Back to the Future
Three decades ago, Energy Future, a bestseller written at HBS, declared that American energy independence and sustainability were critical to the country’s well-being. Today, the book’s analysis is still compelling and its call to action more urgent than ever.
This is a winter of Dickensian discontent for many American families. Bundled up in chilly homes, they see their heating bills cutting deeply into the rest of their household budget. Lowering the thermostat, they wonder when keeping warm became a luxury in the wealthiest nation in the world.
America’s addiction to oil became all too evident, once again, last summer. The country was mired in the fifth year of a costly, bloody war in the Middle East, a conflict many believed was driven in part by a desire to secure access to Iraq’s petroleum reserves. “Black gold” soared to $140 a barrel on global markets, while gasoline shot past $4 a gallon, stunning American motorists. The results were predictable: Prices for everything skyrocketed, and an already recessionary U.S. economy, soon to be slammed by the mortgage and credit crises, began slouching toward the 1930s.
Watching all this unfold, HBS professor emeritus Robert Stobaugh, an energy-industry veteran, could be forgiven for saying, “I told you so.” But as a consummate gentleman, that’s not Stobaugh’s style. Instead, all he need do is open up Energy Future, the 1979 book he coedited with Daniel Yergin, and direct readers to virtually any page. Energy Future makes clear that continued dependence on foreign oil would eventually cause economic and geopolitical crises, unless certain preemptive steps were taken. They weren’t, and today, amid crises, America confronts the same stark choices it did back then, with one important difference: Thirty years have been lost to intransigence and denial. Once-incipient threats are now full-blown, and combined with newly emerging dangers, options and solutions have narrowed. For the contemporary reader, there is between the lines of Energy Future a haunting subtext: Is there still time to save ourselves from ourselves?
Energy Future argues that U.S. energy policy should focus on transitioning from a disproportionate reliance on imported oil to a more balanced energy menu. After examining the pros and cons of various energy sources, such as coal, nuclear, natural gas, wind, and solar, the book concludes that conservation (principally through energy efficiency) and solar energy development would be the most promising approaches for the short term. So interested was the public in its findings and analysis, the book became a widely praised New York Times bestseller. It was also “a model of what university research and monograph writing on a major question of policy should be,” declared Harvard economist John Kenneth Galbraith.
Energy Future has three major premises: The 1970s oil shocks were not anomalies but part of a major transition for energy users and producers; the “externalities” of energy use (its environmental, social, and geopolitical costs) had to be factored in to energy policy; and a free market approach was the best way to achieve economic growth. The book’s cogency and urgency prompted the convening of an energy conference at Harvard’s Dumbarton Oaks in Washington with Stobaugh and his colleagues briefing President Jimmy Carter and earning front-page coverage around the country.
Today, on the eve of the 30th anniversary of its original publication, the book is as timely as ever and troubling in the way it speaks to the present, and what might have been. In 1983, in its 3rd edition, Energy Future could well be speaking about 2008, when it describes some of the basic energy themes of the early 1980s as:
“the instability surrounding world oil supplies, the uncertainty about the reserve base and the depletion rate of U.S. oil and gas reserves, the immobilization of nuclear energy in the United States, the challenge of building up an expanded coal infrastructure, the potential for conservation.”
The book is remarkably prescient in other ways as well: Global warming was seen as a potentially game-changing threat; Middle East instability, particularly in Saudi Arabia, was an ever-present danger, with Islamic fundamentalism even hinted at as a possible factor; and the issue of externalities was fully aired (to an extent often absent even in today’s energy conversation). Energy Future also has this pertinent warning:
“A large, sudden increase in oil prices would have serious indirect effects. It would exacerbate inflation, place further strains on the international monetary system, and sharply contract the demand for goods and services. In short, the economic consequences would likely be a major recession, or possibly even a depression.”
Now a resident of Houston, where he moved after retiring from HBS in 1996, Stobaugh applies the experience gained on numerous company boards to the teaching of corporate governance at Rice University. He recalls the day in 1972 when HBS Dean Lawrence Fouraker asked him to organize an initiative unprecedented at HBS, a venture that became known as the Energy Project at the Harvard Business School. “A number of HBS graduates, mostly in the oil and gas industry, were telling Larry that there were going to be big problems and that HBS ought to do something about it,” Stobaugh says. “That was the genesis of it.”
An eighteen-year veteran of the energy and petrochemical industries who had left business to enter Harvard as a doctoral student in international business at the ripe old age of 37, Stobaugh recruited a team of young HBS faculty members and doctoral students with a combined expertise in energy issues, political science, and technology. “Our goal was to produce a plain English book that would provide a framework for thinking about the energy future,” Stobaugh says. “We wanted to relate not only to academics, but also to the general public and people in the political world who were making key decisions.” The book was scheduled to come out in 1978, but delays pushed it back to 1979, which turned out to be a blessing in disguise. “In 1978, I don’t know how popular the book would have been,” Stobaugh chuckles. “But in 1979, because of price controls, there were lines at filling stations. We joked that while people were waiting in line, they could kill time reading Energy Future.”
The book was embraced by the Carter administration whose National Energy Plan (a mix of energy incentives, taxes, and pricing rules, along with conservation and alternative energy development) Carter himself described as “the moral equivalent of war.” But when oil prices began dropping on global markets and with the new Reagan administration’s emphasis on free markets and expanded domestic oil production, any lingering enthusiasm for a revamped energy policy evaporated. By the mid-1980s, with oil cheap once again, gas-guzzlers returned to the highway. In its 1983 edition, noting that “a stance of overcomplacency” had already settled in, Energy Future describes a situation that sounds a lot like American energy policy since 2000:
“A belief in easy answers; a disagreement over the basic nature of the energy problems and the roles of various actors; sharp shifts in perceptions of shortage or glut conditions; and an inability to tie domestic energy, national security, and foreign policy considerations into one coherent package.”
Whether overcomplacency will once again undermine America’s commitment to a comprehensive, forward-looking energy policy remains an open question.
Partying Like There’s No Tomorrow
“If we’d paid more attention to Energy Future, we’d be in a lot better position today,” says HBS professor Forest Reinhardt, who heads the Business, Government, and International Economy unit. An expert on the environment who began teaching at HBS in 1992, Reinhardt now teaches the elective Energy, a course he introduced in 2006 in response to student demand. He has seen interest in energy issues come and go, usually pegged to the price of oil. In 1985, Reinhardt, then a first-year MBA student, arrived at the School eager to join the Energy Club only to find it disbanding for lack of interest. Six years later, the United States found itself at war in the Middle East with its dependence on foreign oil a factor (as President George H.W. Bush said at the time, freeing oil-rich Kuwait was necessary “to defend our way of life”). Yet even this wake-up call, the Gulf War of 1991, was also eventually ignored.
Fast-forward again to 2008. Despite war in Iraq, despite the looming disaster of global warming, if gas prices decline and the Middle East calms down, could the impetus to get the U.S. energy house in order vanish into the overheated atmosphere once again?
“It could,” Reinhardt concedes, “but I think that the price of oil will probably be higher over the next twenty years than it was for the past twenty. World demand for energy is only going to grow. And whether the market price rises or falls, the costs of environmental degradation and national security, two critical externalities, will make this an important business problem for decades to come.”
As for energy independence, Reinhardt says, “As Energy Future points out, there is no single answer, and I don’t think we can really declare anything off the table. That includes nuclear, despite its flaws, because of its potential for replacing coal-fired plants and reducing carbon emissions.” Regarding a proper role for government, Reinhardt believes that a fuel tax would make the externalities involved and the cost of driving directly visible, with consumers demanding more fuel-efficient cars as a result. As for the new administration in Washington, “It can assert that it is not beholden to previous administrations,” he notes. “There is a huge opportunity to reframe the debate.” Part of that debate could argue that support for green technology might jump-start a dynamic new industry to help boost a moribund economy. Says Reinhardt, “Clean-energy technology could represent a real transformation of society, with extraordinary opportunities for wealth creation.”
Richard Vietor, the Senator John Heinz Professor of Environmental Management at HBS, credits Stobaugh with “taking me under his wing on energy matters when I was new at the School” and recalls being greatly influenced by Energy Future. Like Reinhardt, Vietor is a member of the steering committee of the Harvard Project on International Climate Agreements. He has written dozens of cases on energy matters and regulation and is the author of Energy Policy in America since 1945, written in the wake of the 1970s energy shocks. He is currently conducting a study of wind power worldwide. “I’ve been involved in climate-change issues since the early 1980s,” Vietor says. “It’s very discouraging the United States has done so little as a nation despite decades of increasing carbon emissions. It’s also very disappointing because there are huge business opportunities — worth trillions of dollars — on the clean-tech side.”
For his part, thirty years later, Stobaugh still looks to conservation, including energy efficiency, as a top choice for action. Indeed, he says, energy efficiency has increased to the point where oil consumption per person has declined from 3.5 gallons per day in 1979 to 2.9 in 2007. One dramatic way to further reduce oil use is to increase mileage efficiency in motor vehicles. Stobaugh believes that mandated fuel efficiency is a legitimate role for government and would mean a sharp reduction in oil consumption. “If we could get to 40 miles per gallon,” says Stobaugh, who also favors tax credits for alternative-energy companies, “it would make a world of difference.” And going forward into the global energy future, only a world of difference will suffice.