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Daniel Yergin Interview on oil policy

Daniel Yergin Interview on oil policy

Daniel Yergin has written some of the most influential books on energy, while advising companies and governments on politics and markets. He is now Vice President of IHS Markit. His latest book, The new map: energy, climate and the clash of nations, looks at how oil policy has changed in the last two decades with the boom in US shale and China’s rise. Yergin, 74, recently sat down Barrons to discuss the new dynamics of energy markets. The interview has been edited for clarity.

Barrons: You have written about the oil age, which has lasted for over 150 years. Is it over now?

Daniel Yergin: I’ve been thinking of going back to my fourth book, The price. The assumption was that demand would always just grow, or when it peaked, it would be so far into the future that it was not worth thinking about. And that oil had a permanent monopoly on transportation. None of that is true anymore. I believe that oil and natural gas will continue to be important parts of the energy mix for quite some time. But it will be a very different mix. Renewable energy will be a much bigger part of it. Maybe it will be hydrogen or something else. So it will not be an oil age – it will be an energy age.

The oil industry has had booms and busts for decades. Prices are rising, drilling is rising. Prices fall, drilling is lowered. Now American oil companies are doing something new – they are stopping producing oil even though the price is rising. They say they become more disciplined, not more “live, baby, live.” Do you think that holds true?

I think it holds, because we are now seeing the second slate revolution. It is the revolution in the relationship between investors and companies. It is no longer growth at any cost. You need to return money to investors and rebuild trust to bring investors back into the field. I think it is unlikely that we will see irrational flooding, as we have seen in previous periods. I think the investor pressure is quite large and the investors will not come back in large numbers until they are convinced that there really is sufficient return on a consistent basis.

Do you think the industry is investable now? The shares are very up from last year, but have been flattened in the last few months.

It will not be an oil age – it will be an energy age.

– Daniel Yergin

I think they will be investable again. There was this opulence a month or two ago that prices would go up to $ 100 per night. Barrel. We were skeptical unless there was a real crisis of some kind. It seems that prices are probably in the range of $ 60 to $ 80. What we saw before the shadow of the Delta fell over the country was that demand came back much stronger than many people expected. Demand for oil rose about seven million barrels a day from the first quarter to the third quarter of this year. The world is going to continue to use a lot of oil for some time.

There will be some investors who will have nothing to do with the industry. But for others who see that the returns are there and they are consistent, they will be very interested in those returns as part of their portfolios. As long as we do not have another major virus-driven downturn, or a major crisis in US-China relations shaping the world economy, these companies will be much more focused on paying down debt and returning money to investors than they have in the past.

You mentioned the relationship between the United States and China. Your book examines how much the world has changed when it comes to energy policy. Globalization has fallen apart in the last decade. It was clear that Donald Trump was behind some of it, but it happened before him and continues after. Will it change the dynamics of oil and maybe even prices in the future?

I think oil talks a lot in geopolitics, which is part of the story I wrote. It appears in US-Chinese connections in various ways. For China, its ownership requirements in the South China Sea have a lot to do with the passage of oil imports. The Chinese import 75% of their oil. And they wish they were in the position the United States is in to be self-sufficient. They care about the US Navy and that oil transportation. On the other hand, China has become quite an important market for American oil and gas exports, which most people do not know.

The overall question is where the relationship between the US and China goes from here. As you mentioned, the change began before Trump came in. Until about 2015, it was governed by what I call [The World Trade Organization] consensus – that China would be a responsible stakeholder, part of the same international order. It’s really remarkable how much things have changed. [Barack] Obama’s latest national security strategy spoke of constructive engagement with China. And you look at what has happened since, under not only Trump, but also [President Joe] Biden. Biden has the same people over there as under Obama. Biden says China is a strategic competitor talking about great power competition. And the Chinese see it the same way. Ultimately, it’s the big geopolitical and economic issue of the 21st century where this American-Chinese relationship really goes.

Part of Trump’s trade deal in China was that the Chinese would buy a certain amount of our fossil fuels. Is it starting to change? Could China say “We’re about Russia” or another supplier?

I think it could certainly happen, because the Chinese have shown that if they are dissatisfied, they will act. No more Australian wine goes to China. They want to suspend the sale of rare earths to Japan. But the downside of that for them is that we are also a really important export market for them. So retaliation would lead to retaliation. They see the import of oil and gas from the United States as part of a strategy to try to manage the trade balance between the two countries so that they can continue to sell a lot of things to us.

You also write a lot about Russia. Where do the Russians fit into this? How does the US slate boom affect them?

The relationship between Russia and China, formerly based on Marx and Lenin, is now based on oil and gas.

– Daniel Yergin

I have an anecdote in the book that someone asks [President] Vladimir Putin a question on St. Petersburg Economic Forum. Well, the one who was me. I happened to mention the word “slate”. And that was when he started yelling at me in front of 3,000 people, which was pretty uncomfortable. How low can you get down in your seat when that happens?

I realized he does not like American slate for two reasons. Firstly, it makes us a competitor in the European gas market, which [the Russians] considered their backyard. And second, he sees it as a complement to American power, giving us some flexibility in the world that we did not have before.

Putin has made Russia a global player. And his relationship with China has become very strong. The personal relationship between him and [President Xi Jinping of China] is very strong. There are some in Washington who believe that we can somehow peel Russia away from China. And he might want some flexibility. It’s good for Putin to meet with Biden. But basically, I think Russia and China face eye to eye on many issues — especially their opposition to what they see as an American-dominated international order.

How does oil play into it?

The relationship between Russia and China, formerly based on Marx and Lenin, is now based on oil and gas. Russia has become a major supplier to China, and with the development of liquefied natural gas or LNG in the north, it could be an even more important supplier. It is a very conscious strategy for these countries to bring their wagons together from an energy point of view.

All of these new dynamics, including the American slate boom, are also changing things in the Middle East.

It really struck me when there were attacks on the crucial facility in Abqaiq in Saudi Arabia in 2019. If it had happened five years earlier, you would have had oil prices rise. This time the market just shrugged. I think the development of American slate has proven to be a huge safety cushion against panic in the market. But in the end, there is still only one world market for oil. If you have a major and long-term disorder, it will affect everyone. The United States has a much better position than it did in 2008, but it is not divorced.

Does that make it less likely that there will be war in the Middle East, or at least less likely that we will get involved?

I think there will be questions about the nature of our military engagement. How important is the relationship with the Gulf countries? And you have seen Saudi Arabia turn against what they call a strategic relationship with Russia. [The new oil alliance] OPEC + is truly a Saudi agreement.

If we move out of the oil age, then who will hold power in the next?

We have long focused on oil supply chains. We have just begun to look at the supply chains of a world without carbon, and there are many complexities there.

If you’re looking for where geopolitics and energy come together in net-zero, it’s China, because China has such dominance over the supply chains — 80% of the lithium-ion battery’s supply chains, 60% of the world’s rare earths.

China is very dominant in these supply chains and the supply chains are relatively small in terms of what you need to build. We will need a lot of mining to achieve these goals. We’ve been so used to Big Oil. In the long run, we will have to talk about the big shovels.

Thanks, Daniel.

Write to Avi Salzman at [email protected]


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