Energy Industry Seeing 'Bubbling of Innovation'

Even the oil, gas and coal businesses were green at one point. It just happened to be millions of years ago when green vegetable matter began a long process of degeneration and transformation into a carbon-based, fossil fuel.

Today, the traditional energy business is booming, with crude oil prices pushing $100 a barrel and gasoline pushing $4 a gallon. At the same time, however, the supply-and-demand equation is being taxed like never before and there’s growing concern about finding new reserves.

In the U.S., the dynamic is further complicated. As consumption increases – even with growing conservation efforts  -- so do imports. The potential for new domestic production is limited, if non-existent; oil refineries and natural gas facilities are not being built and potentially rich areas off shore and in the Arctic National Wildlife Refuge in Alaska, for instance, are off limits to exploration and drilling, partly because of environmental concerns.

The energy infrastructure is also a controversial problem. New refineries, pipelines and transmission lines are not being built, even as demand rises.

Given that backdrop, research and advice are needed. Daniel Yergin has made a business of that as well as a public service.

Daniel Yergin, chairman and co-foubder of Cambridge Energy Research Associates.

Yergin chronicled the history of the oil business in his Pulitzer Prize-winning non-fiction book The Prize: The Epic Quest for Oil, Money, and Power. The 1990 book was made into a PBS mini-series.

Yergin is co-founder and chairman of the consulting firm Cambridge Energy Research Associates. He chaired the Dept. of Energy’s 1995 Task Force on Strategic Energy Research and Development. Yergin also serves as CNBC's global energy expert.

He shared his insights on the energy industry, consumption and policy.

How desperately do we need a national energy policy?

I think what we need is a national energy framework that puts the pieces together. I don't think you'll ever be able to write a constitution for energy. We already have a host of policies of all kinds. You need a set of principles and a way of implementing them. You have to recognize we live in the real world and then address energy supply and innovation.

Do we need clear leadership on this issue?

One of the characteristics of the energy industry is that it is a long-term industry. Innovation takes time to develop and unfold. We don't need a highly centralized approach. We're seeing more innovation than I have ever seen, in renewable or alternative energy, for instance. There's been a great bubbling of innovation

The other thing you have to keep in mind is the scale of it. You can have wind grow very quickly and dramatically, but it is still a very small piece of the puzzle.

In a new study of ours, "Crossing The Divide", we're looking at all the renewable energies, and only some of them are close to being commercial and all mostly depend still on some kind of incentives or subsidies, but real progress is being made.

Describe the innovation that's taking place.

What you have is that the large, existing companies - be they technology or energy - are spending on R&D. Government budgets are going up.

Research institution budgets are going up. The entry of venture capital, which is spending several billion dollars a year on so-called clean tech, is important. There's a a real focusing of research on energy at universities, like MIT and many others..

What are the major integrated oil companies doing in that regard?

BP is in a half billion-dollar partnership with the University of California to work on bio-fuels. Shell is doing a lot ... Exxon Mobil spends a billion and a half dollars, depending on how you define it, on R&D a year. You went through a period when energy prices were low and there was the inevitable situation wherein budgets got cut in many companies, although not all of them. That's changed.

John David Mercer / AP The Cheveron Pascagoula Refinery is shown flooded out by the storm surge caused by Hurricane Katrina in a Pascagoula, Miss., Tuesday, Aug. 30, 2005.

Is there a public perception problem then that energy companies are not doing enough?

People don't really understand. The energy industry is pretty high tech. It is an industry run by engineers and scientists. That's not what the public sees. I think the other thing the public doesn't really see, for understandable reasons, is the scale and complexity of the system that supplies this energy. It is not like introducing iPods or YouTube in that you can change things quickly. In a way I think the terrible hurricanes of 2005 demonstrated what people didn't understand: how vast and complicated is the energy system, including the energy complex in the Gulf of Mexico, when electricity doesn't work, refineries don't work, gasoline doesn't get delivered.

This scale of the thing is one of the least understood things of the whole picture and how interconnected we are with the global situation.

What about consumers? They want to consume the energy but they don't want the infrastructure.

People want the benefits of energy without understanding the investment that has to go with it. A good example is offshore drilling in U.S. The capabilities are so much greater than they were 30 years ago to drill in an environmentally sound way with a smaller footprint. Looking forward, the big frontier ahead is how you manage carbon.

Would major energy companies support a carbon tax?

I think as a country, including the energy companies, we recognize we are going to move to some kind of carbon management system. Is it going to be a cap system, a tax, or a combination of the two? That will be the debate over the next couple of years.

Is the infrastructure issue overlooked?

When we talk about energy security, we just talk about production or gasoline stations. You have to think about what goes on in between. The great lesson from the hurricanes of two years ago was the importance of the resiliency of our energy structure. Also, a more efficient transmission system allows you to more efficiently allocate your capital and decide what you build. The other thing is that there is a lot of focus on clean tech, renewables. It is now becoming a big business.

You talk about energy efficiency. How realistic is that?

I think it highly realistic. This is part of the genius of America - innovation, doing things smarter in terms of what we build, what we live in, what we drive. I think the price of energy is a message and the message today is be more efficient. To me that is the punch line.

You chaired a task force a decade ago. What were the lessons learned and what has been applied?

The lesson is that research and development is not something you turn on and off every few years. You need to be consistent and keep up the funding. Otherwise, you lose continuity and lose human capital. That means people.

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