technologies into federal buildings and nascent transportation technologies into government vehicle fleets.

C.         Use federal procurement authority to achieve other demand management goals.

D.        Review and establish new and stricter CAFE mileage standards, especially for light trucks.

E.         Actively promote the development of energy-efficient technologies, including fuel-efficient engine and vehicle technologies.

3.         Maximize efforts to develop every clean source of domestic fuel supply.

A.        Oil and natural gas

1.         Accelerate completion of the U.S. oil and natural gas reserve inventory, as mandated by Congress, paying special attention to restrictions on resource development. Such an inventory needs to be completed soon and well before any plan is adopted to develop particular domestic resources.

2.         Undertake an accelerated and complete review of tax and fiscal policy as they impact U.S. oil and gas development, taking into account the competitive position of the U.S. fiscal regime internationally, in order to attract more capital to the sector.

B.         Power (Electricity)

1.         Create an appropriate, comprehensive statutory framework for electricity restructuring and for reestablishing a capacity cushion for the nation’s power supplies. A new framework needs to overcome the adverse impacts of today’s highly fragmented regime, which has reduced the reliability of power grid and impeded investment in new generation and transmission capacity.

2.         Work expeditiously to improve the statutory framework for approvals of the siting of power generation plants, and transmission and distribution infrastructure.

3.         Evaluate the need for incentives to stimulate the introduction of new technologies into the power marketplace, including distributed generation and co-generation.

4.         Work with state regulators and regional authorities to let companies offer long-term contracts for electric power, and to encourage them to hedge price risks.

5.         Encourage the development of regional power capacity cushions.

6.         Recognize that many of the polices required to meet increased demand are power-source specific.

7.         Assure that regulations protect open access to electricity generated by new nontraditional fuel sources.

C.         Natural Gas

1.         Apply strong leadership to develop a coherent, comprehensive strategy promoting efficient development and use of the nation’s natural gas resources.

2.         Endorse the construction of natural gas pipelines from the Arctic to the lower forty-eight states and work bilaterally with Canada and the U.S. state of Alaska to address important issues that need to be resolved.

3.         Assure regulatory authorities work together to bring about natural gas market efficiencies, including the provision of open access to markets by producers and to supply by end-users, and that allow delivery costs to be determined transparently by market forces so that commodity values are transparent to both producers and consumers.

4.         Invest in—or stimulate and encourage private sector investment in—research and development of technologies that focus on safe and cost-effective ultra-deep water production, smaller drilling footprints, and increased production from non-conventional sources, including methane hydrates.

5.         Encourage natural gas exploration and production through a series of technology-targeted tax incentives that also encourage use of advanced, environmentally sensitive technologies, and that provide counter-cyclical support for exploration and production.

6.         Initiate a mitigation forum process to evaluate infrastructure needs and reduce delays in new pipeline and storage facility siting.

7.         Consider providing incentives to state and local governments that agree to expedite natural gas infrastructure siting.

8.         Invest in—or stimulate and encourage private-sector investment in—technologies ensuring pipeline infrastructure integrity, reliability, flexibility, and safety.

9.         Foster development of advanced storage technologies to increase regional storage capacity and serve peak power and distributed-generation markets.

10.       Evaluate the potential of imported Liquefied Natural Gas (LNG) as a major additional source of base load as well as incremental supply, and in the process accelerate environmental reviews required for siting as well as accommodate the commercial logistics and other user needs associated with facilities built or operated by LNG suppliers.

D.        Coal: Given the nation’s abundance in coal resources it is critical to foster the development of clean coal technologies to promote coal use in power generation, while mitigating the impacts of coal combustion to meet local, regional, and global environmental challenges

E.         Nuclear

1.         Support the Nuclear Regulatory Commission to extend plant life where possible

2.         Constructively work with stakeholders to resolve nuclear power plant spent fuel (and high-levels defense waste) disposition within the next few years, since this is critical to preserving viable nuclear options for the nation.

3.         Work to improve the investment climate for new nuclear power plant construction through NRC streamlining of licensing procedures and by resolving uncertainties surrounding electricity deregulation and restructuring.

4.         Work with Congress to sustain the front-end domestic nuclear fuel cycle through the next half-decade.

5.         Work with Japan and allies in Western Europe to shape a future nuclear fuel cycle that would garner shared support.

6.         Work with the education system to reinvigorate training in nuclear science and technology.

4.         Augment diplomatic initiatives to spur non-OPEC production increases.

A.        Expand Oil and Gas Forum programs.

B.         Investigate ways to facilitate increased investment in Mexico’s oil and gas sectors.

C.         Encourage reforms in Russia’s energy sector.

D.        Improve access to information and transparency on comparative oil and gas fiscal/commercial regimes.

5.         Initiate diplomatic efforts to encourage the reopening of countries that have nationalized and monopolized their upstream sectors.

6.         Review sanctions policies, to identify ways to reduce the negative impact on energy supplies while accomplishing the objectives for which the sanctions were imposed.

7.         Develop a credible international stance on global warming and other environmental issues.

A.        Conduct a thorough review of the Kyoto Accords and recommend ways for the United States to revive international discussions on climate change and also execute bilateral agreements to promote environmental safeguards.

B.         Investigate new ways to promote efficiency and clean energy technologies, including clean coal, expanded natural gas use, and automobile mileage and emission standards, for use in large consuming countries in Latin America and Asia, especially China and India.

C.         Develop a strategy to coordinate with the European Union and the Association of Southeast Asian Nations (ASEAN) on refined petroleum product specifications through multilateral dialogue and bilateral agreements.

8.         Support efforts to develop and disseminate accurate and timely and information about the fundamentals of energy market supply and demand. The administration should recognize that transparency is an important element in maintaining orderly markets generally and in times of emergency or unexpected disruption in particular, and thus should provide a higher budget for the Department of Energy’s Energy Information Agency.

9.         Lay the foundation for new global energy institutions

A.        Embrace the spirit of the “producer-consumer” dialogue, but not the framework with which it has been associated.

B.         With U.S. leadership, foster broad international cooperation on a host of issues including (1) sharing information on oil market trends and the basics of evolving environmental standards on petroleum products and emissions; (2) promoting mechanisms for attracting investment capital; and (3) coordinating information on investments in refinery upgrading and in new demand, which would define the requirements for new grassroots plants.

C.         Build global energy institutions in three ways:

1.         Consider using the European Energy Charter as the basis of an energy institution that the United States should want to adopt on a global basis.

2.         Build on overlapping interests and relations between the world’s largest oil exporter (Saudi Arabia) and the largest energy-consuming country (the United States).

3.         Explore a mechanism promoting a North American or Western Hemispheric energy agreement.

D.        Form the core of a future multilateral agreement through bilateral or regional arrangements based on improving markets, ensuring energy security, and guaranteeing investments and trade on a mutual, reciprocal, and nondiscriminatory basis

Additional Views

On Environmental Considerations, Coordinated Energy and Environmental Policy, Federal and State Jurisdictions, and Enhanced Demand-Side Measures

Energy policy is a derivative policy—deriving from our security, economic, and environmental goals. These are often in conflict. It is therefore difficult to chart an energy policy path that is both coherent and on which consensus can be achieved. Although supportive of many conclusions in the report, we are generally more sanguine than the report regarding the ability of the market, especially under current prices, to bring forth necessary increases in supply for oil and gas. We would place primary emphasis on attending to those infrastructure and volatility issues that are principally governmental in origin and solution. We would also like to emphasize the need for government action in certain areas. These include:

• The need to focus international discussions on atmospheric concentrations of greenhouse gases.
• The development of a coordinated energy and environmental policy that includes specific attention to carbon dioxide and incentives for voluntary early action activities. Unless carbon dioxide is addressed, and addressed in a way that is credible with major domestic constituencies and with others internationally, the environmental regime will remain unstable, increasing investment uncertainty and hence raising energy costs—all this quite apart from one’s judgments about environmental impacts.
• A legislative rebalancing of the boundaries between federal and state jurisdictions to increase federal and regional influence over environmentally based standards and within the electric power sector. The purpose of such a move would be to establish and enforce a consistent and efficient transmission and reliability regime applicable to all industry participants.
• Efforts to enhance efficiency. Efficiency has a critical role in balancing supply and demand. An analysis by the President’s Committee of Advisors on Science and Technology has shown that from 1970 to 2000, improvements in the overall efficiency in the U.S. energy system (measured as real GNP divided by primary energy supplied) saved two and one-half times more energy than the growth of all sources of supply combined.
• Increased federal support of research and development related to energy and environmental technologies on both the demand and supply sides in order to sustain a stable economic environment for energy, to accommodate economic growth, and to meet environmental objectives. Technology has been critical to energy development in the past and will continue to be so in the future.
• Enhanced demand-side measures, including incentives for the accelerated introduction of technology. More effective strategies for the deployment of existing technologies can in particular make a significant difference. In electric power markets, regulation must make demand sensitive to the cost of power if those markets are to work properly. In other markets, the report calls for regulatory intervention to achieve demand restraint, presumably on the unstated assumption that Americans will not tolerate the use of taxes even though, we note, taxes would often be a more efficient instrument of control.

Finally, we caution against using the “crisis” label, which in the past has been the source of much energy policy mischief. Apart from the very serious problems in the California and Western electricity markets, which largely derive from policy, current energy markets are not in “crisis,” and precipitous action should not undermine thoughtful resolution of our conflicting energy, economic, environmental, and security concerns. Apart from the very serious problems in the California and Western electricity markets, most policy made, current energy markets are not in “crisis” and precipitous action should not undermine thoughtful resolution of our conflicting energy, economic, environmental, and security concerns.

Graham Allison

Joseph C. Bell

Charles B. Curtis

On Nuclear Energy

Nuclear power is an indigenous source of energy—invented and developed in America. It is unique in having the capacity to provide enough energy to last our nation—and the world—for at least a millennium. And it can do so without emitting greenhouse gases. Nuclear energy should not be considered as an option, but as a necessity to supply electricity for the nation now and in the future. The Energy Information Administration has predicted that between now and 2020, the United States will need 300,000 megawatts of additional generating capacity, or the equivalent of three hundred large new plants of any type. A minimum of one hundred fifty of these plants should be nuclear.

Michel T. Halbouty

On Efficiency

Between 1973 and 1986, the U.S. economy’s energy intensity (energy consumption per dollar of GDP) declined by 35 percent; since then, the rate of decline slowed dramatically, amounting to only about 15 percent over the period. That slowdown raises total national energy costs by about $100 billion per year. Technologies are in hand to once again accelerate energy efficiency and associated environmental gains significantly. To realize this in a timely way requires that integrated fiscal, regulatory, and technology policies be implemented by the administration and Congress. In addition, the government should use its own procurement activities far more aggressively to develop a reasonable domestic market for new clean and efficient technologies and alternative fuels. It should also work with the private sector and international financial institutions to advance associated deployment in developing countries. Such actions, in creating stable markets adequate to permit private development of alternative technologies and infrastructure, can be an important element of energy security policy and reduce upside price volatility. They fall into the category of “public good” actions addressing market shortcomings. Opportunities are clearly available in both the transportation and electricity sectors. Such demand-side initiatives can have a substantially greater impact than supply-side initiatives on the overall supply/demand balance over the next several years. However, the importance of stability to the success of such initiatives requires a pragmatic joint administration-congressional commitment.

On Diplomacy

In regard to dealing with oil-producing nations during periods of oil price volatility, the report properly emphasizes the importance of quiet diplomatic discussion and a bedrock principle of reliance on market forces. However, the administration, confronted with non-market behavior, also needs to retain the flexibility to use all diplomatic tools of engagement, including appropriate use of public statements. For example, such diplomatic engagement during the last year saw significant production increases while holding in place key international support for use of the SPR to address inventory shortfalls and associated price volatility.

On Critical Infrastructure Protection

Protecting our energy infrastructure from being disabled is an energy security concern of increasing importance. Heightened vulnerability to physical and/or cyber disruption stems from increased infrastructure interdependence, increased risk of cascading failures, and increased reliance on information technologies and telecommunications in the energy infrastructure. An appropriate response demands new forms of cooperation between the private sector, local governments, and the federal government, including robust and timely exchange of sensitive information on both sides. The critical infrastructure protection initiative of the last few years needs substantial upgrading in order to better coordinate with infrastructure interdependencies, provide realistic evolving vulnerability assessments, develop technologies to protect control systems, develop and deploy integrated multi-sensor detection systems to warn of system disruption, and lower institutional barriers to the associated public-private coordination activities. A significant increase in Federal research and development funding for energy infrastructure protection is needed.

Ernest J. Moniz

Melanie A. Kenderdine

On Tax Incentives, Demand Efficiency, the SPR, and Reserve Capacity

Based on the serious energy supply problems facing the United States and in view of past national energy policy initiatives (starting in the Nixon administration), the greatest emphasis has always been focused on increasing supply of traditional fuels. Also overlooked is the fact that the tax code has been extraordinarily favorable to the exploration, production, and development of oil, natural gas, and coal, and that the federal government has subsidized the development of nuclear power far more than it has solar, wind, and other clean alternatives.

It is also obvious that there is little need to provide any tax or other incentive to the oil and gas industry. The major companies are reporting record profits and prices are at very high levels. Consumers—especially low- and moderate-income consumers—are suffering from the high cost of natural gas and other heating fuels. Furthermore, many low-income households are facing utility cutoffs because of the sharp increase in heating costs. These problems require immediate solution—from sharply increasing low-income heating assistance and weatherization programs to prohibiting shut-offs.

While the report does recommend demand-side energy efficiency initiatives, I believe that such initiatives can go much further. Tax incentives for building energy-efficient homes and buildings, installing energy-efficient equipment, and purchasing energy-efficient appliances would create a vigorous market for energy-efficient products. On-the-shelf energy-efficient technologies are available. Expanding U.S. production of energy-efficient technologies will also enhance our domestic economy and provide new opportunities for exports.

While I support the report’s recommendations regarding the building of the SPR, it is also important to define clearly when it should be used. Essentially, rapid increases in price are a sign of market failure. An emergency situation calling for use of the SPR could be defined as a percentage increase in price within a specified period of time—say, 25 percent over ten or fifteen days.

It is also critical to determine a requirement for companies that refine and import petroleum to hold a certain level of stock. As the report correctly points out, deregulation and reliance on the market does not ensure supply security. Previously, companies deemed it to be in their economic self-interest to hold inventory. Now, companies seek to hold as little inventory as possible in order to lower costs. This strategy of just-in-time inventory management has been very costly to consumers and the economy, and requires intervention by the federal government. While some may argue that we should rely on market forces to determine appropriate inventory levels, experience has confirmed that market forces are not working. Requiring all companies to hold a minimum level of inventory will provide at least some cushion of supply during periods of disruption.

A similar strategy ought to be applied to suppliers of natural gas, propane, and electricity. Deregulation of the electric utility market has left utility customers at the mercy of independent electricity generators who, unlike regulated utilities, have no incentive or requirement to build reserve capacity. The lack of reserve capacity, like the low levels of oil inventories, is a growing threat to consumers and the economy.

Ed Rothschild

On Demand Restraint.

The “energy crisis’ described in the report results in large part from the unconstrained growth of energy consumption. The United States is unique among the industrialized countries in that it does not use fiscal measures to limit growth in energy use. This policy must change to control growth of energy use and maintain environmental quality. The most efficient mechanism would be broad-based taxes on energy. In addition, the United States should consider imposing higher taxes on vehicles to encourage the expedited introduction of more efficient energy-using technology. These taxes should be introduced in a revenue-neutral fashion. In addition, regions such as California, which face energy disruptions due to infrastructure constraints, should consider replacing regressive sales taxes with taxes on energy designed to offset the infrastructure constraint.

On the Use of Strategic Stocks

The authors of the report are to be congratulated for their extensive discussion of the role of inventories. Industrialized countries must recognize that the increasingly competitive structure of the global economy prevents firms in the energy sector from holding reserve capacity (whether in the form of inventories or reserve generation capacity). Energy prices will be more volatile as a consequence. Governments must develop measures to compensate for this structural change if they wish to moderate the increase in the effect of price volatility. Such incentives can include more frequent use of governmentally owned inventories or the provisions of tax incentives to firms to build reserves. In planning such measures, governments should recognize that mandated stocks or imposition of reserve requirements by regulation generally are not effective. It must be understood that the cost of any measure designed to mitigate price volatility will be borne either by the taxpayer or the consumer. Efforts should be made to achieve the maximum reduction in volatility at a minimum cost.

Philip K. Verleger, Jr.

Dissenting Views

On Caspian Energy Export Routes

Which export routes for Caspian energy are most appropriate depends primarily on which transit countries offer favorable conditions by facilitating construction of pipelines and charging reasonable transit fees. The actual pipeline construction cost is only one component—and not necessarily a large one—of any commercial decision about which route to use. The record of Russia and most especially Iran is one of long delays and unreasonable demands. At this stage, the Baku-Ceyhan project is more advanced than any other oil pipeline project not yet under construction. In these circumstances, it is inappropriate to assume, as the report does, that promoting Baku-Ceyhan is at odds with a commercial approach toward Caspian energy.

Patrick Clawson

David L. Goldwyn

On Alternative Energy Sources, Minimum Petroleum Inventory Standards, an Organization of Petroleum Importing Countries, Nuclear Energy

U.S. energy policy should be guided by a stronger commitment to developing alternative energy sources and protecting vulnerable households and businesses from price shocks resulting from hikes in the costs of heating oil, gasoline, and diesel fuel.

Mandating minimum standards for petroleum inventories in the United States and creating an Organization of Petroleum Importing Countries (OPIC) to stand up to the Organization of Petroleum Exporting Countries are measures that should be taken to more aggressively protect our oil-dependent economy.

The establishment of federal minimum inventory standards for domestic wholesalers would buffer consumers from skyrocketing prices associated with inadequate inventories at times of high demand. In New England, for example, home heating oil prices went up $1 a gallon in the winter of 2000, when a severe cold snap combined with low inventories to send fuel costs through the roof. Similar supply shortages have resulted in soaring gasoline prices in the Midwest during the summer’s peak demand months.

An OPIC to offset the clout of OPEC would use the threat of sanctions to keep the cartel from illegally manipulating production quotas to their advantage and our detriment. Moreover, OPIC would negotiate an end to radical price fluctuations that hurt producing and consuming nations alike by supporting a floor price for crude oil in exchange for OPEC backing of a ceiling price. A floor price of $20 a barrel would ensure adequate revenues to producing states, which depend on such dividends for their political, economic, and social stability. A ceiling price of $25 a barrel would guard against price shocks while encouraging the development of alternative energy sources in consuming nations.

U.S. policy guided by the goals of expanding nuclear capacity and exploiting domestic sources of oil and gas will not succeed in the long run. Energy independence is critical. This cannot be achieved by more drilling within U.S. borders. The only method is to increase our dependence on effective and affordable renewable energy sources in addition to creating a stable pricing environment for all our energy needs.

We must aggressively pursue promising alternative sources of energy to heat our homes, run our vehicles, and power our businesses. At the same time, we must take a tougher line toward the oil industry domestically to protect the most vulnerable, and use our clout internationally with oil producers to end the price shocks caused by their manipulation of oil markets.

Joseph P. Kennedy II