Keynote speech before the American Legislative Council
States & Nation Policy Summit
Watch the video of the speech
Obtaining adequate energy in the appropriate form, in a reasonable fashion and at a tolerable price, has been an enduring pursuit since the dawn of civilization. For centuries, energy resources have been at the epicenter of geopolitical, economic and environmental issues. It is no different today. And today, we have apparently added job creation as the role of the energy sector.
While not the focus of my remarks this morning, permit me first to make an observation about jobs, and the energy sector — given events taking place elsewhere in this city today. Consider that America’s energy sector today employs about 5% of the workforce. Roughly 95% of Americans are employed in businesses that use, not produce, energy.
One could increase energy sector employment. The reductio ad absurdum — cut everyone off from the modern grid of wires and pipelines, and give everyone a bow saw, 40 acres of renewable forest and a mule, and you can get full employment from energy. Only in subsistence societies is the majority of a population employed in providing energy and fuel to survive.
In a modern society, supplying adequate, reliable and cheap energy to the economy is more important for economic growth, and employment, than the number of people directly employed in the energy industry.
There are endless studies, forecasts and proposals about what we should do about energy-producing and energy-consuming technologies. But, whether to address a geopolitically inconvenient or environmentally undesirable source of energy — we often lose sight of some underlying energy realities.
By this I do not mean whether oil is limited or abundant, or whether we can or should try and change atmospheric concentrations of carbon dioxide. I refer instead to basic principals that are immutable, that constrain, even dictate what is possible – regardless of what we wish were possible. There are seven such principals to keep in mind.
The first principal is that there are two energy economies. There is the oil and transportation part of our economy. And then there is everything else, which is largely electrically fueled. Even though it is the price and geopolitics of oil that energizes debate and political excitement, the two energy-consuming domains are very nearly independent. No significant amount of electricity is produced with oil in the U.S., and very little globally. And, collaterally, essentially no transportation is accomplished with electricity. Electric cars remain, for all the hype, an emerging niche. And an electric Boeing 747 isn’t in the cards.
To be sure, there is a convergence emerging between these two energy economies– plug-in hybrids. But significant convergence will take time, decades likely – in the meantime, energy policies that treat both domains as the same can be counterproductive at best. To put it another way, windmills won’t do anything to run a car – or 99 % of all cars even if this Administration achieves a goal of one million electric cars,. And gasoline is useless to power an iPhone, or anything else in Internet and digital economy.
Which brings us to a Second Principle – – that electrons trump barrels. Electric technologies drive economic growth. Today 60% of the U.S. economy depends directly on using some kind of electric technology, instead of a combustion-based technology –the share was just 40% in 1973. The economic positions of oil and electricity have completely reversed since the first modern energy crisis that started with the October 1973 Saudi oil embargo.
Our economy's increased dependence on electricity—less than 5% of which is created with oil–is a major reason that the nation was not hammered senseless when oil hit $150 a barrel in 2008. As you all know, our current economic woes were not created by OPEC, but were essentially caused by an unholy alliance of bad policies on Wall Street and in Washington.
Of course liquid-fuels will continue to be needed, we still need our wheels and wings to get us around. But about a decade ago, largely unnoticed we crossed over an economic Rubicon – one where electricity has become our primary energy commodity. While we’ve now experienced two consecutive years of negative electric growth – a first in history — when the economy comes out of Recession, the long-run trend of rising electric demand will continue.
And economic growth will return – though it’s anyone’s guess how soon and how fast. But when it does, we will in all likelihood see it emerge mainly because of the power of productivity gains from a resurgent digital economy.
Which brings me to a Third Principal: The digital economy increases energy demand, and specifically of course electricity demand – both indirectly, and directly. By various estimates, information technology (IT) in all its forms has been responsible for about one-half of America's overall economic growth in the past several decades. Information technology growth brings with it more electric demand.
Software and microprocessors continue to infuse every aspect of our economy, from cars to refrigerators, from managing container traffic to airlines, from office buildings to highways and industrial furnaces. All of this arises from an ever-expanding constellation of exclusively electricity-consuming silicon-based technologies that didn't exist two decades ago; hundreds of millions of digital devices from desktop to palmtop, used in homes and offices, on factory floors and shipping docks.
In order to create all these devices, and in order to manage the information flow, we now have thousands of mega-watt-sized industrial-scale digital enterprises from factories that make Pentiums, to massive data centers — WallMart-sized buildings filled with hundreds of thousands of glowing hot microprocessors. There are so many data centers now that they consume more energy than civil aviation – but in the form of electricity of course.
When you watch YouTube on your iPhone, or sit down at your PC, electrons are flowing, coal is being burned and uranium atoms are splitting to feed your digital appetite. All told, the information and digital parts of our economy consume the energy equivalent of 700 million barrels of oil a year. Fortunately, little of it is oil.
The Fourth Principle is implicit in much of what I’ve outlined so far: For all aspects of our energy economy, the central issue is technology, not fuel. It's never really about the raw resources, whether tons, barrels, fields of corn, hours of sunlight or ridgelines of wind.
It is technology that determines why and how we use energy, and just as importantly, how we can tap the planet’s vast resources to provide energy. The oil under the North Sea, or the massive new finds off Brazil’s coast, are useful resources because deep water platform technology made it so. The same is true for the trillions – not billions — of barrels of oil locked in deeper water and oil sands.
It is no different when we tap the sun’s photons or the trade winds, or nature’s carbohydrates to convert to liquid bio-fuels. All these energy sources have the identical characteristics – the primary resource is unlocked by capital-intensive technology.
It is technology that permits us to do anything useful at all with the natural resources around us, and importantly, it is technology that allows us to convert energy from lower value forms in to much higher value forms. Solar photons falling on a farmer’s field can naturally yield plants, but whether those photons end up as food, electricity or biofuel is entirely a function of technology.
This technology reality points to a Fifth Principal: Not all BTUs are equal.
We have a fundamental problem with how we count energy demand and supply. Without regard to the source, or the use of energy, we use a universal unit to count – and ultimately forge policy and regulate — the BTU, or British Thermal Unit. And archaic, but universal unit.
One BTU looks like any other when toted up in the government's energy accounts. You can count the BTUs in a barrel of oil, from a wood stove, a diesel engine, a computer power supply, or a laser beam. This is as useful as comparing the demand for a ton of gold with a ton of wheat, of rocks or a ton of beer. All tons are not equal in value, or utility. The same is true for energy. There is very little informative about data and analysis when it comes to energy when in counting BTUs.
As with tons, the best measure of the value of a BTU turns out to be money. We pay about $20 for a barrel’s worth of BTUs if it is a barrel of oil today (at the well-head, not counting taxes). We only pay a few dollars for a barrel's worth of BTUs from a wood stove. We pay about $10 for the same amount in coal; $200 for the same barrel’s worth of BTUs, to run an electric light or motor; roughly $10,000 for a BTU-barrel equivalent of electrons feeding servers in a data center; and $200,000 for a barrel's worth of laser photons.
We pay different amounts because the BTUs all have very different values. The more expensive BTUs are harder to make, require a lot more technology, but are more valuable. It is perhaps obvious that a laser’s light is different from the glow of firelight.
But what makes one pile of BTUs more like gold and less like rocks? The answer is found in physics, in the concept of entropy – or more specifically, the absence of entropy. Entropy is the tendency of everything in the universe to become disordered, to fall apart. Adding order – logic – involves taking entropy out of a system. A barrel worth of BTUs of chaotic thermal photons from a wood fire, while identically measured in a barrel’s worth of exquisitely synchronized, highly ordered, entropy-free photons from a laser. The former can warm you up, the latter can do eye surgery. The only way this magic can be accomplished is with technology – and by consuming energy along the way.
If we simplistically count BTUs, we create a bias away from high economic value. And we do simplistically count BTUs in our pursuit of energy conservation .
Which brings us to a sixth principal, one that relates to the favored way to ostensibly save energy, efficiency. The principal: improving efficiency increases demand.
I'm quite aware of this heresy in the face of a remarkable bipartisan policy consensus to slake the nation's energy appetite with more efficiency. Actually, the opposite will happen. The U.S. economy is twice as energy efficient today compared with 50 years ago, and our energy use is up 250%. Over the next 50 years, likely we'll triple efficiency and probably come close to doubling energy use.
It is seductive, but uninformative, to note that replacing a specific device with a more efficient one decreases that specific energy use in that application. In the real world, not only do many more new uses emerge for that same or similar device, but many new devices and technologies appear.
At the most basic level of economic reality, lowering price stimulates demand. Improving efficiency is simply one very good way to reduce cost.
History is instructive here. Since the ENIAC, the first computer in 1946, computing energy efficiency has improved roughly a million fold–measured in energy used per logic operation. But the world no longer has just one "inefficient" computer, but builds 300 million annually, each thousands of times more powerful than ENIAC. Measured from more modern times: computing efficiency has improved 1,500% since 1974, 300% in the past decade. The result? Overall electric use for computing has risen.
Radical improvements in energy efficiency produce unexpected, beneficial outcomes. Energy efficiency is what made companies like Google and Apple possible. Operating at the efficiency of the first computers, a single Google data center would consume the entire electric supply of New York City. At the efficiency of early radios, iPhones would be trunk-sized and served by cell towers the size of the Washington Monument. Instead today, because of staggering improvements in computing and information energy efficiency, there are thousands of data centers, billions of computers and cell phones – both are now ubiquitous industries with vast, productive sprawling infrastructures – that consume enormous quantities of electricity.
You will hear that servers, computers and things silicon will become yet more efficient – and we’re told, will solve this problem. This gets it exactly backwards. The ‘problem’ of rising demand is created by rising efficiency.
During the second half of the 20th century, productivity growth driven mainly by technology, took the U.S. GDP up six-fold, but so efficiently that energy use grew at less than half as much. But energy use still grew.
Finally we conclude with a seventh Principle: Energy demand always rises. It is implicit, if not explicit, in much punditry that, somehow, overall energy demand can be reduced. There has been no period in history, outside of pandemics and total wars, or the equivalent in totalitarian societies, when energy demand has not risen over time.
Technology progress brings economic and social progress. Rising energy consumption is just a surrogate measure of rising affluence and well-being. And vice versa. The brief exceptions occur during depressions and recessions. We’re there. No one wants to stay here.
Global energy demand will rise again. Developed nations will continue the transformation from a post-industrial to an information-centric era. And developing nations are poised to simultaneously industrialize and leapfrog into the information economy. In 20 years, global transformation and growth will likely add over $30 trillion to the world GDP. And energy demand will grow – maybe as much as 50 percent. That entails an increase each year in demand equal to one France.
These realities are the central challenge of our era. While a subject for another day, no one should doubt that the technologies do exist to meet these challenges. But it should be obvious by the sheer magnitude and vital importance of the task that we don’t have the luxury of puerile choices of one energy technology over another. We’ll need them all – on both the supply and demand side, each for their own appropriate role. And reliable energy abundance will enable the productive and job-creating growth of our great economy.