Energy's Future: What Should Americans Know?

Transcript

MR. RONALD H. NESSEN: Good afternoon and welcome to Brookings. My name is Ron Nessen. I'm the Vice President of Communications and I want to welcome you to today's National Issues Forum on the issue of energy, energy's future, and what Americans should know. Today's forum will touch on such issues as the sources of energy, America's dependency, conservation, alternatives to carbon-based fuels, and the impact of energy on the environment. We have assembled a distinguished panel and moderator and main speaker.

As your announcement says, the world runs on energy, primarily energy generated from coal and petroleum, and the current war against terrorism and the tensions in the Middle East have raised new questions about the reliability of America's oil supply from that region. Also concerns about global climate change have focused increased attention on the search for cleaner fuels and energy-generating methods. Another interesting development is Russia's determination to become a major petroleum supplier. Also OPEC's periodic moves to restrict oil production and the rising energy needs in China and other developing countries. These are all issues, along with many more, that will be discussed at today's forum.

Our opening remarks today are going to be provided by Daniel Yergin, a highly respected authority on energy policy and international politics and economics. He is Chairman of the Cambridge Energy Research Associates. Dan has won both a Pulitzer Prize and is also the recipient of the United States Energy Award for Lifetime Achievement in Energy and the Promotion of International Understanding. He won the Pulitzer Prize for his book, I'm sure you know, "The Prize: The Epic Quest for Oil, Money and Power".

Our panel will be introduced to you by our moderator today, Gregg Easterbrook. Gregg is currently a visiting fellow at the Brookings Institution. In the real world he's a Contributing Editor of the Atlantic Monthly; a Senior Editor of New Republic; and I say enviously, he writes a football column for ESPN. [Laughter]

Before I turn the forum over to Gregg to moderate and to introduce the panel I want to say that this event is being webcast live on the Internet. Audio and video live streaming. So you can go to the Brookings main homepage, www.brookings.edu. It will be archived and you can look at it at your leisure later. There will be a full transcript of today's briefing also posted on the Brookings website.

If those of you who are listening, are watching the live webcast would like to ask a question or have a comment you may submit those by e-mail and we'll pass them up to Gregg and he can pass them on to the panel. E-mail your questions or comments if you're watching the webcast to question@brookings.edu, and we'll try to include as many of those as we have time for.

With that I will turn you over to your moderator Gregg Easterbrook.

MR. GREGG EASTERBROOK: Thank you, Ron. It's wonderful to think of this as being webcast around the world which is in some ways even more fun than being televised. This means that right now as we speak people in Sri Lanka are staring at their computer screens and saying, "This is what they do in Washington all day long?" [Laughter] I hope this isn't a scary thought.

I tried to find energy jokes to open with and I'll have you know that even jokes.com, which is a very useful resources, has practically nothing under the energy joke category. But I did find one thing, it's an energy joke about Enron which I will read. [Laughter] I know Enron is an energy joke at this point, but this is a variation on the old two cows scenario. Different kinds of economics.

Two cows under feudalism. You have two cows and your lord takes half the milk.

Two cows under fascism. The government hires you to work your own cows and then sells the milk back to you.

Two cows under communism. You have to take care of the cows so the government seizes all the milk.

Two cows under capitalism. You use biological engineering to turn the cows into animals that create far more milk than anyone could ever possibly use, and then you retire and complain about the capital gains tax.

Here is Enron capitalism. If Enron had two cows. Enron has two cows. You sell three of the two cows to a publicly listed company — [Laughter] — using letters of credit opened by your brother-in-law. You then execute a debt equity swap with an associated general offer so that you can get all four of the two cows back with a tax exemption for five of the cows. [Laughter] The milk rights of those six cows are then transferred through an intermediary in the Caman Islands, secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The Enron annual report then lists the eight cows and all nine of them are certified by Arthur Andersen. [Laughter]

You mean you're telling me this wouldn't work?

You all know our panelists here. I tend to be informal when it comes to introductions, especially since all of our panelists are well known. You have their CVs in their brochures. If you need details you can look them up. I'll introduce them from left to right for you.

Daniel Yergin sits immediately on my left; Fiona Hill; Bruce Everett; James Placke; and finally, Bob Crandall. Most of them affiliated in some way or another with Brookings.

I'm going to hand over the floor to Dan Yergin to speak. His reputation proceeds him. It's hardly necessary to say anything about him but I will read you something that is necessary to read. His book, the very successful and wonderful book, "The Command Heights" was also a PBS special. You can now buy either the book to read or the VCR to watch.

Here's what The Washington Post says about him. "A stunningly ambitious, brilliantly successful program. No more important program for making sense of our life and times has been seen on the air in a decade."

Now I can assure you that when the publicist saw that quote he said, "That's the best you could do?" [Laughter] "Stunningly ambitious, brilliantly successful?" Come on. Give me something I can use. [Laughter]

It was both a wonderful book and is a wonderful show, and I hold it up, if you're watching in Sri Lanka you can order it through Amazon.com and it's well worth both your time and money.

Now I'll hand over the platform to Dan, please.

MR. DANIEL YERGIN: Thank you, Gregg. And thank you for that joke.

I remembered suddenly as you were holding up the video, I did remember the first book I did that became a major book was "Energy Future" and it ended up on the best seller list. The book was done at the Harvard Business School and I was very shocked, and the publisher came to me and said well now you're going to have to go out and do talk shows on television. I was a shy, retiring academic and I was totally terrified and said, "What do I talk about?" They said, "It doesn't matter what you talk about, just make sure that they hold up the book." So that's a lesson I learned, and we've now carried it to a new stage, so thank you.

As Gregg said, most of us are affiliated one way or the other with Brookings. I've become a Trustee and it's given me an opportunity to really see from the inside what a phenomenal organization this is and what a great service it does both in terms of policy and in terms of communications with wider publics, and certainly this National Issues Forum series is a very important contribution, and when I was invited to participate I was very pleased to be part of it. I think the attendance shows the interest in these range of issues.

I want to set the scene a little bit by talking about energy security and energy issues. It always seems to me that the starting point for talking about energy security goes back about 90 years ago when Winston Churchill shifted the Royal Navy from coal to oil which meant instead of depending upon Welsh coal the Navy was going to depend upon oil from Persia, from Iran, which raised concerns for the first time about security.

Churchill at that time said the answer is that safety and certainty in oil lie in variety and variety alone. I think that maxim is one that continued to govern because it's really about diversification and it holds true at the beginning of the 21st Century even as it did at the beginning of the 20th Century.

Energy security concerns are front and center again for the first time since the Gulf crisis a decade ago. We're not in a crisis now by any means, and as I say these concerns are on the table and events demonstrate that with the end of the Cold War and the resolution of the Gulf crisis we passed into a decade of exaggerated confidence about security and that included energy security.

Why is energy security on the agenda again? First it's a perennial issue, the rising U.S. oil imports. Thirty-six percent in 1973 at the time of the first oil crisis; now over 50 percent. Secondly, the obvious, the turmoil in the Middle East in all of its dimensions in the war on terrorists. The third, market pressures. And the fourth is something that I think is new, a new concern in addition to the additional concerns about the flow of oil is that the security of our energy infrastructure has now become a central concern, part of the overall focus on homeland security.

As Ron said, the world runs on energy and although it was lost to some degree during the miasma and the inebriation of the new economy, that's true of the U.S. economy too, our $10.3 trillion economy rests on an energy foundation. Some 93 percent of that foundation is provided by oil, natural gas, coal and nuclear power. Oil at about 20 million barrels a day provides almost 40 percent of the total. Then it's quite a range from natural gas at 23 percent of the total to something there's a lot of attention on today, wind and solar — though growing is one-tenth of one percent. So when you look at the numbers, you look at the scale, you certainly see the significance of oil

Also sometimes in debates it gets lost about the significance of our oil consumption. It's noteworthy that the U.S. consumes about a total of the world's oil consumption. It's also noteworthy that American GDP is about a third of the world's total GDP.

Seventy percent of our oil comes from six countries and the oil imports, as I say, have been growing.

Now for 30 years energy independence has been a recurrent cry, yet during those years overall we've become more integrated into the world economy and that, although we didn't intend it, became one of the themes of "The Commanding Heights" when we were doing the series. Some of the changes are really quite striking.

Foreign trade today is about equivalent 25 percent of our GDP whereas a couple of decades ago it was ten percent. One out of seven U.S. manufacturing workers worked for a non-U.S. company. My favorite statistic of all, in 1980 Americans made about 200 million overseas phone calls. Today it's over five billion. So oil, in a sense, and growing oil imports is part of this interconnection. However oil is, I think, not all the time but a lot of the time, a strategic commodity.

The issue is not whether we should import oil but rather to avoid being in a position that makes us vulnerable to disruption. Unless we're able to imagine some draconian regulations or series of technological breakthroughs that are not now apparent, the practical question as opposed to the rhetorical question, does not revolve around substantial reductions in imports but rather about stabilizing them. And how to do that, although it's not always clear, I mean there is in fact no single answer, no single formula, conservation has a significant role. It's noteworthy that today the intensity of oil to our overall economy has declined by about half since the '70s. Stabilizing or increasing the oil production is also important. One will hear great pessimism, but in fact the Gulf of Mexico is an area of great growth, and new technologies are obviously going to be very very important.

Let me throw out, to contribute to the discussion, some principles for energy security. One is, and these are very common sense. One is to recognize that there really is only one oil market and that it's not just what happens to the U.S., it's the overall scene that matters. Two, Churchill's maxim of about 90 years ago about diversification certainly is the case today and has been an important element of U.S. oil policy since the 1970s.

Third, is that emergency stocks such as the strategic petroleum reserve are a front line defense against disruption, but I think it needs to be reminded again and again, particularly when the weather is cold or there are pipeline problems, that the value of reserves like the strategic petroleum reserve should not be devalued and undercut by turning them into market management schemes that confuse temporary hikes with a serious disruption.

Another observation is that the oil market is more flexible than it was in earlier decades, and we might talk about a little bit on the panel. And it's well worth remembering that intervention and control which can be highly counterproductive, hindering the system from a swift readjustment, and many people in this room know that from personal experience. And after all, the famous gas lines of the 1970s were largely home made, the result of controls that prevented moving gasoline to where it was needed from places where it was not needed. So whenever you see the footage of the gas lines in some news clip remember that it was the inflexibility of our system that brought them to the fore.

Obviously cooperative relations with other consumers are important. Governments can do a lot, and our government can do a lot to allay panic through its quality information. Also something that is often a tough problem, facilitating the flow of information within the industry.

I've certainly underlined that most oil exporting nations, almost all of them, there are a couple of major exceptions, recognize the mutuality of interest and are deeply interested in security of demand in stable commercial relations because obviously of their revenues.

Finally, it sometimes gets lost, but a healthy, technologically driven domestic industry is a very important part of energy security and so is a commitment to research and development and innovation across a broad spectrum that obviously deals with environmental as well as energy concerns.

I think what I can do, just for a couple more minutes, is provide a little framework for the discussion we're going to hear up here about where's supply going to come from. Obviously a starting point is that the Middle East is about 30 percent of world oil production but about 66 percent, two-thirds of world oil reserves.

Is there going to be growth? Well, we at Cambridge Energy see a significant growth in world oil supplies just in the rest of this decade that will be adding something more than 20 percent to overall capacity. Some of the most noteworthy growth will be Eurasia; Russian-Ecaspian, Fiona will be talking about that; West Africa; Latin America. As I said, the U.S. deepwater Gulf of Mexico is very important and of course there will also be significant growth based on where we are today in the Middle East.

This kind of growth and capacity will be necessary to meet demands. When you look at the picture you see very striking growth, particularly the new globalizers. India, but particularly China who's oil demands have now doubled in a decade or so. It's number three in oil consumers and it's fast moving up on Japan, so a couple of years will be number two.

The world today has about 82 million barrels a day of capacity, not production. We've seen about seven million barrels a day over the next eight years being added in the middle East but we clearly see just a dramatic turn-around in Russia and the Caspian. Fiona will be developing that point, but what a change. Of course those who have been part of it know they're going through these cycles of optimism, pessimism and so forth. But several things have come together.

Number one, is that the Russian oil industry really is going through a significant modernization as it leaves behind its days as part of ministries and becomes independent companies. The results can be seen in sharply increasing production and also an increasing appreciation of the scale of reserves which is very important.

Secondly, for companies, international companies, there has been much frustration and disappointment over a decade, but now you can see the mentality within the industry is much more interested in participating there and greater confidence that things can be achieved.

A third factor is the change in Russia itself. The nadir was August of 1998 when it collapsed, but the feeling now is that there have been three years plus of substantial economic growth, continuing market reform, and that it's possible to do business there. It creates a more solid basis for economic and political cooperation.

And overall arching all of this is, it's very evident, this new emerging strategic relationship between Russia and the United States and energy is an important part of that relationship.

So when we look out we see Russian-Eurasian production in the next eight years increasing by something like 50 percent, upwards of over three million barrels a day, and Russia will remain and continue to be the Saudi Arabia of natural gas. So U.S.-Russian relations are very important for their energy dimension.

A second area where we see a lot of growth coming is in West Africa where the growth can be something on the order of 60 percent over the next eight years or so. There are a number of obstacles and issues that need to be dealt with including government policies, the political environment. But there are three important things that can be done to help facilitate development in West Africa. One is helping to strengthen state institutions. The second is improving critical relations with West African countries. And thirdly, it's developing the domestic and regional gas markets that are going to be required to get these higher volumes of oil.

The Western Hemisphere, we see about three million barrels a cay being added there but there are questions that hang over the Western Hemisphere, South America, Latin America. One is this kind of post reform political situation, raising a lot of questions about what's going to be the investment environment. Secondly, specifically, are questions involving Venezuela where in fact we see capacity declining, not increasing, because investment is falling there and is not maintained at the levels.

People often talk about hemispheric energy solutions and relations. As we look at it, these are really country by country because each country's situation is different, but there is, while the potential is very large there are a lot of questions about to people, the general questions about the value of openness and reform and I think we're in that period in that some of the elections there. Particularly Brazil will be very significant.

So I think that provides a quick view of some of the areas in which we can expect to see substantial growth and provide some of the questions we'll be talking about.

But I began my remarks by quoting a British Prime Minister, who then became a British Prime Minister in energy security, Winston Churchill. I'd like to conclude by quoting another.

When we were working on "The Commanding Heights" I remember a discussion with Margaret Thatcher. At the end of our talk she said, "Remember Thatcher's Law." Not being very familiar with Thatcher's Law, I very gingerly asked what is Thatcher's Law? She replied, "The unexpected happens. You better prepare for it." And Thatcher's Law seems to me a pretty good principle, indeed an essential one when it comes to energy security.

Thanks.

[Applause]

MR. EASTERBROOK: Thank you, Dan. That was great.

I think I'd like to keep this discussion as informal as possible. In my experience with these things is that audiences feel happier if they get to ask a lot of questions. So let me ask a few questions of the panelists and then turn over as many as possible to you. Since we're doing this on the web we'll ask you to raise your hand and someone will come scooting over to you with a microphone so that everyone in Sri Lanka will hear what you have to say. But let's first start with the panel.

One never knows whether to direct questions at individuals or just throw them out, but I'd like to start by just throwing out questions and allow you to interact with each other a little bit.

I suppose first we would start with the Energy Bill because here in Washington that's what's hanging fire this week. The House and Senate each have their own versions. Nothing has happened yet. It's not clear what's going to happen.

If you dial your brains back to one year ago when the White House was almost on a daily basis describing the United States as in an energy crisis, and the rhetoric was very heated from the President and Vice President both. Now a different kind of crisis obviously came along. But has the world changed so much that we've gone from energy crisis to can't even pass an Energy Bill? I'd like to ask your opinions of the bill, is it significant, why are we no longer in a crisis?

MR. BRUCE EVERETT: I guess, Gregg, one of the questions we've had for many many years in the United States is there's a general consensus we need to deal with energy problems. The question is what is the problem that we are dealing with?

Thirty years ago there was a general feeling that the problem with petroleum was depletion. It was a depletable resource, we were going to run out of it, the timeframe was fairly soon, something had to be done or the economic consequences would be very severe.

I think we discovered by experience that that wasn't really true. Clearly petroleum is depletable but the timeframe over which that happens is much much longer than we thought, so that concern I think sunk into the background.

There have been concerns that have popped up at various times about the potential for supply disruptions from the Middle East; about adverse supply/demand imbalance as causing economic problems. I think that was the President's initial concern when he started to address this. Then of course the question of terrorism came up which caused us to look at everything anew.

I think part of the problem with the Energy Bill is because there isn't very much consensus about what the objective is it's hard to get consensus on any means to achieve it. There are still very difficult problems in the United States, reconciling different views of domestic oil production and the environment, what to do about alternative energy sources, what to do about conservation, particularly government-mandated conservation. There are still questions about government management of marketed prices, particularly in electricity.

So I think the reason we came up with something that's relatively bland and empty is that we still have not reached any consensus on what we're trying to achieve.

MR. EASTERBROOK: If you have not been following the details of the Energy Bill, and it's sufficiently unexciting that you will be forgiven if you're not following them. There isn't much left in it that's significant. The House voted in favor of drilling in the Arctic National Wildlife Refuge. The Senate voted against. And generally if one Chamber vetoes that means it's dead for the year.

Things that are in the bill are essentially continuations of existing programs.

One thing we heard a lot about this time last year was permission to construct refineries and power plants. That was viewed a year ago as a very significant question and now it's almost off the table. Why do you think that is, Bruce?

MR. EVERETT: If we look at a couple of years ago, people were concerned about rising gasoline prices. One of the data points that we talked about was refinery capacity was up in the high '90s. That appeared to be one of the bottlenecks. There was I think a very legitimate concern in the industry that over the last 20 years a very large amount of investment, tens of billions of dollars, has been required simply to keep refineries compliant with the law. Returns on refining investment at least in the United States have been very low historically. But recently that hasn't been the case. Refineries have not been operating quite at those high levels.

So again, we're not quite focusing together on what it is that we're trying to achieve.

MR. EASTERBROOK: On the power side, of course, we did have an awful lot of building and now in just about every part of the country, almost every part, we have what's know and can be described as an overbuild and we're going to continue to see sort of a bust unfolding in the electric power generation. Bob?

MR. ROBERT CRANDALL: It strikes me that the rhetoric surrounding the Energy Bill when it was first introduced suggested that somehow we'd be better off by spending a lot of money to increase self sufficiency. Dan Yergin suggested that at best we probably could stabilize our import dependence but not reduce it very much.

You have to ask yourself the question, how much should we spend to thwart the market which is telling us that increasingly more and more fossil fuels are being produced abroad because they can do it more efficiently than we can, as against trying to prevent the temporary disruptive effects of some supply shock sometime in the future?

In the first place, those things are all in the future. Secondly the probability, we don't know what the probabilities are. And third, anything that we spend to increase our self-sufficiency we spend today.

It seems to me it's probably a very bad tradeoff unless you put a very high probability on disruption or a very large cost on the cost of disruption itself.

MR. EASTERBROOK: If you remember what the mood was like let's say about 1975 when it was widely believed by all establishment figures that oil was just about to become exhausted and that we would all soon freeze in the dark, the thought that in the year 2002 there would be a forum here at The Brookings Institution where we're all shrugging about petroleum supply and saying it's not an issue and why should we worry about it might make people's minds reel.

But let me ask one of the foreign policy questions, James Placke, I'll throw this to you. The question of Saudi Arabia.

Saudi Arabia looked like our friend a year ago. This year our relations with them are testy at best, and it certainly would be possible through energy policy, although difficult, but certainly possible to reduce our dependence on Saudi oil. Should we do so?

MR. JAMES PLACKE: Doing that is not as easy as it might appear. How do we do it? There is no U.S. national oil company that buys oil and imports it into the United States. It's arbitrated by the market. The reason Saudi Arabia is the largest supplier to the U.S. market in addition to being the world's largest reserve holder and having the world's largest production is its cost is right. It comes into the U.S. market and elsewhere in the world at a very competitive rate.

Is this a good thing or a bad thing? Well, from the political standpoint I think both the United States or Americans and Saudis have learned a lot about each other in the last year, and it isn't all pretty, and neither side likes everything that they see. I think the governments are still working their problems quite effectively.

But as a related subject, and this almost always comes up. Well, is it possible that there may be another oil embargo? And it was Saudi Arabia that led the Arab oil embargo in 1973. Could they do that again? Well, the Saudi very quickly when this was raised by Iraq who said follow our example, we're going to cut off oil supplies, the market shrugged, the price went down.

The Saudi Foreign Minister said point blank, "Oil is not a weapon." Period. End of discussion.

There are a lot of good reasons for that, but to my mind the most compelling reason and the one in which I think we can put the most confidence in consumers is it didn't work the first time. The objective was political. It created havoc in the world economy. It shot up inflation rates to double digits, interest rates as well went into double digits. It did a lot of economic harm, but it did not achieve its political purpose and I think that lesson comes in well absorbed.

MR. EASTERBROOK: We would continue to feel nervous about Saudi Arabia for many reasons including that the current Administration might be exchanged for someone else who would be much less friendly to us. So Fiona, that brings us to your favorite question, Russian oil. Many analysts who look at this issue think we should be turning our affections toward the Russian Federation. Another one of those thoughts that in 1975 would have seemed inconceivable.

How confident are you of the situation in Russia and its potential as an energy producer?

MS. FIONA HILL: Well as Dan said in his opening remarks, Russia's potential as an energy producer overall, in gas as well as oil, is substantial. Russia's already become a major oil exporter to Europe. A gas exporter comparable to the European Union. It's hoping to expand and double those exports to Europe. It's hoping to break into markets in Northeast Asia. And clearly you can also see that the United States is an increasingly attractive market for its oil production which, as Dan mentioned, has increased considerably over the last few years. In fact by about a million barrels per day.

The problem however for Russia is infrastructure constraints. It's not so much a problem of the governance of Russia or the political leadership or the potential failure of reforms, it's simply that Russia doesn't have enough [seaport to ports]. Transportation of oil by the major supertankers, the United States. Because the U.S. only imports about three percent of its imports from Russia and the former Soviet Union it could expand that but there will have to be considerable investment in infrastructure to make that possible. So Russia is likely to expand into the markets closer to it in Europe and in Asia in the near term.

It's also got the larger question of bringing on more reserves in oil into production. It's existing reserve makes it much smaller than obviously Saudi Arabia and the Middle Eastern countries. There's potential for new reserve finds, but as Dan mentioned, those may be very difficult to exploit. They're likely to be in the Arctic Circle or in other difficult places.

So for the long term Russia's going to be a very important oil supplier to the global market, the single global market, but not necessarily become a primary supplier to the U.S. market.

MR. EASTERBROOK: What might happen to Russia internally? At some point we would hope that Russian standards of living will rise and Russians themselves will begin to consume their energy. What do you foresee there?

MS. HILL: One of the reasons that Russia's able to export so much oil right now and has in fact become a primary exporter is because of its depressed demand at home. We can expect in the next five to ten years some recovery in the Russian economy that might then increase demand. But I don't expect that that will be particularly dramatic. There are lots of other constraints at play here within Russia.

The other point is also the demand in the countries immediately surrounding Russia like Ukraine, the Caucasus countries, other countries in Eastern Europe, and as their economies start to improve there will be increasing demand there.

The fact that that demand has been depressed throughout Eastern Europe and the former Soviet Bloc has also increased Russia's potential to export to Russian markets. So that is a big question for the future, but it's really hard to predict about how much that will affect Russia's current export capacity.

MR. EASTERBROOK: I'm going to ask a question in general to the panel about environmental affairs and then I'll switch to question from the audience, so start dreaming up your questions.

We, all of us here, sound fairly optimistic on petroleum supplies especially. That in the next few decades at least, which is probably as far as we can meaningfully project, it will be plentiful and reasonably cheap, and if it's plentiful and reasonably chief why not use it? The possible answer to that is because of the greenhouse effect. Greenhouse science is growing steadily stronger, and though the doomsday scenarios are still somewhat fanciful, the chance that the world will want to take some regulatory step against fossil fuel consumption seems to be increasing with each passing year.

So I'll ask you all, I'll throw this out and see if we can discuss it.

Do you think there should be restrictions on fossil fuel use owing to greenhouse science? And if we do need restrictions, what would be the most efficient and beneficial type to have?

MR. CRANDALL: I'll answer your second question first because it's so easy. The obvious choice is a tax on carbon. If you really want to attack global warming efficiently, you tax carbon. Now that taxes not petroleum as heavily as it does coal, and of course we know the taxing of coal in the United States is probably a non-starter as long as the current senior senator from West Virginia is in office.

MALE VOICE: I may have given the wrong impression about being sort of sanguine about future supplies. I gave kind of a best estimate based on what we know today and things going well, but things may well not go well.

First of all, a lot will depend upon the reasonableness of investment frameworks and openness to foreign investment, and secondly, supplies are governed by this law of long lead time. It takes five, ten, fifteen years for a project to unfold and all the way through it people are trying to manage risk. So changes, political changes, economic changes, could throw those numbers way off.

We've had five oil crises of one kind or another since the 2nd World War, and whether it hits us hard or not depends upon is there spare capacity in the world at that time or not. I always think if Saddam Hussein had waited one year the world oil market would have been so tight that there would not have been the ability to manage our way through that and of course he would have also perhaps had nuclear weapons. So things can go in unexpected ways and you could easily imagine a situation where a crisis somewhere in the Middle East and somewhere else at the same time and suddenly this picture would be transformed. It would be a disruption.

MR. EASTERBROOK: But your worries are political as opposed to the supply itself.

MALE VOICE: But the supply itself, like reserves itself, they're really an economic concept. They don't just happen. There's got to be investment and Fiona, you know, if things were to change in Russia or not continue on this track then the kind of numbers would not be there. But yes, they depend upon both economics and politics.

The CAFE standards —

MR. EASTERBROOK: We have a strong proponent of CAFE standards in our panel.

MALE VOICE: Do you want to start with global warming first or do you want me to go to CAFE?

MR. EASTERBROOK: Let's stay on global warming, then we'll do CAFE standards. Because I told Bob before — Bob is the most eloquent opponent of CAFE standards which is the federal regulatory mechanism for automobile mileage. I told him that I wouldn't call on him any more unless he proposed some alternatives. [Laughter] So let's talk about global warming for a bit.

MALE VOICE: Let me make a couple of comments. I think clearly, although there is a reasonable level of consensus that global warming is an issue that needs to be addressed, there is very little consensus on the nature of the phenomena and the timeframe over which it's likely to occur, the severity of it, or the costs of abating it.

I think one of the problems that we need to be very careful about is not taking actions that do far more damage to the economy than the benefit that's likely to come from taking actions against a phenomena that we don't very well understand.

So I think one of the problems that we've had, and again I getting back to the original point on the Energy Bill, one of our difficulties is that we'd like to behave as though it's important to keep oil prices low for economic reasons, but we want to get consumers to behave as though oil prices were high in some administrative fashion. I think that is a challenge in several ways.

First of all, it's very difficult to overrun the market. It's very difficult to get people to overlook the economic signals of the marketplace in preference to the political signals of government. And secondly, as we've always discovered, particularly with the previous edition of CAFE, it generally results in unexpected consequences that you can't really understand.

So I guess my personal view on climate change would be that given the low level of knowledge that we have with this phenomenon and the potential high economic impact, starting to take action to understand low carbon options better really in a research sort of mode, looking at ways that we can improve carbon sequestrations, those are sensible things to do on a research level.

I'm not at the point yet where I would support any significant government mandate to change the way we use energy and I think it's going to be awhile before I would be convinced that that's warranted.

MR. EASTERBROOK: Based on that wording would anyone on this panel support a significant government mandate to change the way Americans use energy?

[No audible response]

MR. EASTERBROOK: Okay. Another thing you never would have believed 25 years ago would you see on Brookings.

Given your caveats, Bruce, about the unknowability of global warming, and it is almost all unknowabilities, why wouldn't you do things that you're confident of now? Things for which technology already exists? And that's my question. The National Academy of Sciences says that technology already exists to increase the fuel economy of vehicles by 25 or 30 percent without a lifestyle sacrifice, so why not do it?

MR. EVERETT: The difficulty of that question I think Gregg is this. If the automobile companies knew how to make automobiles that were safe, more efficient, more comfortable, and cheaper, they'd already be doing it.

The market does those things for us. So if you can find a technology that improves everything without any tradeoffs, the market will do that for you and you don't need government intervention.

Where you need government intervention is to try to force consumers to make a tradeoff that they don't want to make or that the market doesn't want them to make.

I'm always skeptical when people say there are technologies there that involve no adverse tradeoffs because you always ask in the back of your mind, why wouldn't they do that?

MR. EASTERBROOK: An excellent question, Bruce, but the only adverse tradeoff in that case is reducing the trend toward increased acceleration. You would use existing technologies to maintain safety, comfort, etc., but without further increases in acceleration. Typical acceleration speed of an American vehicle has increased by almost 40 percent in the last 25 years and this is something that's not, reaching top speeds and acceleration speeds that have no relevance to —

MALE VOICE: Why has it increased by that?

MR. EASTERBROOK: Because the market likes big engines.

MALE VOICE: Because people like power. You may like to crawl around on the expressway, but a lot of us don't and the market takes care of that.

The reason we produce things is because people get satisfaction from consuming them. The difference between us and the pre-1989 world in Eastern Europe is that consumers make these decisions and the value of their overall consumption bundle is much higher as a result.

Now it is true we could get 25, 30, 40 percent more fuel economy. If you mandated it, it wouldn't come through technology. Most of it would come through reduced size of vehicle and less power, as you suggest. But tomorrow we could all have ten gigobytes per second coming into our homes to direct fiberoptics. If all of you want to go out and spend $5,000 apiece, it could come in tomorrow.

The question you'd ask is what are you going to do with it? Why do you want it? And the same thing people would ask about more fuel efficient cars. Why do they want more fuel efficient cars?

MR. EASTERBROOK: I think one thing, if we do look back at the first oil crisis, as you said in 1975, the sky was falling and in 1979 it really seemed to be falling, but instead of leading to an apocalypse we ended up with an oil price collapse. What happened?

MALE VOICE: I think that one of the most important things that happened, the two biggest things, as near as I can tell, that had the biggest impact of the U.S. energy economy were one, the Alaska pipeline which was worth about two million barrels a day that got approved because of the crisis by one vote, I believe. And the fuel efficiency standards which saved about two million barrels a day, and suddenly oil prices were no longer —

MALE VOICE: I don't think it was the fuel efficiency standards that caused that to happen at first. I don't think the fuel efficiency standards were even binding in the early years because the automobile companies rushed to produce more fuel efficient cars as the Japanese expanded their share of the market. You may remember that. Prior to 1983, '84. As a matter of fact the Japanese had produced such good fuel efficient cars and were not subject to a binding CAFE constraint that we had to restrict the supply of them to 1.68 million a year in 1984 in order to protect our domestic automobile industry. The market took care of it.

MR. EASTERBROOK: I think by the middle '80s the impact of where fuel efficiency was in 1973 and where it was kind of added up. It's a pretty significant savings. But surely even if SUVs became more fuel efficient, if they became a little smaller would that be a tragedy for everybody?

MALE VOICE: I think just a couple of points —

MALE VOICE: The Japanese carmakers are covered by the CAFE program.

MALE VOICE: But it wasn't binding. Daihatsui produces cars that average 30 miles per gallon and it doesn't make any difference.

MR. EVERETT: I think there's a question looking forward about tradeoffs with safety, but it seems to me fairly clear that the CAFE standards that we had in place now gave us a very bad tradeoff with safety. And although there is some argument about the numbers, the National Academy of Sciences study indicates between 1300 and 2600 unnecessary fatalities or additional fatalities per year because of those standards.

Again, we need to remember we're in a mode in the United States now where we ware looking at environmental regulations and litigation where we're willing to spend hundreds of millions of dollars and in some cases billions of dollars over events that have statistical impacts on a handful of people. So I think we can probably say, and I think everybody would agree, that CAFE had some impact on fuel efficiency, but there's a serious question about whether the tradeoff to that was, or the price for that was very high.

Just one final comment and then I'll get off this. I find the discussion on CAFE now very interesting. In my own informal poll — nothing scientific, but the people I know — says that if you ask people the question "Should the automobile companies be forced to make a more fuel efficient fleet?" You get very high positive answers. If you ask people the question, "Should the government force you to buy a more fuel efficient car?" you get very low positive answers.

I believe the reason for that is that people think that the right solution is for everybody else to drive a fuel efficient car. And if you'll notice, most of the major proponents of new CAFE measures like Senator Carey, they don't talk about forcing consumers to do things they talk about forcing the auto companies to do something.

MALE VOICE: Let me just close this out by saying the problem with the fuel economy standard for new cars is that it only gets a very small share of the total oil consumed in the country and it's very bad for the government to suggest you're going to conserve by forcing the costs all on one user. The cost of doing that to society is much greater than doing it equivalently across all uses.

For instance, what if the government were to propose that we all have to replace our oil-fired burners in our basements because obviously most of those things were bought 10 or 15 years ago, they're very inefficient, we should all have to get more efficient oil burners and not force it on cars, force it on home heating. How would that apply politically? Just as bad an idea economically, but a much worse idea politically.

MR. EASTERBROOK: On that I'd like to turn it over to questions from the audience and we'll see where you'd like to take the discussion.

QUESTION: Skip Warbath. I'm President of the Natural Gas Supply Association. My question, though, is more general.

In recent months, the last three months, the polls of the American public on industry has plummeted across every sector of industry, business generally, three to four points. Unprecedented in 35 years of polling history.

The only exception to that — two exceptions. One was the Catholic church. We'll put that aside. The second one is the oil, natural gas, petroleum industry has dropped 11 points. Also unprecedented.

In looking at the cost tabs, it's very clear of the reason. People have lost confidence in business generally but especially the energy markets because we're the ones that brought about the — Enron is associated with energy generally.

When you see that in Washington it's translated in one way. Reregulation. And for those of us dealing with the regulators here as well as the Hill, and not only is one of them, by the way, a very prominent lobbyist here, the mood is reregulate. It is not to allow the pre-market to work. When the same people are asked how would you solve this problem? Months ago they said the market will handle it. Today they're saying, two-thirds are saying reregulate prices. And that's mentioned to Hill at his hearing.

So this is not a flash in the pan. My question to the group is, are we in the middle of a sea change and the sea change being the market is no longer perceived to be working. We all know in this room it does work. And as a result, a reregulatory fever is taking over.

MALE VOICE: Let me just offer a couple of thoughts. I guess my initial reaction was I certainly hope that's not the case. I think there have been for at least 100 years in the United States an ebbing and flowing of the argument over more or less government intervention in the marketplace. And clearly the concerns that people have about the stability of the accounting of the accounts of major corporations is important. It also ties into people's concerns about the stock market and the state of the economy.

Personally I don't see a big change. Obviously those people who are inclined to look to government mandates, solutions, are going to speak a little bit more loudly and have somewhat larger audiences in this kind of environment but I don't believe, and this is simply a personal view, that that represents any fundamental change in the overall political status of the electorate.

MR. CRANDALL: I don't have any insights on current politics but I'll offer you the results of a Brookings study by Clifford Winston and myself which show that the candidates who support or in fact engage in more economic regulation since World War II are less likely to win the White House than those who don't, and that's a change from before World War II. So the first half of the 20th Century, those advocating regulation, economic regulation, were more likely to win. Since World War II it has not been true. Maybe the tide is turning again. I don't know.

MALE VOICE: I think the pendulum is swinging back somewhat and time will tell how far back it swings or not. Obviously it's focused on corporate governance. I suspect that were not the stock markets way down there would be less of that because I think a lot of that also reflects what happens in those markets and the effect of people as they look at their 401K. So this whole issue of trust and governance, as though every company has misbehaved. And sometimes, I was just thinking yesterday it actually is not 1934, but we have to remember that.

MALE VOICE: It comes against the backdrop of the late 1990s. The first time in history that major corporations are putting money in the average person's pocket. It's something that never happened before and average people are now very distressed that it was pulled back out again.

MALE VOICE: I think the good side of the cult of quarterly performance is that we created 40 million jobs over two decades. The bad side sort of goes to the exuberance of that, the irrational exuberance and the temptations that created which we're now wreaking the cost of.

QUESTION: I'm Mandy Kinderdine with Gas Technology Institute.

I spent about 15 years in government both in the executive and legislative and frequently found that government always manages to the last crisis as opposed to looking ahead and seeing what the true problems are. I've heard a lot of discussions about energy supply disruption and the root of that is in the 1973 oil embargo. Even one of the panelists here acknowledged that the oil embargo was unsuccessful. IEA countries certainly define an energy emergency as a supply disruption. I don't believe that we've ever seen any kind of extended supply disruption and I don't think it's even arguable that since 1973, when we developed the roots of those definitions of what constitutes a supply disruption, the oil markets have changed dramatically. We have a global oil market. We have 1.3 billion barrels of strategic reserve. We have increased capacity. We have diversification of sources of supply and the economies of major oil producing nations are so directly tied to oil that the sustainability of any kind of supply disruption is extremely questionable.

My question of panelists is how we justify managing to a supply disruption when that's never occurred in reality, perhaps for a month when Iraq takes a couple of million barrels off, that's never had any appreciable effect. It had no effect the last time they did it. And most people acknowledge today that the true problem with oil security is not a disruption but price volatility, and it makes it very difficult to manage risk in today's, in the long lead times that are required to increase capacity. I'm just wondering, Dr. Yergin.

MR. YERGIN: I might ask you then, if you say we're practicing for the last crisis, tell us what you think the next crisis is?

QUESTION: I think personally that we are not paying enough attention to the growth in oil demand in the Far East and the impact of that on the geopolitics of oil supply, and a lot of where your increased oil consumption is in countries that are not part of the IEA orbit and that we ought to be looking a lot more closely at the impacts 15 years hence of that kind of growth in oil demand on our own geopolitics and where we're getting our supplies from.

MR. EASTERBROOK: ?? I think he answered that question so I'll turn it over to Jim Placke who began his career, the whole OPEC era including in Libya.

MR. PLACKE: I was present for the first OPEC meeting in Baghdad in 1960 and decided I didn't need to go back there any more. [Laughter]

All of the things that you listed as reasons why we can take some comfort in the present situation as compared to 30 years ago are quite valid and there are even more that could be ascribed. But I think there's one item that was not on your list.

In 1990 when Iraq invaded and occupied Kuwait, and it took the coalition under U.S. leadership about six months to pull itself together and toss the Iraqis out, that event took five million barrels a day of exports off the market almost literally overnight. That's fairly significant when you're talking about at that time a market of 70 million barrels a day. And Dan cited earlier some of the reasons why we got through that, but the main reason was Saudi Arabia had its fair capacity of three million barrels a day so it was able to make up a large portion of that shortfall, and you pick up bits and pieces in other parts of the Middle East and other parts around the world.

Without that reserve which is maintained because it's part of Saudi policy, the picture would be I think a little more alarming.

QUESTION: [inaudible]

MR. PLACKE: They still do.

QUESTION: [inaudible]

MR. PLACKE: If you ask ARAMCO and I have many times, they'll say well, the government's policy is to maintain a capacity of 10 million barrels a day. Then they'll sort of wink and say but we can do a little more than that.

MR. EASTERBROOK: If you had to pick something to fear about Saudi Arabia, where would you place the fear that the country will simply fall apart politically for internal reasons, not in retaliation against us or Israel, for reasons that are internal to Saudi Arabia?

MR. PLACKE: Well I have the disadvantage of having dealt with Saudi Arabia for about 20 years and having lived there for about three and I would not say in the, let's say the rest of this decade, and that's going out a little further than I can see, but say for the rest of this decade, I would not rate that as a high risk. I think it becomes increasingly difficult to address that with confidence the further out you get.

Saudi Arabia has many serious internal social and political and economic problems which have bubbled to the surface. The government there has begun to recognize them more explicitly. There is now public debate on these issues, and I think, I'm hopeful that they will address them and resolve them or at least contain them, but that's not a certainty.

QUESTION: Jeff Barrett. Global Strategic Corporation.

In my town we designed and developed the Admiral Rickover Navy nuclear submarines and we've taken that technology and eliminated the steam cycle and the technology is now available to mass produce nuclear power plants as small as your automobile. It would take a year to produce 60,000 and go to the hydrogen economy which the Vice President has winked at us that they're wanting to do but they don't want to put the money up quite yet. So we had permission to show the Saudi Crown Prince the technology and within two weeks he proposed a Middle East peace proposal in Israel. [Laughter]

So what I'm saying is, the United States can at any time they want export energy and go to the hydrogen economy and the President of the automotive industry and the oil boys know they can regulate it and maintain some of the money. So when they're ready, we're ready.

MR. EASTERBROOK: Sir, do I understand you to say that there are going to be nuclear powered SUVs in our future? [Laughter] Road rage is bad enough as it is, I don't know if I want to drive under those circumstances.

QUESTION: I think if a crisis was to develop in the Middle East or the world, Russian-Muslim access to come against Israel or the United States, we could manufacture batteries for homes, but you'd never see a nuclear politically in a car, no.

MR. EASTERBROOK: Let's turn the question to alternative sources. Nuclear is tied up with the hydrogen economy because nuclear reactors could generate hydrogen for fuel cell powered cars. To the panel, how seriously do we take this prospect in the next 20 years or so?

MR. EVERETT: Let me take a start on this because there's been an awful lot of talk about the hydrogen economy, and the attraction of the hydrogen are pretty obvious. It's the most abundant element in the universe, it's combustion products are water, it's one of the fuel sources for fuel cells, a great idea. Why can't this be a vision that we can move to promptly?

And let's take a time out, and I think I'm going to disagree with the gentleman who asked the question. A couple of problems with hydrogen.

First of all, although it's very abundant in the universe, it's not abundant in elemental form which is what you need. Most of the hydrogen is tied up in other compounds. So really, hydrogen is not a primary energy source. It's a secondary energy source and you have to make it out of something else. In that sense it's like electricity. Electricity's clean, it's efficient, it's wonderful, but I have to make it out of something else.

Now I've got two choices really to make hydrogen, conceptually at this point. One is that I can make hydrogen out of fossil fuel, we certainly know how to do that. If you're primarily worried about carbon, that's something that you might think about, but from an energy balance standpoint or a dependency standpoint that doesn't make much sense because you've given away most of the energy content of the fossil fuels in order to make hydrogen.

The other way, and I think what the gentleman who asked the question is referring to is electrolysis of, or hydrolysis of water to basically take water molecules apart and make hydrogen that way.

Technically speaking we know how to do that. The problem with that is cost.

The numbers that I have seen are that if we use grid power in the United States, which is five to six cents a kilowatt hour. You're going to make hydrogen that's going to cost an equivalent of eight to ten dollars per gallon of gasoline.

No amount of efficiency out of your fuel cell vehicle is going to overcome that. If you were to try to do it with a more expensive source of electricity, say solar or something renewable, then the cost would go up, you'd be talking about gasoline equivalent to I think $10 a gallon equivalent.

This is not for the present time an economically viable technology with any source of electricity that we know about.

MR. EASTERBROOK: Now you probably remember, Bruce, just two or three months ago at the White House the automakers got together with Dick Cheney and said we don't need to do fuel economy increases today because we're going to leap directly to fuel cell — It's all going to be practical real soon. You don't sound very —

MR. EVERETT: I want to make a few optimistic comments here because right now there are some automotive technologies that are very exciting that could have some very serious impacts on our economy. Everybody's talked about fuel cells, and for those of you who don't know, a fuel cell simply is a device that creates electricity by recombining hydrogen and oxygen. The oxygen you can get out of the air. The hydrogen you need to carry on the vehicle. These are potentially very efficient vehicles but it's also very new technology, it's very sophisticated, and the cost isn't quite at the point now where these are interesting.

However, an alternative to carrying around a tank of hydrogen on your vehicle is you can make hydrogen as you go out of gasoline, for example. We have the technology to do that. You can make it out of methanol. There are some other intermediate steps that would allow you to gain some of the efficiencies without these problems.

But there are a couple of other technologies that are worth noting. One is many of you have probably seen the hybrid electric vehicles that Toyota and Honda are selling now. Honda sells a little two-seater which to me is more like a toy, but Toyota sells vehicle called a Priess [ph] which is basically on a Corolla platform. This is still expensive, it costs about 50 percent more than a comparable Corolla, but Toyota is very high on this technology. Basically what it does is it has a small gasoline engine, a battery and an electric motor, and a computer that basically allows the gasoline engine to charge the battery or to work in combination with the electric motor to actually drive the vehicle. Very efficient. Several of the automobile manufacturers think this is a wonderful option for the future. Could in fact give us as much efficiency as a fuel cell vehicle at less cost. Not clear.

I also wouldn't rule out the improvements in conventional engines with direct injection coupled with tail pipe cleanup. There are a lot of technologies competing to be more efficient for you as consumers, and we talked a little while ago about tradeoffs. There are a lot of different technologies that could give you the same performance, same safety, much better fuel efficiency at acceptable cost.

I think the sensible thing to do is to let the marketplace work through these technologies. They are all being worked very intensively by people who have both capital resources and technical know-how.

We don't know which one of these is going to be the winner. I wouldn't at this point say the hydrogen power fuel cell is answer. It could be. It could be. It could be that a gasoline powered fuel cell is the lead technology. We just don't know.

Again, this is a case where the marketplace will do this for us. I think the government may have a role in helping to address some of the research issues around this, understanding hydrogen better, understanding some of the fuel cell technology better, but it's the marketplace which means consumers who need to make the ultimate decision on this.

My guess is that you are going to see a continuation of the trend we've seen, that automobiles will get much cleaner and will get much more efficient, and that the market will do that even if the current prices go up.

MALE VOICE: The government did have a role in subsidizing that kind of technology at the big three U.S. automobile producers. I noticed that you didn't mention a single big three technology. In fact the market is taking care of it very well because the market in automobiles is much more competitive today than it was during the first oil shock. I mean we've got eight or nine producers here competing aggressively. In the first oil shock we had what, three and a half or something.

And as to the gentleman in the back, if he had a technology that was really viable today and cost effective today he wouldn't be in Washington selling it. We have a very competitive energy supply, electricity supply industry and they'd be happy to buy it from you. You'd be in Texas, right?

MS. HILL: I'm actually going to join the audience in putting out a question here.

As I sit here and I think about the question that you threw out Gregg, about the greenhouse effect, and the comment you made about the coming new crisis potentially an increased demand in the Far East, it's very easy for us to sit here and talk about how the market in the United States will regulate things, but can we say that on a global basis? Because the increased demand for automobiles in the developing world, especially in India and China as they move forward in their economic development, of course barring some nasty crisis in India, and we can certainly expect world demand for automobiles to increase. We're looking already at about, I think it's about 40-odd percent of world oil consumption in the automobile transportation sector may increase to 58 percent in the coming time. Most of that new demand is not going to be in the United States.

Can we really expect that the free market will deal with these problems on a more global basis? I think that was kind of in part you question. And it just gets back again to the problem that you raised about the greenhouse effect. We can't imagine that Indian consumers or Chinese consumers, others will make this direct leap to some of these new technologies. So in the shorter term, for the next 10 to 15 years, perhaps we have a different magnitude of problems here.

MR. YERGIN: One thing about the hybrid car, it is very promising except it's too quiet — [Laughter] — for the comfort of pedestrians. So that's something that can be attended to.

MR. EASTERBROOK: He's right. I've driven hybrid cars and it's spooky. You have to look at the dashboard to see whether they're on, and there is a certain self defense value to the noise.

QUESTION: I'd like to have you comment a bit about Russian-American cooperation. Very few discussions we have nowadays, and we have many, miss discussing the negative factors of sales to Iran and Russian sales to support of Iraq and so on.

[Yigger Gidar], last week, a former Prime Minister of Russia, had two interesting comments on this. One is he thought of this as the most serious problem, that is nuclear sales, electric sales of Russia to Iran; and his suggestion was that we form a consortia involving various suppliers, the European Union, U.S. and so forth, modeled after the space consortium that we have that deals with Russia and work out package deals in that context.

And, do you think that this is a serious factor in deterring the development of productive Russian-American cooperation? Is Gidar right that it is a most serious problem? And is he right in suggesting that this is the way to deal with it?

MR. EASTERBROOK: What did you mean by package deal?

QUESTION: You get financial benefits in some part of the relationship. The question is how do you compensate for the income that is denied from selling the nuclear reactors to the Iranians?

MR. EASTERBROOK: — subsidizing the former Soviet scientists so they don't seek employment in Libya.

QUESTION: That's another program.

MS. HILL: I think this is an important question. Clearly for Russia it's not simply a question of developing its oil and gas sector of its energy industry. The Russians clearly want to be seen as a civilian nuclear fuel export and developer too. It's an important part of their own energy production, especially for electricity within Russia and within the region. And clearly there's been investment in and around Russia and the former Soviet Union — Armenia, Ukraine, and other areas in civilian nuclear power production. Clearly it's got some very negative connotations, not the least because of Chernobyl and then of other problems of some of the reactors, but there's been considerable development in Minatom that's a very important part of the Russian economy.

So it's true that this is a major issue in U.S.-Russian relations. I think the most contentious issue in fact of the last summit was over Iran, and in a rather generally positive series of discussions at the end of the Clinton Administration Iran was the major sticking point. We do need to find some way of separating off the issue of Iran and Russian cooperation with Iran from Russia's very serious interest in developing its nuclear power facilities and potential even further. I think that's a very interesting idea. I didn't hear Gidar's presentation but that idea of a consortium may in fact be an effective one because it's a reality for Russia and one that the United States will have to address in moving forward. And nuclear power generation is a major issue for the whole region. So in places like Armenia and other former Soviet states that have limited oil and gas reserves, they want to also develop their nuclear power facilities. So this could be something that we could think of on a broader scale, not just for Russia but for some of the other states in the region that would like to develop this service. So that's actually I think quite a good suggestion.

QUESTION: I'm Gregg Shuckman with the University of Central Florida here in Washington.

Gregg, I'm not an energy analyst, lobbyist or economist, so I will preface my remarks by saying I'm perplexed right now. I'm perplexed because a good deal of the rhetoric, especially since 9/11 has been about energy independence and energy security. I'm perplexed because a few weeks ago the EPA released at around 5:00 p.m. on a Friday, and for journalists you understand that's a good way to bury something you don't want covered but an enterprising New York Times reporter picked up this report that says mankind is in fact having an effect on global warming and yet we're saying that the jury's still out.

I'm perplexed because the National Academy, at least a report not too long ago that we're talking about which is a collection of some of the finest minds in science and engineering in this nation, perhaps even around the world, giving some very good, non-partisan advice on how to work our way out of these problems and yet we're saying well, we could spin this away and say more people are going to die if we build cars that are going to be more efficient because they'll be lighter etc., etc. As we all know in this town you can spin a story any way you'd like just to make the numbers work.

So I'm perplexed in general about how we're going to deal with what we do know by the experts that we've entrusted to give us some unbiased advice —

MR. EASTERBROOK: Gregg, let me stop you and ask you, what would you do? If you were king, what action would you impose?

MALE VOICE: What's the problem, first of all? What problem are you trying to solve?

MR. EASTERBROOK: Global warming is real. Assume it's real. What would you do?

QUESTION: It's a basic economist question. It's supply and demand. There's supposedly a finite amount of fossil fuel available.

MR. EASTERBROOK: So if Gregg were king he would bring the problem to you and make you solve it. [Laughter]

Dan, you were king, how would you solve it?

MR. YERGIN: I would ask Robert for some economic analysis.

One approach to it is a no regrets approach. And by the way, when you turn over your capitalist stock in general it tends to become more efficient over time.

MR. EASTERBROOK: You'll need to tell people what you mean by no regrets.

MR. YERGIN: No regrets means you pursue policies in action, whether you embrace it 100 percent or 80 percent or 50 percent or 40 percent, that if it turned out to be 100 percent you wouldn't regret what you had done.

MR. EASTERBROOK: This a phrase we use around Washington to mean we do the things that are common sense against global warming anyway, and if it turns out there's no global warming we're just doing common sense things. But the common sense things tend to be the imposition of higher fuel efficiency in vehicles, power plants and so on. That's the main thing you'd do, right?

MR. YERGIN: Yeah.

And our economy actually is, we've cut our oil intensity in half in 25 years. That's a pretty big achievement. Now the Europeans have a higher moral ground but part of the reason they have a higher moral ground is because Margaret Thatcher battled with the coal miners and the effect on the coal industry. Fiona knows about that. And of course the collapse of the Berlin Wall and the fact that they're burning less dirty coal in what was East Germany. So those are the way the Europeans are in a different position than we were if we use 1992 or whatever as a base year.

MR. EASTERBROOK: Bob, let me rephrase that same question to you by saying, I bring you a sheet of paper that says Bob, scientists have confirmed global warming is real. We must act. What should we do?

MR. CRANDALL: The obvious thing to do, as I said earlier, is you move toward the carbon tax. You start at a low level. That's sort of the conventional wisdom among economists today. But this young man here just solved his own problem. He starts out with energy security, then he goes to global warming and then when asked what do you do about global warming he talks about the finite nature of fossil fuels. If in fact we're going to comer up against the constraint of a finite amount of fossil fuels, the problem solves itself. [Laughter]

QUESTION: I'm Richard Smith, I'm with the Nuclear Energy Institute, so this first statement is not going to be surprising.

If greenhouse gases and global warming is confirmed scientifically as of tomorrow then you should have a major league fuel switch to nuclear power.

MR. EASTERBROOK: Can we get your card, please? [Laughter]

QUESTION: In the sense that it is simply emission free and a source of electricity.

But in a more general sense I think what we're talking about here was framed by Dr. Yergin from the very beginning. It's Churchill's diversification, it's Lady Thatcher's the unexpected happens.

So what is the prudent course? It strikes me as that you have to have a diverse fuel supply, it has to come from different sources, you have to have fuel diversity at home that incorporates fossil fuels, carbon fuel, oil, coal, nuclear power, natural gas, renewables and spread it out because this economy, if it's going to grow, is going to grow because we have a reliable electricity supply and energy supply.

So I would ask the panel, is not fuel diversification and an expanded portfolio, a diversified portfolio, I should say, really what we're talking about?

MALE VOICE: If the concern is about different long-run prices of fuels, yes. But if we're talking about a temporary disruption I'm not sure that is the solution. I think then you need to know how you're going to deal with this disruption and is the disruption going to be less severe if we just consume less fossil fuels over the foreseeable future. Those are interesting questions. I don't know if we know the answer to that.

QUESTION: [inaudible]

MR. EASTERBROOK: I agree with you. [Laughter]

QUESTION: Peter Rosewood, [Inside] Fuels and Vehicles.

There seems to be one sector that's been kind of largely ignored so far in the discussion and that's natural gas. There are a lot of strands to natural gas. How important is gas to liquids, and we have BP telling us that natural gas would be the bridge fuel to the hydrogen economy. That seems to happen at about the same time. There would be kind of a convergence of demands for natural gas to create hydrogen for new electrogeneration. Exxon tells us 75 percent of the new electrogeneration will be based on natural gas.

One question, and I don't want the second comment to overshadow that question, but I find myself having to look out and make sure this is Massachusetts Avenue and not Pennsylvania Avenue, and that this is Brookings Institute and not Heritage Institute. [Laughter and applause]

I personally find it astounding that global warming is pooh-poohed by the panel.

MS. HILL: I don't think we pooh-poohed it.

MALE VOICE: You didn't hear about the Brooking-Heritage merger announced this morning? [Laughter]

QUESTION: I didn't look at the web before I left.

Aren't the consequences of being wrong and downplaying global warming far more severe than if we overreact to its potential or likely existence?

MALE VOICE: I think on global warming we ought the ear from Gregg, our chairman ought to speak.

QUESTION: One more —

MALE VOICE: Oh, you didn't ask your question yet.

QUESTION: Well, two already. This is more a comment.

MR. EASTERBROOK: We're almost out of time. What's your question?

QUESTION: On fuel cells. Honda makes a Civic which is a main line four-seater car. Also on the price of five to six per kilowatt, eight to ten dollars a gallon. I mean off-peak generation you'd be one to two cents a kilowatt which brings the per gasoline equivalent, hydrogen price down to one to two dollars, 1/50 to 2.50. And given that it's twice as efficient a fuel cell, we're almost in parity with hydrogen emersion gasoline. Thank you.

MR. EASTERBROOK: Jim, I remember a graphic you did a few years ago that showed how the ratio of natural gas to overall oil consumption is increasing, and we're on the path to use more natural gas. And by the way, the technology's going to change, L&G costs are going to go down, it's going to become more flexible, it's going to become more of a traded global commodity so gas will loom larger. It will also loom larger in the developing world as we were speaking about. You need transportation, you need a way to move it from where it is to where the consumption centers are.

The famous gas pipeline that was going to go across Afghanistan was premised upon cooperation between Pakistan and India and that didn't work out. [Laughter]

MALE VOICE: Gregg, you're the expert on global warming.

MR. EASTERBROOK: I will take the floor for a moment to answer the question in my view.

I think the science of global warming has gotten so much stronger in the last ten years that some policy response is required now, and I think anything we do will have almost no effect in the first two decades because of increasing fossil fuel use in the developing world which no force on earth can stop. But we can create the economic circumstances for improvement either by a carbon tax or by a pilot carbon trading program. I think what's practical would be North America -- the United States, Mexico and Canada. Create an economic incentive for people to come up with efficient ways to restrict greenhouse gases.

The reason we seem to have no progress now is because no one has an economic incentive to devise means of progress.

MALE VOICE: Not Kyoto?

MR. EASTERBROOK: No, I don't see Kyoto as working, but something that creates a regional economic incentive. People are smart, people will start inventing ways to restrict greenhouse gases once you give them a profit incentive to do so. Suddenly the problem won't look so bad. And secondarily, I think it's important to remember that there are two greenhouse gases — carbon dioxide and methane. In the short term it's hard to imagine how to run the world economy without a lot of carbon dioxide. You can imagine significant restrictions on methane that would do no damage to anyone's economy. The calculations show that if we took steps to restrict methane missions, most of which are forms of waste as opposed to economically useful, this would buy us somewhere in the neighborhood of two or three decades to slow down global warming and develop the technology that would defeat the main problem.

MS. HILL: Can I just make a comment that might put us back on Massachusetts Avenue again rather than on Pennsylvania.

I think that part of the perplexity and the kind of perception that we've suddenly become the Heritage Institute is because we've been focusing on the U.S. energy market. One of the problems of course is the U.S. acts globally but tends to think locally. So many of these issues, just as Bruce was saying, there's a great deal of confusion now in the United States about exactly what we should do, what the exact problem is and how we should tackle it. In may respects because as members of the panel have said that in the United States many of these issues have started to be tackled anyway by technological advance and by, as Gregg and Dan pointed out, by the renewing of capital infrastructure, industry, etc. It really is as Gregg has just said in the developing world where we have the major problems. So if the United States were thinking globally and acting responsibly globally, even if Kyoto is not the solution then the United States would have to be gotten to think about how you would address that problem on a much larger scale, and trying to think then about how to promote technological advancement in the developing world that would help them to leap over some of the problems for the developed world that Europe and the United States have gone through already since World War II, because unfortunately, China, India and other countries are on the same trajectory that certainly the Europeans were in the '60s and '70s before they started to also clean up their own act.

MR. EASTERBROOK: I must say we've come to 2:30, it's time to conclude. We've concluded by solving global warming, so that's handy.

Since today is Friday, at 5:00 o'clock today they will announce the Heritage-Brookings merger so all the papers will miss it. [Laughter]

Thank you very much for coming.