The New Global Energy Landscape
Q&A With Amy Myers Jaffe, Executive Director of Energy and Sustainability
By Tim AKin
Amy Myers Jaffe, one of the world’s leading experts on the oil industry and an influential thought leader on global energy policy, joined UC Davis in October, strengthening the university’s leadership on clean technology, sustainable energy and transportation.
Jaffe is executive director of energy and sustainability in a joint appointment to the Graduate School of Management and the Institute of Transportation Studies. She spent the past 16 years at Rice University as director of the Energy Forum at the James A. Baker III Institute for Public Policy. She served as a Wallace S. Wilson Fellow in Energy Studies and associate director of the Rice Energy Program.
Jaffe’s expertise spans oil geopolitics and strategic energy policy, including energy science policy and energy economics. She was drawn to UC Davis by its focus on sustainability and the interdisciplinary research and relationships between transportation and energy, and by the opportunity to work near California’s state capital, an international pioneer on environmental and public policy issues.
In addition to research support on energy issues, Jaffe is deeply involved in executive education initiatives and will teach an MBA course on sustainable business ventures.
She is a frequent commentator in the media, and an invited keynote speaker at major energy industry and investment conferences and board meetings. She led a discussion about shale oil and gas with global oil industry CEOs and executives at the World Economic Forum in Davos, Switzerland, in January. On The Economist’s Digital Debate in February, she engaged in an interactive discussion on fracking with the Sierra Club’s executive director.
Recently, Dean Steven Currall sat down with Jaffe for a wide-ranging broadcast TV interview about the energy industry and markets. This is an edited excerpt of the interview.
Q – Dean Currall: Tell us more about the activities you’ll be involved with here at UC Davis.
A – Amy Myers Jaffe: I’m thrilled because UC Davis is a world leader in energy and sustainability. I’m very excited to be able to work in the West Village, which is a phenomenal test bed for new technologies we’re going to need as we move forward. It’s a very exciting time to be looking at energy. We’re having great transformation, even in the oil and gas sector, including the development of resources from the shale formations, which is revolutionizing the way we think of ourselves as an oil importer here in the United States. It’s also a pivotal time, from the point of view of climate change, bringing on new technologies and cleaner energy sources. And with the Middle East in turmoil, we’re going to need those new energy sources because we want to preserve the planet and we are going to need them just to be able to go about our daily lives. It’s going to become harder to rely on resources from the Middle East imported to the United States.
Q: Do large traditional oil and gas firms have the research and development and innovation infrastructure to transition to a bigger emphasis on renewable energy? Are they nimble enough?
A: It’s a very big challenge for the industry. The question is how, as a large organization, can you tap the entrepreneurial spirit of start-ups? There’s interest in it, such as the Low Carbon Fuel Standard here in California. You’re seeing companies like BP, Chevron and Shell trying to think about how to bring cleaner fuels into their portfolio, including “liquefied natural gas,” or LNG. And you’ve got big transportation players like UPS that are moving to LNG as a cleaner, perhaps less expensive fuel. So it’s an interesting time to see what technologies might win, what business strategies can work. GE is now setting up business plan competitions in their energy division to come up with new products. They are trying innovative, interesting things, even though they’re large corporations. It’s very hard to be like a Silicon Valley start-up.
Q: In a recent National Public Radio interview you discussed the global oil markets and you drew an analogy to swimmers in a swimming pool. Can you explain that?
A: It’s a global market, and so it’s one price for all. The analogy to the swimming pool is if we’re all having a lovely Sunday and we’re all in the pool and someone takes a bucket and they start pulling water out of the pool it affects the person in the deep end the same amount as the person in the shallow end. It’s less water for the whole pool. And the same way if you pour more water in, it affects the whole pool. So that’s what we have to understand, but it doesn’t mean that having more energy produced here in the United States wouldn’t help us. And the reason it would help us has to do with our trade balance and the strength of the dollar and other positive things that would come about if we kept the revenue from our energy use here in our own country and we’re not shipping our dollars to Saudi Arabia or to Russia or other countries. If we were paying someone who’s producing oil in Texas or Pennsylvania, or with the new oil maybe even Ohio or Florida or California, then that money stays in the U.S. economy and we would be able to wind down our current account deficit over time.
Q: Your recent book, Oil, Dollars, Debt, and Crises: The Global Curse of Black Gold , has a provocative title. Tell us about the market dynamics and the boom and bust activity that you’ve seen in this market and the role of the banks, currency valuation and energy price crises.
A: In times of economic growth, our oil demand goes up because it takes more energy the more economic activity you have. And as the price goes up there’s a lag between the time it takes an oil company or producer to go out and drill for that oil and then bring it to market. The higher the price goes, now we’re importing a lot of oil, so we’re sending that money out to Saudi Arabia, Venezuela and the Middle East. They have small populations; they’re not manufacturing-based economies. You’re pouring hundreds of billions of dollars into an economy instantly as the price is going up, and they can’t absorb that money. So they put it in a Sovereign Wealth Fund, and then the money has to come back out into the international financial system. …You get inflation, you get this giant financial bubble. We saw this in 2007. Then as people lose their jobs and businesses can’t move forward because of the financial crisis, that lowers oil demand. And oil prices fall, which we saw in 2008–2009. So we have this boom-bust cycle. The best way to ameliorate it is to have a steady program in alternative energy and to try to improve energy efficiency, which is something we work on very hard here at UC Davis. It’s a critical element to get us out of this boom-bust cycle we’ve been seeing since the 1970s.
Q: There’s been increasing investment in renewables and alternative energies, but in some circles a lack of enthusiasm and support for traditional oil and gas projects. Take the Keystone Pipeline, for example. What are your thoughts about what’s going on there politically, and also what are the implications for a project like that for the U.S.?
A: I tell people we have to be realistic. I strongly believe that we need to move toward alternative energy, and we need to make the investment to do that. And that means we need to have strong government support for fundamental science and R&D in these important technologies. We need projects like the West Village project here at UC Davis, where we are deploying those technologies in a real-time incubator so we can get them commercialized and proven. But the flip side is we have in this country 350 million vehicles on the road that run on liquid fuel. And we can block the develop- ment of a pipeline or oil and gas resources because we feel that’s “dirty energy.” But who are we hurting if you’re not willing to get out of your car? …What we need is a thoughtful transition where we’re making sure that we have enough supply for our immediate needs, but we are taking steps in policy to make sure that over time those immediate needs fall and that we have a diversified energy portfolio.
Q: Was Germany’s decision to pull back from their emphasis on nuclear power an overreaction to the Fukushima nuclear disaster in Japan? It seemed to be quite a large swing in their energy policy.
A: It’s very challenging in the energy policy space not to overreact because energy production is industrial. Whether it’s the Fukushima accident or the Macondo Spill in the U.S. Gulf of Mexico, when we’re confronted with a temporary failure in a tech- nology because of a natural disaster or because of human error, the impetus, the knee-jerk reaction is to say, “We shouldn’t use that technology anymore.” …The problem with that approach is that there are risks with any kind of energy production. At the Graduate School of Management, we can help energy companies understand how to mitigate risks through smart business operations. That’s part of the role of the business school. It’s why we do executive education, because risks change over time. For example, companies are going to have to start to deal with the risks associated with climate change. Nobody has wrapped their brain around it. A huge percentage of the world’s refining and petro- chemical industry is located on the coast. And they’re places that are going to be affected by sea level rise and we saw that during Hurricane Katrina, where these refineries were damaged by the storm. I can assure you the refining industry hasn’t even thought about that. They have no plan. …Same is true with cyber security. …The Exxon Mobils or Shells of the world five years ago, 10 years ago weren’t thinking about cyber security as a risk to production. Are they thinking about it today? Yes, every minute of the day.
Q: Last year here at UC Davis we hosted a talk by Amory Lovins of the Rocky Mountain Institute. He said that the U.S. could end its reliance on fossil fuels and the U.S. economy could grow its economy by nearly 160 percent while eliminating the need for oil, gas, nuclear and one-third of the natural gas, and that we would save $5 trillion on the net present value cost in this process. Are those figures realistic or is he looking through rose-colored glasses?
A: I like to do an exercise to take energy units and make them comparable. We have 103 nuclear plants in the United States. To convert that to renewable energy, you’re talking about a huge amount of final power. The global numbers—to give you an idea—suppose we wanted to take all of the fossil fuel used globally and convert it to renewable energy. That would be the equivalent of building over 6,000 nuclear plants worldwide. It’s 14 times the number of nuclear plants we have in the world today. In the United States, we’ve added one plant since 2005, and it’s not even finished yet. My point is the scale-up of what we’re talking about is so large that it’s not something we’re doing in a five- or 10-year horizon. …And it’s going to take some government intervention, and it means that citizens have to be engaged in the process.
At the Graduate School of Management, we can help energy companies understand how to mitigate risks through smart business operations. That’s part of the role of the business school. It’s why we do executive education, because risks change over time.
– Amy Myers Jaffe, Executive Director of Energy and Sustainability
View the full 30–minute video interview: www.gsm.ucdavis.edu/Energy-Industry-Insights
Read more about Amy Myers Jaffe and follow her blog: www.gsm.ucdavis.edu/jaffe