by George P. Shultz

Crude prices are rising, uncertainty about developments in the Middle East roils markets and, well, as Ronald Reagan might say, "Here we go again."

Once more we face the vulnerability of our oil supply to political disturbances. Three times in the past thirty years (1973, 1978, and 1990) oil price spikes caused by Middle East crises helped throw the U.S. economy into recession. Coincident disruption in Venezuela and Russia adds to unease, let alone prices, in 2004. And the surging economies of China and India are contributing significantly to demand. But the problem far transcends economics and involves our national security. How many more times must we be hit on the head by a two-by-four before we do something decisive about this acute problem?

In 1969, when I was Secretary of Labor, President Nixon made me the chairman of a cabinet task force to examine the oil import quota system, in place since 1954. Back then, President Eisenhower considered too much dependence on imported oil to be a threat to national security. He thought anything over 20 percent was a real problem. No doubt he was nudged by his friends in the Texas and Louisiana oil patches, but Ike was no stranger to issues of national security and foreign policy.

The task force was not prescient or unanimous but, smelling trouble, the majority could see that imports would rise and they recommended a new monitoring system to keep track of the many uncertainties we could see ahead, and a new system for regulating imports. Advocates for even greater restrictions on imports argued that low-cost oil from the Middle East would flood our market if not restricted.

By now, the quota argument has been stood on its head as imports make up an increasing majority, now almost 60 percent and heading higher, of the oil we consume. And we worry not about issues of letting imports in but that they might be cut off. Nevertheless, the point about the importance of relative cost is as pertinent today as back then and applies to the competitive pressures on any alternative to oil. And the low-cost producers of oil are almost all in the Middle East.

That is an area where the population is exploding out of control, where youth is by far the largest group, and where these young people have little or nothing to do. The reason is that governance in these areas has failed them. In many countries, oil has produced wealth without the effort that connects people to reality, a problem reinforced in some of them by the fact that the hard physical work is often done by imported labor. The submissive role forced on women has led to this population explosion. A disproportionate share of the world's many violent conflicts is in this area. So the Middle East remains one of the most unstable parts of the world. Only a dedicated optimist could believe that this assessment will change sharply in the near future. What would be the impact on the world economy of terrorist sabotage of key elements of the Saudi pipeline infrastructure?

I believe that, three decades after the Nixon task force effort, it is long past time to take serious steps to alter this picture dramatically. Yes, important progress has been made, with each administration announcing initiatives to move us away from oil. Advances in technology and switches from oil to natural gas and coal have caused our oil use per dollar of GDP to fall in half since 1973. That helps reduce the potential damage from supply problems. But potential damage is increased by the rise of imports from 28 percent to almost 60 percent of all the oil we use. The big growth sector is transportation, up by 50 percent. Present trends are unfavorable; if continued, they mean that we are likely to consume—and import—several million barrels a day more by 2010.

Beyond U.S. consumption, supply and demand in the world's oil market has become tight again, leading to many new possibilities of soaring oil prices and massive macroeconomic losses from oil disruptions. We also have environmental problems to concern us. And, most significantly, our national security and its supporting diplomacy are left vulnerable to fears of major disruptions in the market for oil, let alone the reality of sharp price spikes. These costs are not reflected in the market price of oil, but they are substantial.

What more can we do? Lots, if we are ready for a real effort. I remember when, as Secretary of the Treasury, I reviewed proposals for alternatives to oil from the time of the first big oil crisis in 1973. Pie in the sky, I thought. But now the situation is different. We can, as Amory Lovins and his colleagues show vividly, win the oil endgame.

How do we go about this? A baseball analogy may be applicable. Fans often have the image in their minds of a big hitter coming up with the bases loaded, two outs, and the home team three runs behind. The big hitter wins the game with a home run. We are addicted to home runs, but the outcome of a baseball game is usually determined by a combination of walks, stolen bases, errors, hit batsmen, and, yes, some doubles, triples, and home runs. There's also good pitching and solid fielding, so ball games are won by a wide array of events, each contributing to the result. Lovins and his coauthors show us that the same approach can work in winning the oil endgame. There are some potential big hits here, but the big point is that there are a great variety of measures that can be taken that each will contribute to the end result. The point is to muster the will power and drive to pursue these possibilities.

How do we bring that about? Let's not wait for a catastrophe to do the job. Competitive information is key. Our marketplace is finely tuned to the desire of the consumer to have real choices. We live in a real information age, so producers have to be ready for the competition that can come out of nowhere. Lovins and his colleagues provide a huge amount of information about potential competitive approaches. There are home run balls here, the ultimate one being the hydrogen economy. But we don't have to wait for the arrival of that day. There are many things that can be done now, and this book is full of them. Hybrid technology is on the road and currently increases gas mileage by 50 percent or more. The technology is scaleable. This report suggests many ways to reduce weight and drag, thereby improving performance. A big point in this report is evidence that new, ultralight-but-safe materials can nearly redouble fuel economy at little or no extra cost.

Sequestration of effluent from use of coal may be possible on an economic and comfortable basis, making coal a potentially benign source of hydrogen. Maybe hydrogen could be economically split out of water by electrolysis, perhaps using renewables such as windpower; or it could certainly be made, as nearly all of it is now, by natural gas saved from currently wasteful practices, an intriguingly lucrative option often overlooked in discussions of today's gas shortages. An economy with a major hydrogen component would do wonders for both our security and our environment. With evident improvements in fuel cells, that combination could amount to a very big deal. Applications include stationary as well as mobile possibilities, and other ideas are in the air. Real progress has been made in the use of solar systems for heat and electricity. Scientists, technologists, and commercial organizations in many countries are hard at work on these issues.

Sometimes the best way to get points across is to be provocative, to be a bull in a china closet. Amory Lovins loves to be a bull in a china closet—anybody s china closet. With this book, the china closet he s bursting into is ours and we should welcome him because he is showing us how to put the closet back together again in far more satisfactory form. In fact, Lovins and his team make an intriguing case that is important enough to merit careful attention by all of us, private citizens and business and political leaders alike.

—George P. Shultz

About the Author
A native of New York, George P. Shultz graduated from Princeton University in 1942. After serving in the Marine Corps (1942–45), he earned a PhD at MIT. Mr. Shultz taught at MIT and the University of Chicago Graduate School of Business, where he became dean in 1962. He was appointed Secretary of Labor in 1969, Director of the Office of Management and Budget in 1970, and Secretary of the Treasury in 1972. From 1974 to 1982, he was President of Bechtel Group, Inc. Mr. Shultz served as Chairman of the President s Economic Policy Advisory Board (1981–82) and Secretary of State (1982–89). He is chairman of the J.P. Morgan Chase International Council and the Accenture Energy Advisory Board. Since 1989, he has been a Distinguished Fellow at the Hoover Institution, Stanford University.