Frank Zarb on US Energy Policy

Frank Zarb served as "Energy Czar" during President Ford's administration, holding dual appointments in the Energy Resources Council and the Federal Energy Administration. He later became chairman and CEO of the National Association of Securities Dealers (NASD) and head of the NASD's stock exchange, the NASDAQ Stock Market. Currently he is a Managing Director of Hellman & Friedman.

Following is a conversation he had recently with Richard Torrenzano:

Richard Torrenzano: What's been right, what's been wrong with U.S. energy policy over the last 10 to 20 years?

Frank Zarb: There has not been an energy policy in the U.S. in over two decades. That’s the biggest public policy failure in our lifetime, because the public sector refuses to face up to the needs of U.S. energy. 

While I can't tell you anything good about U.S. energy policy, I can tell you some good things about the marketplace that has raised prices, increased production, and encouraged alternative energy sources, but not nearly fast enough. So despite the lack of a government policy, the marketplace has done okay.

RT: Is there excessive profiting in the energy business?

FZ: Talk of excess profits during peak periods for the most part is driven by politics, not by economic analysis. It's been cyclical, with pricing of crude oil, particularly. That drives the rest of the energy sector and for the most part that pricing is in the hands of non-U.S. producers and the world economy. I think there has been a reasonable job done of taking the high-end profits and putting them back into new capital. That's exactly what you want.

RT: What percentage today of our oil comes from North America and what percentage comes from overseas?

FZ: 40% - 60%. Sixty percent from non-North American sources.

RT: Is the U.S. vulnerable to an oil embargo or disruption?

FZ: We are very vulnerable. Just consider -- we now import nine million barrels a day, half of it from unfriendly parts of the world. Think about some kind of military action in the Straits of Hormuz that would reduce the amount of oil available to this country by one and a half to two million barrels a day. That in itself could produce enough economic disruption, particularly on the East and West Coasts to substantially hurt global economic peace.

RT: What kind of reserves exist today that could be put into the hands of people and business? How long would those reserves really last?

FZ: Strategic reserves probably have 90 days worth of production. We started that in 1975 when I was in government to ensure our military had access to fuel in the event of a disruption in Middle Eastern oil flow. Keep in mind, however, that oil has to be piped to a refinery, refined and piped to where it's needed, and it's only a small backstop; an important one, but small.

RT: What are the objectives of a good U.S. energy policy?

FZ: Several. In the short term you have the energy security question. You have to have a plan that will reduce oil imported from unfriendly parts of the world as soon as you can. That should be articulated in barrels per day. If we import nine million barrels per day now, a reasonable objective would be to import only six million barrels per day in ten years.

RT: Ten years is a long time away.

FZ: It's a long time away, but it's energy. You have to think in terms of 10 or 20 years, because in 20 years you have to be moving toward alternative forms of energy. Non-oil and natural gas based energy will be taking on a substantially higher burden of our energy needs. On the other hand, for tomorrow and the next several years, the only organization ensuring energy security is our military. Like it or not, that's what it is.

RT: What are those competing factors to energy policy? How do you view them?

FZ: Competing factors have been there all along. The consumer wants cheap energy and a lot of it. The producer wants to get paid and wants the ability to produce where he can produce. The environmentalist wants to preserve the environment. The politician wants to tell the voter that they can have cheap energy and not destroy the environment in any way, shape, or form. Then you've got the extreme producer who wants to dig holes wherever they want. It's a mess of individual interests without leadership.

RT: Do you think any President or administration can provide that leadership?

FZ: I think the right President, with the right mix in Congress, could. When I was in government as the Energy Czar, we were completing the first embargo and then Congress lost interest in doing anything. I went to see my oversight chairman, Senator Henry (Scoop) Jackson. I said to him, “Senator, what do we have to do to get Congress moving again?” and he said, “Do you know how to make another embargo?” His point was, without a real crisis, the body politic will not get things done.

RT: How long would it take to implement a sound strategic policy? 

FZ: Twenty years, if we started right now. It would be over several administrations. The current administration is talking about going forward with some nuclear power and building one or two nuclear plants. But if you're going to do that, you've got to approach nuclear power on a much broader base than this administration, although I applaud what it has done.

RT: Some of the risks are obvious, but what are the long-term risks of not having a workable energy policy?

FZ: The short and long term risks are substantial harm to our economy, affecting the ability to grow and increase productivity. Energy is economic blood. If energy isn't available at a reasonable economic cost, then you can't grow an economy.

RT: What role do you really think all these new clean energy technologies can play in taking us off our oil reliance? Obviously, there are a lot of technologies in many different areas. What seem to be the most important areas to you?

FZ: The electric current today consumed in the United States is something like 3.7 trillion kilowatt hours. Solar energy is probably 23 percent of that. Wind power is probably 8 percent of that. We have a long way to go before these other technologies take over. The electric car is a great step forward, but it reduces an insignificant portion of the gasoline usage. It's going to take 20 to 30 years for that evolution to take.

RT: They could make some real dents, I would think, over the next five to seven years in solar energy and wind power, no?

FZ: It depends on how big a dent you're talking about. If you're talking about going from 1 percent to 3 percent; sure, but not much more than that. First of all, the economics doesn't usually work. The economics of solar and wind, which are terrific, are currently heavily subsidized.

RT: Is that because the technology is not really advanced enough?

FZ: Not as advanced as it can be. When you compete with high-priced oil, it gets a real boost. When it competes with low-priced oil and gas, it struggles.

RT: How safe do you think nuclear power is today versus how plants were built 20 or 30 years ago?

FZ: A lot safer. The French have done it right for years. A very high proportion, if not 100%, of their electricity comes from nuclear power plants. The federal oversight has gotten extremely good in that sector. It's always a concern, but I think it is well under control. Keep in mind that people complain about nuclear waste, but the military probably produces more nuclear waste than all the utilities put together.

RT: How many more nuclear plants in the United States do we need and how long does it take a plant to come online once the shovel is in the ground?

FZ: Under current conditions, it's an eight to ten year project, including getting the shovel in the ground and fielding your first lawsuit. It's still a very messy procedure.

RT: What kind of issues or surprises do you think the U.S. energy industry is going to face in the next five years?

FZ: You will again have a spike in prices or several spikes in prices. They'll come about by any number of things. It could be a terror attack on some oil fields somewhere in the world. I worry a lot about disruption in the U.S. oil flow, particularly from the Middle East, which if you're a terrorist; you've got to be thinking about how you get that done. 

On the upside, you'll see some interesting breakthroughs in the advancing technology, such as nuclear, solar, and wind power.