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Panacea or Pipe Dream? Energy Policy and the Search for Alternatives: Session I: A Foreign Policy Mandate: Thirty Years of Oil And Gas

Speakers: David L. Goldwyn, President, Goldwyn International Strategies, and J. Robinson West, Chairman, Pfc Energy
Presider: Sebastian Mallaby, Council on Foreign Relations
March 13, 2007
Council on Foreign Relations Washington, DC



NANCY ROMAN (director, Washington program, CFR):  Good morning.  I think we're going to go ahead and get started while they're getting miked up.  I'm Nancy Roman, vice president and director of the Washington program.  And I'm delighted to see so many people here for such an important topic.

      Unfortunately we had to turn away some press and put some members in the overflow room, which is a testament to the subject.  And we're really going to be staying with this over the course of the year.

      Today is a bit of an experiment for us.  This symposium format which we're devoting more than half a day to, as you know, is not our custom or tradition.  But the idea is that it will allow for a bit more depth.  And I'm looking to you all for feedback on the degree to which it does or doesn't, and also for feedback because it's a lot more work.  (Laughs.)

      And I just want to thank Rob Kittleson, who did most of that work, overseen by Jennifer Golden in the back, but also to really look to you for your ideas on ways to build on today's conversation, because we're always trying to make what we do here not be a one-off conversation that's intellectual entertainment, but to actually push the policy discussion forward.  So please, my contact information is in the program, and let me know.

      And then, just finally, I want to introduce and welcome our presider, Sebastian Mallaby.  If you don't know him personally, certainly you know his byline, which is associated with a consistently smart column in The Washington Post.  But he has joined the Council full-time as deputy director of studies, and he heads our Geoeconomic Center.  And in that capacity he's tasked with integrating the economic side of the issues into the foreign policy discussion.

      We're delighted to have you with us today as presider and at the Council.  Thanks.

      MR. MALLABY:  Great.  Well, thanks, Nancy.

      And welcome, everybody, to this symposium.  This is on the record, which means that I am spared the task of reciting and explaining council rules on non-attribution.  Sometimes I feel a bit like the poor air steward who's seeking to get attention from the frequent flyers yet again for how to buckle your seat belt.  But please do turn off your cell phones, BlackBerrys and other things that go beep.  And actually, now that I mention that, I might even follow my own advice here.

      We have this session to focus -- this is obviously three sessions and then the lunch, so we've got time and we're going to pace ourselves.  And we want to devote the first session to teasing out the interactions between energy policy, energy dependence, and foreign policy and security concerns primarily.  That's the main focus of this period.

      And I want to get something on the table before we really get started, which is that I think most people here would probably agree that complete energy independence is not a realistic goal.  You know, and if we reduced import rates by, say, 20 percentage points, 30 percentage points, name your number, it's not even clear precisely what the direct benefits would be.

      If you could name a troublesome country and say, "Okay, supposing we could just stop importing oil from that particular country," it's not clear where the benefit there would be.  I mean, looking around the world, a very troubling country is Iran.  And there have been no U.S. imports of oil from Iran, I think, since 1979, when the embargo was imposed.  And yet if the Iranians chose to stop pumping oil, the global price would go up, and guess which price the United States pays; it's the global price.

      So I just want to get some of those things on the table.  This is not what we -- we don't need to, I hope, go over this ground too much.  But there are nonetheless other foreign policy concerns which are genuine, and we couldn't hope for a better pair of commentators than we have this morning to get into what are those genuine foreign policy concerns.

       On my right, or your left, David Goldwyn, who is the president of Goldwyn International Strategies, an international consulting firm.  I rather like the list of clients that David has advised.  These include not only the World Bank, the U.S. Department of State and lots of Fortune 100 companies.  They also include the warring parties in Sudan's civil war.  You can ask him in the break how he actually got to meet with them, where it was, and whether there was air conditioning; and secondly, the Nigerian government, also a challenging client.  David's also held positions in the Clinton administration and the first Bush administration.

      Then here is Robin West, who is the founder and chairman of PFC Energy; also has advised most of the leading oil and gas companies on everything from portfolio management to investor relations.  And Robin held a position in the Reagan administration.

      So, now, let me start with David.  First of all, do you agree with my preamble that we're not really talking about a foreign policy dividend from energy independence or even strides towards independence?  Is that correct?  And how would you characterize what the foreign policy dividend would be from a different U.S. energy policy?

      MR. GOLDWYN:  Well, I would agree with you that energy independence is a myth, that we use too much oil and gas.  It would take too long to change the structure of the markets.  We're talking about managing the consequences of oil dependency.

      But I think the nature of the threat, and therefore the issue of the response, is that high levels of prices right now, excessive rents, increasing control by governments rather than companies over access to resources, is causing foreign policy problems.

      Overall, the big problem is the threat to U.S. power and influence abroad, and that's because our ability to forge coalitions on non-proliferation, on terrorism, against genocide, are impeded by others' dependency.  Now, you can't end that dependency, but if you can reduce its intensity, if people have more choices of fuel, if the governments have less excess rents, then they have less power.

      And these problems of our friends and allies and our competitors, like China and India, being dependent on oil and being at the mercy, to some extent, of the governments who provide the world market, not them directly, that's a problem; the impunity with which countries which have excessive oil rents can act.

      At $25 oil, Hugo Chavez can't afford his regional foreign policy.  Iran would have a whole lot harder time thumbing its nose at the world community.  And, you know, Russia would not have had the bye that it had on nationalizing the rest of the industry.

      The other problem that we have is the instability which comes from high rents and poor governance.  This is in places like Nigeria.  And again, you can't end that problem by reducing your dependence on oil.  But if prices came down from $80 to $50 to $40 or below, those governments would be required to reform.  And the fact that they can remain rentier states, ignore their people, leads to more instability.

      So you wrap that all together and I think what it tells you is that if you can increase diversity, if you can find more access, if you can then create technological alternatives to oil, you can manage your way through this crisis.  If you keep things the way they are right now, then you will increasingly shift power to the producing countries -- to the Russias, to the Irans and others -- and the U.S. ability to do any business in the world, from Sudan to Iran to Iraq to just competing for influence in Latin America and Africa, will be severely harmed.

      MR. MALLABY:  That's a very interesting answer, because I think for all you long marchers in the audience who plan to stick it out through the whole symposium, which I hope is most of you, this theme of sort of thinking about the consequences of energy in a sort of global way, not just in a U.S. or bilateral way, I think, is going to come up again and again.

      In other words, you're saying that it's not just U.S. dependence that we'll have to be concerned about; the U.S. should be equally concerned about Chinese dependence, Indian dependence, West European dependence vis-a-vis Russia perhaps on gas, and so on.  Is that correct?

      MR. GOLDWYN:  That's exactly the point.  I mean, that's the nature of the threat.  And if you can look at why we were unable to get even European support for smart sanctions on Iraq when Colin Powell tried, when we were trying to do containment, it was the lure of Iraq's oil fields really that pulled France and pulled Russia apart.  They were competing with us for that.

      If you look at China and Sudan right now, why can't we get their cooperation?  It's because they have a huge investment in Sudan.  They have a lot of money.  They don't have other places that will give them direct supply.  They're afraid on the world market.  And so they're using that as a tool.

      So it's our ability to work in the Security Council to form coalitions to do our business in the world.  That's the real threat.  Frankly, at prices -- we can afford these prices.  We can probably even afford this level and sustained higher prices.  It's not an economic problem.  It's a security problem.

      MR. MALLABY:  So high energy prices, therefore, distort not only allies or rivals who are importing oil, but also the ones who are exporting it.

      Robin, can you describe a bit on the history?  I mean, how does that characterization of the threat from high oil prices differ from what we saw in the two oil shocks in the '70s, at the end of the '70s?

      MR. WEST:  Well, the situation today is very different than it was in '73 and '79.  I think it's important to go back.  Let me begin by one point I think is important.  When you're talking about oil and gas and energy, you're talking about a business.  You're talking about markets.  You're talking about resources.  You're talking about capital flows.

      And I think politicians sometimes, when they talk about energy policy, they treat pipelines like aircraft carriers.  And they're not the same.  And so it's very important to really go into the nuts and bolts of this to understand what the constraints are and what the realities of the market were.

      And if you go back, a tremendously important event of geostrategic importance was started in 1961, which was the nationalizations that took place around the world.  Prior to 1961, the international industry could invest anywhere except Mexico and Russia.  And starting in '61, a series of nationalizations took place and that ran through the '70s.  And basically the international industry was pushed out of the Middle East.  They were pushed out of Venezuela.  They were pushed out of the low-cost areas.

      But as prices went up during the '70s, the industry was able to turn and to develop more capacity in places like the North Sea and Alaska.  And basically what happened in the early '80s was you had capacity coming on outside of the nationalized areas in places like the North Sea.  And by the same token, high prices pushed down demand.  So the price collapsed.

      And then, for about 20 years, there was this excess capacity, which was worked off in the market.  And this was a period of low prices.  It was frankly when a lot of oil-producing governments were very weak and couldn't be assertive.  I would differ with David a bit.  The governance of Nigeria at $10 a barrel was as appalling as it is at $60 a barrel.

      But what happened and why this cycle is different is that as the price of oil has gone back up, the national oil companies now control over 80 percent of the resources.  There's an article in the Financial Times I would urge you to take a look at to understand how this industry is really structured.  And in the early '70s, the term was coined "the seven sisters," the great multinational international oil companies.  Well, the FT said there are new seven sisters, and they are the national oil companies of Russia, Iran, Malaysia, Saudi Arabia, China, Brazil and Venezuela.  Is that seven?  Close enough.

      And those are the new players.  They drive the business.  And the fact of the matter is that the industry can't invest.  It can't develop the excess capacity, because most of the resources are off-limits to investment, and the national oil companies themselves aren't investing very efficiently, with a few exceptions, such as Saudi Arabia.

      The other thing which is completely different is the nature of demand.  And demand in Asia -- if you believe that the Chinese economy is going to grow -- and I happen to believe it's going to grow, and I think most people here do -- then energy demand is inextricably going to grow with it.  So you have structural demand growing.  You have the inability to invest and develop new capacity to meet that growth.

      And what's happening in the world now is that we're not running out of oil.  There's the debate about peak oil.  We're not running out of oil.  What we are doing, though, is we're running out of oil production capacity.  That's a very important difference.  And I think that if you look at the whole domestic energy policy debate and the international debate, the structure of the industry is critical.  And the kinds of realistic policy answers is actually very limited and very, very difficult.

      MR. MALLABY:  Now, I hear two lines about this rise of these national oil companies.  One line is these things are a menace because they're so strong; they control so many resources.  Another line is these things are a menace because they're very weak; they're so incompetent.  You know, Venezuela's national oil company is producing way below capacity.   And there's a story recently in one of the papers about Mexico in a similar light.  The sheer sort of politicization of national oil companies mean that they tend to underperform in economic and business terms.

      And so which concerns you more?  Is it the strength of these companies, or it's the weakness, or is it sort of both?

      MR. WEST:  Both, in the sense that they're very powerful in that they control the resources.  But many of them -- I mean, for example, Iran, which has the second-largest resource base in natural gas in the world, is a net importer of natural gas.  And if it goes on for very long in the state of investment and management, Iran will become a net importer of petroleum products the next six years.  And this is just a function of gross mismanagement.

      But what concerns me is the state oil companies and the politicians who control them.  The other thing to keep in mind about oil, politicians don't care about oil.  Oil's like the plumbing.  They care about the money that is generated from the oil.  And all they want to do, the politicians and the governments, is they want to siphon as much off as they can.  A lot of these guys, to invest in these huge projects takes 10 or 15 years to get a return.  They're not going to be around in 10 or 15 years.  They don't care.  They don't feel a responsibility to the common good, to the global market.  And that's one of the big problems.

      MR. GOLDWYN:  If I could just add one point to Robin's, I mean, the other problem with these weak companies is the potential for dislocation.  Supply can't respond to demand, and therefore these small marginal producers have a lot more economic power if they have either acreage that's open or if they have the ability to withhold their oil from the market.  So why does Ecuador end up on the front page of the Financial Times?  It's only in a market where there's very thin supply.  There's limited access where people are competing for that resource, but they're able to command that attention or, frankly, act with that kind of impunity.

      And so the other great danger here of these big, powerful, but inherently weakly mismanaged oil companies is that we will have tighter supply.  And if we don't have other choices, then the power of marginal producers, the political power of marginal producers, will increase.  And that's a problem for us, because these are countries which should otherwise not be able to thumb their nose at the international community.

      MR. MALLABY:  David, I want to ask you, there really seems to be a mystery about Chinese oil policy, which is that clearly they see security from going around Africa and doing deals to lock up resources, that whether you own those resources or not, you're going to pay the world price for oil.

      So I don't quite see how that protects you.  In a security crunch, they may feel that if they own the resources and a war has seriously disrupted supply, they could at least get the oil.  But actually, if the oil is coming from Sudan, it can be interdicted by the U.S. Navy, whether it's owned by the Sudanese or by the Chinese or by somebody else.

      So the logic, from the Chinese point of view, of pursuing a strategy which has enormous side effects for foreign policy arguments -- for example, over the Darfur genocide -- why did it -- do the Chinese see it this way because they are simply misguided, or is there actually a logic to their belief that physically owning the resources improves their security?

      MR. GOLDWYN:  Well, I think the policy is shortsighted.  I've just come back from Beijing, so I got an earful of this misguided policy.  But it's not -- you know, they're not the first.  The Japanese followed this.  And actually, you know, the western countries followed this in the early '70s as well.

      I think Chinese policy is guided by a couple of things.  First is they don't trust the market.  You know, they think, in a race for resources, that the United States and the western countries will bid things away.  Second, it is about, I think, the strategic insecurity.  If there's a conflict over Taiwan in particular, the U.S. will block the Straits.  They won't be able to get access.  They had a long-term plan that said, "So, therefore, we should look at pipelines like to Kazakhstan."  Well, we can bomb a pipeline also, if push comes to shove.  And so that doesn't provide them security.

      But those are the choices that they have in front of them.  And so they are using state subsidy to finance their oil companies, to go out and get resources in the hopes of, at any price, locking up some supply or feeling they have an edge in the world market.

       But the other motivation for Chinese oil policy is political and influential, which is that it buys them a tremendous amount of political influence.  And this is not new for China.  Since, you know, really the 1960s, primarily over Taiwan, China has, in Africa and Latin America and other places, used whatever resources it has to gain political alliance.  And its ability to build railroads and sports stadiums and highways and to overpay for oil resources makes them politically important to these governments.  And that gives China political influence as it rises around the world.  So even if it's overpaying for resources, even if it's misguided in terms of energy supply, they still get a pretty significant benefit from the way they're doing business.

      MR. MALLABY:  But is the Sudanese or Zambian vote in the United Nations on Taiwan really going to influence the outcome of an argument over Taiwan independence?

      MR. GOLDWYN:  Individually, no.  I think in aggregate that they think it has.  But on Sudan, I think you see China's policy changing.  I think now they've used more of their influence with Sudan.  Andrew Natsios said some nice things about them.  But they're realizing that the harm to their international reputation of really being purely mercantile when it comes to a place like Sudan is harmful to their global power.

      And I think they don't quite know what to do about it, but I think you see that shifting, because it's their image in the world and how they're viewed which is one of their primary motivators.  So I think they've dug themselves a deep hole in Sudan, but I think they're starting to see that the cost of that may be higher than the benefits.

      MR. MALLABY:  Robin, David talked earlier about the question of the interaction between oil prices and development in poor countries, whether you're more likely to get failed states if oil prices are high or low.  And in some ways, you know, oil windfalls are rather like aid windfalls.  There's a whole literature on studying whether development assistance does or does not promote growth.

      And I think in general the consensus, although it's a contested consensus, would be to say that it's much more likely to produce growth if the country has good governance.  That's the basis for the Millennium Challenge Account design -- give the aid to countries with good policies.

      The problem with oil windfalls seems to be that there's almost an identity between having the oil and having the bad governance.  Do you see any way out of this?  Have you followed the experiments in Chad to try and manage the revenues?  Is there any hope in this conundrum?

      MR. WEST:  Last week -- I'm also chairman of the board of the U.S. Institute of Peace.  And Jill Shankleman wrote a book about oil money and corruption, which I commend to you.  It looks at all of the test cases, including Chad.

      So far the situation is pretty bleak.  And what happened in Chad, you had a very poor country that desperately needed the investment.  The World Bank and Exxon and Chevron and Petronas came in and they worked very hard to set up a mechanism where money -- where accounts would be monitored; money would flow to the education fund.  There would be all these different kinds of things.  Well, the investment was made.  The price of oil went up and the government of Chad said, "See you.  We don't need you anymore."

      And also one of the things that became clear is it's just as easy to steal from the education account as it is from the ministry of petroleum.  And I personally think that -- again, I keep coming back to people focus so much on oil.  And I think one of the founders of Exxon -- not Exxon -- one of the founders of OPEC described -- the Venezuelan president described oil as "the excrement of the devil."  It's destructive capacity in virtually every country where oil production dominates the economy.  It's politically disastrous.  But it's not oil.  It's the money from the oil that is the problem.  And my view is that the great enablers of this problem, frankly, are the international banks, because the money is just moved to these banks.  It's not the international oil companies.  There's really nothing they can do.  They're there at the sufferance of the governments, and they try as best they can.

      The big international companies, they regard corruption as bad for business.  They don't want any part of it.  The American companies legally can't do it and don't do it.  But it's the banks, and not the American banks but the -- I mean, the sums of money I hear about that are flowing in from Africa and the former Soviet Union, they're coming in in billions and billions of dollars to people's personal net wealth.

      And I think that this is a -- talk about U.S. national security.  You are creating a situation where the most important producing countries are inherently unstable because of the corruption.  And it's going to compound the problems.  And so the more we depend on the oil from these areas, the more unstable they are, the less leverage the U.S. has.  I mean, it's just a chain of disastrous events being set in order.

      MR. GOLDWYN:  If I can just add one thing.  I give Nigeria advice on this transparency issue.  So I think there actually are things that companies and governments can do, and, in fact, are doing right now.  But it's a long-term fix.  And all of these anti-corruption --

      MR. WEST:  That means it's working right now.

      MR. GOLDWYN:  Well, actually, I would say in some places progress is being made.  I'll use Nigeria as an example.  But you have to have political will in the country to change at some significant level in order for any of these efforts to work.  You can't do it purely from the outside.

      In Nigeria, Obasanjo was running on anti-corruption.  He was running on transparency.  So he supported what was initially the U.K. Extractive Industries Transparency Initiative.  But the companies helped.  Basically the rule was, if the government builds it, then the companies will cooperate.  And they were willing -- and, you know, they're in the room today.  Shell, Chevron, others, even Exxon disclosed what they paid well by well, tax by tax, item by item, and let it be published on the Web.  Now, what good did that do in a place where lots of money is being stolen?  Well, it enabled people to know how much money the government had.  And the finance ministry put down the allocations for the states on the Web.

      Well, people learned that in particular states there was billions of dollars going at the state level, but none of it was being spent.  Now, where did it go?  That gets to Robin's issue.  It went to banks outside the country, and banks aren't helping.  But what you are doing is empowering people at the local level to hold their government accountable.

      Now, we came up with 95 recommendations on flaws in the Nigerian system that needed to be fixed, and the clock is going to run out on April 20th on the Obasanjo administration.  Will any of this stuff get implemented?  Will anything happen?  Well, we don't know.  But there is now a large movement inside Nigeria pushing for it, and it comes to the question of what's U.S. foreign policy.

      Do we hold the next government accountable for these steps?  Do we say that this matters in U.S. bilateral policy, what you do?  If we do, if we raise it, frankly, as I think we have not in our last three or four meetings with Obasanjo, then we have a chance of bolstering that indigenous movement to try and make change.  So it's not easy.  It's long term.  But there are tools to work with.

      MR. WEST:  But one thing -- let me interrupt, if I may -- one of the things that's very important, I think it's very unfair for the U.S. government and U.S. companies to be responsible for reforming petroleum -- the governance of petroleum-producing states.  And I believe it should be the responsibility of the G-7, if not the G-8; I'm not sure Russia is going to be too aggressive in this area.

      But if the G-7 countries actively support this and make it collectively in their interest, recognizing that it's fundamental to energy security, then there's a much better chance.  But I think this should be done on a multilateral basis, and I think the president should insist on this.

      MR. MALLABY:  You know, another country where there is a test case, I think, on the effectiveness of this publish-what-you-pay approach, which is great in theory -- I mean, sunlight clearly is a terrific disinfectant, and so publishing what money there is makes it possible for NGOs in the society and the country to hold the government accountable, or at least try to do so.

      But Angola, I think, is a country where a lot of the publish-what-you-pay -- you know, it became a cause celebre.  It was put under pressure.  Global Witness, which is a terrific NGO based out of London, tried to bring transparency to revenue flows, whether they were diamonds -- from resources, whether they were diamonds, from oil, from timber.

      Now, just yesterday I got a call from a distressed Global Witness representative saying that their researcher from Britain had gone to Angola and had been arrested.  And that doesn't seem as if the government is cooperating with the kind of transparency, publish-what-you-pay kind of initiative.

      And the theory of Global Witness is that, again, this has something to do with China, that to the extent a country like Angola has the ability to defy G-7 pressure and say, "Hey, we can cooperate with somebody else who will be the sponsor and patron of our oil sector," they don't need the West.  They don't need the G-7.  They can defy a sort of transparency agenda, whether or not we raise it bilaterally with the Nigerians or anybody else.

      So, again, I mean, am I being too pessimistic or are we locked into this negative spiral?

      MR. GOLDWYN:  Well, let's be clear.  Angola actually was never cooperating with publish-what-you-pay or the Extractive Industries Transparency Initiative.

      MR. MALLABY:  The lack of cooperation just became more brazen.  I guess that's --

      MR. GOLDWYN:  That's right.  In fact, they were in negotiations with the IMF, you know, on a review of their standards and codes.  And China came in with first a $2 billion loan and then a supplementary $3 billion loan, which allowed them essentially to get all the financing they needed for government purposes and to tell the IMF, "We actually don't have any interest in these conversations anymore."  And that's a case where there really is no internal support in the Angolan government for any of this.

      Now, what do you do?  Well, you can't force it from the outside, but you can certainly use bilateral policy, you know, to say that actually we think this is important.  But the real maneuver here is not dealing head-on with the Angolan government.  It's dealing with China.

      It's having a conversation with China, which is, "China, what is in your long-term interest?  How long is Angola going to be a stable oil supplier?  What are they going to do with this?  What are going to be the consequences in the region?  What are people going to think about China in the world?  And maybe you have your long-term interests in a stable market and more stable governments."

      But we need to have that conversation with China, and as a government we haven't.  And just to come back to Robin's point, so, yes, it needs to be G-7.  It needs to be multilateral.  But not every government has the same level of influence with every other government.

      The U.K. government has influence with a lot of its former colonies.  The United States has influence with countries it has other relationships with.  So we need to integrate our energy policy and our foreign policy in a way where we use the influence that we have in creative ways to try and get countries to move in the right direction.

      MR. MALLABY:  I want to put one other issue on the table, or maybe two more, but the next one is the Strategic Petroleum Reserve.  I think that, you know, if you'd asked somebody 20 years ago, "What is the main tool that we have to guard against the danger of a blockade from OPEC or wherever else?" this would have been seen to be -- not only the U.S. system but the international system of reserves was seen as the chief protection.

      Now, a lot has changed since that system was set up.  China and India have become major consumers.  They are not in the system of holding reserves, so they are, in a sense, free-riding off this buffer supply without having to pay for storing any of the spare oil.

      Second of all, private-sector energy trading has become way more sophisticated.  And I think perhaps their stocks have grown a lot.

      So, Robin, in this different climate, I mean, does one need to rethink the management of this reserve system?  Was President Bush, in the State of the Union, when he said he wanted to greatly expand the reserve, was he going in the right direction or not?

      MR. WEST:  I think SPR does have a role to play.  I disagree with how it's been managed.  SPR was organized to deal with interruption of supply, which was -- the big threat back in the '70s was that oil would be cut off and we just couldn't get the oil.

      I think there's -- one of the things I hope you'll keep in mind today is our definition of energy security, which is reliable supply at reasonable cost in an environmentally sustainable manner.  And so you have supply and cost and the environment.  They're three different factors.  They're related, but they're different.  And in the old days, SPR was just about the question of supply.

      But frankly, it is a factor in the market.  I argued with the administration, when prices were running up around the time of the Iraq war, that they were buying -- they were taking oil, light sweet crude, from the Gulf of Mexico, oil in kind from royalties, and putting it in the SPR and having the effect of driving crude oil prices up.

      One of the problems with energy policy is people say, "Let the market do it," which means don't do anything and don't change anything.  But the fact of the matter is the government is an active participant in the market every day.  It substantially influences government policy.

      So if you're looking at policies, look at the effect the government is having on the market.  And over time, SPR has had an effect on the market.  You're absolutely correct that demand has grown worldwide, that India and China are free-riders, although the Chinese are going to get into the petroleum reserves business, and also that the oil business since the '70s -- oil in the early '80s was -- the first contract on the New York Mercantile Exchange was about 20 years ago, and oil was commoditized.

      But now what's happened is oil has been financialized, and it's really a -- commodities are a financial institution -- or oil is a financial commodity, and it is the largest commodity, and so it's traded very aggressively.  But as you manage SPR -- this is a long answer to a simple -- it's actually not a simple question -- the fact is that as you look at SPR, you have to understand its impact in the market.  And it's having an impact in the market.

      And frankly, I think there are times, if the situation is becoming insecure in Iran or someplace like that, and the Iranians are consciously withholding oil from the market, they're trying to squeeze the market, which puts more economic and hence political pressure, I think we should be prepared to use SPR, because everybody else is using tools in the market.

      MR. MALLABY:  But I guess the question is -- and I'll give you a chance in a second -- but I guess the question here is really, is there an analogy with what's gone on in global currency trading?  In the 1980s, when the yen was deemed to be way out of line, the Plaza Accord succeeded, through a governmental agreement, in essentially changing the direction of the yen.  And the Louvre Accord a couple of years later then stabilized it.

      Now, people can debate precisely what role, whether the yen was going to go down anyway after Plaza, but basically it does look as if at that time in the currency markets, government had enough clout to weigh in and change the direction of prices.

      Now, if you try to do that now with the Chinese currency issue, most people think it just wouldn't work.  I mean, there aren't enough reserves out there, even -- well, certainly not enough reserves held by the G-7; I mean, reserves being held by the Asian countries and by the oil exporters.  But the ability of the government to influence what's become a much bigger, more traded, more liquid market has declined in terms of currency management.

      Now, in the oil example, if it's true that oil is now extremely actively traded as a commodity and global consumption has gone up a lot, the size of the market has increased, does a government reserve or a government reserve system, is that a long enough lever still to actually influence the price in any useful way?

      MR. GOLDWYN:  No, it's not.  But its goal is not to influence price.  Its goal is to provide replacement supply and deter embargoes.  And I think it's been very successful in that.  It hasn't been used properly.  When the Venezuelan oil strike went on, it was 7 percent of our supply.  Refiners were clamoring for it.  We should have used it.  So, I mean, that's its first goal.

      You know, in the event of a terrorist attack, a country goes out, a political weapon, you have the ability to moderate the impact of price by replacing supply, by releasing it onto the global market.  But unlike those currency accords, we don't really control the currency, you know.  And so, no, we can't use it to impact price.  And the ability of OPEC and others to counter what we do relatively quickly by production cutbacks is significant.

      But if you look at its primary purpose -- deterring embargo, replacement of supply in the event of weather or terror or something else -- it's successful.  But the global reserves of the international energy agency no longer represent a majority of the world's consumption, because China and India aren't in it.

      So if you look at how you're going to make this tool effective for its intended purpose, you have to make it bigger.  You have to include China and India in the collective energy security system.  You probably have to cover product, because that's what you really need in the event like Rita or Katrina, where refineries go down, you want to fly airplanes.  You want to move ambulances.  You're going to need product -- maybe not in a reserve; maybe by companies holding stocks.  And you need to put something outside the Gulf.  In case something happens in the Gulf, it needs to be someplace else.

      So our strategic reserves need to be modernized for their intended purpose, and I don't think the president's policy does that.  But in terms of can we control price through reserves, no.

      MR. WEST:  I agree.  One of the things to keep in mind, in Europe the companies are required to maintain product stocks distributed around Europe.  And I think that, again, if you go back to reliable supply at reasonable cost, I mean, what's happened so far is price has gone up and basically the middle class has been able to bear this price.

      But where, frankly, all hell breaks loose politically is if there's an actual interruption of supply of petroleum products.  If you can't fill up your car -- I don't care whether it's $5 a gallon -- if you can't fill it up, people are going to be very angry.

      MR. MALLABY:  Okay, we're going to go to the audience.  And I want to put one more issue on the table, though, before we do that, which is climate change, the elephant that I've been ignoring in the room.

      Just quickly, clearly climate change is a policy objective in and of itself.  But is there also an interaction with the foreign policy questions that we've been talking about if climate change is not managed successfully, the cost of that change will be distributed unequally around the world?  Bangladesh will suffer more than the Netherlands -- no, bad example.  Bangladesh will suffer more than Italy.  I mean, does that add another dimension to this foreign policy concern?

      MR. GOLDWYN:  Absolutely.  I mean, climate change is a -- to some extent, if we do something about it, it's an opportunity.  But otherwise it's a security vulnerability.  It's a moral vulnerability, not only because if there are disasters around the world as a result of climate change, the United States will end up aiding them, paying for them, trying to address them, but countries are going to blame us; 25 percent of the world's consumption, a huge amount of emissions.  When things go wrong, they're going to be looking for somebody to blame, and they will point to us.  And if we don't do anything even to address the problem now, then our isolation, our vulnerability, will increase.

      MR. MALLABY:  Okay, so an extra cost for U.S. foreign assistance and an extra cost for U.S. moral leadership.

      Okay, I do want to go to the floor.  So please identify yourself, your organization.  Wait for the microphone.  Anybody got a question?  I see one right in the back -- behind you.

      Q     (Inaudible.)

      To what extent --

      MR. MALLABY:  I'm sorry, I didn't hear.  Who are you from?

      Q     Ian Talley, Dow Jones Newswires.

      MR. MALLABY:  Thank you.

      Q     To what extent do you see the connection of China's investment in the blue navy, blue-water navy, and its investment in foreign reserves?

      MR. GOLDWYN:  Well, they are investing.  The percentage increase in their military spending made headlines, certainly when I was over there, from a small base.  But China has multiple goals.  One is they want to protect access and routes, and they don't want to rely on the U.S. Navy for all the world's protection.

      But their ability to change that dependency over the next 20 years is pretty modest.  So they're going to do something, but not a whole lot.  But it's certainly driven by their fear of dependency on us and their vulnerability.

      Strategic reserves -- I think they are building reserves for good reasons, which is they need to be able to sustain a supply disruption also.  From our point of view it's a good thing because, as Robin said, otherwise they're free riders really on our strategic reserves.  We don't know whether they're going to use them for price or whether they're going to use them for replacement supply.  And that's why that should be the subject of a conversation between us.

      Unfortunately, right now the Chinese are talking to Saudi Arabia about how to manage their strategic reserves, not talking to the United States.  So the direction of that conversation is not very good.  But it's something we need to work on.

      MR. MALLABY:  I see another one right in the back.

      Q     Andrew Paterson, Environmental Business International.

      Iraq -- comments?  You've missed it.

      MR. MALLABY:  For or against it?  (Laughter.)

      Q     Well, the narrow question is, they're hovering above and below 2 million barrels a day.  The goal was to get them to 4 million barrels a day.  That marginal production, which Robin so aptly pointed out, can have a huge swing in the marketplace on price.  It's a non-linear phenomenon.

      What do you see occurring over the next two to three years?

      MR. WEST:  Let me -- I'd say that there's been a lot of talk about the oil law.  But there are a few pesky details that still have to be worked out in the oil law, such as controlling authority.  And some really central issues haven't been settled between who's going to decide what between Baghdad and some of the provinces.

      That, plus if there isn't physical security, it'll be very difficult for big investors to go in and get their hands on and really help operate the big fields.  Theoretically, Iraq production could go up to north of 6 million barrels a day; more if it's properly managed.  I mean, the country is largely unexplored.

      But I think that it's still, with the exception of some very small investors -- Tatneft from Russia; a Norwegian company, DNO, in Kurdistan -- they have -- but these are very marginal operations.

      In terms of getting investment of scale to substantially influence production, it's going to take a long time.  And we're not at the inflection point where things start getting better yet.

      MR. MALLABY:  Okay, let's go to the front.

      Q     Bill Arnold with Shell.

      Robin, you mentioned a country in the Middle East that's importing natural gas.  To bring up the elephant in the room, could you discuss the role that sanctions may play in this sort of thing?

      MR. WEST:  I've been involved in sanctions issues for a long time.  I think that for years, when oil prices were low, sanctions of oil-producing countries was considered a cost-free option.  And if we wanted to squeeze production in Libya and Iran, that just wasn't a problem, because there was a lot of spare capacity.

      Now there's less spare capacity.  I think --

      MR. MALLABY:  Sorry to interrupt, but did it actually succeed even in squeezing capacity, or did the Libyans simply export elsewhere?

      MR. WEST:  It chilled investment.  It really did.  I mean, you had the Italians and the Spaniards and the French were in there, but it was not on a scale and, frankly, on a level of professionalism that it might have been if it had been really wide open.  And when it did open up, the whole international industry went pouring in.

      Iran is obviously a complicated question, because you've got -- frankly, this is a policy -- I'm just an oil guy.  And I think that over time the world will certainly need Iran's resources.  But for the near term, in terms of the political priority, you know, it would appear that -- I'll leave it to Sebastian, but it would appear that the sanctions are putting pressure, political pressure, creating internal pressure on the government of Iran now, which is what they want.

      MR. MALLABY:  There's a question back there.  David Sandalow.

      Q     David Sandalow from Brookings.

      Do you think that oil prices can be explained by physical supply and demand, or is there a psychological component?  And if there is a psychological component, does that suggest that the reserves of consuming nations could be used effectively to moderate price volatility by making clear that they will be released on a coordinated basis in the event of price swings?

      MR. WEST:  Well, I think that, of course, there's a psychological aspect and there's a risk factor.  I think it's important also to keep in mind that the commodization of oil has substantially transformed the market.  And you can see a very high correlation between rising oil prices and the number of contracts coming in.  The oil markets have changed.

      I think that the idea of using our reserves in a coordinated basis to manage price on a regular basis -- I don't -- David, you may comment on this; you're involved in this with energy -- I'm not sure -- firstly, I don't think the government has the ability to do it, even if we wanted to do it.  I'm not sure we'd want to do it.

      MR. GOLDWYN:  Well, we can do it at times.  Actually, I think the short answer to your question is yes, that we can.  And if you take that -- but not all the time.  So if you go back to before the second Gulf war, during the time of the Venezuelan oil strike, where you had a tremendous amount of insecurity, how did the financial markets react?  Well, first, they listened to see, would the U.S. government intervene?  And then the vice president put out a statement which was not actually consonant with the Energy and Policy Conservation Act, but basically "Not unless there's a disaster in Saudi Arabia."

      How did the financial markets react?  They said, "Well, if there's a crisis, we had better buy supply now, because we're not going to be able to count on the U.S. government to come in with either a release from the SPR or a coordinated release."  So the price shot up.

      Was there a psychological premium there?  Yes.  How big was it?  I don't know; 10 bucks, maybe?  Twelve bucks even?  Could you have changed that with rhetorical policy, saying, "If there is a crisis, if there is a significant disruption, we will release it"?  Absolutely.  You would have dropped at least five bucks out of that price, I think, in a heartbeat.

      If you had actually had a release after the Venezuelan strike and supplied U.S. refiners quickly and in a significant way, you might have had an even bigger job and reduced security long term.  But does that mean that today the U.S. government could lower the price of oil by a release of the SPR?  Absolutely not, because there isn't a particular event or fear or potential disruption that's out there to be addressed.

      So you have to be careful about it and you don't want to be constantly intervening for price.  But when there is an event which correlates to the purpose for which we have an SPR, U.S. policy makes a big difference.  And this is where I think we've been very inconsistent and confused the markets about what the U.S. is going to do.  And that's an area where we can do better.

      MR. MALLABY:  The question suggests that, you know, the signaling around how you talk about the SPR, how you might use it, is sort of as delicate as a signaling around monetary policy.  And if you look at the attention and skill and care devoted to central bank signaling vis-a-vis the vice president making a statement, you know, there's rather a big gap in the sophistication, it would seem to me.

      MR. WEST:  We are the ones who coined the phrase that the Saudi oil minister is the central banker of oil providing stability and liquidity to the market.  I mean, the person who parses his phrases carefully, as the chairman of the Fed, is the Saudi oil minister, not the U.S. secretary of Energy.

      MR. MALLABY:  Another question.  How about here on this side?

      Q     I'm Marty Devine, retired ExxonMobil, and I serve on the board of Oil Field Services Company, a Norwegian shipping company.

      You commented on the national oil companies and the growing influence and the 80 percent.  Do you see a time, and given Halliburton's announcement to move to Dubai yesterday, that the major oil -- the international oil companies may be iced out over a 10- or 15-year period and they just work directly with oil field services companies, these national oil companies?

      You talked about the inefficiency of them and bringing Oil Field Services Company or buying them.  Do you see that as kind of an evolution, or do you see the major oil companies, coming from one of them, surviving in this future world?

      MR. MALLABY:  Not something that Exxon's stock price has signaled, so far.

      MR. GOLDWYN:  Well, I mean, Robin knows the ins and outs of these companies better than I.  But I would say, just from a broad perspective, I think it'll be a cycle.  I mean, if you look back over the last 20 or 30 years, the only countries that have increased their capacity without the significant help of international oil companies is Saudi Aramco.

      And so I think you will see this increasing nationalization, and in places like Venezuela you're going to see production fall and you're going to see a significant challenge to how they're going to get production.  And you will see variation.

      Venezuela and the heavy oil is going to look to the international oil companies -- huge capital, lots of technology.  They're going to need it.  The deals won't be so good, but I think there'll be points of access.  But as production falls and as we make progress on technology and revenue streams are tightened, then I think you may see these governments go back to the international oil companies.

      Will you get to the point where they are squeezed out completely?  In some countries, yes; globally, no.  But the field has shrunk, and it's shrinking still.  And when that cycle will bottom out and when it may come back up again could be another 15 years.

      MR. MALLABY:  (Inaudible.)

      Q     Marc Sumerlin, the Lindsey Group.

      One of the benefits of today's markets, despite all its problems, is that there is basically one world spot price and it's a very liquid, deep market.  Is it possible to imagine a world in the future where so much production is locked up by these long-term contracts, where China's purchasing -- locking up oil in these contracts forces the U.S. and other countries, where you might actually have the spot market be shrinking in size?

      MR. GOLDWYN:  It's hard to see where there's an economic incentive for the oil sellers to do that.  I mean, I think the volume of oil dominated by long-term contracts, by China in particular, is really not that great.  But those are contracts which don't guarantee price; they just guarantee supply, because the governments still want the most money.  And I don't think they've figured out a way to beat the spot market.

      MR. WEST:  I agree.  The other thing is that actually they are long-term supply contracts, but they -- the contract is pegged to some global market price.

      The second thing is that if you look at the international companies, if Exxon is producing in Nigeria, it will sell at a world market price to the U.S. -- to the refining subsidiary.  It's not a closed system like the old days.  And so this is -- it's actually a pretty transparent system.

      And I come back to this notion of commodization.  I mean, there's an enormous amount of oil and an enormous amount of money tied to that oil that moves in these contracts.  So I think that the markets are becoming more transparent and more global, more transparent and more fungible than ever.

      MR. MALLABY:  On the left.

      Q     Richard Land, the Southern Baptist Convention Ethics Commission.

      To what extent do you think nuclear power is an option that could help to mitigate the need for energy?  And address the climate change issue, and what are the obstacles?

      MR. MALLABY:  I just want to mention that, you know, the next panel that we have is entirely about alternatives to oil and gas.  So we'll focus on that then.  But by all means, take a crack at it.

      MR. WEST:  Let me say one thing.  One of the things I think is terribly important to keep in mind, and that -- at times I just, you know, shake my head -- is the scale of the oil industry.  You should realize that this is an industry where -- nobody really knows the numbers, but somewhere in the order between $100 (billion) and $250 billion in 2007 dollars has been spent for 100 years or more.

      This is a colossal industry.  And the notion that this industry is going to be replaced easily, taking care of a growing world economy, is highly unrealistic.  The president went off bright-eyed and bushy-tailed to Brazil, who's all excited about ethanol and how exciting ethanol is -- "Ethanol is the fuel of the future" and all this kind of thing.

      Just look at the model of Brazil.  Well, most people don't realize it, but the Brazilian gas market is 3 percent the size of the U.S. gasoline market, and the notion that there are sort of easy quick fixes to replace global liquid supply, which is the oil -- now, nuclear is a different issue.  Nuclear is used primarily for power generation, not as a transportation fuel.  But I think also then when you get into the issue of global warming and CO2, a lot of that is tied to coal.

      Now, the transportation sector clearly has a role to play in that.  But again, it's important to recognize where the CO2 has come from.  One statistic I thought was interesting that I saw was that the world cement industry generates as much CO2 as all the automobiles in Europe.  So it's important to kind of focus on this and who's really causing the problem.

      The other issue that comes up is the issue called insequestration.  They'll probably be talking about it later.  But again, the scale of the amount of carbon that would have to be sequestered -- the technology doesn't exist.  By the same token, if any industry is going to be able to handle it, it's going to be the oil industry, because they've been sequestering and moving CO2 for 100 years.

      And so I think nuclear global warming and global liquid supply, they are three legs of the same stool.  And I think that this is an area that you're not going to be able to solve one without the other.  But again, the scale of this problem is what is really daunting, and it can only be handled on a global scale.

      MR. MALLABY:  Do you want to get in on this panel preemption game?

      MR. WEST:  I'm just making the oil pitch.  I'm not trying to --

      MR. GOLDWYN:  Just 30 seconds.  I agree, at least in terms of oil for the U.S., it's mostly about transportation.  You only get the nuclear as an answer if you have electric cars, and we're a ways away from that.  And you have to solve the nuclear waste problem if you want to site a whole lot more nuclear plants in the United States.  And that's a problem that we haven't quite figured out either by solving the Yucca Mountain issue or by figuring out other answers; so I think big challenges.  And it doesn't really get at the oil problem so much as the climate problem, but important to do.

      MR. MALLABY:  I've got my eyes tightly on the clock.  I believe we have another 15 minutes.  Is that right?  Fifteen minutes.  Okay, we're fine.

      There's a question in the front here; the lady in front with the blue jacket.

      Q    I'm Mitzi Wertheim.  I'm running an energy seminar called "Energy:  A Conversation About Our National Addiction," which is funded by the Department of Defense.

      I want to ask all three of you -- this is a systems problem.  It's not a climate problem separated from the other.  It's not an oil problem.  It's not a gas problem.  We don't think in systems in this country.  How do we start moving in that direction so people understand the consequences, second-, third-, fourth-order consequences of any of the choices we make?

      MR. MALLABY:  What do you mean by systems?  Can you explain that a little bit more?

      Q     It's all connected.  I mean, you can't just deal with oil without thinking about what's the carbon you get from that.  You can't think about coal without thinking about the climate consequences.  And we tend -- I mean, the Navy and the Air Force started working on carbon to liquids or coal to liquids without thinking about the carbon sequestration issues.

      They're now starting to recognize there are real problems with that.  But for a while they were running off hell-bent for election, even talking about setting up their own systems on military bases.  It's a one-off solution kind of mentality that we have in this country.

      MR. WEST:  Let me offer my thoughts.  David, you may have yours also.

      My sense is that, frankly, there are -- this actually isn't rocket science; that, for example, if you want to cut -- I believe we can't supply our way out of the problem on oil, global liquid supply.  I think we've got to deal with the question of demand.

      If you want to cut -- and there's always discussion about ethanol and everything, and ethanol's fine.  And the environmental community likes to say, "Do you realize we're producing 8.5 billion gallons of ethanol a year?"  They get all excited.

      Well, the way the oil business looks at things, 8.5 billion gallons, to understand how we look at it, first you have to divide it by 42, which gives you barrels.  Then you have to divide it by 365, which gives you the daily production, and that number goes down dramatically.

      And by the same token, if you want to actually influence things, for example, if you ask people to drive 60 miles an hour and have good air pressure in their tires, you could cut 2 million gallons of oil -- 2 million barrels of oil a day out of U.S. demand like that.  It's just a question of political will.  And --

      MR. MALLABY:  I was waiting for Robin to bring in the air pressure and the tire story.  (Laughter.)  We like that.

      MR. WEST:  And frankly, Americans want to drive big, comfortable cars at high speeds to their increasingly distant homes.  Okay.  But there's a cost.  And, you know, we're going to hit the wall.  Either -- and this is a function, I think, of political leadership.  And I think that until some serious communities that aren't directly -- there's some very powerful constituencies in the United States that so far have regarded energy as a second- or third-tier issue.  It's not their problem.

      And the fact of the matter is -- some people in this room have heard me say this -- is, you know, when people on fixed income cannot afford to heat their homes or gasoline is $7 a gallon and they're trapped in their snow-bound houses in New England, I mean, all hell is going to break loose from AARP.

      What I would argue, that there are these constituencies that should start paying attention now and give the politicians permission to act.  Again, on a lot of these things, there are solutions out there.  They're complicated.  I mean, Yucca Mountain -- I mean, I guess -- I mean, I don't really understand the issue, but 10,000 years strikes me as adequate security, but maybe I'm wrong.  (Laughter.)

      But, I mean, I just think it's a question of political will of managing these problems and making some difficult decisions and getting on with it.  But I don't think anything is going to happen until there's a crisis, frankly.

      MR. MALLABY:  Do you want to take a crack at this?  It seems like the question is, are we in danger of being Balkanized into a sort of range of initiatives that treat energy security as a sort of mechanical problem where, you know, solution A will get you there rather than looking at the broad range of market-based options that will combine to make progress?

      MR. GOLDWYN:  Yes.  And we've been that way for a long time.  And you're right; we look at -- we have a foreign policy box and we have our energy box and then we have our climate box, and we don't look at how they mesh together.

      But I agree with Robin.  The solutions that are good for national security, good for climate, good for energy security, are well-known, well-researched.  This is not a case where more research needs to be done.  It's a question of leadership and political will.  I think Robin's exactly right.

      But at this point, I think, you know, the days of waiting for constituency groups to assemble and lift up and move a government are not going to happen, absent a major crisis.  And we had 9/11.  If the next day the president of the United States had stood up and said, "You know, I need 50 cents a gallon this year and 50 cents next year, and 20 years from now we're going to have a different system," people would have said, "Yes, sir, absolutely."  You would have passed that.  But that day is gone.

      And so, I mean, what we need more than anything else is a sustained high price for gasoline.  And if you had a sustained high price for gasoline, we'd have the cars that Europe has, which are big, luxurious CD players and leather seats, but they get 10 miles a gallon more than we do because, you know, they run off diesel.

      And so, you know, the technology is there.  But we have to solve this problem of getting great efficiency measures, which then reduce demand, which then reduce price, which then increase consumption over again.  It's a systems problem.

      We've got to look more than five years ahead.  It's going to have to come at the presidential level at this point.  I think industry is changing -- GE, the coalition, you know -- because it's hitting the bottom line, and they're realizing there's a better way to do business.  But there's too many disaggregated parts.

      So one thing you need to do is try and have a strategic approach in the government at looking at an energy policy.  But there's nobody in the White House who's really responsible for doing that in a way that cuts across Interior and EPA and Energy.  And we're talking about a system of government that has very weak regulatory power over the energy system anyway and the foreign policy people.

      So you need somebody at the White House who's responsible for this and who can command and integrate the different parts of the government.  And then you need somebody to say, you know, "These are the big ticket issues that are going to move the dial."  You know, and it's been gas tax or floor price, CAFE, and investment in the right kinds of technology, not what every senator or congressman wants to do.  And that means change and breaking a lot of people's rice bowls.  But we're going to do it anyway.

      And so far nobody's done it.  President Bush hasn't done it.  President Clinton didn't do it.  You know, everybody does bits and pieces, but not in a big way.  And it would be nice if somebody did it, but I think, if you even look at the campaign right now, we've got lots of safe solutions but nobody's really telling the straight truth.

      MR. WEST:  Two things.  You probably want to go to another question, but this is a hot button for me.

      MR. MALLABY:  That's okay.

      MR. WEST:  I think one of the things is that what's really important is that what the politicians are all looking for are pain-free solutions; you know, that we'll have, you know, Iowa becomes the new Saudi Arabia, the farmers become the new sheikhs -- (laughter) -- and it's great.

      Well, it ain't going to work.  There are no pain-free solutions.  You're going to have to deal with demand.  And frankly, most of the things that David pointed out really deal with demand.

      The second point is research.  All the politicians -- Democratic Party, the president, everyone -- says, "This is so exciting; we're going to pile money into research."  Well, there are two facts.  One is, we have spent $50 billion in the last 20-odd years at the Energy Department on research.  We have precisely nothing to show for it.  The government does not know how to run a decent research program.

      The second thing is, people say, "Well, we need an energy Manhattan Project."  Well, you couldn't do an energy Manhattan Project right now.  The intellectual property laws wouldn't permit it.  And so this whole question -- I mean, everybody talks about research.  Nobody talks about how you manage research.  And this is a fundamental question that some serious people -- not, with all due respect, a bunch of congressmen and people running for office -- are going to have to focus on.

      And then, frankly, laws are going to have to be written.  It's just got to be handled very, very seriously, because right now it's kind of -- it's just throwing and wasting.  They're wasting money.  But what's even worse is they're wasting time.  And I think time is actually the most precious thing.

      MR. MALLABY:  We're going to wallow in the pain of solutions later in this symposium.

      Does anyone have a question about foreign policy?  Yeah, right here; Joe Bell.

      Q     Joe Bell from Hogan and Hartson.

      This discussion on the foreign policy side has focused almost exclusively on oil, except for one reference to imports of gas into Iran.  Does gas have some particular issues especially associated with it in terms of its foreign policy issues or discussion?

      MR. MALLABY:  Good question.  What do you think?

      MR. GOLDWYN:  I don't think so.  I don't think there's anything particularly unique about gas in terms of its foreign policy consequences.  I mean, you need pipelines or you've got to freeze it and use LNG to transport it.  But in terms of having a large resource in the ground which generates a lot of money, which needs to be managed and regulated in the country, which, if it's very successful, means you kind of need to tax people in order to get it, it's not a whole lot different than oil.

      MR. MALLABY:  So that, I assume, is locked into particular suppliers because of pipelines and because LNG is not widely -- I mean, not as developed as the spot market for oil.  West Europeans are more dependent on Russian gas than, say, the United States is on Venezuelan oil.

      MR. GOLDWYN:  Well, I think as long as you don't have really a global market for gas -- yeah, although we're moving in that direction -- yeah, I think that's true.  You have particularly dependencies of Europe on Russia.  And so it requires Europe to have an affirmative policy to diversify supply by building LNG plants, by bringing gas in from North Africa, so we can have diversity of supply.  But it's the same strategy as oil, which is you want to diversify your suppliers.  You want the greatest number of people producing the greatest amount of supply.  You want to get open access overseas and you want to create a global market.

      You know, I think -- but even if you look in Latin America, where Venezuelans want to build a pipeline to the rest of the hemisphere -- now, if you're in the rest of the hemisphere and you're a gas producer, you're thinking that's not a good idea.  And maybe it's not the best sort of most reliable supplier.  But even those governments are looking at their traditional energy security answer, which is they're looking to multiple pipelines or they're looking to LNG as a way to respond.  So absolutely, there are vulnerabilities.  But I don't think there's a different kind of vulnerability too different from oil.

      MR. WEST:  Energy security in Europe is about natural gas.  Energy security in North America is about oil.  That being said, I think that, yes, the Western Europeans, because of pipelines, are tied to the Russians and will be for the foreseeable future.

      By the same token, the Russians are tied to Western Europe.  There was this preposterous exchange about a year ago between Barroso, the secretary general, whatever he's called, of the EU, president of the EU, and President Putin.  And Putin said, "Well, I might take my gas and ship it to China."  And Barroso got all excited.  And this was an exchange on the front of the Financial Times and everything like this.  But it was an absolutely nonsensical exchange.

      The first thing that Mr. Barroso had not bothered to -- Mr. Putin had not bothered to check, looking at the prices, the Chinese were not paying for imported LNG, and they weren't going to pay the price.  And if you look at the map, I mean, from basically Siberia over to -- from western Siberia to China is a long way.  So that gas is always going to go to Europe.  But again, the politicians -- I mean, one of the problem is -- I keep coming back to where I began -- this is business.  This is about investment.

      Putin likes to treat pipelines like aircraft carriers, but it's nonsense.  And they go around and they talk about Putin in this energy diplomacy and all the leverage and everything he has.  But in point of fact, if you look and look closely at what he's done, very little has actually been accomplished.  And he has not that much leverage.  And, yes, he's permitted the Chinese to invest and the Malaysians have invested; the Indians have tried to invest.  But, you know, it really isn't a very big deal and it hasn't moved the needle very much one way or the other.

      MR. MALLABY:  Well, the main defense against the Russian natural gas card is mutually assured dependence.

      MR. WEST:  Yes.

      MR. MALLABY:  Question over there.

      Q     Matthew Goodman with Stonebridge International.

      In Asia policy circles, and particularly people interested in regional architecture in Asia, there is talk of regional institutions to talk about -- (inaudible).  Do you think that's a useful target of U.S. foreign policy?  And, if so, how would you structure such an institution in terms of membership, and in particular agenda?  What should they talk about?

      MR. GOLDWYN:  Well, I don't know that Asia needs its own institution, but you definitely need a conversation.  I mean, there's huge potential for a Northeast Asia energy grid.  You can link, you know, frankly, Russian supply and South Korean power generation and North Korea.  You can work Japan into that context.

      But I think there are existing institutions to do it.  You know, there's APEC, where you have sort of the suppliers and the consumers in there.  You have the IEA, where you have, you know, a number of these countries as members.  I mean, the problem with new institutions, as opposed to conversations, you spend a whole lot of time building the institution, not a whole lot of time having the conversation.  But I think that should be a target of U.S. foreign policy to foster that kind of a conversation, but in a contact group just involving the countries that have something to contribute.

      And I think you can bring to bear things like Ex-Im Bank and OPEC and others to help ensure those pipelines get built, although I think the Japanese pretty much make the pipe, and so they'll take care of that.  But there are tremendous synergies, and they need political facilitation.  But I think it's a job for diplomacy rather than --

      MR. MALLABY:  You mentioned IEA as an alternative to Asian Regional Forum.  Isn't the IEA membership the same as the OECD -- 22 countries -- and therefore a lot of Southeast Asia is now a part of that?  You'd have to reform that.

      MR. GOLDWYN:  And we need to.  But they also have a non-member countries facility.  As a convening power, the IEA has, you know -- it has the U.S. and Japan in there already.  And I think if you're looking for an institution that could host this conversation, they've already done energy analyses of almost all the other countries in the region.  They have a body of expertise, both in markets and in technology.

      So as a convener, I think, you know, you could use an institution rather than building a Northeast Asia, you know, energy agency.  But it's sort of a separate question.  The IEA does need to expand, particularly to bring China and India --

      MR. WEST:  One thing I think is important is that if we have a Northeast Asia energy agency that has dialogues and things like this, nothing's going to happen.  At the end, it's got to happen at a commercial level.  But I would argue that a very interesting and successful model is the construction of the Baku-Ceyhan pipeline, which really was an alliance between BP and the U.S. government to get something done.

      But unless something is commercially underpinned, unless there's a real business and a real business logic and investment, you know, the investment -- the actual infrastructure won't take place.  Ministers can meet, but there have been a lot of energy dialogues in the last 20 years that were just energy dialogues.

      MR. MALLABY:  Okay, I'm going to end this meeting punctually.  And the good news is that if you didn't get your question in, you might be able to smuggle it in to the next session, since this has got a sequel to come.

      So thanks for coming.  Thanks to the panelists.  And we'll reconvene soon.  (Applause.)







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