Bernard L. Schwartz Lecture on Business and Foreign Policy
New York Ciy, New York
RICHARD N. HAASS: Good afternoon. Good afternoon. Welcome to the Council on Foreign Relations. My name's Richard Haass and I'm lucky enough to be the president of this organization.
And today we're lucky enough to have David O'Reilly, the chairman and CEO of Chevron, speak to us.
Let me say a few things then to get us situated, shall we say. This is the Bernard L. Schwartz Lecture on Business and Foreign Policy. Coincidentally, we have Bernard L. Schwartz.
This is one of our great series here, and Dave O'Reilly is -- fits perfectly in it. Over the years, we've had such people as John Chambers, Eric Schmidt, Craig Mundie, Mike Armstrong, John Thornton. This is not the slouch series; these are real voices and leaders of America's corporate community.
And again, thanks to Bernard for making it possible.
On the housekeeping side, if people would turn off things that are electronic, it would be a great help. And if you could please turn them off. You don't want your BlackBerry on. I can assure you the market will go down during the next hour. Think of this as a respite from that news. It'll be good for your blood pressure. So please turn off such things.
The scenario for today is I will turn things over to David in a minute. He will talk for about 15 or so minutes. He and I then will have a little chit-chat, and then we will open up to you, our members, to have at him.
I should also say that we're not alone in this room. We've got a virtual audience as well, that we have participants from around the nation and the world are viewing this meeting via a live Webcast on CFR.org.
And if you haven't been on CFR.org recently, you should. It recently just won an Emmy, beating out all your major news organizations, and it is, quite simply, the best Web site in the world dealing with American foreign policy and international relations. As a matter of fact, you should bookmark it and you should make it your home page, while we're at it -- at the risk of bragging about the home team.
Let me say a couple of things about Dave O'Reilly. Shockingly enough, and it's good you're sitting down, Mr. O'Reilly is Irish. And as you -- but he's real Irish; born there, educated there, though the accent is long gone.
He's been with Chevron for 40 years, quite extraordinary in this day of regular turbulence. And this is somebody who has worked with one company for that long and now he is at the pinnacle.
The subject today is, obviously, issues of energy. The timing could not be better. What are quite possibly the first big public policy challenges, I think, not for President Obama, but President-elect Obama, will be whether and how to engage in the question of public support for our automobile industry. And at the center of that is, obviously, energy questions.
I would simply say that here we are, it's 2008; it's 35 years since the first energy crises that accompanied the Middle East war of October 1973, and we do not have 35 years of public policy accomplishment to show for it.
And the fact that we are using and importing as much energy as we are, particularly of the oil and gas variety, is not a celebration of public policy excellence. And the consequences for our economy, for the environment, and for our strategic position in the world -- consequences in all three are profound.
But another way of saying that is also there's an opportunity here, because progress in this area would be a threefer, having positive consequences for our economy, for the environment, and for our strategic position. So this is, I would hope, and I would predict, going to be front and center for the new president and for the new Congress.
And we could not have a better person introducing this and giving us some of his ideas about it than one of our corporate statesmen who has wrestled with these issues now for four decades.
So Mr. O'Reilly, over to you, sir, and thank you for coming here today.
DAVID J. O'REILLY: Thank you, Richard, and good afternoon. It's great to be here with all of you.
And as a person that's been involved in an industry that is so often misunderstood and gets negative press for it, I welcome the opportunity to enter into this discussion, to share some of my thoughts with you about the future of energy, which is really vital -- vital to our prosperity.
And as a new member of the Council, I'm delighted to be here also, because this Council on Foreign Relations has a reputation for delving into the depth of important policy issues that affect not only the country, but the world. And I think that in this extraordinary year, with all that's going on, never could a role like this be more important.
We've elected a new president. We've felt shocking developments in the financial system. We experienced a dramatic slowdown, and are still experiencing it in our own economy, as we've seen a dramatic rise and fall in commodity prices -- all in the very, very recent past.
And the early agenda of the new administration is clearly going to be focused on how to get the economy back on track, but energy can't be too far behind because -- how closely intertwined energy and our economy are.
And both the financial markets, which are very much in the news today, and the energy markets are absolutely colossal in their scale and in their impact. They touch on so many of the things that sometimes we take for granted, and they're so important for our competitiveness.
The financial markets are clearly interconnected; we know that from our experience. Also, the energy markets are interconnected. And the energy sector, whether it's oil or gas or coal or nuclear or renewables, and how efficiently we use all that energy, really do help drive human progress.
However, in recent years the global energy market has been impacted in a way that's deeply affecting our economy, and those effects are intensifying. And polls show that the public consistently ranks things like gasoline prices as the number two issue of concern when polled about what's going on in the country and what's good for the health of the country.
High energy prices help drive inflation. They squeeze family budgets and cause ripples throughout the economy. And when we don't have affordable energy, it's a negative, and when we do have affordable energy it clearly helps our quality of life and helps grow our economy and raise the standard of living. So the public concern in these polls presents an opportunity.
W. Edwards Deming, one of America's most respected business thinkers -- the late Edwards Deming -- once said it's not enough to do your best. You must know what to do, and then do your best.
The good news is we do know what to do. For many years, informed observers have been telling us about the challenges we face in energy, and have offered solutions. The bad news, and Richard referred to this, is policy has not kept pace. And it's not just for a few years; for many decades.
And right now I think Americans do want action. They're seeking reliable, affordable energy, and they're seeking energy security. And when you think about it, energy security is essential for economic security.
Reliable, affordable energy helped drive our economic performance in the '80s and in the '90s. Energy supports every aspect of our economy -- the budgets of our households and our business sector, and it directly and indirectly provides millions and millions of American jobs and enhances the standard of living of those people, as well as our economy at large.
But to have a meaningful impact, because the system is so large, we have to address our energy challenges in a coordinated way so that the outcome is greater energy security and greater economic security. And I think this is the time to do that.
If you read his book, Hot, Flat and Crowded, Tom Friedman framed the need for change. I'm going to quote here: "It will be the biggest single peacetime project humankind will have ever undertaken. Where is the political leader anywhere in the world who will talk straight about the size of this challenge?" unquote.
So our new administration has an opportunity to make realistic and sustaining changes to our approach to energy and, in doing that -- to do that, create a comprehensive energy policy.
Now, the American people want answers, as I mentioned from those polls earlier. And the questions I am asked often start with the word "why." Why are energy prices so volatile? Why don't you think oil prices will return to $20 a barrel anytime soon? Why, why, why.
For 20 years oil traded in a relatively narrow (band ?). It fluctuated between 15 (dollars) and $20 a barrel. Sometimes it dipped; sometimes it rose. But in general, its impacts were modest and there were no detrimental effects on the economy.
But in this century, that has changed. Oil prices have increased significantly, and instead of being around $20 a barrel, we saw them go up to about $100 a barrel -- although they've retreated down to around 60 (dollars) in recent weeks. That's (clearly ?) a relatively high number, compared to the history of the last 15 or 20 years.
So the answer to the question why, I think, is tied up in what I call a new energy equation. And its implications are much more acute than I even expected at the time when we coined that phrase a number of years ago.
And when you think about it, there are really at least four reasons why energy prices have gotten higher and why they're likely to stay relatively high. Not $100, but remember, 60 (dollars) is still relatively high.
First, the emergence of a growing middle class around the world, which is driving energy demand. There are more than 6 billion people on Earth today, and that's growing. And all of us in this room are in the golden billion, enjoying a standard of living that all the others, maybe until recently -- (chuckles) -- a standard of living that many could only dream of.
At the other end of the scale are 2 billion people with essentially nothing -- less than $2 a day, no health care, no clean water. And in the middle are the billions that aspire to be like us.
And the good news is that year by year, many of those people are moving into a higher standard of living, into that growing middle class, and that's good news. However, the consequences of that trend are increasing demands for goods, services, and commodities of all kinds.
The second reason for higher prices is geopolitical dynamics continue to put upward pressure on prices. And I don't just mean the issue of conflicts in the Middle East, although that certainly plays a role. The situation is far more complicated.
We're seeing a resurgence in the last decade or so of resource nationalism, and that's the impulse by governments to tightly control their resources and limit foreign or open investment.
Third, new supplies of oil resources are challenging to find and extract. A lot of the easy-to-reach, inexpensive supplies in accessible places have been used, and what's left is harder to find and more difficult to drill, and more expensive to produce.
And fourth, we have deliberately, through a policy or an absence of policy, constrained our own supply by placing limitations on domestic exploration of drilling. In the past 20 years, America's oil production has declined by 4 million barrels a day.
This is the equivalent of taking a major oil-producing country off the map of the world. And during that same period our demand for oil has grown by 4 million barrels a day. Economics 101 -- less supply in a time of rising demand means higher prices.
Last year global production barely exceeded demand. Spare capacity stood at just over 2 million barrels a day; that's out of about 86 million barrels a day demand. And world oil production last year barely increased.
In fact, seven of the top 15 oil-producing countries experienced (flat ?) declining production last year, and among them were Mexico, Venezuela, Norway, and Nigeria. And although in recent months the supply-demand balance has improved somewhat, as the NPC study -- that's the National Petroleum Council study -- said last year, and I quote, "There are accumulating risks to the supply of reliable, affordable energy in the future."
But there are solutions. And the necessary actions that we must take become apparent when people understand the realities of energy. So let me provide you with a little information on our energy system.
We are the largest beneficiaries, as Americans -- largest consumers of oil, and -- (inaudible) -- oil and gas and all forms of energy, and we've benefited greatly from it. We generate about a quarter of the world's domestic product and consume about a quarter of the world's energy.
We're becoming more efficient in how we use energy. Today we use half of the energy per unit of GDP compared to 40 years ago. So where does it come from?
About 40 percent is oil; about 23 percent each coal and natural gas; 8 percent comes from nuclear power, and renewables make up 7 percent -- about half of that is hydropower. Less than one half of 1 percent comes from wind and much less than that from solar. We import about two-thirds of our oil and about 15 percent of our natural gas. Basically, the rest of our energy we are self-sufficient in.
And let me dispel one myth. The U.S. is not an energy weakling. We are an energy powerhouse. We're the number one producer of nuclear power and ethanol; the number two producer in the world of coal, natural gas, and wind; the number three producer of oil.
So when you look at the energy system from a global perspective, we're very strong. And when you look from a global perspective on the consumption side, like America, the rest of the globe is very similar; we're powered by oil and natural gas and coal. And by 2030, experts predict that the world will need 40 percent more energy than it does today, just based on growth in population and increasing standards of living.
Now, I want to make one important point, and that point is scale -- the scale of the global energy system is enormous and destined to get larger. Today the world consumes -- from all energy sources, if you convert them into oil equivalent -- 10 million barrels an hour. Ten million barrels an hour of energy. That's 120,000 gallons per second. Think about that, folks. That's the scale of the energy system.
So these are the key facts, I think, about energy, and they're important to understand. And facts are the antidote to the myths and half-truths and impossible contradictions which too often pass for energy thinking.
For instance, we want to decrease our reliance on foreign oil, but we want to restrict domestic production and we call on OPEC to increase their production. Heard that one?
We want less carbon, though we're fearful of nuclear power, one of the few scalable sources of energy that generates no carbon. We want energy companies like Chevron to invest their profits to provide new supplies, but we want to take away those profits through a windfall profits tax.
Time and time again someone tells us that he or she has found the solution to all of our problems. Some are phony; some are real, but not realistic.
For example, renewable energy. It's very real. We need it. It will be an essential part of the future which I envision, but it's not realistic to suppose that it can replace conventional energy in a short time frame, as some suggest.
Our energy systems required massive investment over decades and decades, and to supply the needs of 300 million Americans requires time and money, and lots of it.
Now, I believe we will develop and implement new technologies that will move our economy towards a greater reliance on renewables and alternatives. But the development and application of technology takes time.
Look at the computer industry, for example. Fifty years from the development of the silicon chip was required before computers were a large -- (inaudible) -- part of our daily lives.
Will energy alternatives take that long? I hope not, but we need to be realistic. Even with the rapid growth of renewables, experts estimate that over 80 percent of global energy demand will still come from oil, natural gas, and coal 25 years from now. These conventional energy sources will remain indispensable for meeting demand for decades to come, even as we pursue greater contributions from other sources.
Now, the flip side to -- (inaudible) -- alternatives is the notion that we can drill our way out of the problem. We can't. There just aren't enough domestic reserves, and what's there will take time to develop. But more access will help.
So we need to get beyond simplistic solutions and focus on our primary objective, which is energy security. The reality is there are no silver bullets, no quick, easy answers. Massive scale, long lead times, -- (inaudible) -- capacity, growing demand -- these are the realities we face.
And there are solutions, but they're not either/or solutions that are so often portrayed in our political system today. It's not a choice between more drilling or more efficiency, coal or wind, nuclear or solar. We need greater efficiency and renewables. We need nuclear and clean coal. We need wind and oil and natural gas. We need it all. Our path to energy security cannot be found in one option. We have to have multiple options.
Last year, the National Petroleum Council published a study entitled "Facing the Hard Truth about Energy." It had five recommendations. I'm going to briefly run through them before I mop up.
First, moderate demand by increasing energy efficiency in all sectors of the economy. Second, expand and diversify all U.S. domestic energy supplies. Third, strengthen global and U.S. energy security through a renewed commitment to energy trade and investment. Fourth, enhance science and engineering capabilities. And fifth, address greenhouse gases through a transparent, predictable carbon policy.
We are facing a moment of decision when it comes to our energy future, and the time to act is now. I am confident we can take the right steps to achieve that energy security, and I'm not alone in my views. The American public is engaged in energy security. We're embracing energy efficiency. We're endorsing the need to develop more of our own supplies, renewables and conventional energy. And we're striving to use energy in a more environmentally responsible way.
The recent campaign rhetoric produced one catch phrase that I like. It says, "We need all of the above." The all-of-the-above approach should be the new energy mandate for our incoming administration, and we need this new energy policy to be addressed as a strategic economic priority as well as a national security priority.
President-elect Obama must deliver a national blueprint to achieve distinct goals for each of those five recommendations from the National Petroleum Council. And above all, to properly plan for the future, these goals need to be clear, realistic and specific.
If government acts to address energy security, the benefits to our economic prosperity will be significant. Responsible and environmentally sound development of our vast energy resources over time will add high-paying jobs to all sectors of our economy, generate billions of dollars of tax revenue for our local, state and federal governments, reduce our dependence on imports and improve our balance of trade.
These are benefits we all desire. At this time of economic uncertainty, our energy industry can provide renewed economic growth and greater energy security. Our energy industry can provide a stable foundation for a prosperous future.
Thank you very much. (Applause.)
HAASS: Thank you, sir. When you talked about a catch phrase during the campaign, you didn't mention the one I thought you were going to mention. I didn't hear any "Drill, baby, drill."
I want to quote one phrase, though, from your speech. And you talk about, quote, "Public policy has not kept pace," and the gap between the energy challenge and energy policy. Why is that? Before we fix it, we have to diagnose it.
O'REILLY: Well, my view is that our political system doesn't deal very easily with anything that requires a long-term commitment. And I would put energy is requiring long-term commitment to a strategy that you're going to stick with for decades.
You know, it's the same issue with Medicare, same issue with Social Security. These are things that our system just doesn't deal with, and it doesn't lend itself to a two-year or four-year election cycle. So we've got to get beyond this if we're ever going to solve some of these relatively intractable problems that we face.
HAASS: You obviously go around the country talking about these issues. You hear about it a lot. Is it your sense that, given the electoral outcome, given the mood of the American people, that the prospects for closing this gap, if you will, are better now than they've been?
O'REILLY: I think the public -- you know, the shock of $4 gasoline, which is fading at the moment but still is there, I think, and the current economic condition, I think, give us a window of opportunity to set in place some long-term steps around energy policy. And I think they involve both sides of the equation.
One-half of the equation is a commitment, a long-term commitment, to energy conservation as a value, which is something that I think the right in our political spectrum tends to discount, though it's very important. On the other hand, we need to worry about energy supply on all types of energy, which the left tends to discount. And we keep getting into these either/or answers, and the answer isn't either/or. It's got to be "and." And I think the American public is ready for a much more united, comprehensive, "Let's solve this problem" approach than we sometimes give them credit for.
HAASS: Are you concerned that the fact that oil has lost 50 percent of its value is going to make it that much harder?
O'REILLY: Yeah, a little bit. But, look, $60 oil, or whatever it is today, is still three times what it was five or six years ago. And the reason it's where it is today is that there's concern about the near-term global demand. And we will work our way through this global demand slump. And once the economy starts picking up and growing again, we'll be back in the same spot as we were for the last two or two.
So I think we're getting a breather here, and we ought to use the breather as an opportunity to fix some things, as opposed to letting this kind of run off the bottom of our list of things to do.
HAASS: I agree with you on that. One of the phrases I did not hear in your speech -- I must say, I was pleased not to hear, but I did not hear -- is energy independence. And you talked quite a few times about energy security. So am I right to assume that your definition of energy security does not require energy independence?
O'REILLY: No, it does not. And I think, you know, we already produce, as I said in my remarks, the vast majority of energy we consume. A lot of people seem to think we don't, but we really do. We import oil, yes. We import some natural gas. But, you know, we import a lot of our natural gas, for example, today from Canada.
Well, Canada is a trading partner, and I don't think we can kind of discount the fact that we have trading partners and that we have free flow of trade and goods between countries. So that's one of the other recommendations is to encourage a more aggressive and assertive approach to establishing better investment climates and trade climates around the globe. So I think that helps.
HAASS: Let me just, then --
O'REILLY: So independence isn't necessary as long as we continue to work on those trading relationships.
HAASS: Let me push it a little bit farther. What, then, is a definition of energy security, because it's clearly not energy independence? How will we know when we've achieved it?
O'REILLY: I think when we have some confidence that -- I think if you were to pick one area where we don't have the confidence yet that we have resolved our problems, it's probably in the area of oil, because we are importing oil from parts of the world that we feel are unstable or insecure. If we were importing all of our oil from a place like Canada, I think we would feel differently about the whole issue.
So I think we've got to get to a point where we are importing, but we feel that we're importing from a secure source of supply, not one that's relatively insecure. But independence, we don't have to have.
HAASS: You quoted Tom Friedman, who gets quoted a lot these days on energy issues, and talked about the challenge. When people talk about organizing the U.S. response to this, some people have in mind that -- and I should have a nickel for every time I've heard it -- "What we need is a 21st century equivalent of the Manhattan Project" sort of response, as opposed to those who say, "We don't need that. That's not appropriate. What we really need is government simply to set some predictable standards, guidelines, regulations, let the private sector work, let venture capital work, let the companies work, and we will get to energy security much more quickly through the dynamism and entrepreneurship and creativity of the American economy, rather than through some large government-financed program."
So is this Manhattan Project image essentially -- is it right or is it actually a distraction?
O'REILLY: My view is it's a distraction. The Manhattan Project, you know, whatever you want to call it, was very much focused on a very specific single outcome, or putting a man on the moon, single outcome. Here we're talking about multiple sources of solutions. We're talking about demand-side solutions. We're talking about supply-side solutions.
I don't think we can pick winners and losers in this. We've got to let the marketplace decide what the winners and losers are. And I think this whole idea of Manhattan Project is framing this incorrectly. It's clear to me that we're going to need all of these alternatives to be pursued. And as we learn more about them and deploy them at scale, then they'll be able to make a difference. But if we think -- if we're counting on something to meet our needs in the future and we find out that it ain't coming, that it can't be -- (inaudible) -- we're going to be in a heap of trouble.
Let me give you an example. Right now there is a mandate to increase the amount of ethanol we have in gasoline to enormous numbers, beyond what we can get from corn. We're already -- almost 40 percent of our corn crop is going into ethanol. But there's an idea that this next-generation ethanol is going to come out and bring us to the next level. It hasn't been invented yet. It's not available at scale yet.
So I'm not saying it won't be. I hope it will be. But we can't bet on that until we know that it's coming. As I mentioned earlier, just to get from the invention of the chip to a wide deployment of computers, you know, where they're in our pockets, they're everywhere we go, it took 50 years.
So we've got to be very careful that we don't count on something that isn't going to be there. And that's the trouble with what I call macro-industrial policy where people pick things. You know, the Russians were pretty good at that, and look where it left them.
HAASS: The next thing you know, they're going to take over the banks in this country. That was a joke. (Scattered laughter.)
O'REILLY: I'll leave the jokes --
HAASS: Actually, based on that reaction, I think -- (inaudible). (Laughter.) Man, touchy out here these days. (Laughter.) Lighten up, people.
Talking about which, there's -- as I suggested before, possibly the first policy challenge to Mr. Obama will be what to do about the fact that the automobile industry is on something that looks like life support at the moment. Is there a way that you would suggest he and his administration should approach this question of our financial intervention? Is there a way that could actually get us closer to the goal of energy security?
O'REILLY: You know, I've thought about this, and I really don't know. I think the issue -- first of all, we have this massive rescue plan, as it's called, aimed at the financial system, which is really geared to trying to get the credit markets working and to get financial flows working so that our economy will click again. So I think using that money to start picking winners and losers around the rest of the economy is not the right thing to do.
Now, if we want to deal with the auto industry, we ought to have a separate package for them. But I think one of the issues that I would ask -- and I don't have the answer to this -- is, look, the auto industry in this country -- (inaudible) -- old-line auto industry, has struggled for decades. It has struggled, whether the economy is good or bad. It's struggled, whether gasoline was $3 or $1.50. So there's something wrong.
These companies can make money in Europe, they can make money in Asia, but they can't make money in Detroit. And so, you know, part of -- I think a part of helping them resolve their problem has to be to get to the root cause of why the cost structures are uncompetitive. And if you look at our industries, the industries that are successful in our country that are high tech -- my own industry, very high tech, and we do some of the things that are unimaginable with technology today; the computer industry, our aerospace industry. There are so many -- our pharmaceutical industry. These are globally competitive because they have to compete on a global basis.
So we've got to get our auto industry to be able to compete on a global basis. And if that's the outcome of a rescue plan and the commitment to that, then I can see it working. But if it's putting money at something, ultimately the priority has got to be on the economy, because no matter what happens in Detroit, people aren't buying cars today. If they can't get credit, if consumer confidence isn't there -- you know, you can't talk people into buying from them. You've got to have cars that are competitive and that will appeal to the customer and will make money at the same time. So we don't have a sustainable model right now, and that needs to be the outcome of whatever happens in Detroit.
HAASS: I just want to ask one last question, and then I'll turn it over to our members.
You raised the question of windfall taxes -- windfall profits, rather -- not windfall taxes, windfall profits -- and you basically showed -- I guess that's a contradiction between that and asking you to do more exploration and development.
Let me turn that around the other way, which is if more areas of the United States, particularly offshore, were opened up, is it then safe to say that actually the companies could be -- that Congress and the administration and the public could be assured that there would be a lot more spent on exploration and development so that profits would diminish, not because people are being less successful but because more was going to work to produce oil?
O'REILLY: Profits would diminish? What do you mean?
HAASS: Well, not that profits diminish, but that more money would be put into --
O'REILLY: Oh, absolutely. There would be -- I mean, first of all, the unfortunate thing is this can't happen overnight, as I said in my remarks, and it isn't going to solve all of our problems.
Let me give you an example. We're bringing on two deepwater developments in the Gulf of Mexico, one today, actually, and the next one -- (inaudible) -- will come on second -- third quarter, I guess, next year. The combined production from these -- well, first of all, let me tell you, we made the discoveries 10 years ago. Prior to that, we had to do the seismic work to identify the opportunities before we even made the discovery. So you might say this is the result of a 15-year commitment to search, find success, design, build, develop, and then ultimately produce -- 15 years.
Now, let me tell you what the benefit of this is, though. The total investment on these two oil fields, between the two of them, is around $6 billion. That's the money we've invested. It's created thousands and thousands of jobs -- construction jobs, operating and maintenance jobs, collateral jobs from suppliers, and the like, that will go on for decades. These will operate for decades.
The production of 200,000 barrels a day at about $60 a barrel is about $5 billion of oil per year we won't import. That's $5 billion of less trade imbalance that otherwise would have occurred. It's $500 (million) or $600 million of royalties a year to the federal government, because these are on offshore leases that will be paying royalties to the federal government. And that doesn't include the income taxes that we hope we'll be paying on the profits that we make there.
This is a win-win for America, absolute win-win. And we need to be able to do more of that here, not less. So somehow we've got to get people oriented to the fact that this is good for the economy; it's good for jobs. Everybody benefits from an investment like this. And ultimately we hope the shareholder will benefit. But the idea that somehow it's all going into the pockets of big oil is totally flawed.
Think of the benefits and then think of the fact that 80 percent of our shareholding is in pension plans that affect millions of people and their well-being every day. We should be proud of companies that are doing this. They shouldn't be vilified by Congress. They should be encouraged. We should be getting a pat on the back instead of all this negativism.
HAASS: With that, let's open it up. Wait for a microphone. Please stand and let us know who you are.
QUESTIONER: Hi. David Brunschwig (sp). Thank you for your words.
You talk about free trade. In this country and in other jurisdictions, like the European Union, there are strong rules against (hyper- ?) concentration and in favor of openness. Yet in your industry, you have an anomaly, which is that a large percentage of production is controlled by a cartel. Is this a good thing?
O'REILLY: Thirty percent -- 30 to 40 percent of the production is controlled by, quote, "OPEC." But the reality is, it's not as effective as it sounds. Most countries act in their own self-interest. And it is particularly true when you get into these -- if you get into tougher times.
I can -- the only time I can remember where there was really an effective functioning of a cartel was the Texas Railroad Commission, which was in existence for a number of decades to control oil production in this country; and then, for a period of time in the '70s, when we had deliberate disruption of oil supplies to the world that led to gas lines at the pump.
But I think we've gone way past that. And I think OPEC, although, you know, they meet and they talk about what they're going to do, the reality is look at how they perform. And I don't think it necessarily behaves in a cartel-like manner. They tend to behave in what's in their own self-interest.
QUESTIONER: Nice to see you, David.
O'REILLY: Hi, Maurice, how are you?
QUESTIONER: Good to see you.
One of the things you touched upon is the volatility of the oil prices. When prices go down, as they have, to what still is a high price one immediately gets the sense that some of these projects that require a much higher base, particularly for continuity, get put on hold by a -- the Athabasca Sands is an example, that there's a reduction of that.
Would a floor price of some kind, guaranteed in some fashion, enable you to focus on some of these -- what, by margin -- by today's prices, might be marginal projects? Would that help in looking at things that you wouldn't otherwise look? And would it help to continue to overcome the fluctuations in price and the volatility of prices?
O'REILLY: It's an interesting question. And I'm not sure how we could ever get something like that to work. But, most of us make decisions -- and I'm speaking, at least, for my company, we make decisions based on the long-term view of price, recognizing that we're going to go through the cyclicality.
So we accept cyclicality as an inevitability. Now, we don't -- we don't count on the floor; we don't count on a ceiling. We just assume that -- where there are going to be some times where we go through a 25-year lifecycle of a production project, or an oil field -- which, typically, 25 to 30 to 40 years, we know that cyclicality is going to exist.
I think the -- I think that the challenge that I think alternatives face is how to gauge the energy markets, because clearly an alternative that's in a growing mold, that's being introduced into the market, where the economics of a new energy may benefit from some sort of a floor in order to guarantee their success, or some sort of support there to guarantee their success at the early stages.
But, you know, I just don't know a better arbiter than the market. And the market tends to be cyclical in commodity businesses, and that's -- we've learned to live with it, I guess.
HAASS: Can I follow up also, that you suggested -- and I'm not sure you can answer this, which is, it's a long -- the maturation of -- from beginning to end of a project, for you, could be decades. And you've got to have so much -- some projection of what you're costs are.
When Chevron now makes a long-term calculation in order to do something, do you have any assumptions about an average oil price -- five, 10, 15, 20 years hence, that, for you, is a trigger price; that you need at least that -- you'd have to be confident the price would be at least that level to --
O'REILLY: Yeah, well, we assume range -- a range of prices. And we need to test at the low end of that range to make sure -- and it's not a matter of just one project, because we have the benefit of having a portfolio of projects, so you're looking at an aggregate number of projects. You want to make sure you don't sink the ship in order to get to the destination. So, yes, we do test at the low end to make sure we can survive.
But it's very hard to -- and we certainly don't count on $140 oil, or anything like it. Those are fleeting periods. History tells us that, you know, it's fleeting when it gets high, and it's fleeting -- when it gets too high, and it's also fleeting when it gets too low. I mean, we were at $8 or $10 a barrel in 1998. And you just knew -- when you were sitting there, we would make the investments on a higher price assumption than we were experiencing in 1998 at that time, because we knew that it couldn't be -- you know, in 1998 conditions just were not sustainable; just like we knew that 2008 conditions were not sustainable.
QUESTIONER: Paul Strauss (sp), with Kissinger Associates.
David, thanks very much for your comments. Could you take a moment and talk a little bit about nuclear power? Covering the world, as you know, China, Japan, Europe are very much tied in with their nuclear policies, and so on, and there was a lot in the campaign, from both candidates on that. And I just wondered if you might comment on nuclear power in the United States and how that dovetails with your long-term outlook. Thank you.
O'REILLY: Today -- thanks, Paul.
20 percent of our electricity, roughly, comes from nuclear power, and most of our nuclear power plants were built in the '70s. And there were a few -- there were a few odd ones that came in later, that had been delayed for awhile. So, you know, within the next decade or two these are going to have to come crashing down because they'll have reached the end of their lives.
So, we have -- we have lost a generation in dealing with nuclear power, and we just got to get back into it with a vengeance, because I don't see how we can get to a world where we're managing carbon emissions effectively without a commitment to nuclear power, that increases the percentage of electricity that comes from nuclear power, not reduces it.
Right now we're on a path to reduction, and that's the wrong direction to go. 50 percent of our power generation today is coal. And coal can be made more efficient, but it also, even being more efficiently used, is the greatest carbon -- of all the fuels, is the greatest carbon generator.
HAASS: One of our policy -- (inaudible) -- produced a report basically consistent with what we are saying. We have to be building, and essentially putting online, two nuclear plants a year simply to stay where we are now, because the roughly 100-plus nuclear plants that are just in our -- even with service life extensions could go out of business in 50 years -- the last ones.
So, we need to be producing at the rate of two a year; and, needless to say, we ain't doing that.
O'REILLY: Yeah. The -- I talked to some folks that tell me that the first one or two -- if everything goes perfectly, the next one or two will come on around the end of the next decade, or around 2020. So, we -- that's the soonest that you're going to see a new nuclear power plant.
QUESTIONER: I wanted to talk a little bit about the future of how you manage companies such as your own. I once managed a company, not as large as yours, but still a fairly large one. It strikes me we're at the beginning of what could be a very new era. You know, the financial services industry used to be 40 percent of our profits in a normal year. And now of course the financial services companies are out of business or heavily-owned by government entities; sovereign funds are growing; defense industries are very intermingled with governments -- of course, your industry is.
So in a world where the role of ownership and private sector freedom of action is -- potentially looks more different in the future than it might be in the past, I'm wondering, have you had occasion to think about what this means for how you manage companies like yourself? Is it a good thing, or a bad thing, and any comments you have to make, because we're just at the beginning of what potentially could be a new era of corporate management and governance?
O'REILLY: Yeah, even in our business it's reality, and it has been for some time. I mean, one of the things that attracted me to this business when I got into it a little over 40 years ago was the intersection of technology, economics and geopolitics. And, to some extent, we have been -- you know, our success is very much dependent on how we interact with those who give us permission to operate -- whether that's, you know, the U.S., the State of California, the government of Kazakhstan, you know, the Canadian government, whatever it is.
So we are -- we've been operating in this mode -- private sector companies, publicly-traded, masses of shareholders, but in this mode of having to be able to partner effectively with governments, and we have to demonstrate to governments that we are contributing more than we're taking. And I think we do that -- we are able to do that extremely well in many, many different environments. But the value proposition to them has to be clear if we're going to be successful. It sounds like more -- there'll be more industries joining in our -- (laughs) -- joining our group here.
HAASS: Yeah. You've got a microphone heading your way.
QUESTIONER: Hi, Dan Rosen (sp).
In your remarks you alluded to the importance of encouraging a better investment environment. I wonder if you could elaborate a little bit on cross-border investment flows in your industry, and the importance of depoliticizing them, or to what extent we should not depoliticize the control -- the intervention, if you will, on cross-border investment flows in oil?
O'REILLY: Yeah, I think the reality is that -- thank you, Dan, in reality there's a lot of cross-border investment already in our industry. A number of the deep water blocks in the Gulf of Mexico recently have gone to Petrobras, the Brazilian company, for example. But most of this escapes under the radar screen. And I think -- and, of course, we have deepwater blocks in Brazil, so there's a lot of this happening.
And I think, you know, demonizing it in a way that it -- that I think occurred during the political campaigns is rather unfortunate because the reality is that this has been a good thing. And it seems -- you want to investment to flow to where it makes the most sense, creates the most value and produces energy for the world.
And to some extent, one of the difficulties about energy independence that I want to come back to, because I think you phrased this question -- (inaudible) -- Richard, is that if any sector of the globe is experiencing a significant energy insecurity, in a sense we're all going to be insecure because the globe is so intertwined.
And I think it's very, very important that we look beyond our own borders here. And this idea that somehow we can insulate ourselves from the rest of the globe is just as unrealistic as the view that somehow China could insulate its economy from the rest of the globe, that somehow they were decoupled. We're not decoupled. We're coupled. And it's inevitable that there's a connection.
QUESTIONER: Thank you, Richard.
This is sort of pick up, and I would appreciate your thoughts on this, on the allusion to the Manhattan Project kind of project. I'm just quickly going back to your points on why you think oil prices are where they are -- growing demand, which is not going to come down any time soon, so, your thoughts; hard to locate resources, it's becoming increasingly more difficult and expensive; nationalism -- hoarding as we call it.
So, on the one hand you have that. So, in the medium to long-term -- which you say is how we should view energy planning, you would have to end up thinking about alternatives, because you've got depleting resources, growing demand, difficult to access those resources. So, perpetually seeking higher prices of a depleting resource.
Now, when I look at -- let's take Exxon, for a quarter they are investing close to $7 (billion) to $10 billion in R&D. And when you compare that with the President-Elect's plan to invest somewhere around $15 billion over a period -- annually, over a period of 10 years, what strikes me --
HAASS: There's got to be a question here coming soon.
QUESTIONER: Sorry -- yeah. What strikes me as being odd is, how can we marshal up -- relying on the market or the private sector, the resources to invest in the source which would need to be permanent and renewable sources?
O'REILLY: With a massive amount of investment going into energy of all sorts, far, far beyond all these numbers that the government talks about, I think you made that point, these numbers are tiddlywinks compared to what the private sector and private investors are already doing. So, there's an enormous amount of money going in there.
One of the things that people miss, I think, is also the tremendous opportunity that exists in energy efficiency, which is my first recommendation, by the way. And the first recommendation of the National Petroleum Council study -- it's the first recommendation of what I -- the letter I sent to President-Elect Obama, is that there is so much more we can do on the efficiency side.
We doubled our efficiency in the last 40 years. We should be able to double it again in -- without having to wait 40 years to do it. So, that's an enormous prize there on the efficiency side. And then the multiple supplies -- I think we need to look at all of these opportunities.
HAASS: Rick -- (inaudible).
QUESTIONER: Rick -- (inaudible).
Just a question about China and their investments in Africa. They've been very, very aggressive in pursuing a strategy of engaging in Africa, including some of the more unsavory regimes. One of the implication -- (off mike) -- Chevron, the industry, and you think U.S. policy in having them as effective as they have been in securing energy assets?
O'REILLY: Well, I think China is pursuing its own self-interest here, and it needs to be able to develop and access resources outside of its own borders. And that's not an unhealthy thing.
Now, I think the key question that you asked is policy question, though: Should the U.S. -- what should the U.S. policy to Africa be? And I think we need to sustain a, you know, a good relationship with Africa and build stronger links to Africa. Now President Bush, to his credit, actually did visit a number of times in Africa and did reach out to them. But we need to sustain that and go far beyond, I think, before we go on.
Our own business has not been affected by this opportunity. There's plenty -- there's plenty of opportunity for the world, for a number of the players in the world. So, I don't see this as a threat. I do see instability in Africa, though, as a concern. And that instability is tied back to the quality of life and the standard of living and governance.
So these are issues that we've just got to work on, and they can only be done multilaterally, effectively; not unilaterally. So this is an area I think for the new administration to work as well -- to add to that long list of things that are on his list.
HAASS: The gentleman at -- actually, yes, with the -- (inaudible) -- I'm sorry, I don't know your name. I apologize. They'll get a microphone to you there.
QUESTIONER: Anthony Richter from the Open Society Institute and the Revenue Watch Institute.
A question about transparency of the business operations of the energy sector. In recent years a number of the oil majors -- including yourselves and Shell and BP have joined something called, "The Extractive Industries Transparency Initiative," for which you are appropriately lauded. I was wondering if you would say why you have joined this; and why you think it's important; and are there limits to your commitment to transparency?
O'REILLY: Well, -- (inaudible, laughter).
QUESTIONER: We want to know exactly where they're --
(Cross talk, laughter.)
O'REILLY: Just read -- you know, read our 10Q, our 10A, whatever. You know, it's getting thicker every year. But, no, I think joining the Transparency Initiative is a good thing. I think the issue that -- you know, that we have to -- it's very good for governments to publish what they get. And we've made some, I would say, limited progress. We're not where we need to be here.
I think the -- when governments account for what they're bringing in, and what they're spending, it ultimately explains to the people -- their citizens what's happening to the money. And where we've seen -- we've seen some progress. I'd have to say that we've got a long way to go. So we're for it. We're into it. We think it's better to try to encourage this through cooperation. And we're going -- and I have to say, frankly, there have been ups and downs of this, and there's -- there's more progress that needs to be made.
HAASS: So you get -- I think you'll make it the last question, unless it's a short question and a short answer.
QUESTIONER: You mentioned --
HAASS: Please identify yourself, okay.
QUESTIONER: Dick Huber (sp), I'm sorry.
HAASS: Yeah, Dick.
QUESTIONER: You mentioned the intervention of Petrobras in the Gulf, and that you now are doing something in one of those blocks in that very deep new discovery off Brazil. I've seen a lot of mentions of it. I've never seen anyone give a more meaningful description of how important that can be going forward.
O'REILLY: Well, we're not in one of the new ones. We're in -- the ones we have are ones that we've already made discoveries on, but not in one of those new ones, Dick, because we don't have information on that.
QUESTIONER: Did you --
O'REILLY: I don't know, I'm not in --
HAASS: Do another one.
QUESTIONER: There's a short question and a short answer.
HAASS: I want to thank -- you get the last one then.
QUESTIONER: Could you comment on the degree --
HAASS: You have to identify yourself.
QUESTIONER: Les Rigler (sp), sorry.
Could you comment on the degree to which carbon emissions trading will help facilitate the distribution of energy to developing economies? Thank you.
HAASS: Why did you have to make it more general
HAASS: Imagine we set up some kind of a carbon market and -- what will that mean for you?
O'REILLY: Well, I think -- well, we're already operating in the carbon markets in many places out in the world. So, I mean, we know -- (inaudible). But, I think the question is a more subtle one: How does that help the developing world. And until and unless they actually participate in it, it's not clear to me that I can answer that question.
HAASS: Well, it looks like I'm going to get the last question, which is there's only one thing that you said that I questioned, which is a much lower percentage than usual here, which is about the price today being still relatively high. If I look at the next 10 or 20 years, I would think this is extraordinarily low; that it's much easier for me to see how demand grows, given China and India above all, and that public policy sluggishness historically that we've seen -- (inaudible) -- than it is to see how supply grows.
And so I would think, you know, in five or 10 or 15 years I can imagine that oil prices being considerably higher than they were even at the peak -- six months or a year -- it just seems to me forces of demand appear to be considerably stronger, if you will, to put it in a crude sort of way, than forces of supply and moving forward, particularly given India and China's economic growth, even if they were growing -- if both were growing several percents slower than they are now. Why is that dead wrong?
O'REILLY: Well, because I still -- I think you're underestimating the benefits of conservation and efficiency. I think you're going to see a much stronger response on the demand side, and history -- you know, we're into another round of vehicle efficiency, CAFE standards they're called here. But, I think the public's going to get there sooner than the regulations are. And I see -- I think that's the area that I think -- that's why I feel the way I do, compared to your view.
HAASS: Okay. Hope you're right. Given my track record, you probably are.
O'REILLY: (Laughs.) -- (inaudible) --
HAASS: Thank you very much.
O'REILLY: Appreciate -- (inaudible, applause.)
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THIS IS A RUSH TRANSCRIPT.
Watch experts discuss U.S. energy security as part of the McKinsey Executive Rountable Series in International Economics.
Increased petroleum production in the United States, fueled largely by recent technological advances in hydraulic fracturing and horizontal drilling, has had a profound effect on the U.S. economy and global energy markets. CFR's Robert Blackwill sits down with Admiral Dennis Blair and former BP CEO John Browne to outline both the economic and geopolitcal implications of the current U.S. energy boom.
Ernest Moniz, secretary at the U.S. Department of Energy, joins Matthew Winkler, editor in chief at Bloomberg News, to discuss the "all-of-the-above" energy strategy of the United States.