The Global Energy Landscape

Tuesday, December 13, 2011

Experts discuss the energy demands of emerging economies, as well as the stability of oil supply.

This meeting is the first in a series of global partnership meetings with the Financial Times.

ROBERT RUBIN: I am Bob Rubin, co-chairman of the Council on Foreign Relations, and I welcome you to this evening's meeting, The Global Energy Landscape.

This discussion will be the first in a series that we're doing in partnership with the Financial Times, and we are very excited about that partnership. It's a wonderful organization, as you know, and we look forward to exploring many vital issues in the time to come.

This evening's event is hosted by our corporate program, and the corporate program is designed to bring together senior executives of major corporations, to give them the opportunity to interact with each other and also to interact with the experts who are involved and the council brings together in order to better understand the issues that are vital to our times and the policy choices that face our country.

The discussion of energy seems particularly timely, given the uncertainties in the Middle East, including Iran, the vast increases in recoverable gas and oil because of recent technological developments and the implications of all that for economies, for geopolitics, for the environment, increasing concerns about global warming and other environmental issues, and much else.

We're extremely fortunate to have with us this evening two outstanding participants to help us guide -- help guide us through the enormous complexities around energy. Daniel Yergin, as you all know, has long been preeminent on matters relating to energy, and he has now written a new book, "The Quest: Energy Security and the Remaking of the Modern world." And Dan just told me you can read it from first page to last page or you can pick it up and start anyplace in between. It apparently is modular in the way it's been written. (Laughter.)

It delves into the pressing issues of energy with the perspectives on economics, environmental matters, geopolitics and politics themselves.

And we have with us Carlos Pascual, who's a highly experienced diplomat, a former scholar -- distinguished scholar at Brookings Institute and now the newly appointed special envoy and coordinator for national energy affairs at Department of State.

I was instructed not to raise any questions myself, but I, as chairman, am going to take the liberty of violating that instruction.

And let me -- let me raise two slightly off-the-beaten-track questions, firstly -- for the -- for the panel to discuss. Firstly, should energy price include the negative externalities that are involved in environmental effects and particularly in climate change? And secondly, what do supply and pricing effects of the new capturable reserves of natural gas mean for the development of the renewable energy sources and conservation?

With that, I'll turn the session over to the extremely capable hands of Ed Crooks, distinguished U.S. industry and energy editor of the Financial Times.

Ed, the platform is yours. Thank you.

ED CROOKS: Thank you very much indeed.

Well, yes, please, please, yeah, please -- please join us.

Well, Robert, thank you very much indeed. Thank you for that very excellent introduction, those very kind words and for those rather thought-provoking questions.

Just in order -- perhaps to give our panelists some time to reflect on the (answers ?), just a couple quick housekeeping notes, if I can. If you could please make sure that your phones are off, rather than just on mute, because they're, you know -- it'll interfere with the microphones if you don't.

To be clear, we are all on the record here. Everything is on the record. This is being sent out over the web, I think. So if that troubles you, then have to wait until we're off-line before you make the other points you might want to make off the record.

And you know, we're being -- as I say, we're being watched around the world, a few of our members watching this on a password-protected videoconference. And hopefully you'll all get a chance to ask all the questions you want here in the room. And we'll also, I hope, be taking questions from around the world from, as I say, members that are watching on the web.

So, yes, two excellent questions there, from (Mr. Rubin ?). I mean, perhaps -- well, we won't start with them. I wonder if we -- perhaps we -- I mean, we were saying we weren't going to have any introductory statements, but perhaps just if you could tell us a little bit about what you do.

Perhaps, Carlos, let's start with you, because you're -- it's a new role, right? And I'm interested just to get you to explain a little bit about what it is exactly that you do at State.


It is a new role. The position I have, special envoy, coordinator for international energy affairs -- it's a long title. I always kid that the longer your title, the more insecure you are about what you do in life. (Laughter.) And maybe I am insecure about what -- (chuckles) -- I do in life every day.

But one of the things Secretary Clinton asked me to do, when I took this position, was to create a new bureau on energy resources in the State Department, and the reason for that is that energy is such a fundamental driver of our economics, of our national security. And if we don't have the capacity to both manage the resources that we have largely today, which are heavily fossil fuels, and if we don't have the capacity to deal with some of the market incentives that drive that transformation to a new energy future for the future, which is very much at Bob Rubin's question of how do you price some of the externalities and how do you create the incentives. Because these are some of the questions that have to be raised. If you can't, in fact, actually compensate technologies and create the demand pull for those technologies and if you can't create viable financial vehicles, you can't advance them.

So a challenge that we have is how to take these basic realities of the need to be able to manage the geopolitics of energy, the need to manage transformation, the importance of also looking at those who are left out of modern energy services -- there are about 1.5 billion people in the world that don't have access to electricity -- and these became the framework for what we're doing in this energy resources bureau: working together with DOE and trying to match the technical capabilities that the Department of Energy has with policy and market- related drivers that help us understand how to promote market stability, how to promote market transformation, how to advance commercial viability of projects on -- in poor countries. And those are the critical areas that we're working on now.

CROOKS: Interesting, thank you. And Dan, turning to you, as Bob was saying, you just published "The Quest," which I know -- and I'm pleased to be able to say -- was reviewed very favorably in the Financial Times by me.

(Laughter.) It was also -- actually, it was short-listed for the FT -- (inaudible) -- I won't ask you to summarize all 805 pages in the next 15 seconds, but perhaps you could give people a -- just a bit of an outline of what it's about -- (inaudible).

DANIEL YERGIN: First of all, let me correct one thing. I think it's 803, but I --

CROOKS: Oh -- (laughter) --

YERGIN: But actually, when Bob suggested that I had said you could read the book in a modular way, I was really just quoting your review, which had pointed out that in a sense, there are several sort of sub-books within the book.

But there are three big questions that tie the whole thing together that are very relevant to what's on Carlos' agenda and really to what the future of energy is all about. One is growth in the world economy. We could well see a world that's -- despite the current economic travails and turmoil, that doubles GDP in two or so decades or something more than that.

That will require a lot of energy. Where's that energy going to come, what's going to be the mix, and who will provide it? So that's the first big question. The second is the energy security questions, which are both the traditional ones, many of them centered on the Persian Gulf or the South China Sea -- also the new questions about cyberterrorism, cybervulnerability. And then the third is kind of what Bob was pointing to, which is how do you meet both your energy objectives in a growing world and meet your energy objectives at the same time. And the answer is it's not easy.

So I think that -- those questions kind of define the whole narrative of the book. And then what I do to -- I mean, really, I've been working on it for five years now. But I -- chairman of IHS CERA, Cambridge Energy, and we have about 300 people around the world. And the job is to try and understand energy markets in themselves and also in their kind of technical and political and economic context. And that's kind of what's ongoing work.

CROOKS: Thank you. So I mean, perhaps to kick it off, I am a journalist, I'm afraid, so I'm going to want to talk about the most kind of burningly topical urgent issue right now, which does seem to be Iran. We've heard a lot of talk about, obviously, rising tensions, a lot of concern about oil supplies, concern about the Straits of Hormuz in particular. How should we be thinking about that? And to what extent is energy, then, a very important factor in the way we think about Iran?

Carlos, then --

PASCUAL: Well, I think one of the things that has been a challenge has been to educate people about how global oil markets actually function, because obviously, one piece of it is that you need an equilibration of -- between supply and demand in those global oil markets in order to maintain stability in the prices.

But in addition to that, there is a concept that is called "spare capacity." And Michael Levi, sitting in the back together with a colleague, Bob McNally, wrote a very good piece in Foreign Affairs -- what, June, July, Michael? And the critical issue here is that the spare capacity that we have in global markets today is relatively small. The total size of the global oil market is about 89 (million), 90 million barrels a day. The spare capacity, one can argue, is somewhere between 2 1/2 (million) to 5 million barrels a day. So what happens when you take 1 1/2 (million) to 2 million barrels off of that spare capacity in order to fill in for supply for Libya? It tells that marketplace that you have stripped away the capacity to respond if you have another crisis or an emergency.

And so if you're dealing with markets that are subject to speculation and risk, what you then end up having is this rather interesting and anomalous situation. If you read Dan's book, one of the things you'll get out of it -- and you covered it in your op-ed yesterday in The Wall Street Journal -- is that there are very significant new supplies of oil that are coming into global markets. And everybody says, so what's the big deal; what's the problem? The problem is that those new supplies aren't immediately -- they're not elastic. You can't turn them on and off tomorrow. And so if you have an immediate problem or spike that takes some of those supplies off the market, then the speculation starts. Then the price spikes start.

And so the challenge that we end up facing is when you have issues like Iran and the question of sanctions against Iran coming onto the market, how do you work with consumer countries on consumption patterns and how those sanctions might be handled? How do you work with key supplier countries to ensure that you get supplies onto the market? How do you coordinate those statements together? How do you create some sense of confidence that you can maintain spare capacity so that in the end you maintain some degree of market stability, and you don't get the price spikes and the kinds of speculation that would normally happen in this kind of situation?

CROOKS: But in practical terms, there's not a great deal you can do about it, right? I mean, it's supplied by it's nature, as you said, inelastic demand. It's highly inelastic, therefore you're going to get a volatile market. I mean, one of the -- one of the potential weapons that consumer countries have is the oil reserve. But of course, we had the coordinated release by the IAEA countries over the -- (inaudible) -- have no effect whatsoever, or very little effect.

YERGIN: Yeah, I mean, we can see that the market is, as Carlos says, relatively tight. It's actually just kind of done the calculations. And look back: This year the average price for oil will be higher in real terms than it has been at any time since 1860. So it's kind of a message: Markets are tight, strong demand in the emerging markets, the other supplies. The potential's there, but they need to come into the market.

And also, I think something I've been told, you know, a week -- a couple weeks ago, kind of geopolitics wasn't in the price of oil. But because of this rising tension with Iran, really starting with the U.N. report about Iran's nuclear program a few weeks ago -- since then, you can feel that coming into the market with that anxiety. And today the Iranian, the newspaper that's very close to the Ayatollah, came out and said that Iran should -- if there are embargo(s) against its oil in some form, it should be prepared to shut the Gulf. And there's talk about they're doing exercises about that. So it's just the ratcheting up of tension.

And of course, the U.S. is leaving Iraq, and Iraq is a potential major source of supply. Carlos will have a view, but they're clearly -- you know, the question is, what's the extent of Iranian influence they're going to be, and will that affect supply from that country?

CROOKS: Which has an interesting effect on Iran's (incentive set ?) here, of course, which is that as a (main ?) oil -- as a major oil exporter, it's (bet setting ?) in a very large way from the elevated price of oil, which it's pushing up as a result of its -- of the issues it's creating. And the saber rattling on the part of Iran, I think I read today the -- Iran's oil revenues will be the highest this year that they've ever been.

YERGIN: Yes, right.

CROOKS: So they are -- as I say, they are the beneficiary of the tension they're creating. So it's quite a particularly tricky issue there to resolve. PASCUAL: Well, you've just given a good description of why I exist and why this new bureau's been created.

CROOKS: (Chuckles.) Just in time.

PASCUAL: Because -- exactly. But it's these kinds of issues that we have to be able to build the political, geopolitical capacity to be able to work through. The understanding of energy markets, the ability to combine that understanding of energy markets with a way that we conduct a dialogue with a whole range of actors.

And one of the things that you begin to realize is that you don't fix issues like this simply by going one or two places and solving a problem. You know, the amount -- Iran's total exports, oil exports in a global market are about 2 1/2 million barrels a day -- again, out of a market of 89 (million barrels) to 90 million barrels. So on the one hand, you have to think that if we work together strategically and with key suppliers and we can bring additional supplies on to the market -- Iraq, for example, went up 500,000 barrels a day over the past year. It could easily go up another 500,000 barrels a day over the next year. Libya's supplies went off the market. They are starting to come back on again.

And so if you begin piecing these elements together -- and there are new supplies coming out of Ghana, new additional supplies of Angola coming back on to the market, potential supplies coming on to the eastern coast of Africa. And so what seemed in the past to people as maybe not that significant of 200,000 barrels here, 400,000 barrels there, is part of what actually makes up that whole texture, that whole fabric of what can become a stable market. And that's what we have to have the capacity to be able to work with. Because it's not -- it's no longer just going to one or two places and saying, hey, can you pump an additional million barrels a day and we'll all be fine? It's become a much more complicated market to be able to work with.

CROOKS: But the short of the issue, it's not so much total production, total capacity: It's swing capacity. And then -- well, that's the thing. It's having the reserve margin there that you can turn off when you need it, when for instance it -- (inaudible).

PASCUAL: (Inaudible) -- in Saudi Arabia. And you certainly see in this kind of rising competition between Saudi Arabia and Iran -- it's in Syria, it's in Bahrain, it's in Yemen, and of course, it's in the Gulf itself. And whole question about whether -- what this -- what the response would be if Iran does continue to move towards nuclear weapons.

Just an editorial I mentioned which jumped out to me more than anything else, and it was -- if the translation's correct, is actually explicitly saying that this is now a chess game that's being played between Iran, the United States and other countries.

CROOKS: So, I mean, I was being pessimistic in suggesting there isn't a lot you can do about it. I mean, what do you think, Dan? Are there things that can be done?

YERGIN: Well, I think that, you know, there are a range of different things that can be done. Sanctions have a lot of issues about them, but I think when one is looking at the range of options, you can see policies driven toward sanctions of some kind with the kind of things that are being discussed right now.

The other thing that's happening -- Carlos gave that map of where you see new supply coming into the system where you didn't see it before. You know, Ghana was not an oil exporter before, big discovery jubilee there.

But to me what's really interesting is what's happening in the Western Hemisphere and that there is a rebalancing that is going on in world oil; that how far it will go, we'll see, but there are three big things. One is off the coast of Brazil, the pre-salt. Brazil has a capacity, if they are able to act on their plans, to be by far the largest producer in Latin America, one of the (major producers ?). By 2020 they could be producing twice as much as Venezuela. That a very interesting number.

Second interesting number is the oil sands, which is a million and a half barrels today, more than Libya was exporting before the -- this civil war, capacity to go to 3 million. And then, you know, you have to say what's the new new thing in world oil today, or at least U.S. oil, U.S. energy. It's not shale gas anymore. You know, everybody knows about shale gas and everybody now talks about fracking like they've been talking about fracking all their lives. The new thing is tight oil, which can be done very fast using the same technology. And it was just a couple of hundred thousand barrels a day in 2000; it's, like, maybe a million now, could be 3 million by the end of the decade.

So that is a -- and that's why North Dakota is now the fourth- largest oil-producing state in the country.

So we can look at those supplies, too. That takes some pressure off the Gulf. I mean, Gulf oil can go east. But this all takes -- you know, some of it can happen fast. The oil sands is -- not the oil sands, the tight oil is happening fast. But you do have to, in this kind of situation, as Carlos says, keep your eye on what's the balance and how much cushion is there in the whole system.

CROOKS: As you say, these are some potentially very, very significant developments. I mean, as you say, it's highly uncertain. We don't know how this is going to evolve. Forecasts of oil production are not -- are, like every other forecast of everything else, pretty unreliable. But it's not inconceivable you could imagine a world where the United States oil imports are very significantly lower than they are toady.

I mean, Carlos, what's your -- one, if that's an objective that it's right to be working towards and should the administration be doing more to encourage that; and two, what are the consequences if we do get to that position?

PASCUAL: Well, I think one of the things, just to put the issue of global supplies and U.S. supplies back with the other question of -- with the talk of Iranian sanctions, can it be managed in a way that keeps (filling ?) markets, I think the answer is yes, you can; but one of the things that is significantly different is that you're operating in a market that is bringing on significant supplies that gives you the capacity to be able to -- that gives you some maneuverability within that market. And there have been different times in our history when we haven't had that same kind of maneuverability.

That doesn't mean that you don't need to look at that critical factor of spare capacity, but if you can maintain those levels of spare capacity and have additional supplies coming on to the market from the United States, from Ghana, from Libya, from Iraq, without drawing that spare capacity down or minimizing the extent to which you do, you have a different kind of equation that you can work with.

YERGIN: But you know, it is interesting; the country that has had -- between 2008 and 2010, I believe the country with the biggest growth in output was actually the United States.

PASCUAL: Absolutely.

YERGIN: And since 2008 till the present time, our oil production's up 18 percent. And I think -- you know, I didn't think about this so much in the past, but I do now, and it's been brought home by what happened with shale gas, because we were on a course as a country to importing significant amount of LNG, probably spending about $100 billion a year to do it. Now we're talking about exporting some gas.

But the significant thing too is the -- this means money is spent here rather than going into other countries where it might go into sovereign wealth funds or other things. And the shale gas development has -- just over these last few years has created in excess of 600,000 jobs.

There are very few industries in the United States in the last few years that have created 600,000 jobs. So there's a kind of economic component as well -- as well as kind of the strategic element to this development.

PASCUAL: So, yes, domestic production -- it doesn't --

YERGIN: You know, I --

PASCUAL: It doesn't mean that you can (ignore ?) the rest of the global market. And this is one of the things that I think is important to keep in mind, because we still are -- as big as we are, we're -- let's say, if we got up -- we're currently at about, what, 8- 1/2 million barrels a day? And if we were at 9 (million barrels) or 10 (million barrels) or even 11 (million barrels), it means that there is a far larger market out there.

And what happens in that broader market can create instability. There can be price fluctuations. Those price fluctuations, because oil is a global commodity, still affect us. But it's a different kind of impact. It's not asking the question: Are we going to be left out without supplies because of the vulnerability of the suppliers? That question is changing. And so you still have to be concerned about prices, but the stability of your supply is very different today than it was before.

CROOKS: And so, I mean, presidents -- I think every president since Nixon has talked about energy independence, or at least reducing dependence -- and including President Obama has talked about that. Do you think that's still a worthwhile objective? And how far can you get down that road?

I mean -- well, question one, is energy independence, complete independence, at all realistic? And two, then, if it's not, how near to it might we get?

PASCUAL: Do you want to start?

YERGIN: Why don't I -- yeah, why don't I take that first?


YERGIN: It's interesting, every president has said that. Then you get into these discussions about: What does independence mean, anyway? But the view I take in the quest is that we really should be thinking about it in terms of energy security and that -- resilience of our system. If we're importing less oil right now from other places, there are other benefits from that economically. We're part of a global market; we're not seeking autarchy.

And it was interesting, I quote in the book a senator who I was having this discussion with. And publicly he talks about energy independence, and then he privately will say, look, you know, what I really mean by energy independence is energy security. And so there are a lot of elements of that.

But I think what we can see is a Western Hemisphere that is more on a north-south axis in terms of supply, rather than an east-west axis. And it will mean then that the Gulf, the Persian Gulf, will be looking more and more to the east as its growth markets.

PASCUAL: And I think one of the things is you've got to keep putting these issues back into the context of global markets. It's not a market that we control and have firm borders around the United States. And so from that perspective, yes, domestic production is good. If you think about it from a commonsense perspective, if you can competitively produce a product that has a global value, and you can produce more of it, and you can utilize it or export it, is that a good thing -- and you can do it economically? Sure, it's a good thing. And can you do it economically? That's one of the critical questions.

A key factor that has changed in the global environment, and that you bring out very well in your book, is that because of the changing -- of changing prices, that there are types of production now, like tight oil, like shale gas was at one point, that can now be brought onto international markets in a commercially viable way that at one point couldn't. Technology has changed radically, as well. So all of those are positive things.

But at -- while we are doing all of that, we can't simply shut our eyes and say that we don't care about what happens in the rest of the world. That would be like saying: OK, the United States produces wheat, and therefore we're no longer going to be concerned about what happens in global food markets. Those global food markets affect us. People understand that even though we can produce wheat, shortages on international markets on wheat can affect the price of bread in the United States, right? And people don't have that immediate, intuitive understanding of the relationship to oil markets, but that's very much how we, I think, have to orient ourselves.

CROOKS: Right. I mean, I think you've answered the question I was just about to ask, but let me ask it anyway, just to get it -- make it absolutely explicit. You could imagine a situation where in 10 years time, in 20 years time, the United States no longer imported a single drop of oil from the Middle East. It would still have the same interests in the Middle East, the same foreign policy interests, the same energy security interests in the region, as it does today?

PASCUAL: I think it does. And, you know, it -- there's a different type of volatility that one is concerned about. You're no longer looking at directly the questions of access, but now the United States imports -- what is it, 19 percent, I think you had in your op- ed?

YERGIN: Sixteen.

PASCUAL: Sixteen percent? I read your --

YERGIN: You -- (chuckles) -- good.

PASCUAL: (Chuckles.) And -- but it's not directly affecting, on a day-to-day basis, our security in the United States.

But we do -- we are concerned about what's happening with production in the Middle East because it affects a global market that has an impact.

YERGIN: And I think we -- you know, just because of the nature of the refining system and so forth, we would continue to import. So we'd have an interest -- but what's going to be one of the questions that unfolds over the next several years: What happens with other countries who have a much larger growing interest in that region as well, particularly China? What's kind of their role? And you know, we see them participating now in the anti-piracy efforts off Somalia and so forth. So other countries will also have security interests there.

CROOKS: Indeed. That may not always accord with those of the United States, right? I mean, you know, when you look at China's relations with Iran, for instance, that's sort of --

YERGIN: But I think one of our objectives should be to have -- and this is something that Carlos will be central to -- to work as -- that we and the Chinese have the best understanding possible of each other's energy positions, common interests and opportunities for collaboration.

CROOKS: Thank you very much.

Well, I'm going to throw it open now to questions from the floor. If any members have got questions they would like to ask or points they'd like to raise -- there's one there in the back. If you could stand up -- (inaudible) -- we've got a mic coming around. If you could stand up and give us your name and affiliations and all, that'd be great.

Q: Anish Melwani from McKinsey. On this point around other countries and the implications of energy policy, talk a bit about, if you could, Europe and the opportunities potentially for shale gas in Europe and what that might do to the reliance on Russian gas and the power dynamics, therefore, about the Russians and how important gas is to them, if you could.

YERGIN: Well, do you want to take that first, or --

PASCUAL: Why don't you start? I'm happy to --

CROOKS: It's a subject that I have very strong views on. But go on. Why don't -- let you go --

YERGIN: Well, why don't you -- why don't you give --

(Cross talk.)

CROOKS: OK, I know you don't want to know what I think, but I'll tell you anyway. I am a European, so -- (inaudible). I think it's going to be very, very difficult to make it fly in Europe. I think that the differences in kind of environmental consciousness -- I think there are a lot of places where you would never get to frack in a million years. And of course France, notoriously, has actually banned fracking. And in particular, the issue about legal title to land and mineral rights, which often don't (resolve ?) to landowners in the same way as they do in the United States, will make it very, very hard. I mean -- and also, there's still quite a lot of uncertainty, actually, about really how much the resource is there.

So maybe in Ukraine, maybe in Poland -- Poland, probably the most promising country of all, and that's the one that's attracted the most interest from U.S. companies. But I think it's going to be difficult. I think it's going to be slow. And I think the idea that it's going to make a big difference in the short term or even the medium term to Europe's reliance on Russia for gas supplies, I think, is mistaken.

YERGIN: I think -- yeah, it's a patchwork. I think Hungary is another country I would add to the list. Your own home country has had a very large discovery near Blackpool.

CROOKS: Which has caused outcry and huge protests against the idea of people trying to develop it. I mean, they had -- there was an earthquake there, which was blamed on the fracking itself. That's been -- it's been controversial.

YERGIN: Right, seismicity is a -- is definitely a question surrounding it.

But -- so I think it -- yeah, I think it's mixed. But I think Germany is more or less in the same category as France on it.

PASCUAL: If -- let me pick up on --

YERGIN: But let me just add, however: A country that is intensely interested in this and is going to move as fast as it can is China.

PASCUAL: Yes, absolutely.

And if I can pick up on that, I mean, just to put this in perspective, shale gas today accounts for somewhere between 30 (percent) to 33 percent of U.S. gas production. And five or six years ago that amount was 1 percent. The radical change that has occurred in the United States is phenomenal. And as Dan said earlier, there are two export licenses that have already been approved by the Department of Energy for the potential export of gas from the United States. Terminals that were being built for import of LNG are being converted to the export of LNG, just to give you a sense of the dynamic.

Now, can that extend itself to other parts of the world? The geological formations that are here in the United States are not unique. There are places in Europe that certainly have the potential. As you said, Poland and Ukraine are the ones that are most obvious. There are a few others that have the potential.

One of the things that we have been trying to do is to extend the experience that we've had in the United States on environmental and regulatory issues, including the shortcomings and the lessons that have been learned, in order to be able to extend that to other partners so that if they are going to do -- develop shale gas, they can do it in an environmentally responsible way.

There are issues related to gas and emissions, to water, to the fluids that are used, to the well casings, to seismic-related questions, that we have been trying to compile and to share with our partners. In some cases, it's been through seminars that we have with the Department of Energy and the Environmental Protection Agency, with state agencies, with the universities that we've been involved with.

Because the point of this is that if it's going to happen -- we want more gas to be on international markets, but it needs to be done in a way which is environmentally sound and sustainable. And we've been learning a lot of lessons about that in the United States. Dan's been involved in a study group that has been advising the Secretary of Energy here in this country.

Now, China -- just a comment on this: They're beginning -- just beginning in the process of explorations on shale gas. There are several U.S. companies -- a couple of U.S. companies that are involved, some other international companies that are there. We have had discussions with China about this. We've indicated that we are willing to try to share some of the lessons that we've learned on the environmental side.

If China -- if China does have significant levels of gas, one of the opportunities that it offers China is the ability to switch from coal to gas, and it goes back to Bob's original question about gas and renewables and how does it fit in. Gas is a hugely important commodity, and if you can get a significant expansion in the demand for gas and the use of gas coinciding with the -- with the very significant increases in gas supplies that we're seeing in international markets, in the near term -- in the next decade, it could potentially facilitate a switch from coal to gas that, over that 10-year period, could have some of the largest impacts on CO2 emission reductions that you can get, because of the scale and volume of the transition that you can achieve.

It's not the long-term solution. Even with massive increases of gas consumption relative to coal, you still do not meet any of the targets that have been discussed in the global climate change process. And so the way that we need to look at this, and going back to answering Bob's original question, is that gas can be hugely beneficial in terms of near-term reductions in CO2 emissions. The development of shale gas could be extraordinarily helpful to that in the near term. But if you just stop there and do not combine that with analyzing the incentives for the production of renewable energy and for energy efficiency, then you don't achieve the solutions that you need to -- in order to ensure that we don't allow the planet to go above 2 degrees centigrade.

YERGIN: Right. It's actually very instructive to say, you know, kind of where does shale gas come from? Because five years ago, it really wasn't on the agenda. Three years ago it was still planned that the U.S. would mainly import LNG, and it's interesting.

So much you see in energy, you think it just came very quickly. This thing was 25 years in development; it was one man, George P. Mitchell. I have the story in the book. It's fascinating because I talked to him, to people who worked for him, and for 15 years, he was convinced there was a way to solve this problem of getting gas out of shale, and people would say, George, you're wasting your money; you're -- why are you doing this? And he would say, well, I want to plow on, and if you don't want to do it, I'll find somebody else to do it.

So, end of 1990s, a kind of breakthrough in the technology; the second breakthrough came a few years later in terms of horizontal drilling and putting the two together; and then it was for five years -- it kind of developed under the radar screen. In only 2008 did you suddenly see U.S. gas volumes going up, not down. So it's happened really quickly.

Of course the public concern has come quickly too, and Carlos gave those numbers. It's, you know, 33, 34 percent of our gas production now.

So just to say that I was on this SEAB, Secretary of Energy Advisory Board subcommittee, that was charged by President Obama on March 31st to talk about this (hundred-year ?) gas supply and producing it safely. And so we spent -- we had 180 days to do it and basically came to the conclusion that the real risks are not the risks that you hear about from fracking, which is the hydraulic fracturing itself, very unlikely to affect water. But it's a question of produced water; it's a question of air pollution; it's the community impact. It's a lot of trucks suddenly coming in to a community.

And we came up with about 20 very pragmatic recommendations to address these questions so that this resource can be -- continued to be used and developed in an environmentally sound way. And I think that's been helpful for other countries to kind of see -- kind of a road map for it.

CROOKS: Thank you.

Just to take another one from the floor.

Yes, there. Thank you.

QUESTIONER: (Off mic) -- Bramwell. I wonder if you could talk about the Keystone pipeline and what it can do for national security, what it can do in terms of reducing energy costs. And my understanding, that cheap energy is quite important to economic growth, so -- and this pipeline also creates a lot of jobs. But I think more importantly, I wonder if you could talk about, you know, the U.S. relationship with Canada, and are we going to be pushing Canada towards shipping oil off to China instead?

MR. YERGIN (?): Why don't I take that question.

MR. PASCAL (?): Yeah. (Laughter.)

MR. YERGIN (?): Unless -- no.

PASCUAL: Look, one of the things I can -- I'm recused from working on issues related to the Keystone pipeline. When I started, back in the State Department, working on these issues, there was a team that had already been created on it. It was important to keep that team together because there are obviously a lot of very complicated questions. And so I've not been working on it in any way, and I can't address it.

YERGIN: So let me address it, because I think it would be in line with what I would take to be the point of your question. Oil sands, you know, was regarded as a fringe energy resource until the late 1990s, and then it started to have this growth. There is -- the Keystone pipeline, the throughput for that pipeline would be equivalent to about a third of Iran's total oil exports. It's a big deal.

It would -- we're already so integrated, as Michael Levi knows, with Canadian energy, I mean, it's really one energy market. And this would bring greater efficiency because that oil -- first of all, the pipeline system was created to take oil from the Gulf of Mexico up to the midcontinent. Now we have the growth in North Dakota and the growth in Canada, and to bring it down to this huge refining complex on the Gulf Coast in part, it would create a lot of jobs. It's interesting, six major unions have said, you know, we do know who to build pipelines safely. And it seems from a kind of energy security point of view, energy development point of view, it would -- it was, you know, very sensible.

There's this argument about the carbon footprint of oil sands, and that's kind of where the heart of it -- I believe the argument is. If you look at a well-to-wheels analysis, you know, from the production all the way through the exhaust from your automobile tailpipe, Canadian oil sands adds about 6 percent more of CO2 to the atmosphere. That's comparable -- than the average barrel used in the United States. There are many other barrels that we use in the United States that are in that same range.

I think the answer to your question as near as I can tell, and Michael would be a better -- you know, would know that -- but the reaction of the Canadians to the decision to postpone it has been very negative -- not surprising -- and leading them to a view that maybe they shouldn't only have one customer for their energy, as the prime minister said, maybe they should have other markets for their energy products as well.

And the obvious one is, again, Asia, China. Chinese companies have invested over $10 billion in the oil sands. And so they presumably invested in it because they see it as a business, not as a philanthropy. And so, you know, this raises -- increases the probability that Canadian -- some part of Canadian oil sands will go west to the Pacific and on to China, enabling Asian countries to diversify their energy resources. And Vancouver is slightly closer to China than the Persian Gulf. So I think there are unintended consequences.

Now, of course it was not a decision to cancel it; it was a decision to postpone it till first quarter of 2013, but for TransCanada, you know, they've already spent $2 billion on this, so this is a lot of money they've already spent. So it just creates uncertainty, and it's obviously controversial, but it's basically postponed. But from an energy security and an energy resilience point of view, it -- you know, it makes sense. And it just basically means that the pipeline's logistics are catching up with the change in the nature of energy production in North America.

CROOKS: On my point about the Canadian reaction, apparently the radio talk shows in Alberta, the night the State Department decision was announced, were quite entertaining listening. Certainly, you know, if you didn't want to hear bad things said about the United States, you shouldn't have tuned in.

We have a couple -- one down here and then one in the back. Thank you.

QUESTIONER: Byron Wien, Blackstone.

Can you give us some indication of what these alternative energy sources -- electric cars, things like that -- are likely to do to the demand for oil?

And also, could you be as specific, Dan, on what oil -- what kind of production we're going to get out of oil sands in relation -- we were very specific on shale gas. What about oil? Are we are going -- is that going to make a major impact? Is that a game changer for the U.S. economy?

YERGIN: Well, the -- do you mean tight oil or do you mean --

QUESTIONER: Yeah, tight oil.

YERGIN: Tight oil.

You know, it's still early days, but it's sure growing fast. And of course, this is -- as I said, this is the oil that's produced using similar technologies from very dense rocks. And you know, given the difference in the value between oil and gas, it's obviously a much -- there's a big incentive to develop it.

So -- and again, you know, you have these formations in other parts of the world. And so, you know, maybe not in Europe but other places will develop them. So I don't know if we'd go so far as -- you know, that word "game changer" kind of gets overused. I don't know yet if it's -- if we can say that. But it is -- you know, it has a potential to be much more significant, particularly if it's developed in other parts of the world. I would say it only kind of went on the radar screen in, like, February of 2010, so it's pretty recent but pretty fast.

The electric car, there's this -- marvelous two pictures in "The Quest" of a woman charging her electric car in 1910, and Carlos Ghosn, the CEO of Nissan, charging his electric car in 2010. And if you look at it, it's actually the same picture; it just looks like -- there's just this gulf here of a century in which the electric car was run off the road by the Model T, which came out at $825 without a top, but the top was extra -- and it looked like the electric car's gone.

So around -- you know, for various reasons it starts again, you know, gains momentum 2005, 2006, 2007, lithium batteries, different technologies. I think the success of the hybrid opened the door to more electricity in transportation. And we now see the cars on the road. And climate change is one of the reasons driving it. It's also international competition: China, Japan, the United States. Who's going to be preeminent in it?

I would say, you know, truthfully that it's probably going to be five to 10 years before it's clear whether the electric car is really a niche product or whether it is a real mass market product. A lot of momentum, a lot of policy driving it. As with other technologies, people will say, you know, the cost has to come down on the battery. And as often happens on technology, there are a lot of very informed people who have different views as to how quickly and how that will happen. So I would say off to a start, but it's still very early days.

PASCUAL: Just to put this a little bit in a wider context, if we look at the growth in oil demand globally, most of it is in the non-OECD countries right now. And the OECD countries' demand for oil has been pretty much flat, and part of that has been due to the introduction of energy efficiency technologies and renewable energy. And so in those markets, the share of renewable energy and other clean energy and energy efficiencies are actually now taking a larger and larger share. That's a significant market to continue to develop.

Also to put this issue in perspective, in 2010, the world's largest investor in renewable energy was China, which invested about $48 billion in renewable energy technologies, in addition to all that they were investing in coal fired plants and everything else.

On an annual basis, the amount that gets invested in energy infrastructure is, what, $1 1/2 trillion, somewhere in that ballpark --

MR. : Yeah.

PASCUAL: -- in energy infrastructure, OK? And so one of the challenges is how to create the market incentives to expand the share of renewable energy in those investments in energy infrastructure.

The cost of solar is about one-third now of what it was a decade ago?

YERGIN: For photovoltaics, yes.

PASCUAL: For photovoltaics. Wind electricity generation in some parts of the world are coming close to the kilowatt-hour costs of what gas-fired generation would be. And so you're starting to create newly and -- different and new competitive markets. So that wind is now competitive; in some areas photovoltaics are starting to get there, and in five years probably will be there.

And so we're going to see -- we're going to see a very different kind of power market, electricity market, in the next five to 10 years than the one that we're seeing right now, which will increasingly move away from coal. We'll see more gas in it, we'll see more wind, we'll see more photovoltaics. And the challenge will be to continue, with the expansion of those renewable energies, to use the economies of scale to drive down the cost. So that if you can use this 10-year gap of using more gas to reduce CO2 emissions with gas, that you then have the potential to continue transitioning into other renewable energies that gave you the longer-term sustainability and cost economies that you want to achieve.

CROOKS: Yes, we have -- yeah, a question there. Thanks.

QUESTIONER: Hi -- (inaudible) -- from 21st Century Business Herald. It's reported that United States will become a net exporter for the oil- related products in 2011. So what will it bring to the international oil price and the global energy market, in your opinion? What influence will it -- will it bring? Thank you.

YERGIN: Well, I think that there's been some confusion. I know what you're referring to, because people have talked about the U.S. being a net exporter of products. I mean, it's confusing, because the U.S. is a net importer. Our net imports have come down from 60 percent to 46 percent; our oil production up 18 percent, as I mentioned before. But we are now exporting more product, and product that's not being used in the United States, and so -- but it's still a much smaller share than the volumes that we -- the overall volume that we import.

CROOKS: Yes. I mean, for energy, it's a -- it's a net exporter of refined product, but still a very large importer of crude oil. That's the -- that's the --

YERGIN: Yeah, exactly, because we, in terms of -- that's right, imports of refined products than exports. And, you know, there's an imbalance in the world. We use primarily gasoline. Middle distillates -- diesel is used in motorcars in Europe, and it also turns out to be the kind of fuel of -- kind of, of economic growth, because it's what all those trucks in those emerging markets use. And so there's a draw to export diesel.

CROOKS: Now, that's a -- does being a net exporter of products have any real consequences to the global markets, or is it not terribly significant?

PASCUAL: Look, I mean, all of those global markets are that: global markets, where you've got an equilibration of supply and demand. And we're a small part of that total equation. I -- given the increase in demand that we've seen in the non-OECD countries, the amount that we're exporting at this point in time is contributing to a balance in the overall market. It's contributing to helping the price stay within the levels that it's maintained and not go higher.

But as we've seen, the price of oil -- Brent crude is about $108 a barrel today; WTI, which is the U.S. commodity, is about $98 a barrel. That's -- both of those are trading at a premium of -- what? -- 20 (dollars) to $25 a barrel from where they were about a year ago. So I don't think that we've seen any particular risk of unbalancing global markets and prices radically dropping right now.

CROOKS: Yes, a question at the back there, and, yes, then a couple more. Now, we're running a little short on time, so perhaps if you could keep your questions brief --

QUESTIONER: My name is Andrew Dunlock (sp) --

CROOKS: And the answers, too, yes.

QUESTIONER: My name is Andrew Dunlock (sp) -- (inaudible) -- could you comment on some of the noneconomic factors affecting the oil price: the Arab Spring and the Saudi budget, $100 oil-plus, most people look at to balance; Russia's and Putin's alliance with the pensioners, which obviously just got more expensive, which is $100-plus oil; as well as deleveraging the financial institutions where, you know, you've got a backwardated oil market, but almost every participant in the oil market sees a very, very tight physical market.

YERGIN: Well, I'd say that it's clear that in the -- you know, in the Middle East, in the Arab World, they need more revenues. The Saudis had a $131 billion spending program, which is, if you (grossed ?) it up for our population, would be double the stimulus that we had. That's a lot of money. The region -- countries -- the whole region needs money. And I think that also, another factor in there is that costs have gone up. We're -- the cost indices that we do to try and track it, we see some of the costs are at or above where they were at their high point in 2008. So that's another factor in it.

So you know, a year and a half ago people said that $75 was the price. Now you hear kind of people, from their budgetary point of view, need $85 or $90 a barrel. And you're suggesting that maybe that number has gone up. Clearly, what's happening in Russia is a -- a lot of dynamism -- or not dynamism, but sort of uncertainty -- new uncertainty has been introduced. And they're going into an election cycle, and so spending will go up there. But -- so I think all of those kind of factors come together. And then the other noneconomic factors -- what we were talking about before, the geopolitics.

PASCUAL: A good reason to read Dan's book. It's a -- (laughter) -- he addresses these things very well. But if I could say one thing about gas, because one, I'd feel badly if we didn't discuss it at all during this session, and secondly, it's related to this question and the geopolitics of this issue as well. The global gas market is not only increasing tremendously, the nature of those markets is radically changing. The trade in LNG has been increasing about 20 (percent) to 25 percent a year. The trade in pipeline gas has stayed either relatively flat or declined.

So the price of gas in the United States right now is about $3.50, even a little bit lower, per million BTU. In Europe it's $9 for the gas you produce and about 11 (dollars) for pipeline gas from Russia. It's about $13 for gas in India or China, and it's gone even as high as 20 (dollars) in Japan in the spot markets. This cannot exist in 10 years if you have an LNG market that starts to create a global market for gas.

So an example vis-a-vis Russia: In Western Europe, a number of the smaller utilities, because they have a competitive market for utilities, started importing LNG for -- from Qatar, undercutting the long-term Russian pipeline gas price. The traditional utilities that had been buying Russian gas came together and got back together with Gazprom and said, if you don't modify your prices, we're going to go out of business, and nobody is going to be buying your gas, which indeed lead (sic) to a renegotiation and a lowering of Gazprom's price for Western Europe.

OK, these markets are dynamic. They're changing. And we can't look at them from just a static perspective. And I think part of the challenge that we face as we get new supplies, as we get changing means of trade, that we have to understand that there are going to be new levels of equilibrium that are set in these markets and that the geopolitics in -- across the world, frankly, are going to change because it's going to affect the ability to which individual countries can exert power over their neighbors in a way that they might be able to if they -- if those neighbors don't have any other alternatives.

CROOKS: Well -- (inaudible) -- we are now just about out of time, I'm afraid. (Inaudible) -- we've just about run out. Apologies to anyone in the room that we haven't had time to get to your questions. Apologies also to anyone on the Web who emailed in a question -- haven't been able to get to those either, I'm afraid.

Very quickly, though, you reminded me of Bob's very first question. Just very quick answer on -- both of you on this, which is externalities caused by energy production and consumption: Should we be pricing those? (Audio break.) (Laughter.) But Carlos, I want an answer from you, too.

PASCUAL: Yeah. Well, I think, you know, we're not -- we're not -- we don't exactly have a shadow price for it. But if you look at policies -- for instance, just take one: renewable fuels -- renewable portfolio standards for electric utilities, which are basically saying that a certain percentage -- and California has now said a third of their electricity by 2020 -- has to be renewable, which means that basically, you're putting in a higher-cost electricity and taking out a lower-cost electricity.

I would say that already in doing that, you're kind of creating a shadow price to reflect some view of carbon, not a very even -- not a market price. But are we going to have a direct -- you know, carbon taxes in the United States? I think the general tendency now is that taxation's a little controversial, and I would say -- (laughter) -- it's probably -- (inaudible) --

CROOKS: No, well, good question. OK, forget what is happening and what might be politically acceptable; what should we do?

YERGIN: Well, should we -- I mean, in other words, are you saying should we price it in, in some way?


YERGIN: I think it's hard to say we should when you're just looking at the realities. You could say that the Europeans do that by having a $4 a gallon tax on gasoline. They've done that; they're actually probably doing it to just raise revenue. But it does have that other impact.

You know, again, I have this story in the book about a congressman -- Democratic congressman who voted for a 5-cent increase in gasoline and he went into his local post office on a Saturday and almost got mobbed -- (laughter) -- people were so angry. So I think it's kind of having to be --

CROOKS: (Inaudible.)

YERGIN: Right. I do want to just say one thing, though.

One of the things that is -- a story that, when I was researching the book, that really hit me and a quote that I think captures a lot of what Carlos is talking about. Talking to one of the key Chinese decision-makers, and he said, you know, the -- that these fierce winds they have in the northwest, he said, we used to regard them as a natural disaster; now we regard them as a precious resource. And I think that to me kind of shows an evolution that's happening.

CROOKS: Carlos, yeah.

PASCUAL: I'm not going to answer what the "should" question is. (Laughter.) But Bob's question really does put us at the center of what has been in the middle of the global climate change debate,particularly leading into Copenhagen and where there was not a clear outcome, and it's been at the center of the U.S. domestic debate on energy, where there's not been the capacity to reach a consensus on whether or not you should put a price on the externalities of the use of fossil fuels.

And so, in the end, what has happened -- because the only way that you get adoption of renewable energies and other clean energies is that if there's a price incentive to be able to do it. And some of those price incentives have been created, as Dan said, through renewable portfolio standards in individual states, through feed-in tariffs, i.e., tariffs that the utility pays to you when your renewable energy -- your photovoltaic cells on your house feed in electricity into a grid and what the actual cost of that might be, whether it in effect is -- pricing an externality is less than transparent because it's not done in a systematic way. But it's been what has been politically feasible and viable within the current market.

And so the question that we -- that we have to keep coming back to, I think, is that if we don't have the political capacity right now and the space for the debate to be able to address those questions of whether or not there should be a price on the externalities, the question becomes how do you ensure that you get market and tariff structures and regulatory standards and emission standards that, in effect, create the demand pull for renewable energy and clean energy technologies and energy efficiency? Because if you don't have a market for it there, then you're never going to sell these things and you're never going to make the transformation, and we're going to have a disaster on our hands in 30 years.

And so what we need to keep asking ourselves is the question of, OK, if you can't have the perfect world, what can you do to actually make a difference and achieve results? And what we've been seeing is that there are ways to do this, and if you can increasingly drive down the cost of renewables over time, if you can take advantage of the new discoveries in gas, if we can make investments in our pipeline distribution systems for gas to be able to use it more extensively in the United States, there are real mechanisms that we can utilize to reduce CO2 emissions and to create incentives for real transformation of our system.

YERGIN: Well, Carlos, there's one more to add of course, which is efficiency, which is, you know, as a country, we're twice as energy efficient today as we were back in the oil crisis days. We could probably do that again, and of course that has enormous impact and that brings benefits -- climate, environment, saving money, the whole range of things and energy balance -- and you just think, boy, if we hadn't been -- become twice as energy efficiency -- as energy efficient as we are today, we'd be in big trouble. So that is, in a sense, a huge reservoir of energy that is still to be mined.

PASCUAL: (Inaudible) -- a practitioner in this field, Dan's book is a huge resource. (Laughter.)

YERGIN: Thank you.

PASCUAL: It is phenomenal. It helps give you a sense of history of how we got here, but it uses that history to think about how we can create a better future, and that's a great contribution. So thank you, Dan.

YERGIN: Thank you.

CROOKS: An excellent note to end on. It sounds like the (government to me ?) -- I think at Durban this is something we're going to have to keep talking about. But -- (inaudible) -- Dan Yergin, Carlos Pascual, thank you very much both for coming along -- (inaudible, applause).






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