Council on Foreign Relations
New York, N.Y.
MORTIMER ZUCKERMAN: Good afternoon, everybody. My name is Mort Zuckerman, and I'm the understudy for the role of moderator of this panel, which is a part of the McKenzie Executive Roundtable Series on International Economics that is organized by the Maurice R. Greenberg Center for Geoeconomic Studies and the [Council] Corporate Program.
We have two distinguished speakers who have a great deal of expertise in a rather arcane world: Peter Huber, who is the senior fellow at the Manhattan Institute for Policy Research, co-author of The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy; and Paul Roberts, who is a journalist and author of The End of Oil: On the Edge of a Perilous New World. This is a meeting that is on the record, and we will speak here for about 20 to 25 minutes and then open it up to questions from the audience.
There is a story that is told of a man who was describing to this friend how he drove 30 miles to a saloon because the beer was a nickel a stein cheaper. And the friend says to him, "That's crazy. I mean, you think of all the gas and oil you use, and the wear and tear on your car to drive there and drive back. I mean, it makes no sense." He says, "I know, so I drink until I make a profit." I use that as an introductory commentary so that Peter can give us some sense of his views on why oil prices are less significant than a lot of people think, both as oil and as a percentage of energy. Peter.
PETER HUBER: Well, as a percentage of our GDP [gross domestic product], what we're paying for oil is in steady decline over the long term. I mean, our GDP is growing faster than our spending on oil. In the short term, on any six-month swing, oil prices are volatile. The short term— the short term, we have seen— people's memories are short. If you remember your history of the early 1980s, in the space of eight weeks in current dollars, we saw oil prices drop 60 percent from $50 [per barrel] to $20. Oil prices peaked at $86 in the early 1980s, current dollars. There are short-term swings in the price of oil; long-term price of oil is stable, and the long-term GDP growth is much faster than our spending on oil. All of those trends are long-term, well-established, and they still hold today.
ZUCKERMAN: So you do not think there have been any structural changes in the demand for oil and/or energy as a result, for example, of the emergence of two huge economies, India and China, and an explosion of the middle class in those countries, particularly in China, where the number of automobiles and the rate of energy consumption has been jumping by 12 to 15 percent a year?
HUBER: It's interesting, the one number you didn't give us is how much oil China is actually consuming today. I wonder how many people know—
ZUCKERMAN: They've become the second biggest importer of oil after the United States.
HUBER: There still is a number for how much oil China is consuming. It's two billion barrels a year, OK—
ZUCKERMAN: --barrels a day.
HUBER: --a day, which is two billion barrels a year. OK, global consumption is 30 billion barrels a year. Look, the emergence of an economy of a billion people has a long-term importance, which nobody can possibly underestimate. It affects our labor markets, energy markets, food markets, steel markets, all markets; that goes without saying. Is a two-billion-barrel-a-year demand in China today a major factor in a 30-billion-barrel-a-year oil economy? Not yet. Over the long term, can it become one? Certainly.
ZUCKERMAN: But that's roughly 7 percent of the world's oil market, as you say. And that kind of additional capacity, to improve capacity by two million barrels a day, or roughly— it's not totally that— that's a marginal increase in demand that could have a disproportionate effect on the price, is that something that you would not take seriously?
HUBER: China didn't go from zero to two billion barrels in the last six months. I mean, they are growing fast, and particularly a lot of their oil consumption is— they've actually been using diesel gen [generator] sets to generate electricity, because they have no electricity infrastructure. That won't last, because it's a very inefficient way to generate electricity, and they know that. They're going to other things.
China is a factor. The notion that China today is jerking around our oil markets doesn't stand up to common sense. Their marginal increase impact on global consumption has not been 7 percent in the last six months, it's been a few percent. U.S. consumption, of course, has grown. Global oil consumption is increasing by a billion barrels a year, every 30 months, OK? China is one small piece of that, but it's still the developed economies that account overwhelmingly for [oil] demand. China is a factor, but the notion that they have structurally changed our energy markets is not correct.
ZUCKERMAN: Let me ask you one other question before I ask Paul to jump in. In terms of new supplies to deal with what is now anticipated to be a steady, and shall we say, slightly more robust increase in energy consumption, in part as a result of the much more dramatic expansion of India and China's economies than was previously anticipated, do you see any concern over new supplies?
HUBER: We are always looking for more oil, because globally our demand always rises. It's a very valuable commodity. Since the last big oil shock in the early 1980s, global demand— I'm doing this without pawing through my notes— but [global demand] rose by about eight billion barrels a year, and non-OPEC [Organization of the Petroleum Exporting Countries] supply rose by about six billion barrels a year. None of this happened fast. These things are very capital-intensive. There are very few places in the world where you can just turn the spigot and you get huge swings in production. And those happen to be mainly in the Persian Gulf.
But the biggest oil producer in the world today is Russia. You have to put in a lot of capital infrastructure to increase Russia's supply, because you need pipelines and other things to get the oil out of the ground and to the right places. Alberta [Canada] has recoverable, they say, 180 billion barrels— it has in tar sands a trillion barrels. At $15 a barrel, they are pumping it today, a million barrels a day. If you invest capital you can boost that. The Orinoco Basin in Venezuela has comparable supplies. These are capital-intensive. They are slow-moving. You can get short-term dislocations. But the notion that the planet itself is running dry, that our technology has reached the limits of what it can do is foolish. That's not correct.
ZUCKERMAN: Well, in politics they say that politicians who rob Peter to pay Paul can always count on the support of Paul. So I will turn to you, Paul, and ask you how you react to this sort of relatively contained view of both the pressures of demand and the limits of supply.
PAUL ROBERTS: Well, I look at $50 oil like a physician looks at blood pressure. It tells a lot about the health of the patient. You have to correct it first and recognize that, yes, inflation has made $50 oil a lot less painful than what we were paying 30 years ago.
But $50 oil is higher— is almost double what we were paying three or four years ago. And it indicates a couple of things. One is that, although China is not the monster that it's sometimes portrayed, demand generally is growing, and the line between demand and supply is tighter than it's been for years. And one of the key reasons is that all this spare capacity that once reassured the markets and was mainly in Saudi Arabia is quite thin today. And regardless of what we can pull out of the ground in the next 50 years, the next six months is really what's concerning the market.
There is the risk that, almost at any moment, some of the big producers and big exporters are going to have some sort of political problems. I mean, yes, Russia is today the world's biggest producer of oil, but it consumes a great deal domestically. We're really concerned with the exporters, and those are primarily Saudi Arabia, again, because Saudi Arabia had the spare capacity. This spare capacity did two things: It could come online relatively quickly when we lost a country like Venezuela, like we did a couple of years ago. As importantly, it let traders know that there was no point in bidding up the price, because eventually the Saudis would come in and flood the market.
That capacity is no longer there. So traders now really have— their ceiling has changed substantially. More fundamentally, the security that we once enjoyed, the idea that someone could come in and save our butts in oil, has evaporated. And I think what Iraq shows— I mean, it doesn't really matter what our reasoning was going into Iraq, the market doesn't care why we went into Iraq. What the market cares about is that, since we've been there, we haven't been able to create the kind of stable environment that you need for raising oil production. The market sees that. The market also knows that if the U.S., stretched to its max militarily, cannot create that kind of environment in that country. What happens if, at the same time, we have more trouble in the Middle East? What happens if Venezuela goes offline, or Nigeria? I mean, really, $50 oil tells us that the oil situation is not stable. It's less stable than it has been for a long time, and that's the thing to focus on right now.
ZUCKERMAN: Is the $50-a-barrel price of oil taking place in the context of— there are political risks out there, in Saudi Arabia, in Iran, in Iraq, in Russia, in Nigeria, in Venezuela. At this point, though, are any of those political risks inhibiting their ability to produce oil? And, if you say, the market has a short-term view, there is a wonderful thing that [economist] John Maynard Keynes once said, "In the long run, we'll all be dead." Wrong. In the long run, we'll all survive and flourish. In the short run, we can be dead.
So my question to you is, since the suppliers at this point, with the exception perhaps of Iraq, which is perhaps a million barrels a day lower than it was before the war, is the issue that is pressing on the market, in a sense, a sort of speculative issue, because they are concerned that there will be a drop? Or is it real current conditions of supply and demand?
ROBERTS: Well, if I knew, I would be making phone calls right now.
ZUCKERMAN: I forgot to tell you, turn off your phones unless you have a direct line to your oil trader.
ROBERTS: We don't know, because either OPEC is choosing to keep prices this high because this is a new level, that say $45 oil is the new level. Importing economies can tolerate that, and it's certainly good for exporters. Either that, or they can't raise production— they're physically unable, or fiscally unable. We're not sure. The Saudis claim they have lots of oil. They claim they're making investments. And it's a matter of time. But you know, it's been a matter of time for a while. And the Saudis don't have that spigot any more. They don't have the capacity to just flip the switch any more. It's been used up. It's been used up, in part, by demand from China, which, although it is not, again, as big as some people claim, it has been steady. The Saudis have not made the investments in extra capacity.
The question is, why not? Well, either they're choosing to, because they're tired of being our supplier, they're tired of being our butler, or, for various reasons, they can no longer make the kinds of production increases that they have in the past. Why not? Well, it could be simply fiscal, they don't have the capacity, the wherewithal, the expertise, to raise production in fields that are now older and require more technical expertise, or it might be that they are reaching some sort of a geological limit.
Now, I know it's not fashionable to talk about peak oil, but we do have to recognize that these are old fields. Some of the biggest fields are in Saudi Arabia, and they are also some of the oldest. And they have also a lot of water in them now. This isn't a sign of the end-is-near tomorrow, but it is an indication that they're having to change the way they produce oil. All this adds up to a market that now has trouble meeting supply; at least it has more trouble than it used to.
HUBER: You know, one can look for words all over the place. I take refuge in numbers. The oil output has actually increased, with the most modest exceptions like global depression and so on, without interruption for 120 years. All right? Now, it may well be that we are fortunately or unfortunately born at this unique moment in history— and perhaps Paul knows more about the condition of Saudi fields than I do— for a long time, most of the words out there say that under the ground in the Persian Gulf there are 600 billion barrels of oil. Now, they might be wrong. Perhaps there are only 400 billion, maybe 300 billion. We do know that global demand today is 30 billion, OK? So that's a fairly large number, and normally, you don't go looking out beyond 10 or 20 years. You've got to build things, you've got to build pipelines and drills and so on. But usually, you don't go exploring far afield for reserves when you're bottlenecks aren't what's in the ground, but your harbors, your pipelines, your drills, your political instability.
So this talk— this is not you, folks. We could have had this lunch and most of this conversation 20 years ago in the early ‘80s, and we could have had it in 1973, and I can give you literature from the 1890s that sounds exactly like this. So far, they've been wrong. That doesn't prove they're wrong today, but all of the powerful historical trends indicate that I would not, if I were you, bet on long-term oil at $50, OK? We have seen oil drop 60 percent in eight weeks. Seven years ago, oil was $12 a barrel. And I see nothing structurally out there in terms of the poor supply in Europe that says things have changed.
If the Mideast goes up in flames, take it from me, we will see $150 barrel of oil, or 200 [dollars a barrel]. But if democracy breaks out all over the Mideast, and sanity prevails, what a lovely thought, OK, we will see $15 barrels of oil.
ZUCKERMAN: Well, if you are now a national security adviser to the president of the United States, and you are concerned about the impact of oil prices on the economy or at least on the next election— and that certainly was a political issue to some extent— what would you advise him to propagate in terms of national-energy policy?
HUBER: Well, first of all, oil is politically very sensitive, because it's the one form of energy people really see weekly at the pump; they whip out their wallet; they feel it. What they don't know is that oil is not the dominant fact of their energy lives. The two numbers that define the U.S. energy economy are seven and 11. We consume seven billion barrels a year of oil, we consume 11 billion barrels of oil equivalents a year in coal, uranium, natural gas, hydroelectric power, OK. Those are the core numbers.
So what do you do politically? You do two things. One, you make the appropriate gesture for oil, and overwhelmingly those are boosting domestic supply, not because I think that is, in fact, strategically the best way to go, but politically it's very important. That is why I think that Alaska will break open. And I'll tell you something: If we see oil at $60 to $70 a barrel for three or four years, we will begin drilling again off the coast of Florida and off the coast of California, too. Even the Californians will go for that, and we've got another 20, 30, 40, 50 billion barrels just locked up for environmental reasons. I'm not saying I want to unlock them, but I think the political reality will push us that way. Much more important is bridging, wherever you can, this divide between our seven oil economy and our 11 not-oil economy.
And there are more bridges than people realize between those two sides of our energy economy, and the technologies for bridging those two sides are evolving fast. There are tax policies and pricing policies that can have a profound effect on them, and the long-term real stuff, not daydreaming about windmills and solar and things that have no impact at all numerically, but the real impact, practically, is to see what you can do to bridge those two sectors of our energy economy.
ROBERTS: Well, I mean— yes, Peter, I think if democracy breaks out tomorrow, we're going to see some wonderful things happen in the oil markets, but that is a fairly loaded proposition. There's really nothing in the past to suggest that democracy can move that quickly, I mean, even in a best-case scenario. I don't think that anyone really disputes that oil, in the long run, can become much cheaper than it is now, provided that political situations work out in our favor.
But there seems to be a growing likelihood that's not going to be the case, quite aside from any questions of supply. We could agree to agree that there is an infinite supply of oil and that, unfortunately, most of it is in Russia and Saudi Arabia. If those regions are politically unstable for whatever reasons, then that oil is, in effect, off limits. And you'd have to keep that in mind, regardless of what kind of new technologies are going to come up to make oil extraction easier. We're not going to supply ourselves with Alaska or with off-shore California. That's not going to happen. The world needs too much oil.
And if Saudi [Arabia] and the Middle East continue to be likely hotspots for political instability, that is going to affect the price of oil. It may not fit into an economic scheme, but it is the truth. I think more generally, yes, we do use a great deal of electricity in this country, and, yes, electricity is going to make up a larger share of demand in the future. But if we're still using oil mainly in our transportation fleet, then it really doesn't matter what our electric share is, because oil will still have that kind of hold on our political culture. It doesn't necessarily mean the end of the world, but it means we have to keep at least part of our focus on the here and now and the political situation, the geopolitical situation, in particular.
ZUCKERMAN: This is a question I've always pondered and wanted to get an answer to, although I know it's impossible to answer, but let's try it anyhow. There's another constraint on the market, it's called— there's an artificial control of supply called OPEC. If there wasn't an oligopolistic organization such as OPEC, what do you think the price of oil would be today?
ROBERTS: Well, the number I've heard is around $15 a barrel. That's what the natural price would be if we could— if all oil were available equally, and if the market could actually see what's there or could at least explore. But, as you say, there are a number of constraints, and you know, the constraints aren't all just in OPEC. We have a constraint in refining capacity; we have a constraint in how quickly we can move oil from point A to point B. The natural price is 15 [dollars], but again, oil is intrinsically political. It's worth so much. And it's more than just the value that it supplies, because we can drive with it. There is no replacement for oil in the transportation sector, and that factor alone explains why oil will continue to be the dominant energy issue, regardless of its share, until we get a replacement.
ZUCKERMAN: And so, is your advice to the president to increase domestic supplies or reduce domestic consumption through conservation programs?
ROBERTS: Well, you ought to be careful about conservation, because a lot of people consider that a nasty word. If I was going to advise the president, I would say, "Look, right now, the emphasis in the U.S., as far as oil is concerned, is a supply-sided emphasis, and it's on foreign supplies." We may talk up the potential domestic production. We may talk up the amount of oil that's in Alaska, but nobody in the White House expects Alaska is going to solve our problems.
We know that the additional oil will come from overseas, and traditionally, Democrats and Republicans have approached that by building alliances with oil producers. We've had successes there, and we've also had some failures. We hoped that Eurasia— we hoped that all of Central Asia would become the next Saudi Arabia, and it hasn't, in part because it's hard to get the oil out of there, in part because it's politically unstable, but largely because the oil that we all thought was there hasn't shown up.
It continues to be the Middle East. The Middle East will continue to dominate American foreign policy insofar as oil is concerned. So, I guess the question is, coming up with an exit strategy. We're not winning ourselves more; that's not going to happen anytime soon, but at least making serious signals that we are going to move from oil in the transportation sector to something else, recognizing that it's going to take time. This isn't going to be overnight, and we're not going to become energy dependent— or independent, overnight. But I think it would be wise to at least keep sending signals to our allies and to the market that we intend to move in a direction away from oil in the transportation sector.
ZUCKERMAN: You know, Wal-Mart, I think the median income of the consumer at Wal-Mart, the customer at Wal-Mart, is somewhere around $26,000 to $27,000. And they have attributed the relatively slow growth that they have enjoyed in first-store comparison to oil prices. So it does have at least an effect on a part of the economy, wouldn't you say?
HUBER: Higher prices reduce demand, even in relatively inelastic markets. If you wanted to have a serious national policy to reduce oil demand in the United States, you would do what Japan and Europe have done; you would put a serious tax on oil. If you back out their gasoline taxes, they tax their oil as high as $85 a barrel.
And we don't. We couldn't get $1.50 a barrel tax during the first Clinton administration, when both houses of Congress where controlled by Democrats. But let me just follow up on a couple of points. First of all, in our transportation sector, numbers matter, folks. We can say things are completely separate, but then there are numbers. You will not fly planes on anything but oil, I agree with that. That's 0.6 billion barrels a year of our total seven consumption.
So planes will keep flying on oil. The two billion barrels of oil a year, OK, it's what, 30 percent of our consumption, almost, OK?--more than that. In our transportation sector, OK, is in fleet vehicles and buses, and things like that, OK? There you have a clear, cross-elasticity with natural gas. They are running those vehicles today on natural gas. And so, if you have a good natural-gas policy, which we do not, you can actually have a substantial impact there, OK.
The trucking business already has strong incentives to be efficient; you can't do much there. And the final question is, will we bridge— is there any future for bridging three billion barrels of oil demand in light vehicles, passenger vehicles, with something that's not oil? And I think there is. There's a serious future— it's not hydrogen, OK— but it is the evolution, which I think will come naturally, of the hybrid electric car. As hybrid electric cars evolve— they have five kilowatt hours of battery pack in them. It's not a big battery pack. It's enough for a few miles— OK, up to five miles— but most trips are under five miles.
And as that infrastructure evolves, which it will naturally without mandates from Washington, you move toward a world where you can plug in your hybrid when it's parked in your garage or at work. The kilowatt hours on the grid are much cheaper than anything you can generate with a gasoline engine in your car, and with that, bridging process is happening.
Our industrial sector consumes a billion barrels a year of low-grade oil. That is cross-substitutable with other fuels, natural gas, and electricity. And there are policies that can promote that. You know, people— it's easy to say our transportation sector is locked into oil. I would say about 30 percent of our transportation sector is seriously locked into oil; the rest is not. And we can implement policies to bridge between oil and non-oil fuels.
ZUCKERMAN: Peter, what's the most prescient prediction you made in the oil world in the last half-dozen years?
HUBER: I last wrote, at least in public, about oil in 1998. I think it was the 25th anniversary of the Arab oil embargo, and oil was then at $12 a barrel, and we tracked out in an article in Forbes. We said, "Look, it was sky-high in the early ‘80s; it's now at $12; it will go up again; it will— these markets are volatile, but the long-term trends are dictated by the technology of oil extraction and by political and regulatory factors." And I stand by every word of that. Politics can do anything to these markets. They can do anything to any markets. Your computer markets, your wheat markets, your steel markets, they can certainly disrupt your oil markets, but the long-term trends are favorable, and the technology trends are very favorable.
ZUCKERMAN: So that is, in a sense, the same prediction you have today.
HUBER: Absolutely. I stand by it.
ZUCKERMAN: Paul, you want to try your best prediction over the last few years in oil and what you predict by way of today in terms of where we will look, what it will do to us?
ZUCKERMAN: Both pricing, supply, call it what you will, its political impact as we go forward.
ROBERTS: Well, I think the smartest thing I ended up saying was that hybrids would start to become— would get traction in the market. And they appear to be in a small, kind of a model way, and I'm quite encouraged by that. Peter points out hybrids point the way to a huge potential in terms of transforming the transportation sector. I don't think it's going to happen by itself, but I think there's a lot of potential there. In terms of oil prices, I mean, the classical way to look at this would be say that in times past, price spikes have the seeds of their own rescue.
It typically takes about 5 to 7 years from the oil prices spike until you see a flood of new oil brought on as companies are encouraged to go out and look for new oil. We've had these high prices. I don't know if they're still qualified as a spike. It might be more of a plateau. But we've had these high prices for about three-and-a-half years, so we would anticipate in two-and-a-half to three more years, we'll see another flood of oil. And the question, I think— and until that point, I think we're going to see oil in the $45 to $50 range. And at that point, in two-and-a-half years, we'll see a change, but the real question is, what kind of change? If things are as classical economists would tell us, then oil will go back down, because there's going to be a monster flood of oil that's going to come with all this encouragement that the oil industry is getting right now with these prices.
But if, in fact, it is harder to get that oil, or if political— for whatever reasons, politics or geology, then I think prices are going to stay higher. Now, the key thing, I think, to keep in mind is that this sort of disconnect between the U.S. and the rest of oil market. Fifty-dollar oil has, despite everyone's predictions, and $3, $2.50, $3 gallon of gas has not been enough to keep us from driving. In fact, we drive more this year than we did last year. And— so the question is— $50 oil wasn't enough to do it, and yet $50 oil is high enough to indicate problems, in my view, in the dynamic between supply and demand.
So the U.S. isn't encouraged through pure-market dynamics to do anything about its oil demand, and yet oil demand is already problematic in the market. I see that as a problem that is going to require our focus.
ZUCKERMAN: So does that give you more concern that Goldman Sachs' prediction of oil that might spike at $106 a barrel, if you recall that about several months ago, do you think there's any serious probability that that might happen?
ROBERTS: Absolutely. I mean, tight markets are more volatile; that's the bottom line. And this market is tighter than it's been in a long time. It is more prone to volatility. All it takes is a hiccup. I mean, right now, there's what, 500,000 million barrels of spare capacity? Most of it is in a heavier oil that is not usable as widely as we'd like. What happens if Venezuela goes off again? We don't have the capacity to come in. I mean, we'll [have] $150 oil, and the question is whether it's going to be a spike, which implies they're going to have a short-term rise, or there's going to be longer term.
I think in the long term, there is a great deal of oil. I subscribe to the fact that we've got lots of oil in the ground, unconventional oil, in huge amounts. The question is whether we're going to have the stable economic and political environment to make the kinds of investments we'll need to make to get at that oil.
ZUCKERMAN: China has been making long-term contracts in the oil market on some kind of pricing formula that I don't know is public knowledge. What do you think the impact of that is in terms of the rest of the oil consumers who do not seem to engage in that kind of long-term contracts because they are mostly private markets rather than public markets?
ROBERTS: Well, it may signal the beginning of a new kind of geopolitical oil trading. You know, Peter brought up the point that, if we see oil at $80 a barrel, you can rest assured that we'll be up in Alaska and going off shore. And I agree that's a probability, but my concern is that if U.S. strategists begin to fear that oil truly is going to go up to $100 a barrel, and [will] truly damage our economic growth and therefore our geopolitical standing and power, I don't think they're going to be content to simply look at Alaska or off shore.
I think inevitably they will turn— the focus will [turn] toward the Middle East. It's where we've looked in times past. We came very close to becoming heavily involved in the Middle East during the ‘70s, and the reason we didn't go forth [was] because the Soviet Union said they wouldn't allow it.
ZUCKERMAN: What do you mean by that?
ROBERTS: I mean, I think that the U.S. will become— if oil appears to [be] going high enough to damage our economy, I don't think we're going to be looking for solutions domestically. I think we will look at some form of intervention in oil-producing countries abroad. I think that's— I think we've made all the— I think there are all the signs that we would do that. And I don't think that it's necessarily a Republican or a Democratic strategy. I think it would become a U.S. strategy.
So the question is, trying to have— is beginning to build up long-term alliances with oil producers. That's great, as long as the world political system contains itself and contracts are still honored. If we move to a point where we're considering military intervention, I don't think those contracts are going to mean much.
ZUCKERMAN: You want to comment on this before we open it up to the audience?
HUBER: I agree with Paul halfway. Our current imports from the Persian Gulf are 0.9 billion barrels of oil a year, about 15 percent of our demand. People think we're— that's— we could displace personally, I mean, forgetting about the rest of the world, we could displace all of that in heartbeat. From Alaska alone we've got 20 years of all of our Persian Gulf imports. But, of course, these markets are global markets, and unless we're going to build a big wall around us and try to be autarkic— that was tried in the ‘30s, it was not a good policy— that we have to contend with the rest of the world.
Europe is horrendously dependent on Persian Gulf oil, OK?--I mean, where it's actually coming from. I know it's a global market. If we do end up intervening there, it will be for much the same reason that we had troops all over Europe during the Cold War. Japan is very dependent on Persian Gulf oil. Our principal allies are very dependent. So we are worried about the destabilization of the globe, and to the extent we're going to be world leaders, then I suspect Paul is right. There is a lot of oil there, and it matters to a lot of people.
But I do think the scenarios that we, personally in the [United] States, are tremendously dependent are not correct. We could easily be oil exporters ourselves today if we chose to go after all the oil that we're choosing not to drill for.
ZUCKERMAN: Why don't I now open this meeting up to questions from the audience. Would you please identify yourselves when I recognize you. Back there.
QUESTIONER: My name is Steve Mukamal with the firm of Barst & Mukamal. I'd like to address the question to Peter. You spoke about the possibility of—
ZUCKERMAN: Could you be a little louder, please?
QUESTIONER: --using hydrocarbon as a vehicle to alleviate some of the problems that we may encounter, especially with domestic travel. What will this do, assuming this is a policy that works with regard to the other economies of the world that have become dependent on the sale of oil— how will this impact on countries like Saudi Arabia or Kuwait or Iran or other countries that the North Sea oil— Venezuela— if the demand now drops, because we were so successful in converting domestically to hydrocarbons, for example, or hybrid use?
HUBER: Well, to begin with, that's a problem I'd love to have to face. Let's look at the downside. At current $50 a barrel, if, in fact, the Persian Gulf does have 600 billion barrels under the ground there, we are talking about shipping to them $30 trillion dollars. I do not like that number at all. I will say no more, but I think that is a very scary prospect. I would not wish to confide in that region of the world, as [it is] politically governed today, $30 trillion of anybody's money, or 30 trillion Euros, OK. So I would be delighted to have that problem.
No. 2— we're not close to having that problem— No. 2— I believe— this is a political statement— much of the Mideast is currently artificially stabilized by this weird flow of money. I mean, the political— the incredibly— the feudal structures they have in certain countries that need not be named are sustained by their ability to splash cash around as needed to pacify people. It could be very destabilizing, just as high prices are destabilizing in other ways. I mean, in answer to an earlier question, I think OPEC is not a problem today. Osama [bin Laden] is a problem.
ZUCKERMAN: Yes, question over here.
QUESTIONER: Thank you. Vijay Vaitheeswaran with the Economist. Question for the two gentlemen: If you would comment on what would be the implication of the arrival of a meaningful carbon price? That is, whatever happens with the Kyoto Treaty [on climate change], the arrival of some kind of carbon legislation in the U.S.--that is the only market that matters, a quarter of the world economy— some kind of meaningful impact on carbon emissions?
And I say this, what would be the impact on oil markets, medium term? I say this, bearing in mind that the auto industry and the oil industry has, by and large, successfully met every environmental challenge that's been thrown at it, in terms of smog, pollution, et cetera. Cars today are 98 percent cleaner in most local air pollution tests than the ones 30 years ago. But carbon dioxide is one test that they can never meet. Once you burn gasoline, you're going to emit carbon dioxide, and if we move into a carbon-constrained world, what does that mean for oil markets, and, in particular, if we move towards tar sands, which are even more carbon-intensive than conventional oil? I wondered if you gentlemen would comment.
ROBERTS: It's a great question. I'm going to assume that we're going to need to move into a carbon-constrained world, which affects everything from the usability of tar sands, to simply our economic growth.
In terms of how it affects world oil markets, right now most of the big oil companies— in fact all of them— are looking seriously at technology that will allow them to sequester carbon from whatever resource they happen to be using, whether it's coal or oil, heavy oil. And I think the question they have is, when do they need to start worrying about that?
Everyone is aware that carbon is a potential problem. Perhaps it's only political; perhaps it's only a question of convincing the people who believe in climate change that they're wrong, or maybe it's a matter of a holding action. I think that at some point in the next 20 years, we're going to have some sort of a carbon regime. I think that oil companies are quite aware of this— energy companies generally— and right now, they are figuring out ways to position themselves, given their current asset mix, to take advantage of that.
I know a lot of oil companies are now investing heavily into patents for technology that will allow them to sequester carbons, and they're trying to figure out their pricing models. What's it going to take? What will the tax have to be before this makes sense? It's being discussed among companies privately. It's not being discussed publicly in Washington, where it really needs to be discussed. I think that's part of where this debate has to go.
You can have an energy policy that doesn't touch on climate. We've got one right now. You can't have a real climate policy in this country that doesn't deal with energy. And I think that it requires taking many steps backward and looking at the policy at a 40,000 foot level, which this country hasn't shown much of a capacity to do over the last 50 years. But it has to happen. But I think the energy companies are the least of our worries. I mean, they can take care of themselves. And further, nothing is going to happen without their participation. It's not like we're going to build this carbon-free economy next to them. So they will be involved. They will find a way to be involved profitably.
HUBER: Well, you did use the word, meaningful carbon tax. So a meaningless carbon tax is not of interest. At the most fundamental level, when you burn a carbohydrate, you get your heat by burning the hydrogen and a hydrocarbon and by burning a carbon. In natural gas, it's about 80 percent hydrogen, heat, and 20 percent carbon. So a carbon tax is quite favorable to natural gas. In uranium, it's 0 percent carbon. And in between, on oil, I don't know, it's about 40 percent carbon combustion and 60 percent hydrogen. And coal, it's about 80 percent carbon. And these are— I'm doing it from memory— but I'm about right on that.
But clearly, a uniform carbon tax will tend to skew your consumption across that sector, a meaningless one won't. This gets me then to my— oh by the way— this then gets me to my political prediction, and I'm not saying this to be annoying. Politically, I think there is zero chance that the economies that matter will implement a carbon tax. Since China is apparently the one we worry about most, I think there is zero prospect that China will implement one.
I don't think India will implement one, or if they do, I think it will have no impact. In other words, it won't be respected. Europe, possibly— Europe is a shrinking economy, a shrinking population. Their policy is lethargy; they can do anything. But I don't think— and they don't matter, OK? But the Europeans— the U.S. economy is the growing economy. South America, the ones that have a rising future, I think there is zero chance.
And if you want the U.S. politics, you can just go on our walk-through— natural gas, oil, and coal— and ask yourself— I mean, this is the country that has coal in West Virginia, in many Democratic places, and we have never been willing to touch coal. We will suppress uranium, but we burn more coal. We'll flip back and forth on natural gas, but we burn more coal. You know our energy policy, the core of our energy policy since 1980, when all is said and done, has nothing to do with anything except coal. We have burned more coal and still more coal. We are burning a billion tons a year of coal, and we're not about to change that. It's politically very powerful.
ZUCKERMAN: Question over there. Would you identify yourself please?
QUESTIONER: Morris Mark, Mark Asset Management. One thing that struck me about the conversation was the total lack of mention of the impact of technology on future energy supply and the ability to create it environmentally friendly. Taking that into account, we have more oil shale in this country, in terms of reserves, than the Saudis have oil. The tar sands' number in Canada is somewhat equivalent, much less the coal you were talking about.
Now the simple question, I'd like to start it with Mort, because he is the most politically astute. Why hasn't one of our political leaders of either one of the parties advocated anything like a [World War II] Manhattan Project [to develop the first nuclear weapons] for energy, so we can take the money that we're sending to the Saudis, the Iranians, and all other good friends, and put it to work in this country taking those hydrocarbons and producing them in an environmentally friendly way at an economic cost?
It would seem to me a country that can create the A-bomb, a country that can create the microprocessor— just government, in effect, saying, "We will make this capital commitment available for a long enough period of time so that the people involved don't have to worry about the Saudis fooling around with the oil market every time we get used to high energy," they'd move the price down so people say, "Oh, we can't make this kind of investment." Why no Manhattan Project for energy? Why not turn the oil shale and the tar sands and the coal into something useable?
ZUCKERMAN: Well, I hope it doesn't sound like false modesty to suggest I'm not the most sophisticated on the politics of this. But I will say this: First, that's a long-term project, and very few governments that we have take long-term positions on anything at the national level. When they take long-term positions, for example, it's primarily to cut taxes, and therefore run big deficits in the country. And this kind of quote/unquote Manhattan Project, which we have to imagine would come to billions and billions of dollars, has very little short-term payoff in political terms. And that, alas, is, I think, the dominant view of most of our political people. There are so many issues on which we could make progress, both financially and otherwise, if we could take a long-term perspective. That's almost impossible within our current political system. And it's amazing how rare that that takes place. But that would be my own reaction to it.
You know, the Manhattan Project worked for a different reason. No. 1, it was secret. No. 2, we were in a war where we really felt the threat. That changes everything. When we have a crisis— Sputnik [satellites launched by the Soviet Union in the late 1950s], for example, was something that caused a crisis in America, because it was so visible a blow to our national self esteem and identity that we began to actually put a lot more money into technology and into the education of people in science and technology.
It's very difficult to do that today. It's a sad thing to say, but you look at the threats, for example, that China and India present to our economy in longer terms, and we are doing very little to combat that threat. But there are many areas where long-term, large-scale projects would pay huge dividends in this country, and it's very difficult to see where the leadership for that comes in our political system. Do you want to comment on that, Peter?
HUBER: You know, General [George Smith] Patton completed his roll into Germany [in World War II]--his tanks were fueled by German coal. The Germans had a synfuels program [to synthesize liquid fuel from sources such as coal or oil shale] at the end of the war, because they had to. Jimmy Carter had a $20 billion program. There are lots and lots of ways— you give a chemical engineer enough money, he can make stuff that looks and burns just like oil out of just about anything. You can make it out of corn; you can make it out of turkey offal, and you can make it out of tar sands and shale and gas, you name it. It's takes a lot of money, and the problem is that it may not be a good investment. There may be a better way of getting oil, like out of the tar sands, unless they have a carbon tax on it, or maybe peace breaks out all over. Who knows?
And you have to be very careful. Do you know what the U.S. oil industry will spend exacting domestic oil in the next five years? $250 billion. That's just for the little small tiny amounts, 40 percent, that we actually do here. It's kind of tricky to get a $250 billion spending program on a far-out technology, whether it's hydrogen or oil shale or whatever, when somebody somewhere— unless Paul is completely right about everything, somebody somewhere might just flip the spigot, and then your money is going down the tubes.
Jimmy Carter's $20 billion, OK, sold off for well under a billion [dollars]. I mean, it's still out there somewhere, but— it's been done. I'm not saying you're wrong. It's not clear it's good spending.
ZUCKERMAN: Paul, do you want to comment on that?
ROBERTS: Well there's no risk-free course we can take. There is no way that we're going to avoid taking some hits. And there is no way that we can't look at the next 20 years or 30 years of evolution in the energy economy as anything but a rolling experiment. I mean, I'd like to be able to tell you that here are the three technologies we need to pursue and that way you can make a bundle of money. But that's just not the case.
I think the best that we can do is recognize that there are various factors that are going to pop up, a lot having to do with politics. We may, in the meantime, find a bunch of new oil. We may find a new technology that will allow us to convert tar sands into useable fuel for our cars and do it in a carbon-free way. But all this stuff— I mean, mainly what we're interested in, is having the market do it for us. We would like for there to be a market-based solution. The problem with a market-based solution today is that it ignores carbon. I mean, at some point, we have to acknowledge the fact that the market sees carbon as a freebie. Actually, it doesn't see carbon at all. It doesn't have to. We can go on emitting carbons, and there is no way to say to the market, "This is a cost."
Now, Peter has talked dismissively about a carbon tax. But I think what we need to acknowledge is that, at some point we need to say, "Look markets, avoid carbon, but do it any way you want. If you could find a way to convert tar sands into fuel and take the carbon out and do it cost effectively, great. We don't really care. Just do it. If you can find some other way to produce energy and then lower your carbon emissions, great. We don't care."
The problem is today the political climate doesn't even allow us to talk about carbon. And the reason is, Peter points out, coal, because right now anything that's anti-carbon is anti-coal. And this has thwarted Presidents Clinton— it thwarted the first Bush and it's thwarted this Bush from even talking about carbon. So clearly, we need to make a political deal with coal industry and the utilities that depend on coal and the states that depend on coal.
And we need to say, "Look, coal is the future. We're not going to try to get rid of you, but we need your help. And in return, we're going to help you burn cleanly. We're going to help fund technology and research that allows coal to be used cleanly. In return for that"— and we're going to consider this a Manhattan-style project— "it's going to be something like the bailout of the airlines. We consider this an emergency; we're going to do it. In return for that, we want your political support for a carbon regime, OK? We want you to support the idea that in 20 years from now, say, we're going to start having a tax— yes, a tax— on carbon, on each ton emitted. We're also going to create a cap-and-trade system that will allow you in the market to decide how best to apportion that." We've done it with sulfur in this country, quite successfully. They're doing it in Europe. The jury is still out as to how successful it will be.
The point is it's doable. Once that carbon regime is in place, it may be 20 years down the line, and the market says, "We don't like clean coal. That didn't work out. That wasn't very costeffective. But we found these other three technologies that work." I personally don't care. As long as we have a carbon regime in place, because, although we can't be absolutely certain that the climate is going to fall apart in 50 years, we do know that if we discover in 50 years that it is in serious shape, there is no way in hell that we're going to come even close doing anything by that point.
HUBER: Paul, could I just— coal is almost pure carbon. Almost all external value comes from burning carbon. There isn't much hydrogen in it. So it's hard for me to visualize a deal or a carbon policy that isn't hostile to coal. It's as close to pure carbon as you could burn.
ROBERTS: It absolutely is. I think what we have to recognize that there are ways to deal with it. Granted, maybe coal doesn't turn out to be the fuel. I mean, if you're going to deal with carbon, if you're going to acknowledge that carbon is a problem, then maybe coal isn't the magic bullet that we hope it is.
HUBER: And then you have your political problem.
ROBERTS: Well, we have a political problem now. I think we can both agree on that.
ZUCKERMAN: Question over here.
QUESTIONER: David [inaudible]. A question to Peter: How would you assess and quantify the refining bottleneck? That is, the Saudis often invoke that bottleneck as one of the drivers of the price increase.
HUBER: From all I've seen and heard, it is a serious issue. It is very close to impossible to build a new refinery in the States for environmental reasons. We haven't built any serious new refinery capacity in decades. You can, of course, refine overseas and then import your refined products to the states, but that requires, again, long-term planning in countries that are willing to do this. And if you're looking at the price of the refined products, of course, they can be jacked sky high by any bottleneck at any point, whether it's getting oil out of the ground or transforming the oil into gasoline. It's a serious issue. There are plenty of them.
ZUCKERMAN: Question over here.
QUESTIONER: Ben Steil, Council on Foreign Relations. Peter, I want to go back to your earlier comments about hybrid vehicles. If I understood you correctly, you said you envisioned us moving more in this direction without government mandate. And my question is, why wouldn't government mandate subsidies, incentives, some sort of prod, actually help in this area, given the legitimate environmental concerns about gasoline-powered cars, given the legitimate geopolitical concerns about our dependence, the degree, on Persian Gulf oil? Why not, for example, a mandate that by 2015 vehicles in the United States, and perhaps in the EU [European Union] and Japan, would all be fueled by hybrid technology meeting a certain standard? If we did this on a cross-border basis, that would drive down the cost of developing and implementing the technology. What would be wrong with having a government mandate?
HUBER: Let me answer it in both parts. First, why I think it will happen anyway— I have an article in the most recent issue of the Journal of Mechanical Engineering. I think there have been evolutions in the— today, when you take 100 kilowatts of power in your car— it's not electric, of course, but that's how much energy the prime mover generates when you redline your mid-size car. And it's all distributed mechanically except for two kilowatts. It moves from the engine; it goes, "chunka-chunka, bang-bang, click-click," and it eventually drives your wheels.
The technologies have come of age, literally in the last decade, not before, that make it much better from an engineering perspective to convert that to electricity and then distribute electrically. Our big diesel locomotives are built that way. All the navy ships are being built that way. The monster mining trucks that dig all this coal are all hybrid electric vehicles. It's coming to Detroit and Japan, and I think it's wonderful, precisely because it wasn't mandated by the government.
The problem with government mandates is that these things are tricky. They involve complex issues of timing and when the technology comes of age. [Then-Vice President] Al Gore wanted to do this in 1992. We weren't ready in 1992. We didn't have the power of semiconductors. We have them today, OK? The actual trajectory, many people say will start with a prime mover, "We should do a fuel cell." A fuel cell is useless in Detroit today. I could give Detroit a free fuel cell. They can't drop it in under the hood. They don't have the power-train to take electricity and distribute it. Detroit is making a transition to a [inaudible] electrical standard. You can't distribute electrical power at 14 volts. You need wires this fat.
These— you know what, the Potomac isn't very good at making those calls on timing and what you do and in what order and so on. And as soon as it tries to, it does stupid things. And if the dynamic is there anyway, which I'm quite convinced it is, with, actually, Japanese manufacturers leading the way. We should say, "Hallelujah, brother," and sit back and let it happen. We shouldn't be so frightened of the markets resisting [inaudible] and high oil prices will accelerate it. Let them do that.
ZUCKERMAN: So if you were advocating a government policy, in a sense, to improve the prospects for— the oil risks to this country and to this economy, you would not advocate a Manhattan Project; you would advocate something a lot simpler in the form of a tax?
HUBER: Actually, I'm glad we got there. First of all, engineering, design of cars, Washington ought to have the wisdom and courage to stand back and do nothing, all right? And I think they're having that at the moment. But the important convergence, again— if there's anything anybody remembers from all the words I've said, remember 7 and 11, OK? Eleven billion barrels of oil equivalent are not oil today. The very important convergence is between the electrical sectors of our economy, the non-oil sectors, and the transportation sector.
Our current gas-tax policy— and I can back up the numbers; you won't believe them, we have a hugely higher tax on the fuels that generate electricity than we do on oil itself. You've got to back it out right. It's not easy to feed out. But our de facto taxes on coal and uranium are up in the 50 [percent] and 100 percent rate if you back out the tax put on kilowatt hours back to the original fuel. Our taxes on oil are 10 percent. We should flatten out our taxes on raw fuel, and we should only tax the raw fuel. And we should encourage, wherever possible, any bridging between the electric sector, which none of which is oil, and the oil sector. Those are big numbers. There, you right away can have substantial impacts on oil demand. And they're not Manhattan Projects. These are the kinds of things governments should do— tax policies and interfaces between markets.
ZUCKERMAN: Question, anybody? Well, we're close to the end of the hour. I'm going to ask just one other question here. And this goes to the politics of these things: I mean, there has always been a feeling that big oil has a stranglehold on a lot of American politics. Is that your judgment today?
HUBER: Big producers of very valuable stuff have a lot of political influence in the United States. Silicon Valley does, all right; they have a lot of political influence. They're very good at what they do. And oil certainly does, energy markets, absolutely. And the military does. Energy is a very emotional thing, I think, largely because people— oil is, because they whip out their wallet once a week or twice a week and they pay for it. And so that has political clout, yes.
ROBERTS: Well, you know, the oil companies didn't hide all the solar technology in the ‘70s. They often get accused of sitting on the technology that is going to save us from oil. And the fact is, they invested really heavily in solar in the late ‘70s and early ‘80s, not because they thought solar was better than oil, but because if solar took off, they wanted to own that market, too. And that is essentially where they are today. They are ready to change, if they can make money, if they can keep a dominant share in whatever we change into. And they are waiting.
And not all oil companies are the same. They have different personalities and different strategies. BP and Shell, to the extent that you can be out in front and be an oil company, they are. And they are investing more heavily in bio-fuels and in alternatives. And at least they're making noises, true, but they're also getting out there some investments. Companies like Exxon Mobil have different strategies. They are so large that they can wait until an alternative energy economy develops, if it does, and appears profitable, and then they'll buy their way into it.
All of these companies want to make money. They all want to make money sustainably over the long term. But they're not the ones we should be looking to, to be taking risks. The risks have to be taken in the political sphere, and that's really what we keep coming back to is, we need to start taking those risks.
I'll close by saying that in 1907, I think it was, Winston Churchill was then running the British navy, made the decision to convert the navy from coal to oil. Now at the time, this was quite radical, because the market didn't yet understand that oil was a better fuel than coal. It wasn't yet seen that it was simply more bang for the buck. And, in fact, it appeared to be a huge strategic risk, because England was self-sufficient in coal. It didn't have any oil. And yet, they were going to convert their fleet to a fuel that they were going to have to get far away in the Mediterranean at the time, and they were going to be at risk, as this is a time when Germany is arming itself. World War I is just around the corner. And Churchill, he said, "Look, we need to have our ships running on oil because they will run faster. We must be able to beat the German navy. And that's how it'll be. It'll be the few miles an hour that we can move faster. That will be the key."
He took that risk, well before the market saw it. And, in fact, all the assets were in coal at the time. It was an anti-market move. It turned out to be where the market was going to get, eventually. But it represents the kind of government-initiated strategic move that we may need to see now. You can hope that the market will follow. You can plan your strategic initiatives so the market will follow, but it may take something that appears radical at the time. And that's what I think we need to be gearing up for.
ZUCKERMAN: Well, on that, I will thank our panelists for a really interesting panel and thank you all for joining us. [Applause]
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