JOHN GAPPER: Welcome, everybody. And I see we've got a good turnout this morning for something so early, so it's clearly an interesting subject.
Welcome to today's Council on Foreign Relations meeting. This breakfast meeting is part of the McKinsey Executive Roundtable Series in International Economics. It's presented by the Morris R. Greenberg Center for Geoeconomic Studies and the Corporate Program.
I'd just like to remind you all that this meeting is on the record, so be very careful about what you say, because there might be journalists around. (Laughter.) And could you actually take a moment to turn off your cell phones, BlackBerrys, satellite phones, whatever. And I'm told there's a little bit of interference of the system, so really turn them off.
Today's meeting has the title "Energy Security: What It Means and How to Achieve It." And we've got a distinguished panel to discuss that.
My name's John Gapper. I work for the Financial Times. I write a column about business and editorial comment for the paper. When I started this job four years ago I had to catch up on various industries such as pharmaceuticals and so forth. It didn't strike me that the energy industry was a particularly pressing priority, but that's changed and I need to educate myself, and I think many of you guys in the room are experts already but others will feel the need to know more about the issue, which is why we're here.
We have with us David Goldwyn, who's the president of Goldwyn International Strategies, an energy consulting firm, also senior fellow in the energy program at the Center for Strategic and International Studies. And he served on the Council on Foreign Relations Task Force on Energy Security. We have another David, David Sandalow, an energy environment scholar at the Brookings Institution, also chair of the Clinton Global Initiatives Energy Change and Climate Group, and also most recently of Ending Oil Dependence. And Tom Wallin, president of the Energy Intelligence Group, which is the publisher of the specialist titles read by senior executives in the oil industry, including Petroleum Intelligence Weekly.
So we've clearly got a pretty expert panel, and I'd like to start by asking the panel the first question, really; energy security, what it means. Tom, does it mean being completely independent of other countries and the U.S. not depending on oil from other countries, or does it mean just being very friendly and secure with other countries?
THOMAS WALLIN: Well, I think the idea of energy independence is an idea that really is a -- it's not a reality. It's not something that's achievable for the United States. And there are a lot of reasons for that. It's partly because the global oil market is a market where -- you can't escape from it -- it's a totally globalized market. There's no way to really isolate yourself, insulate yourself from it. And also in the case of the United States we are so dependent on imports, and we're going to remain that way, so independence is really not a possibility for us.
I think that our politicians are really doing us a disservice by pushing this as a concept for the public. We're in an interdependent energy world and I think that we have to -- my view is we have to really embrace that interdependence and deal with it in a realistic way.
GAPPER: David Goldwyn.
DAVID GOLDWYN: For me, energy security is the ability of a country, the United States, any country, to access the resources that it needs to maintain its national power and to do it without compromising its foreign policy or its environment and are you choking to death on the emissions. And so that's what drives every country. It's really about survival, not about price.
And for the United States, our vulnerability isn't so much the economics. Our vulnerability is that our ability to form coalitions on proliferation, on Iran, to combat genocide, even to try and keep some sort of bulwark against regression in places like Russia, is severely compromised by not only our own dependence on oil, not imported oil, just oil, but also that of our friends and allies.
And this is the key to the interdependence, is that if we didn't use any oil at all but Europe and Asia were dependent on oil and on those producers, we would be as vulnerable as we are today. And so the problem is interdependent and the solutions have to be transnational as well.
GAPPER: David Sandalow.
DAVID SANDALOW: I agree completely and might even go a step further. I would say, unfortunately, reducing oil imports will not solve many of the national security, economic or environmental problems that people often associate with oil. I think many Americans would be quite surprised to learn that, but we haven't imported a drop of oil from Iran in 25 years. That has not prevented the Iranians from being able to use their oil card in discussions over their nuclear program. And the reason is because of the world's dependence on their oil.
Similarly, in the summer of 2000, British truckers went on strike over rising diesel prices. The reason was the rising world oil prices. That was the time the U.K. was entirely energy independent. It was exporting oil into world markets. But that fact didn't protect British truckers from rising world oil prices. The percentage of imports that a country takes in does not determine the price that its consumers pay.
And then finally, there's no environmental difference between imported oil and domestic oil of any significant consequence, so fundamentally the push toward reducing imports is not getting us at the most important problems related to oil.
GAPPER: So I'm just going to ask the panel, out of the rich array of countries that you can be worried about at the moment, what would be your number one worry? Or which country would be your number one worry? David?
GOLDWYN: Well, it's a close competition between Russia, Iran and Nigeria and Venezuela, but I would say in terms of the real vulnerability for the United States, I'd probably say Russia, because it's Russia's wealth from oil, Russia's impunity and Europe's growing dependence on Russia, particularly for gas, not for oil, that poses the greatest threat for U.S. national security policy, because our efforts on Iran to try and combat proliferation there are directly undermined by Russia internally, you know, sort of the nationalization, the elimination of the press, even the threat of future oil production because of the way Russia has nationalized the industry, are all at risk.
And we have very few tools to combat that trend. And our closest ally on that, which would be Europe, in a sense we have lost also because as we've seen in the last, I think, five years, Europe has been virtually silent to almost every negative step taken by Russia, and that's directly tied to their dependence on Russian gas. And not only that, they've allowed themselves to have Gazprom buy into the downstream in Europe. So I think we're losing through Russia, Iran, Europe, oil dependence, dominion over Central Asia. I think it's the most complex.
SANDALOW: I'm going to answer that question in a slightly different way than you intended it, I think, John.
GAPPER: All right.
SANDALOW: The two countries that I'm most concerned about are U.S. and China. And it's because of a different issue, and it's because of global warming. And I think the most fundamental problem we face across the array of all of these issues is the rapid rise in the concentration of heat-trapping gases in the atmosphere, and together, the U.S. and China make up almost half of the greenhouse gases that are going into the atmosphere. You may want to get into that issue later, but I don't have anything to add on the geopolitics of oil beyond what David and Tom can add, but I'd focus on U.S. and China.
GAPPER: Tom, do you have something to add?
WALLIN: Well, I would sort of look at it from a different point of view, perhaps because I'm more attuned to what's happening immediately right now. And I think the immediate vulnerability is probably coming from Nigeria, where you have a lot of instability, increasing threat of some kind of civil war or state of anarchy in the Niger Delta, which is a key producing region in the world. It's a key source of gasoline-rich crudes for the United States. And this summer, you know, we could have a problem in Nigeria that could -- you know they've already lost a third of their production, they could lose the rest of it. That would create an oil shock, really, with the given tightness in the global oil market that we have right now.
So, a difficult one for the Middle East producers to respond to because they're far away, they produce a different kind of crude oil. It's a question whether we release SPR crude. I mean, we're never very far from one of these situations.
GAPPER: Okay. So we can't go around the world and say how the U.S. should deal with every individual country, but let's talk a little bit about OPEC and what the U.S. attitude to OPEC should be and how it should deal with trying to preserve some form of energy supply. Tom, again.
WALLIN: Well, I guess I have a view on OPEC and what's happened in the world oil market that might be different than others. In the last five years, we've moved into a seller's market for petroleum in the world, and the people that have the power in this market are OPEC, Russia, other exporters. And the position of the U.S. for the last 30 years on energy -- basically, there's been a bipartisan consensus that we want free markets and that's what we want to promote domestically and that's what we want to promote internationally.
It's very difficult to promote free markets when the power in the market lies with OPEC. And my view of it would be that we have to do something more creative than just sort of say, "Well, we want free markets." I think we have to play ball and try to work in a system of a more managed market for petroleum. I think that's probably where we're going. Eventually, we're going to get dragged there, I think, by the dynamics.
GAPPER: But we're not in a managed market at the moment.
WALLIN: Well, we're in a managed market in the sense that OPEC manages it, yeah. But I mean --
WALLIN: It's being managed by the suppliers. Well, there's an importer's side of the market and we have a lot of clout and we have a lot of influence that we can exercise. But I think that we're not the ones that are making the rules in that system.
GOLDWYN: Well, I guess I disagree on a couple of points. I mean, one, I think we're actually not dealing in a managed market, we're in a market by default. We went through a period, you know, when prices were $10 so, international oil companies stopped investing, OPEC countries stopped investing and so prices began -- through production cuts, prices rose.
Then demand picked up and we had a demand shock. And it wasn't that OPEC designed and said, "Oh, we're going to get to 70 in five years." They just didn't have anything when demand went up, and so the price went up. So I think that's managed by default. If it was managed, we'd be talking to them about what's the investment. And that's where I think the second issue I would take slight issue with Tom on is that I don't think we can engage OPEC effectively as an organization, but I do think we need to engage the producers because what we want them to do is invest their money or our money or somebody's money in production while hopefully we're on a path to break our dependence on oil but get ourselves through the next 20 years.
And not every country is the same. We don't have to talk Nigeria, a member of OPEC, into allowing investment, because they're wide open. We can try and talk to Venezuela but, you know, they've got their own plan and we won't talk them out of it. The Saudis we can talk to and they will pretty much speak for the other Gulf producers.
So it's really dealing country-by-country with the goal of promoting either access or investment or -- and the protection of a market system, particularly the spot market and not long-term contracts, so that we have the ability for supply to respond to demand. That said, I'm very pessimistic that that will be a productive conversation.
It's certainly been a very intensive conversation, producer-consumer dialogue and all these things, but, you know, they're going to do what they want to do. And unless we impose leverage and condition access to our market on some reciprocity in theirs, unless we use some sort of lever or take real action on breaking the dependence with oil, it's a one-way conversation.
GAPPER: And is it essentially an upstream problem of getting the stuff out of the ground or whatever you do upstream, or is it a refining issue?
GOLDWYN: Well, it depends on what the -- the problem in terms of producing crude is really an access issue. It's that if international companies can't get access and the countries which have the reserves don't invest themselves, then you have, you know, a reduced set of options. The problem of why gasoline prices are so high is a different problem, and that has a lot to do with refining.
WALLIN: And a lot of that is self-inflicted, I think, by the way --
WALLIN: Well, also by the way we've run our environmental policy and how we've structured our gasoline market and our ethanol mandates, and things like this are creating choices for refiners and for investors about how they respond in the oil market and the gasoline market.
SANDALOW: To sort of pick up on one point David made, I think the -- looking more long term, the power of OPEC will prevail as long as the world's transportation systems remain dependent entirely on oil. And right now about 96 percent of the energy used in our transportation fleets is oil. That doesn't strike us as odd because we grew up with this and our parents grew up with it, our grandparents grew up with it. This is an essential commodity for an essential function that, you know, OPEC substantially controls a large portion of.
To really break the influence of OPEC, what we would need to do is move towards more alternative fuels in the fleet. That means electrification of the auto fleet, to some extent biofuels and some other alternatives.
GAPPER: Before we move on towards those sorts of issues, let's just talk about the Strategic Petroleum Reserve and full reserves. Firstly, what is it? I mean, people keep talking about it and I never know what it is, whether they've got it all in a tank at the back of the White House or -- (laughter) -- how much there is of the stuff, where they get it from. And secondly, is there a policy, and what should the policy be in terms of releasing those reserves?
MR. SANDALOW: David's the expert.
GAPPER: Tell us what it is first.
MR. GOLDWYN: The Strategic Petroleum Reserve is about 700 million, I think, probably growing, barrels of crude oil, some heavy, some light, in salt caverns in Texas, Oklahoma, Louisiana. It is there, created, you know, in 1975 as a buffer so that when there's a real -- originally, when there was a real disruption of oil, we wanted to be able to replace it. It was also built as a deterrent, which was basically to persuade countries that an oil embargo would not be fruitful. It has grown considerably but it has not kept up with the pace of demand.
And the policy -- there are two triggers, as we were talking earlier, David was saying. One is if there is a, I think, a severe supply disruption which we expect to be sustained which has severe economic consequences, that's one trigger. And then the law was changed subsequently basically to say you can, you know, if you have a severe disruption which you can manage, then you have the ability to, you know, with the president's authority, to intervene. That's the theory.
In practice the use of the SPR has become so politicized that sometimes governments use it when people think it's not appropriate, which is they think the price is going up and they just want to -- they want to look like they're doing something. And in cases like the Venezuelan oil strike, you know, which displaced 7 percent, maybe more, of U.S. oil supply when we didn't use it because the Bush administration didn't want to look like it was like the Clinton administration.
And so we don't really have a practical policy for when to intervene, how big, how fast or how long. And we also have an additional problem of it's just crude oil and what we really need to run planes, trains and automobiles is -- you know, is motor gasoline and fuel and we don't have any reserves of those.
MR. SANDALOW: And that last point is particularly critical and it was critical in the post-Katrina situation, where our problem was the shutdown of refineries, and the SPR didn't help us at all because it doesn't store refineries. I think it's time for a serious look at the management of the SPR, and in particular the way that politics enters into it. And it's time to look at whether we ought to have a body like the Federal Reserve Board manage the Strategic Petroleum Reserve and get it out of politics.
MR. WALLIN: I think that would be a really good idea. I think that would be a very positive thing.
GAPPER: Okay, let's talk about alternatives for a little bit before we open it up to the audience for questions. How realistic is it -- I mean I think you've all suggested essentially that we're stuck with oil for better or worse for quite a long time. But clearly there's a great deal of thought going into alternatives both for transportation fuels and for other forms of energy. How much hope should we place in that sort of thing, and how does that impact on the environmental issue?
SANDALOW: The first point you made is fundamental. I mean, oil is everywhere. We spend more than $1 billion a day on it in the United States. And so we are not going to change overnight our dependence on oil. Our auto fleet, which is driving our dependence on oil, only turns over at the rate of about 7 percent a year. So even changes in the new car fleet take a long time to work their way through the system. But that said, there are some pretty exciting developments out there, and over the course of a generation, I think we could dramatically change our dependence on oil.
The one that I think has got the most potential for affecting this dynamic is electrification of the auto fleet. And, you know, we have a massive infrastructure for generating electric power, obviously, around this country. It does us essentially no good in terms of getting off of oil because our cars can't connect to it. I mean, one often hears people say we should build nuclear power plants to help us get off of oil or we should build solar and wind to get us off of oil. Those technologies, in fact, don't help us get off of oil, because, again, our cars can't connect to it.
So it is only when we get plug-in cars that we can use those technologies for that purpose. And that's coming, actually. The hybrid engine has exploded dramatically, and getting a plug-in hybrid engine is the next step. General Motors announced a prototype car about a year ago on this and it's coming.
The other big development is biofuels. The ethanol explosion in the past couple of years has been remarkable. I mean it's still tiny in comparison to the total oil supply globally, but there's a huge growth in global biofuels, and we could talk about that more if you want.
GAPPER: Yeah, that would be interesting. What does anybody else think about ethanol and --
WALLIN: Well, I'd make a couple of points about this. I mean, there are some cautionary notes that I would sound here. One is in terms of electricity -- it's expensive stuff. And, you know, the idea of a plug-in hybrid sounds great but, you know, it takes a couple of units of energy to get that unit of energy to your outlet, you know, in terms of generation and transportation of it. So it ends up being a pretty expensive way, compared to, say, conventional gasoline, to run an automobile. And people have to be willing to pay that. There has to be a market structure that incentivizes that. And I think we're a ways away from that.
The other point in terms of ethanol is that corn-based ethanol is just not that -- I mean it's not that energy efficient, and that's where the explosion has been. And we really have to get to cellulosic ethanol, which is a new technology, an untested technology, in order to really arrive --
GAPPER: Could you explain a little bit about what cellulosic ethanol is.
WALLIN: Cellulosic ethanol is the ethanol that's made from things like woodchips and grasses and so forth; it's not made from corn. And the corn, you have to use fertilizer. It's more energy intensive to grow corn, and that's the basic difference. But the cellulosic process requires special enzymes and, you know, efficiencies that haven't been, you know, fully developed. It's not commercial yet, but people expect it to be. I mean, you know, David could comment on that.
SANDALOW: Finally, we have some disagreement. We have radical agreements on energy independence. I don't agree on electricity and the cost of driving. I think the cost per mile of driving an electric car is actually quite low. The purchase price of an electric car at this point is quite high. The batteries are expensive. And we need actually a pretty high volume of purchase before those battery costs come down. There's a lot of work going on in this right now. But the figures I've seen are about the equivalent of 75 cents a gallon to drive an electric car, you know, once you've bought it.
I think corn-based ethanol, you know, has got a fair amount of potential. We're going to get up to about 10 percent of our gasoline usage with corn-based ethanol in this country. I don't think we can go much higher than that.
And there's been a lot of debate about whether it's good for the environment. I've done a literature review on this in the past year and I think my assessment is it saves about 20 percent of the emissions of greenhouse gases as compared to gasoline. So it's not transformative, it's not game changing, but it's good.
And by the way, that's about what a hybrid gets. Many hybrids are about a 20 percent saving. So it helps -- and then I do agree with Tom that cellulosic ethanol, which is switchgrass, is the big game changer. And we're not there yet, but again, there's a lot of money and scientific talent going into that technology right now.
GOLDWYN: Let me offer a point of pessimism and disagreement. (Laughter.)
GAPPER: I like both of them.
GOLDWYN: I mean -- and we wrestled with this on the task force as well. But you have to understand, appreciate the scale of the problem. Eighty-four million barrels of oil a day is what the world consumes. Just think about that number -- 84 million barrels a day; the United States 20 million barrels a day, 75 percent for transportation. So you're talking about huge volumes.
I don't know and I don't think we can predict which technology, whether it's hybrids or advanced engines or it's cellulosic or it's plug-ins, is going to be the one or whether more likely there will be a portfolio of technologies that will help break this dependence. But what we concluded in the task force is that none of this will work, none of this will work unless you do something that actually moves the dial. And the only way you move the dial is to block in a high price for motor gasoline.
Now you can do that, or strong incentives for much more efficient cars. And there are three ways to do it. One is gasoline tax, favored by economists, easiest, lets people pick which technology is going to get them there the fastest. The second is CAFE, which is top down, is gainable, has weaknesses, but is the only thing in the last 25 years that actually worked.
GAPPER: This is a federal fuel standard.
GOLDWYN: This is basically mandating increased efficiency of automobiles one way or the other -- by weight, by class, whatever -- it's basically saying you've got to make more efficient automobiles. That will go a long way.
The third is something called tradeable credits, which is essentially capping the amount of -- well, Marty Feldstein was on the task force so we had to do this one. He understood it; I don't think the rest of us understood it. But you're essentially going to cap the amount of, you know, gasoline that you're going to use. You're going to create vouchers, people can buy them and you can deal with the poor.
But the thing is that unless investors are certain, I would say that gasoline is not going to go below $3 or $3.25, and I would say on the other stuff that the price of carbon is going to be at least $30 -- none of this happens because it's already on the drawing boards for technology. I mean there's a car in California, you know, it can go hundreds of miles at high speeds on very low gasoline, but it's $200,000 a unit. To make this stuff commercial, to get Exxon into the alternative fuel, to get, you know, automobile companies to make 50 miles a gallon, you've got to have -- you've got to eliminate that the price is going to crash again.
WALLIN: And I would say it's got to be done in terms of a long-term strategy, because these are long-term investments. Whether you're talking about, you know, electric power or refineries and so forth, this is a long-term investment cycle business. And so, you know, you have to have clear signals for the market as to where things are going to be.
GAPPER: Well, locking in the high price of gasoline permanently sounds a bit un-American to me, but maybe people will get used to it.
I'm going to ask the audience, or members of the audience, if they have any questions. I'd just like to remind you, wait until the microphone arrives. When the microphone arrives, speak into it, which is the best technological way to get your voice heard. And could you just stand and state your name and affiliation, just so we know. And keep it reasonably brief. And keep it to a question. There.
QUESTIONER: Jack Mintz. I'm actually from Canada, the University of Toronto, where we do have high gasoline prices compared to the United States, and there hasn't been the big push over to hybrids yet, but it is starting.
Actually I do want to pick up on this issue of gasoline prices. A few weeks ago, I listened to the Democratic presidential race and I thought the most embarrassing part of the debate was when the candidates were asked, "Would you lower gasoline prices, roll them back?" And frankly none of them made sense. I mean, they were talking global warming, energy security on one side, and they were talking about taking away incentives for the oil industry on the other side and rolling back gasoline prices. So, you know, it seems to me that politics isn't quite there.
And another example is, of course, you know, why not take the tariff off Brazilian ethanol? I mean it's half the price of corn-based ethanol in the United States and certainly, you know, would help reduce it quite considerably. So it seems to me that you have a really tough political issue here in the United States. And after reading Daniel Yergin's book "The Prize," it's very clear in my mind that the politics is not going to go away that easily, and I guess I'm a little bit sympathetic with David Goldwyn's comment that there really isn't yet the politics here --
GAPPER: Well, let's turn that into a question and just ask -- (laughter) ---
QUESTIONER: I was going to, but anyway -- (laughter).
GAPPER: Well, I think it's the question, the implied question, which is, are politicians up to the job?
GOLDWYN: No, not yet. (Laughter.) I mean, it's really disappointing. It is uniform and bipartisan. (Laughter.) The absolute fear of telling the voters that they can't have cheap gasoline, and that -- or better yet, that it is dangerous to their security to have cheap gasoline and that we're not going to have it anymore and you're not going to see it again, and get used to it.
At this point, I think -- and we're seeing it today in the Congress right now as CAFE standards are about to go off a cliff and a bunch of other useless legislation is going to get passed -- probably counter-productive -- the leadership on this really has to come from the president. It has to come from top down and it has to be education first. You've got to stand up there on TV and tell people the truth and take the hit. And you have to do that, you have to do it in a sustained way. You've got to lead in the Congress; you've got to drive the process. You can't just mail in the CAFE bill and hope it will pass.
You know, on, you know, September 12th, if President Bush had stood up and said I need 50 cents a gallon this year, a quarter next year and nickel every year after it for the next 20 years, and we will not be using gasoline when your children get their driver's license, people would have said, "Thank you, yes, sir," and they would have done it, because it was a moment of crisis. But that moment has passed. And I think absent a new crisis or somebody who's willing to risk their presidency, it won't happen. You won't change the political culture. And if I had to bet right now whether we'd see it in the next five years, I'd bet no.
GAPPER: Well, that's pessimistic. Anybody else a bit more optimistic about politicians? (Laughter.)
SANDALOW: Okay. I want to avoid being Panglossian here, but let me tell this. I think largely what David said is dead-on right. But let me say I had the experience, last summer I went to a luncheon with Newt Gingrich, and about a week later I went to a dinner with Howard Dean. And I asked both of those men the same question, which is what should we do about oil dependence, the same thing we're talking about here.
And both of them gave me the same answer. I mean, both Howard Dean and Newt Gingrich said, "Huge national security issue, we have to come to grips with it." Both of them said, "Ethanol, ethanol, ethanol." Both of them said, "Manhattan Project." Both of them said we need to improve the fuel efficiency of our auto fleets. Now, absolutely neither one of them said we need to raise the gas tax. But, in fact, there is a dramatic bipartisan agreement on the need to address this problem and that reflects widespread public belief. So I think that gives you something to work with.
WALLIN: Yeah, I would say in addition that, you know, these problems -- this problem isn't going to go away. We are in a sort of age of energy insecurity. There's no clear, easy way out of this. It's -- you know, it's embedded. And so that's going to keep pushing us and keep pushing us, and eventually, I think people are going to have to start, you know, thinking about real solutions, but it takes a long time to work that education process through.
GAPPER: Okay, I think we've got a question there.
QUESTIONER: Stephen Kass, Carter, Ledyard and Milburn. I actually have a follow-up question directly on this. I've heard here and elsewhere lots of informed speakers articulate the consensus and agreement as to precisely what you're talking about. And then there's always an opportunity to blame, not quite as articulately as you did, David, but to blame the political leadership of both parties for failing to do anything.
My question is, if the informed American public and its business leadership and people such as those at the council are in such agreement, why are not those not otherwise influential or otherwise influential segments of our society not sending a much clearer message than they have been to the political leadership of the country?
It's not just the public, it's institutions, it's commercial organizations and the like. And why is it that they are pointing to the political vacuum rather than exercising power that they exercise when they want to accomplish something?
GAPPER: Well, and I guess added to that question, you know, what's the role of business leaders or Wall Street or anybody to say that -- to translate that message to the political leadership?
WALLIN: One thing I would say is that oil companies, I think, have done a very bad job of telling their story and leading on this issue. And I think one of the reasons is that there's a great populist anti-Big-Oil tradition in this country and they've gotten beaten up so many times that they've just taken an attitude of we're going to keep our head down and we're not going to say anything and we're going to try to, I don't know, present as positive an image as we can without saying anything. And I think that's been a real mistake in terms of getting the message across.
The other point is, I think, that our country is at once a very big energy producer and so we have, you know, we have a very big vested interest in producing energy, but we're also the biggest consumer in the world. So we're fighting out this conflict between producer and consumer and that's why we end up with legislation that doesn't go anywhere, because we can't come to a common view. We don't have a -- we're on both sides of the market.
GOLDWYN: I think the other thing, I mean, on something like climate, you're actually seeing business drive the process, and it's changing it and I think we will make progress there. And that's because it is very directly a bottom line issue, because it's the cost of electricity, it's buying huge plants, making big investments, wanting to know what the rules are. So it's clear that their bottom line will be advantaged by knowing what the rules are.
Oil is much more complex and much more indirect. As a cost of doing business, it's significant but it's not really a huge part of the economy, we are much more efficient than we were. And the solutions are much more politically complex and, therefore, the politics are because, you know, there is less agreement even among the experts, even on the council. We said there were three things that would change. We didn't pick one and we didn't say all three, because there wasn't agreement.
So I think is it CAFE? Is it a tax? Can you take the risk? I think it's a -- and the consequence, this sort of national security danger, the fact that we are losing our influence in the world is remote. I mean, you're on the Council on Foreign Relations, you understand it, but for the average American this is remote, and the connection between I've got to pay $3.25 and Iran or Russia, I mean, just doesn't penetrate. And CAFE versus a tax versus something else is a much more visible, painful cost. And so I think the solutions are less clear, the politics are harder, and therefore the political leadership is much more reluctant to pick one of these as a solution.
GAPPER: We've got a question here.
QUESTIONER: Ralph -- (inaudible) -- University. Two questions, Mr. Goldwyn. First, in your list of danger countries, you didn't mention Saudi Arabia. Is there any particular reason for that? Are you more optimistic on Saudi Arabia than you are on the others? Second, could you give us a few examples on how the Strategic Reserve has worked? And has it been used frequently to intervene?
GOLDWYN: The second one is simpler. Let me do that one. It has been used but not often. And during the first Gulf War when there was an announcement that it would be released, there would be a big sale and not all of the oil which was offered was sold, that was actually a successful use because the market was calmed. Post-Katrina there was also another sale, and so there was -- it was bridging oil for the refineries before it came from far away from places like Saudi Arabia.
Those were, I think, two successful uses of it, but it hasn't been used that often, and there have been some swaps now and then, but it hasn't been used that effectively and not in the cases when we would really have needed it most, like, I think, the Nigerian oil strike or the Venezuelan oil strike.
QUESTIONER: Who manages it, the Department of Energy?
GOLDWYN: Well, the Department of Energy manages it, but the decisions -- it's the president's authority, some of it's delegated to the secretary of Energy, and then there's an interagency decision taken when something is needed to be released.
But in the first Gulf War, I mean the Bush administration paid dearly for waiting a year while fear drove the price of oil up, engaged in an interagency debate between the State Department and the Treasury Department. Treasury said don't intervene in the market, State Department said don't irritate the Saudis. And the Energy Department and the Commerce Department were just saying, you know, the prices are going out of sight, and the political people were saying, do something. And that was driven by the NSC.
When I was in the Clinton administration, you know, in 2000, the process was run, you know, part out of the Energy Department and part out of the White House and it was same thing. It was this interagency debate, with the economic people and the diplomatic people all talking about should we, how much, when, which paralyzes the decision process. And that's why this idea of a federal reserve, I think with the ability of the president to override that process and say we want to send some country a message so we're going to have a release anyway, is a better process because it's all mucked up.
GAPPER: Maybe we should ask the other members of the panel about the Saudis, just to spread it around. Should we trust them? Do we like them? (Laughter.)
WALLIN: Well, I would say that, you know, we talked about countries at the beginning of this, you know, what areas you're most worried about, and ironically we didn't talk about the Middle East at all.
WALLIN: And in a lot of ways, you know, American energy policy and American Middle East policy are the same thing at a certain level. And it's something that people don't -- we try to separate them and we try to think of them independently, and I think that's a big mistake. But it's part of the whole issue of in terms of energy policy we have to think bigger, we have to think of all the ramifications.
But in terms of Saudi Arabia itself, I think Saudi Arabia is absolutely -- the U.S.-Saudi relationship is at the core of the security and future stability of the world oil market. This is the country with the largest reserves in the world. They need us, we need them. We understand that.
We've unfortunately had a lot of strains in that relationship since, you know, 9/11, and they continue. And, you know, the whole situation in Iraq has basically hurt our position in the Middle East as a whole with the Arab world. And we have to do something about those things if we're worried about energy. You know, we have to improve it. I don't know --
GAPPER: David Goldwyn, the Saudis?
GOLDWYN: I think the risk of a political upheaval in Saudi Arabia is slim. I think the regime is stable, not going anywhere. The chance of a terrorist disruption in Saudi Arabia is significant but, I think, pretty well managed at this point. And our ability to sustain even an attack on something like Abqaiq or, you know, one of the major refining processes is -- it would be significant, but unless it was leveled to the ground, it would be a year or an 18-month disruption and we could work around it.
So those two risks I think are quite modest. The Saudis want to be in the oil business for a long time to come, so they have been pretty responsible managers of the market in the sense of at least they are investing in more capacity even if the president tells them we don't want to use foreign oil.
So they're being responsible. So as an oil player, Saudi Arabia's not a high risk. The issues we have with Saudi Arabia are what are they doing internally, how does that impact terrorist financing, how do they act in the region? And from the United States, do they care what we think anymore? And the answer a lot of the times seems to be, no, not too much because they're kind of tired of the things that we're saying. They're not the only ones.
So I think, you know, that's the real issue. It's the relationship and U.S.-Saudi -- how we cooperate on important goals for stability in the Middle East. But I don't think the Saudis are going anywhere and so I didn't put them high on the list.
MR.SANDALOW: One other point, quick point long-term. If you start to look over the multi-decade period given what's going on in the Persian Gulf, one can not exclude the possibility of a nuclear strike in the region, including on the Saudi oil fields, and the catastrophic implications of that would be quite extraordinary, and it is one reason to diversify the transportation fleet away from oil over the course of the next 10 or 20 years.
QUESTIONER: Lara Setrakian, ABC News. I wonder, are there countries other than the U.S. that you consider to be relative success stories on the front of either energy independence or the ramp-up of alternative fuels? And are there best practices from those examples that may be useful to the United States?
GOLDWYN: When you run test scenarios on who can best sustain a disruption, the Japanese always win the contest because they have the most diversified economy in terms of energy. If you look at Japanese demand and if you look at European demand, you would have to say that their tax policies have been enormously successful in stemming the increasing demand for oil. So I would say Europe as a whole in terms of reducing dependence on oil, investing in mass transit. The same car you can rent here will get higher mileage in Europe, and that's all because of the tax regime. So I would say Europe and Japan are good models for using policy to control oil demand.
SANDALOW: An interesting country that usually comes up in this conversation is Brazil, which has, over the course of the past 130 years had a sustained policy to promote biofuels and ethanol in particular. And it's been quite successful in that regard.
That success is sometimes overstated. It's still a relatively small amount of their overall liquid fuels supply, but it's significant. And in Brazil today, about 80 percent of the new cars that are sold are flex-fuel cars which can take either ethanol or gasoline, and in the gas station you can buy one or the other. It's an important feature of their market.
GAPPER: I saw this lady here.
QUESTIONER: Hi, I'm Cassie Yanosek (sp) from BP. And I have a question about coal. I notice that hasn't been discussed yet today. And I'm wondering if you all could speak to what you see coal as in terms of a potential solution for this energy security agenda. And also given the fact that the U.S. and China both have huge reserves and it's cheap. So where do you see policies going that potentially use coal as a solution, but also given the high carbon content?
GAPPER: Yes, coal seems to be the issue where security and the environment get strained the most.
SANDALOW: Very hot political issue for exactly that reason on the floor of the U.S. Senate this week. The United States has more than a 200-year supply of coal. Obviously, coal is abundant in China, in Russia, in India. Coal to liquid technology has been around for many, many years. The Germans used it in World War II. The South Africans used it in the apartheid era and have continued to use it. Sasol, exactly.
It is an extremely high producer of heat-trapping gases. The Sasol plant in South Africa is the single largest point source of carbon dioxide in the world. And if you move from oil to liquid coal without advanced sequestration technologies, you're almost doubling the amount of global warming gases you put in the atmosphere. So, from that regard, it is an extremely unattractive solution.
It's also quite expensive. And as I understand the commercial dynamics right now in this country, the vendors who are, including Sasol, who are looking for opportunities here are looking for 20-year contracts from the Department of Defense in order to assure the success of their investment.
GOLDWYN: But countries are going to use it. And as the statistical review just showed, carbon concentrations are increasing, demand for coal is increasing. Half the carbon is from China, all of that's from new coal plants. You know, so countries are going to do it whether we like it or not, and so are we.
So I think the answer is that we've got to in the interim make serious investments in carbon sequestration. And we've got to get the Congress to some extent out of the business of picking which state the project is going to be in. And there's a study, this MIT study that John Deutch and Ernie Moniz did, who said, you know, you've got to have big investments, big three different technologies and try and commercialize it because otherwise you're not going to be able to tell countries not to use coal. You've got to focus on --
SANDALOW: Countries are going to use coal for all electricity generation for sure. I think it's much less sure that they'll be moved towards coal to liquids to -- for our fleets.
GAPPER: What is carbon sequestration, by the way?
WALLIN: Putting carbon back in the ground, you know, basically, in an old oil field, usually in an old oil field or gas field.
GAPPER: And can that be done easily? Or --
WALLIN: Yeah, they're doing it. It's being done, but it's expensive. It's not something that you can -- there are a few projects in the world --
SANDALOW : It can be done, but it has never been done on the scale that would be required in order to seriously have an impact on our global warming problem.
WALLIN: The good thing about the U.S. is we have a lot of depleted oil fields around the country that we can, you know, fill up. (Laughter.)
GAPPER: (Off mike.)
QUESTIONER: Michael Ryan from a law firm, Cleary. A follow-up on carbon sequestration. As a lay person, when you read about hybrid, when you read about other things like this, you say well, that could maybe work over time. Every time you read about carbon sequestration it seems like a total fantasy. Can this in fact -- I mean I understand it's not commercial yet -- but as you guys look at it can this in fact be developed? Is it a reasonable thing to expect?
SANDALOW: Absolutely. It's already -- it's been done successfully over the course of a couple of decades, on a smaller scale than we need but it's been done quite successfully. There's a very good study out by MIT on this recently that says it's feasible, we know how to do it, the technology's there; however a lot of work is needed in order to scale it up and know how that will work.
QUESTIONER: Irving Rotter with Sidley Austin.
If I could ask a question of the two Davids. First one is, just drilling down a bit on the --transforming the fleet to a more -- fleet based more on electricity, have any studies been done that would look at the number of power plants that would have to be built, what those power plants would run on, the amount of improvement that would have to be done to the transmission grid, and what that would do to the economy in order to transform the fleet from one that's based on gasoline to one that's based on electricity.
And the other question to David Goldwyn . When oil was at $15 to $20 a barrel, people talked about a $50 tax per barrel as being an incentive to change us -- in dependence on foreign oil. Now that there is, in fact, a market-based $50 tax that's come about, is the answer not political will but sustained prices, which will basically stabilize the market and get the oil companies to basically invest because they see high prices being sustained over time?
SANDALOW: On your first question, about electricity, David Goldwyn whispered to me, "Your favorite question." (Laughter.) He's heard me answer this before, and the reason it's my favorite question is because the answer is so much better than most people expect. And the answer is, we don't need much extra power generating capacity in order to power huge amounts of electric cars.
And there are two reasons for that. One of them's electric cars actually are pretty efficient; you only need about the energy of a space heater to move an electric car. But even more fundamental than that, we have a lot of extra generating capacity at night that we don't use, and if we could design a system so that people plug in their cars at night, which is what we think most people would do to recharge, you just don't need that much generating capacity.
There've been some good studies on this. And with about half of the car fleet being electric, which is decades away, we would only need about 4 to 7 percent more generating capacity nationally. And there's another study that said we'd need almost none with up to 200 million cars on the road. So you don't need much extra generating capacity in order to do this.
Now, as our electric generators become cleaner and cleaner, if they become cleaner and cleaner, the -- a slightly different issue on the environmental -- the environmental consequences of this would become better and better. But you don't need much extra generating capacity.
GOLDWYN: The answer to your second question is yes, which is that I think you're right; the answer is really to sustain current high prices, and the tricky part is how do you do that? Do you do that -- you know, Senator Lugar says a floor price on crude oil. Or maybe it's not even so much a gasoline tax but basically a price floor for gasoline. The question is how do you do that, do you have some sort of variable tax? How do you lock that in over the long term is what's tricky and where there isn't political will to implement a solution.
QUESTIONER: Bill Harrison, JP Morgan Chase. Just to comment on the political reality, I think that the oil problem is no different than Social Security, health care, in that the American public doesn't see this as a crisis. We all might, and do, and that global warming may be the trigger because I think people are beginning to focus on that. But let's assume that for the next five years that we do nothing about this, we -- sort of the environment that we're living in continues. Give us your best guess as to the range of the price of oil. We've had tremendous range and volatility.
And the second question is, what advantages do countries like China get from trying to create all these quote, "strategic relationships," whether it was Unocal or whatever they didn't get around the world, in this free market, global world we're living in?
SANDALOW: You want to guess the price of oil?
WALLIN: The price of oil? Well, a very difficult thing to get right. But our view is that we could see, you know, crude oil prices at least -- you know, U.S. gasoline's sort of a different set of issues, but crude oil prices soften a bit in the next few years. I mean we've got, you know, some demand impacts from these higher prices, we can see that very clearly. Demand growth has slowed down from what it was in the first part of this decade globally. It's mainly growing now in places like China and in the Middle East, Gulf, other oil-producing countries where they have subsidized prices. That's where most of the growth is coming from.
And then on the supply side these higher prices have also stimulated, you know, a little bit more production, there are some projects coming out; but the problem is that, say, after 2010, the picture is that there's just not much growth at all in non-OPEC production. And so all the production growth has to come from OPEC, for the most part. And that's something that's very hard to see how the kinds of demand growth when you start thinking about demand growth in the future in China and India and the developing world, in particular, where that supply is going to come from.
And so you get to a picture out in, like, 2015 to 2020 that looks very hard to sustain so you get a lot of upward pressure on prices then, I think. You know, so we maybe have a pause here for a few years where we're at this level or a little bit lower even, and then I think it goes up more.
GAPPER: What about you guys?
GOLDWYN: I think you're going to see much more volatility. I mean there's two things that I remember, the task force study. One answer to this problem is domestic, taxes, things like that. The other is foreign policy. And I think what happens if we don't address this problem -- this was our point in the task force -- is that what you're going to see is a lot more disruption.
Five years from now, we don't deal with this, you're going to see Venezuela not invest and grow in production. You're going to see more strikes, more violence in Nigeria. You're going to see an increasingly aggressive Iran and you may see more conflict in the Middle East. So what's the price going to be? Sixty, 90, 80, 70, 95, 55 -- I mean you're going to see this volatility because bad things are going to happen.
And it's like what are the Chinese after with their deals? They're in for locking -- they're in for political influence, for one. They're in for insurance if there's a conflict with the U.S. over the Taiwan Straits and we decide to embargo China and they've got to get oil from someplace. Who's going to give it to them at any market price? That's what it's about.
GAPPER: David, you're our resident optimist. Do you --
SANDALOW: (Off mike.)
GOLDWYN: Never again 40, I don't think.
SANDALOW: Just a quick comment. I've heard reports that there's never been a time when the ratio of production at risk to extra capacity in the system has been higher. And that means volatility and that means continued upward pressure on prices.
GAPPER: Okay, we're going to have a last quick question.
QUESTIONER: Herbert Levin, America-China Forum. Thirteen years ago this council did an independent task force report on relations with China. One of the recommendations of that task force was that we get China into the International Energy Agency even though they're not always (CD ?) members, and that that agency not be a consumers' OPEC but that you've got serious discussions of supply and that U.S. encourage its majors and drillers to have joint ventures and cooperative ventures and get out of harassing them on tech-transfer issues. And the companies that we consulted said they were willing to do this because the Chinese were going to need enormous amounts of oil and there was instability among the traditional suppliers.
That recommendation along with others, you know, sort of vanished. I wonder if you have a view on that approach to this problem; increasing supply to the maximum by U.S. technical and tax initiatives.
GAPPER: Yeah, or more generally what China should be encouraged to do.
GOLDWYN: Well, it's part of the same recommendations are -- in this one, is bring China and India into the IEA, more joint cooperation with the Chinese. Engage China. We have more in common with China as a consumer of oil than we do with any other country in the world.
And the second part is happening. I mean, ExxonMobil is building a heavy conversion -- basically de-crude refinery with the Chinese in China. And so some of that cooperation is happening. But to bring the Chinese into the system, even having a diplomatic dialogue, we only did it last week, was the first time --
WALLIN: The Chinese are building an SPR of their own right now, so are -- the Indians are doing this. We need to cooperate with these countries and, you know, work for common policies in this area. You know, this is part of this whole interdependence picture.
SANDALOW: The Chinese have stronger fuel efficiency standards then we do.
GAPPER: Okay. Well, on that -- (inaudible) -- note, we'll end. Thank you very much to the panel. (Applause.) And thanks to everyone else.
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