Senate Budget Committee Testimony
Washington, D.C.
Tuesday, January 30, 2001
Mr. Chairman and members of the Senate Budget Committee:
I am Matthew R. Simmons, President of Houston-based Simmons &
Company International, an investment bank specializing in energy. I also
serve on the National Petroleum Council and the Bush/Cheney Energy
Transition team and was a former Chairman of the National Ocean
Industries Association. I have worked in investment banking and
extensively analyzed the energy business for over 30 years.
In a brief period of time, I will attempt a frank and candid summary of the
energy problems that the USA and the entire globe now face. The
problems are real and they are serious and they will have a negative impact
on many parts of our economy. Too many parts of our economy cannot
function properly without a reliable source of energy. In fact, it is hard, if
not impossible, to find an industry sector of any importance that is not
dependent on such needs.
The energy problems also transcend a single form of energy such as oil or
natural gas. They extend across the entire face of the energy complex,
from worldwide petroleum to natural gas, to electricity. And the problems
are not localized, although various areas will suffer certain energy
problems worse than others will.
The root of our energy problems is a lack of any significant additional
spare energy capacity. Soaring energy demand finally consumed virtually
all of the nation’s and the world’s energy reserve. We have not run out of
basic energy. But, we have run out of a physical way to increase, to any
significant extent, added energy supply until massive and costly additions
are built. This task, if started today, could take the better part of a decade
to accomplish.
In essence, our energy supplies are in dire shape. We still have plenty of
resources-- we simply lack the capacity to get them out of the earth,
transform them into usable energy, and finally deliver them to an energy-hungry
economy which still relies on energy more than any other single
input to remain healthy and to grow.
We are out of spare oil and gas supplies at the wellhead. We are out of
tankers and pipelines to transport more oil and gas to where it is needed.
We are out of refinery capacity, out of spare drilling rigs, out of coal-fired
electricity generating capacity, as well as with nuclear and hydro too. In
fact, it is hard to find any spare capacity throughout the entire energy
complex.
Perhaps the greatest looming shortage is in people. For two decades, the
energy industry tried to cope with poor financial returns through constant
downsizing and company-wide layoffs each time oil prices collapsed. As a
result, few new people have entered the energy business in many years. It
was too risky and too many other parts of our economy were far better
places to work. When the biggest source of new rig hands started coming
from prison parolees, this was a sure sign that the industry’s people
equation had reached crisis stage. There is anecdotal evidence that about
40% of the energy workforce will retire within the next five to seven years
with almost no new entries into the energy workforce.
So many of our energy problems are the by-product of two decades of low
energy prices and neglect. These low energy prices were certainly a boon
to our energy consumers, and aided the world’s economies to achieve
unprecedented economic growth. But, low prices also resulted in two
decades of marginal financial returns in the exploration and production of
oil and gas. They also created absolutely terrible financial results for the
large number of relatively small companies that manufacture all the rigs,
specialized tools and exotic subsea equipment that aided the great oil and
gas technology revolution. To survive the past 20 years in energy,
companies had to merge and then merge again, cutting costs and
headcounts with each consolidation. But, even all these moves were not
enough to reduce costs in line with steadily falling energy prices.
The same low prices resulted in our downstream petroleum industry
averaging about 4% return on a fully depreciated asset base. Had these
assets been new, the returns would have been even worse. Consequently,
no new refineries have been built in North America in over 30 years and
about 20% of our refinery system that was in place two decades ago have
been closed.
For over a decade, almost no new power plants to create additional
American electricity were added. It is easy to blame this on deregulation,
but the poor returns these plants would have generated was the core issue
leading to such a colossal electricity shortage, not just in California but in
many other parts of the United States.
While these low prices were a boon to energy consumers, they lulled
everybody into a false sense of security. Because energy prices were so
low, people forgot how important reliable energy was to their lifestyle and to their business livelihood. And, give-away energy prices discouraged
any form of serious energy conservation. Instead, Americans fell in love
with electric gadgets and Suburban cars. And, too many companies based
part of their business strategy on the false premise that energy costs were
almost free, and would remain so.
As the world’s media has finally started covering energy again, given the
sudden appearance of one energy problem after another, many stories
have commented on how these energy problems came “out of the blue.”
They caught most people by surprise, but this was simply a by-product of
our overall neglect of energy matters.
Every problem that the United States and the world now faces was
predictable for the past several years, if one took the time and effort to dig
into the available energy facts. I began to speak about the problems we
would encounter when our energy logistics finally reached 100% capacity
over 10 years ago. The first time I addressed the logistics bottleneck issue
to any governmental advisory group was at an Outer Continental Shelf
Policy Committee in May 1990.
As late as last summer, I testified at the Senate Energy and Natural
Resources Committee that natural gas was headed for a train wreck that
would then boomerang into our electricity grid. But, these views were not
at the time within conventional wisdom so few people paid any attention to
the warnings when there was still time to correct or at least moderate our
energy woes.
A partial reason why this energy crisis came as such a surprise resulted
from a decade of bad energy data. Our energy information systems broke
down as the decade of the 1990’s began. Energy forecasts from the Energy
Information Agency and many other forecasts continually underestimated energy demand and confidently predicted even lower future energy prices
that were already too low to justify any needed expansion. An accidental
but bad energy road map was created that led our energy business over a
cliff. Reforming this bad data should be a top energy priority of the new
government.
It is now too late to prevent the energy problems we face. The capacity
cushion we once had is now gone. It is time, however, to face the reality of
this grave problem and begin fixing it instead of debating whether the
problem is real, or spend a year or more searching for the culprits who
created such an energy mess. We all played a role. Energy consumption
without insuring a simultaneous energy supply was practiced by every
single American.
There are only two ways to solve this problem. One makes no sense. The
other must be executed. The simple, but bad solution is to shrink our
economic activity to re-create an energy cushion once again. This means
regional recessions. Alternatively, it means abandoning certain energy-intensive
activities like manufacturing aluminum, glass, steel and concrete.
But, even if we write off these highly energy-intensive industrial activities,
general overall economic growth, once it occurs again, would soon
consume all the spare energy capacity this plan created.
A far better plan is to quickly mount a massive energy infrastructure
building plan. It is not just added oil supply, though this is very important.
It means an expansion of the total energy complex, nationally and around
the globe. It means more wells drilled in each place where added
hydrocarbons can safely be found. It means more drilling rigs, more
platforms, more supply boats and tankers. More refineries, pipelines,
power plants and transmission lines.
The expansion cannot be modest. If the world embarked on a mission to
expand our energy complex by 10%, it would take the better part of a
decade to accomplish while only buying three or so years’ of future growth.
It takes as long to build one house as it does three, so I would design this
energy expansion to create an increase of around 30% so a meaningful
energy cushion is once more created. Once such a cushion is rebuilt, we
should never again describe a day or two of extra energy reserve as
“energy glut.” It was this “just-in-time” thinking that led to many of our
current woes.
While this building process is underway, we also need to overhaul or
rebuild the entire energy complex, which now affords the world the luxury
of using over 180 million barrels of oil equivalent energy each day. If this is
ignored, the 30% addition will be futile. The world’s energy base is now
rotting and far too old -- the consequences of two decades of ever lowering
energy prices. It all has to be completely refurbished or rebuilt.
This energy expansion and overhaul will be a massive and costly task. It
could easily be described as an Energy Marshall Plan. By the time it is
complete, the cost will be in the trillions of dollars and could easily exceed
the cost of rebuilding Europe after World War II.
One reason I describe this as a “Marshall Plan” is to put the role that
governments should play in this task in some perspective. Many now think
the “Marshall Plan” rebuilt Europe. It merely created the momentum to get
the process started. The total cost to government of the “Marshall Plan”
equated to less than $90 billion in today’s dollars. This might represent
less than 5% of the total cost to rebuild Europe. It merely started the
process so the private sector could complete the job. The same needs to
to be done in energy.
As tempting as it will be to hope otherwise, there are no “silver bullets” to
avoid this task. Every form of energy must be expanded, particularly since
some may not work. Energy conservation is an important part of this plan,
but it is no solution as too much evidence exists to show that even
massive conservation does not create enough new energy capacity. In the
same vein, alternate renewable energy is vitally needed but this tiny source
of energy generation can grow by astonishing rates and still remain almost
irrelevant for years to come.
Someone must pay for this “Energy Marshall Plan.” The only realistic
source is through higher energy costs. The adjustment will be painful for
some and creating a transition is an area for the government to play a role.
Perhaps the greater stream of government revenues which will come from
higher energy prices can be used as a windfall to bridge the pain of those
who need time to get accustomed to the real cost of reliable energy.
As we begin this “Energy Marshall Plan,” we are likely to see our energy
supplies and energy capacity further shrink before they begin to grow. Too
many physical areas of the energy system are simply too old to keep
running and our global oil and gas supply base is now facing too steep a
rate of annual production declines to see these offset by a few new energy
projects coming on-stream. In the meantime, an added concern of mine is
how we are now “robbing Peter to pay Paul.” We are overextending the
heating oil runs only to face motor gasoline shortages or having to rob a
neighboring state of its spare electricity margin to bail out a shortage
elsewhere. Henceforth, any emergency fixes must be executed with
extreme care to avoid compounding the overall problem.
As the steps to correct these energy problems begin, there is grave risk of
a collision between those with environmentally-driven passions to stop any
form of real energy expansion and consumers who need a fast solution to their own dire energy problems. And, a collision could easily occur
between those who see energy companies generating high profits from
rising energy costs as unfair and the need for profits to be high enough for
the private sector to bear the major brunt of one of the costliest industrial
projects ever tackled. Finding a true harmony between these clashing
forces is an area in which government needs to play an active role.
I will end my remarks by urging this Congress and this administration to
show leadership in guiding the industry to begin this “Energy Marshall
Plan.” The sooner it begins, the faster we permanently fix these problems.
And, the faster this spending starts, the less likely it is that the world
careens into a deep recession. You cannot spend the money this “Marshall
Plan” entails and sink into a deep recession.
I commend this important Senate Committee for addressing these serious
issues so early in the Congress’ 107 Session. Our energy problems are
real and they are serious. It is time to begin rebuilding our energy
complex.
Mr. Chairman, thank you for allowing me to address these extremely
serious issues. |
