Energy issues and the economy are inextricably linked in a challenge that defies easy and simplistic solutions, said John Watson, ’80, chairman and chief executive officer of Chevron Corporation, during a lecture under the “Energy in the 21st Century Lecture Series” at Harper Center on October 13. The University of Chicago Energy Initiative sponsored the discussion.
Watson, who has spent his career at Chevron and was named to lead the Fortune 3 company in January 2010, said the fundamental economic principles he learned at Chicago continue to guide the way he analyzes problems, approaches issues, and leads his business. “I recall wondering just how much of what is taught here would have any relevance to the business world. And I’ve come back with the answer: a great deal.”
He recounted major global events of the time — 1980 — including the overthrow of the Shah of Iran, political disruption in the Middle East, and the skyrocketing price of oil. “I watched all of this and realized how critical the energy business is to America – not just to our energy security, but to our basic economic security,” Watson said, commenting that while much has changed since then, much has not.
“The energy debate is still politically charged, and a lack of understanding about market fundamentals continues to generate some ill-informed policy,” he noted. This is problematic for the United States, he explained, because “affordable, reliable energy is vital to the life we lead today and to any progress we hope to make — for ourselves and the world.”
“The world's energy system is huge. And its foundation — fossil fuels — are ubiquitous in our economy,” he said, detailing the role of oil not only in transportation fuel but also in myriad consumer products. “So what do we get from this energy? Simply put, we get our way of life.”
Preserving that quality of life and extending it to developing countries will require significant future energy consumption, he explained. For that reason, the sheer scale of the world’s energy needs is far beyond the capacity of any single source or technology. “Under any scenario, oil and natural gas will be the largest part of the portfolio for decades to come,” he said, explaining the need to pursue all forms of energy. “By 2050 there will be 90 million more people here, and two billion more people in the world. All of them will need energy to maintain and improve their standard of living. So more exploration and drilling are crucial, but they are not enough. Coal and nuclear will play a large role. Expanding our use of renewables is good and necessary. In short, we must do all of these things and do all of them all at once.”
To meet future demand, policymakers should adopt stable and competitive policies that promote expansion of all energy sources, while generally avoiding subsidies, he explained. Spain spent $38 billion on renewable energy subsidies from 2000 to 2008 only to reverse course when Spanish solar power only reached one percent of total power production. The result was “a spike in power prices – and stranded investment,” he said.
Although Watson does not consider the answer to be subsidies, he does see great promise in renewable energy. Chevron, he said, is the world’s largest geothermal energy producer and produces more energy from its geothermal operations in Indonesia and the Philippines than all of the solar electricity generated in the United States. “Chevron is committed to renewables,” said Watson, “but I’ve charged my company with developing a renewables business that is profitable and can operate at industrial scale without subsidies. We won’t chase arbitrary mandates.”
Watson also addressed the challenge of greenhouse gas reduction, noting that economic principles will govern an effective solution. “It is no coincidence that the strongest environmental standards exist where we have strong and developed economies,” he said. “Economic growth generates capital that can be invested in new technology to protect the environment,” and jobs and livelihoods should take priority in times of economic weakness.
“There are multiple pathways to a low-carbon future. We have choices,” he said, endorsing energy efficiency and research and development to reduce emissions.
— Mary Paleologos