The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  JIENENG JIANPAI

  In 2004 an alarming calculation reached the desks of China’s leadership. It showed that if China consumed oil at the same ratio as the United States, by 2030 it would be using more oil than the entire current world production. That drove home the compelling urgency of efficiency. The 11th Five Year Plan in 2006 adopted the slogan Jieneng Jianpai—“Save Energy! Cut Emissions!”—as a pillar for economic development, and it set ambitious targets for energy conservation. Jieneng Jianpai became a ubiquitous slogan in public spaces—in subways, on buses, in newspapers and magazines, on television. Yet consumption was still growing at a rapid rate. By 2007 Chinese overall energy demand had more than doubled from what it had been in 2000.6

  So worrying was this trend that one critic that year lambasted the country’s energy and environmental performance: “Industrial sectors with high energy consumption and high pollution have grown too rapidly,” he said. “The contradictions between economic development on the one hand and resources and the environment on the other have become sharper.” To top off this critique, he added, “The masses have much to complain about environmental pollution.”7

  That critic happened to be Premier Wen himself. The pressures for reform are coming from many directions—from rising demand for and increasing imports of oil, mounting pollution, international criticism on carbon emissions, risk of local militancy—and the increasingly vocal concerns of the growing middle class and the party cadres themselves.

  The government is promoting policies to moderate energy demand and reduce pollution at the same time. This is both for energy objectives and to lay the basis, in the words of Premier Wen Jiabao, for a “new industrial system”—competitive new industries based on low-carbon technologies that would make China a leader in “green energy.”8

  China has set a broad national goal of quadrupling the economy by 2020, as compared with 2000, while restraining the growth in energy demand to a doubling. This is a very ambitious objective, and it is being pursued in many ways. The “Top 1000 Program” aims to cut energy consumption among China’s largest energy-using enterprises, which by themselves represent a third of the country’s entire energy consumption. Today China’s fuel-efficiency standards for vehicles are stiffer than those of the United States.9

  But Beijing has been cautious about using the price mechanism to reduce demand. One senior official was asked why China still controls retail petroleum prices, partly shielding consumers from world prices. He summed up the reasons simply: “Farmers, the army, and taxi cab drivers.” In other words, Beijing wants to mitigate the price burdens for rural Chinese, many of them struggling at the lower end of the income table, and avoid stimulating outbreaks of discontent and violence in the countryside. The military certainly will not welcome higher burdens from energy costs. As for taxi cab drivers, that was a metaphor about fear of triggering urban protests against rising petroleum prices. Thus the movement toward price decontrol has been gradual and incomplete. Fear of inflation has led to a reluctance to allow electric power prices to rise to match the increase in coal prices, resulting in disruptions in power supplies.

  Critical to reshaping energy demand are provincial and local government officials, who implement the central government’s policies, and thus have an enormous impact on the shape of the economy. Local leaders are graded on economic growth and job creation in their region or locality. Today, however, they are also evaluated in terms of how they do in promoting greater energy efficiency and environmental protection. “Now a mayor is under great pressure,” commented a mayor of a city of eight million. His role as head of a major Chinese city goes far beyond that of his opposite numbers in cities elsewhere in the world. His responsibilities include employment and job creation, as well as raising living standards and salaries and reducing income inequality. Pushing rapid economic growth is the mechanism for meeting all these targets. “I have to keep economic development going, but on the other hand I have to take care of reducing energy consumption.” However, he can wield, as he put it, “government administrative measures” to help him. That means, for instance, that he has the power to consolidate the more than 300 paper manufacturing facilities in his locality, down to just 20 in order to raise energy efficiency.

  In 2010 Premier Wen sternly announced that improving energy efficiency was so critical that the government would use an “iron fist” to improve it. This was followed by an order from the government for the swift closure of more than 2,000 of the most energy-inefficient steel mills, cement works, and other factories in the country. Also provinces were instructed to stop providing discounted electric power to energy-intensive industries. In some localities, firms were ordered to shut operations for part of the week to ensure that energy-saving targets were met.10 The Twelfth Five Year Plan, adopted in March 2011, reinforced the energy-saving goals.11

  INDUSTRY: HOW LOW THE FRUIT?

  In Europe, Japan, and North America, the part of the economy that is best organized to become more energy efficient is industry. In the United States that sector consumes about a third of total energy. One of the fundamental things that companies do is strive to understand and manage their costs and quantify the paybacks on their investments. This is particularly true of the larger, more energy-intensive companies that do the hefty job of converting raw materials into the industrial products that, in turn, are made into things that people buy. They have the scale, the organization, and the urgent need to manage big costs like energy. It is less true of smaller firms that do not have the flexibility or capacity to home in on their energy usage or of companies that are more energy-light to begin with.

  The last few decades have seen major gains in industrial energy efficiency. The price shocks of the 1970s started the process. Then in the 1980s the introduction of new computer systems enabled companies to manage processes much more effectively than previously, reducing energy usage. Energy itself became a focus again beginning around 2000, as costs started to rise.

  Although industry has become much more efficient over the past decades, still the potential for significant savings remains. For one thing, technology is not static, and technological change is always opening up new opportunities. Advanced sensors and new computer controls, for instance, are providing “opportunities that could have barely been imagined in 1980.”12

  Changes in operations and maintenance, perhaps leavened with a little investment, can lead to low-cost gains. Other savings require larger capital investment in new equipment, facilities, or retrofitting—that is, modernizing and updating—part of an existing facility. The potential for efficiency across industry may be great. But volatility—the way that prices can rapidly move up and down—can be a real challenge. Companies are more likely to invest the money and effort—and stick with it—if they believe that prices will be high enough to have a significant impact on their costs and bottom line.

  “ASPIRATIONS”

  Dow Chemical—the largest U.S-based chemical company and one of the world’s largest industrial consumers of energy—provides a casebook for what is possible. Its annual bill for energy and feedstocks is almost $30 billion. It uses the equivalent of one million barrels per day of oil. Between 1995 and 2005, Dow reduced its energy use on a worldwide basis, per pound of product, by 25 percent. Those savings are a big number; the same amount of energy would have been more than enough to supply electricity to all of California’s residents for a year. From Dow’s point of view, it was more than worth the effort—$9 billion of savings from an investment of $1 billion. But how did this get done?

  In the mid-1990s, Dow’s top management set a target for reducing its energy use by 20 percent over a ten-year period. It was what Dow CEO Andrew Liveris called an “aspirational goal”—meaning that it was not very carefully calculated. Rather the message initially was “go figure it out.” Said Liveris, “Every aspect of the system rewards and incentivizes the engineer, the plant person, the person who’s managing the car fleet, the rail fleet, to find ways
to save energy. It’s part of our DNA.”13

  But two major obstacles stood in the way: The first was organizational—the efficiency had to be seen as important in itself, not just a by-product of good maintenance. That required organizational redesign. It began with the appointment of a Global Efficiency Leader, who became the Keeper of Technology for the company, with the mandate to implement aggressive energy conservation plans globally. This leader sponsored teams and networks within the company that identified opportunities and then figured out how to capture them. Accountability for meeting targets was set at the factory level, along with the promotion of what the company started calling“an energy efficiency mind-set.”14

  Second, the company found that it did not have consistent ways to measure energy use, so common metrics had to be worked out. This was followed up, said Richard Wells, who had responsibility for Dow’s energy program, by “leveraging ideas across the company. The biggest learning was that there was no silver bullet, but a lot of basic blocking and tackling.”

  The 25 percent gain came from a very wide range of projects. Some of it involved building large cogeneration plants, which provide heat and power together, thus increasing efficiency and reducing the need for energy. Some was also the cumulative effect from aggregating many small things. Dow uses a lot of steam to make chemicals. “A single steam trap leaking is not a big thing,” said Wells. “But you list all of them and it’s a big number, and fixing them at the company level—that is a big deal.”

  Dow has now set a new target—another 25 percent improvement in energy efficiency by 2015. “More technology will be required in the next ten years,” said Wells. “Change has to come at the molecular level.”

  Andrew Liveris was the one who set the new 25 percent target. “You’ve got to institutionalize this as part of your behavior,” he said. “When you have a signal, amazing things can happen.”15

  The International Energy Agency has analyzed the world’s industrial sector, which consumes a third of the world’s energy and is responsible for 36 percent of carbon emissions. It concluded that up to a quarter of the sector’s consumption would be reduced using “proven technology and best practices.” Reducing energy consumption would in turn eliminate as much as 12 percent of the world’s entire CO2 emissions. The energy savings would be equivalent to one and a half times Japan’s entire energy use. But the study did not consider new technologies that have not yet been widely dispersed. The implication? A 25 percent reduction in industrial energy use should be considered the “lower range estimate of the technical potential for energy savings and CO2 emissions reductions in the manufacturing industry sector.” In some parts of the world, it may well be higher.”16

  THE “GAME CHANGER”

  One industry that really wants to save energy is the airline industry. Over the last several years, fuel has been its number one cost—25 to 35 percent of overall costs. Indeed, fuel is the largest element in the cost of an airline ticket. This only increases the drive to control those costs in an industry that lives on the margin—indeed, often enough, on very thin margins.

  “Increasing efficiency in the use of jet fuel is incredibly important to us,” said Jeffery Smisek, the CEO of United Airlines. “We spend significantly more on fuel than on labor, which is our next highest cost. Volatility of prices kills us. We can’t price to volatility.”

  Airlines have been seeking higher fuel efficiency since the 1970s and, since then, the fuel efficiency of jets has more than doubled. Using the same amount of fuel, new jets carry the same amount of passengers and cargo twice as far as their older counterparts did. The gains come in many different forms. The development of winglets—the little curved pieces at the end of the wing—reduces drag and saves on fuel. The addition of these winglets now enables 737s to fly as much as 6 percent farther on the same amount of fuel. Adding life vests on such routes as New York–Miami, Dallas–Miami, and Los Angeles–Cancún satisfies a regulatory requirement so that planes can stop hugging the coasts and fly more directly over water, saving fuel. When fuel prices soar, every bit of extra weight really hurts. So planes may now fly with less potable water, lighter-weight catering carts, and fewer magazines—or no magazines at all. Making the outside skin of the airline smoother reduces drag, and painting it with lighter colors rather than darker ones reduces air-conditioning costs. Continuous descent arrivals (CDAs) save fuel on longer, more gradual descents. At some point, $60 billion or more will have to be spent to replace the current 1950s air-traffic control system in the United States with a twenty-first century system. That will save fuel because airliners will no longer have to zigzag their way across the country, tracking land-based navigation aids but instead will be guided by satellite signals on more direct routes. They will spend less time circling and will be able to make more precise approaches. All of that will save fuel.17

  But the biggest gains of all will come from the next generation of airliners.

  WHICH “20 PERCENT”?

  When Boeing was deciding what its next generation of airliner would be, it invited representatives of 59 airlines to Seattle to vote on what they as customers wanted. The company was doing the R&D on designs for two different next-generation aircraft. Both designs promised 20 percent gains, but along different vectors. One was the Sonic Cruiser, which at mach 98, close to the sound barrier, would offer speeds 20 percent higher than current jets. The other was the 7E7, which promised a 20 percent gain in fuel efficiency. The Sonic Cruiser would save time. The 7E7—the E was for efficiency—would save fuel, which would mean a major improvement in operating economics.

  There was no secret ballot that day. It was a New England town hall meeting. Each airline representative had to take his or her company insignia and walk to the wall on one side of the room or the other and pin it under the design of either the Sonic Cruiser or the 7E7. At the end, on the Sonic Cruiser side of the room, there were exactly zero insignia; on the 7E7 side, 59. Fuel Efficiency had beat Time, 59–0.

  The result is what is now known as the 787. Though much delayed, partly by the complexity of its supply chains, the 787 will—by the time it joins airline fleets—be the most fuel-efficient large airliner in the sky.

  The main source of fuel efficiency improvement is in the airframe, the fuselage. That results from moving away from aluminum, the mainstay in commercial airlines since the 1950s, to lighter, stronger materials called composites or carbon laminate. Lighter means less weight and that in turn means less fuel. Carbon laminate is the material used in tennis rackets. But a tennis racket is one thing. Scaling up from tennis rackets to a 270-seat airliner with a fully loaded weight of 540,000 pounds is quite another, and that required major technological breakthroughs.

  Despite the delays, the Dreamliner is an airplane that fits what many airlines want for the growth period ahead. Air travel is on a sharp ascent, especially international travel. By 2026, according to one estimate, the number of commercial airliners in operation worldwide will double from today’s 18,200 to 36,400. This growth is the result of rising incomes, globalization, and more open markets. This adds to the imperative for fuel efficiency. But, as Jeffery Smisek points out, fuel prices themselves will also determine the scale of air travel. “If we have higher fuel costs, we will have smaller airlines with smaller route networks,” he said. “If we have lower costs, we will have larger airlines with larger networks.”18

  To be sure, as the growth of low-fare airlines has expanded travel opportunities across populations, a backlash has emerged. Some, mainly in Britain, oppose air travel on what they describe as “moral” grounds—global warming. Its members have taken a vow of abstinence and renounced flying. The founder of the Rough Guide travel books announced that he was cutting way back on his personal flying and would stick to Britain and the train for his summer holidays. In addition, he pledged to add a section to the Rough Guides on the “negative effects of flying.” In the spirit of solidarity, the competitive Lonely Planet guides stepped up with him on this.
The Anglican Archbishop of London backed them by pronouncing that taking an airplane in the course of a vacation constituted a “symptom of sin.”19

  Civil aviation produces about 2 to 3 percent of total CO2 globally. So fuel efficiency is not only an energy strategy, it is also a carbon strategy. A 20 percent improvement in fuel efficiency means about a 20 percent reduction in CO2 emissions. Those savings will become more significant as the number of planes in the sky increases and as airlines find themselves faced with actual or proposed national and international carbon reduction regimes. Still the biggest push for efficiency will come from the customer—not those who fly as passengers, but the direct customers, those who buy and operate the airplanes—the airlines. For them, fuel efficiency is a question of economics. And it’s not just a matter of operating economics. It’s also survival economics.

  THE RIBBON

  As the world turns over its capital stock—of buildings, vehicles, equipment, and factories—efficiency will be enhanced, because they will embody higher standards of efficiency. As conservation is increasingly seen as a competitive energy source, it will be compared with other investments. In many cases, the economic case for conservation will be very compelling.

  Yet with all this said, efficiency is at two great disadvantages. It does not have a sizable and vocal constituency of proponents. And it is not something that you can reach out and touch.