Meeting

Renewing America Series: Rethinking the U.S. Approach to Energy

Tuesday, June 7, 2022
Speakers

Managing Director and Global Head of Commodity Strategy and MENA Research, RBC Capital Markets; CFR Member

Principal Researcher and Director, Frederick S. Pardee Center for Longer Range Global Policy and the Future Human Condition, RAND Corporation; CFR Member

Program Director, Environment, William and Flora Hewlett Foundation; Former Deputy Special Envoy for Climate, U.S. Department of State (2021–2022)

Presider

Senior Fellow, Wilson Center; Senior Strategist, Center for Climate and Security; Former U.S. Deputy Undersecretary of Defense for Environmental Security (19932001); CFR Member

 

Our panelists discussed the U.S. approach to energy, from foreign oil dependence to the transition to and consideration of other energy sources, and climate concerns.

With its Renewing America initiative, CFR is evaluating nine critical domestic issues that shape the ability of the United States to navigate a demanding, competitive, and dangerous world.

Transcript: 

GOODMAN: Thank you, Kayla, and welcome to today’s Council on Foreign Relations meeting, “Rethinking the U.S. Approach to Energy.” This meeting is part of CFR’s Renewing America Series, an initiative evaluating nine critical domestic issues that shape the ability of the United States to navigate a demanding, competitive, and dangerous world.

I’m Sherri Goodman, a senior fellow with the Wilson Center and senior strategist at the Center for Climate and Security, and I will be presiding over today’s discussion.

We have a total rock star panel with us today to discuss this very important question about rethinking the U.S. approach to energy.

We’ve got—(phone rings)—oops, my apologies on that—we’ve got Helima Croft, who is the managing director and global head of commodity strategy at RBC Capital Markets, and just this week is involved in discussions and meetings with members of OPEC, so we’re going to get her take on that.

We’ve got Robert Lempert at RAND, who is a principal researcher and director of the Pardee Center for Longer Range Global Policy and the Future Human Condition. Basically what I say about Bob Lempert is anything you want to know about the future, future systems, you go to Bob, and he can kind of give you the big picture systems-think on it. So we’re very blessed to have him.

And then of course my dear friend Jonathan Pershing, now back at the Hewlett Foundation, but just having left as the deputy special envoy for climate at the State Department with Secretary Kerry and having served in that and related capacities in a variety of administrations, and so a deep expert on the climate-energy nexus.

So with that, I want to start with Helima, and since, Helima, you have just come out of some meetings with OPEC leaders. And we want to talk about what forces are shaping U.S. energy today and what we should do about it. And today, of course you know, energy is not only about oil and gas, but it’s renewables, nuclear, hydro, and also the critical minerals and materials we need to power a decarbonizing economy.

OK, so Helima, give us the take from the recent OPEC meeting, your current meeting, and then what about President Biden’s sort of, somewhat, overtures to Saudi Arabia. How should we—how should the CFR members understand that current mix?

CROFT: Well, thank you so much for hosting this meeting today. We have a rock star moderator in you, Sherri, so it’s very timely to have this conversation. And I think when we look to the OPEC meeting that we just had last week where the producer group decided to bring forward more barrels than originally planned, to essentially wind down this very large cut they initiated in 2020, and essentially bring forward—the remaining barrels are a part of that cut—to July and August.

I think it represents a reversion to the traditional energy diplomacy that the various White Houses have engaged in. Whenever there is a supply problem, when we have a supply shock because of a producer going offline, or we have—in this case I would say—multiple factors contributing to this incredible run-up in prices, whether it be the fact that we are, you know, having a situation where investment has come out of the energy sector—in 2020 when we had such a, you know, collapse in demand and prices, you know, cratered, we had a lot of investment come out of the energy sector. We then had a period—and we’re still in that period—where, you know, people are, you know, driving to work, getting on planes, mobility restrictions being lifted—importantly we’re going to watch what happens in China.

And so even before we had this Russia invasion of Ukraine, we had very tight oil market. We had prices, you know, a week before the invasion around $90 Brent, and so this was a market that was already tight. And we had the Biden administration making calls, requesting additional OPEC barrels from, like, you know, November, December of last year—you know, the sense that we may need to reach out to countries, you know, that sit on spare capacity and ask them to deliver barrels, and that was what we saw, I think: the fruition of a multi-month diplomatic effort to try to get Saudi Arabia and countries like UAE—the only countries at this point sitting on remaining spare capacity—to bring these barrels on to the market.

We have another complicating factor, though, when we think about energy prices—is a shortage of refinery capacity. You know, we have not had a major refinery built in decades. And so that is also contributing to the pain that U.S. consumers are feeling at the pump.

And so the question I think right now is when we think about, you know, where this traditional energy diplomacy will lead is how much is left in the tank in terms of spare capacity. And we just did host a session at my bank with the secretary-general of OPEC, and he basically reiterated things we’ve been hearing for months; that there is just not a lot of additional barrels right now that can be brought on to this market to make up for Russia if we are to see, you know, significant and prolonged disruption from Russia. And so I think this is something that we’re going to be dealing with over the summer—higher energy prices—and into the fall, and there are not a lot of great policy options to deal with the supply side of the equation. We’ve had the largest SPR release in history. Again, we’ve asked OPEC for more barrels, but beyond that, the idea of a supply response being able to mitigate the impact of this war, I think that’s going to be a challenge.

GOODMAN: OK, well, we’re all going to come back to the potential demand responses at the end of our discussion, but now I want to go to—you know, to Bob.

What should we Americans understand about where we are in the energy system right now? Where are we in the trajectory, both of—as we said—this very tight supply that Helima described as a combination—even before Putin’s war on Ukraine, which has tightened it further? And where are we—what should Americans know, and what should they—how should they be thinking about it?

LEMPERT: Thanks, Sherri. Great question and, you know, the IPCC—the Intergovernmental Panel on Climate Change—just finished releasing it latest round of reports—its Sixth Assessment Report and, you know, mostly the bad news in there—which there is plenty—got most of the attention. But there is a lot of really interesting good news in there as well; in particular on the—you know, on the technology front there really has been a revolution over the last decade, half decade or so, in the potential for a gigantic change in our energy system. So solar and wind in many cases—if not most cases—are now less expensive as new sources than fossil fuels, and that’s before you even count for, say, the health benefits—co-benefits you get from less fossil fuels on local communities, and the fact that, you know, an energy economy like that would have much less price volatility for a whole bunch of reasons that we could describe.

So there are a lot of potential benefits. It’s just a matter of getting from there to there. And, you know, one of the messages is that we need to go quickly to deal with some of the climate challenges, and, you know, I think one of the things that we’re seeing is a—that we need to be more attentive to all the ways a fast transition can go wrong, and particularly cause a lot of pressure on the consumers, who have been highly stressed—in the middle class that has been highly stressed.

GOODMAN: All right, so let’s talk a little bit about those unintended consequences of the energy transition, and as you pointed out yesterday in our preparations, you know, we used to think that higher energy prices would be good for the energy transition, and now, you know, it’s just not so clear if we can get those renewables and the non-fossil resources deployed fast enough to either meet the urgency of the climate crisis or the needs of consumers in their day-to-day life without significant pain. (Pause.)

LEMPERT: Yeah. So, I mean, there’s long-term and shorter-term challenges there. I mean, in the longer term, we need to think about the potential instabilities we are building into the system, both at the microscale and macroscale as we start to head down these transitions—you know, that a—we’ve already started to see systems where—you know, in California, Texas, Australia—where you get—you know, at some times in the day we have more renewables going into the system than the system can take, so we need to learn how to manage our grids differently. I mean, there’s a whole bunch of technical ways to do that coming down the pike. It also requires new business models for how, you know, the grid deals with consumers with distributed energy and so forth.

GOODMAN: Right.

LEMPERT: So we need to be real attentive about how do we do that and do really take the—you know, sort of the worst-case planning seriously, and think about how we’re going to hedge against some of those vulnerabilities.

In the—go ahead, yeah.

GOODMAN: Well, I know those distributed energy resources provide so much promise for a future more secure, less vulnerable, and a reliable energy system. The question is how fast we can get there.

So I want to bring Jonathan into the conversation because you have just left—as you said—or you left the day before Putin’s war on Ukraine started—serving as the deputy climate envoy for the Biden administration. And you’ve—tell us how, Jonathan, we can align our climate ambition with today’s energy realities.

PERSHING: So thanks very much, Sherri, and to the CFR folks for hosting the discussion. Really great to have a chance to talk about it.

It feels that the world has shifted a bit on its axis over the course of the last—let’s just call it four months. We tend to think about change as being remarkably slow and pretty incremental—you know, steadily you chip away and things shift. I would argue we’ve been there on things like electric vehicles, which are moving into the marketplace—now they are a couple of percent, now they are few more percent. We think if we go at the same rate, in about 25 years they will be the bulk of electric capacity in the system.

But now all of a sudden we’ve been faced with this crisis, with this incredible shock, and it’s disrupting all sorts of things. And it’s added on to a series of baseline disruptions that were already underway, right? It’s added on to COVID, it’s added on to an economic process that has been highly variable, really volatile, and then we add this additional energy shock into the system.

And so to me the question is how do we align these things? Rob already mentioned this report from the Intergovernmental Panel on Climate Change, but he could have also talked about the political agreement that was reached just last November from the global community around the climate agenda itself, and people are beginning at the head of state level to acknowledge a really serious crisis looming and, in fact, already beginning to manifest on that side.

So the issue, as I look at it, is will this crisis be a moment in which countries decide to make a rapid change—recognizing it’s disruptive, recognizing there are price implications—or will it be a moment where comfort, and political concerns, and immediate constraints on price dictate a very conventional response. I personally think that we’d like the former; we will get at least a piece of the latter. And let me just say two words about each.

On the former, we are certainly the REPowerEU program—that’s a big initiative developed by the European Union to think about how they can comply both with their green deal structure, their climate commitments, and an increasing reduction in reliance on foreign imports of oil and gas. If they had ten years, they are on a pretty good trajectory that gets them more or less where they want to be, which is a deep decarbonization plan, significant reduction in global reliance by about 2025 or 2030.

But they are now faced with a crisis in which the Russians could turn off or the Europeans could choose to turn off all of their gas, not in five to ten years, but maybe even by this winter. How do they do that? That’s much, much more disruptive. That requires a radical acceleration. Do they actually have the right workforce in place? Do they have a supply chain that can provide for the adequate responses to everything from wind turbines, to solar panels, to things like heat pumps that could provide alternative forms of heat in the cold European winter? The answer is not yet. So could they build it? Yes, but with an incredibly aggressive program, and that’s not yet underway.

But now play it out to the global level. What are others looking at? So you’ve got places like India saying, my goodness, the price of Russian oil is way down. Why don’t I buy some? You’ve got places like China saying, you know, the price is way down, but I’m not so sure I want to be beholden. But in the meantime, I’ve got all of this demand; I need a bit more coal into my mix. And it’s not that countries aren’t simultaneously building out their renewables—they all are—and it’s not that banks—and Helima can speak to this much more than I can—it’s not that banks aren’t saying, this is a pretty risky investment, folks. You want to invest in fossil fuel now to make up this supply constraint? What are you going to do in five years when governments come back with their climate change commitment and you’ve got a stranded asset? So there’s a series of these interconnected pieces which, in my mind, are real.

And then finally I’d say we shouldn’t ignore the fact that the climate crisis is getting worse every year. That’s driving the politics. It’s driving the politics in Europe. It’s driving the politics in China. It’s driving the politics here. You look at wildfires in California, look at the drought in the Midwest, you look at storm surges coming across the nation. You look at the election that just happened in Australia, which is in no small measure a climate change election. You are seeing this pervasive climate constraint, and that’s going to also influence the discussion.

GOODMAN: Well, as usual, Jonathan, you gave us so much on that energy and climate landscape there. And I would just note that earlier today I released—with the International Military Council on Climate and Security—a report on decarbonizing defense as a way for militaries globally—but specifically NATO and the EU militaries—to lead in this energy transition. And indeed they are beginning to, and particularly in the U.S. they are—they do recognize that, in an era of contested logistics, as we say, decarbonizing and making—and reducing supply chain constraints by being able to power your weapon systems with alternative fuels, or hybrid, or locally, is going to be increasingly important—so sustainable energy. And that’s sort of a new way—and so in every sector of the economy there are these new initiatives, new ways of thinking about our energy system in light of the global climate crisis.

Let me come back to you, Helima, because you work—you know, you’ve got both the oil and the gas bit. So the gas—as Jonathan just underscored—the looming, near-term crisis may be more in gas, so shape that dilemma with us.

CROFT: No, I think that I’m concerned both about oil, gas, and food. I mean, the thing about this crisis is Russia—people say it’s a gas station. It’s not a gas station; Russia is a global commodity superstore, and there are multiple commodities that are impacted by this war, and I would say the food crisis is something which is terrifying—

GOODMAN: Huge.

CROFT: —in terms of how this can play out.

In terms of gas, I mean, this is where we see the European dilemma. I mean, the Europeans have just announced plans finally to embargo seaborne imports of Russian oil. They had to do a workaround for countries like Hungary, Slovakia to continue to be able to import pipeline gas, but if you—oil, but if you look at what they are going to do in six months’ time with voluntary reductions on pipeline imports by Germany and countries like Poland, that’s two million barrels of oil that will be off the market trying to find a home. We can talk about whether India will continue to be able to absorb all these barrels, taking that 30 to 35, or even greater discount on oil barrels.

Gas? There is no movement right now to really discuss banning gas imports because obviously there is no easy replacement for gas. And I think there is grave concern, as Jonathan laid out. We’ve seen the Russians cut off small importers of gas—essentially I would say shots across the bow—warning shots essentially saying if you don’t come to our terms on ruble payments—and we can talk about a ruble payments mechanism—what I think is very interesting is that when the Russians came out and announced this demand, that you will pay in rubles, you had the European Commission now saying, no, it’s a violation of contract terms. Do not do this. But they have walked back from that when faced with the prospect of having major importers and major companies being cut off after seeing what happened with smaller importers—Poland, Bulgaria, now Finland, Denmark.

The companies and countries that have been cut off are the smaller importers. The real concern is what would happen if you have a major importer cut off, and when you travel to, you know, other major gas producers. I was in Doha in March for the Doha Forum and, you know, behind the scenes, you know—you know, officials there were saying, look, 85 percent of our gas on long-term contracts goes to Asia. The 15 percent that Europe is buying on the spot market, we’re not going to divert that next year, but we cannot ride to the rescue. I mean, yes, there has been additional U.S. LNG volumes going into Europe, but if we were to get a significant cutoff of Russian gas, that could have really very, very serious economic consequences.

Again, I don’t—I think the oil situation we should be concerned about as well because of lack of spare capacity and the food situation, but gas is really a frontline concern of European leaders.

GOODMAN: Great. So Robert, share with us your thinking about where we are on the food insecurity as part of the broader climate insecurity. We’ve got some short—very short-term food insecurities arising across the Middle East, North Africa; other importers of wheat, fertilizer, sunflower oil; other products that traditionally come out of Ukraine and Russia without a lot of, let’s say, capacity of their own. So how are we going to handle that system shock over the next year or so?

LEMPERT: I mean, that’s obviously a tremendous challenge and, you know, I suspect maybe Jonathan has more to say about this particular challenge than I do.

But, you know, this is—clearly, I think we need to be as aggressive as we can, trying to make sure that growers elsewhere get the fertilizer and the other materials they need and, you know, intervening to make—you know, at the government level to make sure that we’re not leaving any, you know, productive assets idle in order to—you know, to make up for these shortages.

GOODMAN: Well, Jonathan, how are we going to handle both a food and an energy crisis coming on top of the already existing climate crisis while we’re in the middle of a war wrought by a—as you said—(laughter)—not just a petrol state, Helima, but a commodity superstore.

CROFT: Yes.

PERSHING: You put an awful lot on me. I’m glad I’m in a panel of people who can actually offer a response, Sherri.

Just one quick thought just about your own recently released piece. I am struck by the dynamics of war and the cost in lives to supply troops. As I’ve understood it—and I think you’ve done this research—as I’ve understood it, the analysis says that the majority of troops are actually killed as part of convoys, and the convoys are mostly about fuel. So it’s a really interesting set of data that strongly supports a military interest in finding real alternatives. And so I think the fact that you’ve released that and made that public is super important.

I want to come just back on the food question and think about this in a larger framework. And Rob has put some kind of context around this already. But as I look at it, it’s not easy to say that we’ve made good choices over the last number of years. The vast majority of our food is actually controlled—we have, I think, basically five staple crops. Something like two-thirds of all of our calories are from corn and rice, and it’s like just stunning numbers, and there are something like four commodity traders in the world that control 80 percent of the commodity market. It’s a pretty concentrated funnel through which all of this is moving.

The second thing is that we have not really diversified supply adequately with only a handful of countries that are major global exporters—Russia and Ukraine being high among them, the U.S. as well, Brazil as well—but we now look at climate change as an additional exacerbating driver. This is expected not to be a great year for production—not a terrible year, but we think with the expected combination of heat, and drought, and weather phenomenon, this is going to be a slightly below average year, in part because of climate change effects—that from the U.S. Department of Agriculture’s assessment of U.S. production.

So you’re not going to see the U.S. making up supply, and in this sense, it’s fundamentally similar to what Helima has suggested about global supply for oil and gas. It’s not a supply side option that we face. Having said that, there is something like one-and-a-half times as much food produced in the world as consumed in the world. The extra half is disposed of. It’s waste. It’s either pre-consumer waste, which means it’s lost in the field because of supply chain constraints, or it’s post-consumer waste, in which case we buy it and we throw it away. So it’s not that we don’t have enough food; we just have to figure out how to change it and move it around.

Actually, in some ways it is a very good analogy to the energy problem. It’s not that there isn’t enough energy. There is enough energy. We have new ways of producing both energy and alternative models for food. We have not made the political choices. We have boxed ourselves in to a history in which things are remarkably constrained, and disruptions such as the ones we’re seeing—that are exacerbated by the economics, exacerbated by the threat of climate change and now the reality of climate change—are making these much more difficult.

So I think, going forward, the solution is a very near-term alternative about looking for that extra capacity, looking to manage the distribution in ways that make more sense, and in the long term, choosing very different models to build resilience.

GOODMAN: OK. Well, thank you, Jonathan. That’s terrific, and thank you for alluding to climate as a threat multiplier, which we know is something we are all dealing with now every day. And we’ve been talking about kind of the supply side, but let’s go now to the demand side. And here I want to ask you—all three of you, before we open it to our members for questions—about this question of demand. And one of the things that has come up in Putin’s war in Ukraine that we’ve seen from some of our European allies, particularly in Germany, is requests for citizens to reduce their energy demand—drive less, change their thermostats. OK.

Now here’s the question for your American audience. How do we make demand reduction or efficiency sexy again? Like how could it be like Tesla instead of Jimmy Carter in the sweater? Like what is that national campaign? What is your best branding idea for reduced demand as we navigate our way through this tricky energy transition?

Who wants to lead off with this question? (Laughter.) I know Helima just can’t wait to give her answer now.

LEMPERT: I mean, I can start if no one else wants to.

GOODMAN: Fine, go ahead, Bob.

LEMPERT: Great! I think on energy we—I mean, the great secret with Tesla is the brilliant—is that in fact electric cars have better performance than gas cars. They are incredibly peppy and so, yeah, you say, right, they are super sexy. And that’s what—you know, a big part of what they were selling.

I think with the energy and the American public we need to paint, you know, the vision of what’s on the other side—you know, energy abundance, no energy volatility, you know, better health outcomes, et cetera, et cetera. I mean, there’s a little bit of an analogy with water here in the West, you know. There’s the emphasis on, yeah, it’s short, but—you know, but how nice it is to have different style gardens and so forth, so there’s a vision at the other end. So I think we need to paint a vision on the other end.

And then, as a part of the way of getting there is gamify it. You know, you provide the information to people—how are you doing against—you know, vis-à-vis, you know, your average neighbor? You know, where are you using the energy—so the extent to which we can both get the vision and then get the information in people’s hands, which is, you know, what exactly can they do to reduce their energy consumption, and how can they do better than their neighbor—

GOODMAN: Right.

LEMPERT: —is a way to do it.

GOODMAN: New rock gardens for lawns in L.A., right?

LEMPERT: Actually, native plants, which are very pretty. (Laughs.)

GOODMAN: Native plants, right, and succulents.

LEMPERT: Yeah.

GOODMAN: Exactly.

LEMPERT: Yeah, exactly.

GOODMAN: OK. Helima, Jonathan, who is jumping in?

CROFT: I’ll jump in. I’m not the branding guru that—(laughs)—Robert is, but I do—I’ve been struck by—with this crisis—that the initial response of Western governments was to say, we’re going to hurt Russia but not ourselves and try to say that we’re going to shield our consumers from the impact of the sanctions policy by not disrupting oil—the idea that we’re going to shield our consumers. And I do think that Javier Blas at Bloomberg, my good friend, has been writing so eloquently on this by saying in certain times there are like such serious crises to our global order. And if we really believe that the Russian invasion of Ukraine represents a grave threat to the post-war security architecture in Europe, then I think we can have an honest conversation—or should try to have an honest conversation about what the shared sacrifices are entailed in that response.

And so I do think that the degree to which, you know, people think it’s Jimmy Carter to say put on a sweater, I do think explaining what this current crisis means in terms of the security architecture, the fate of democracy in Europe, and saying that the sacrifices that we may be required to make in the West are quite—not as significant as the sacrifices that are being made by people in Ukraine. So I think putting it in a context of sort of what is at stake and being honest with the public when we say there is no supply response—by saying that we’re calling OPEC and tapping the SPR, those are all meaningful but that might lead people to believe that there is a silver bullet on the supply side, where, in reality, that this may be something that’s required of all of us to make sacrifices and adjustments because this is what this moment demands.

PERSHING: I want to come in on top of both Helima and Rob with two different thoughts. The first one is that I think that we often demand that something be sexy for it to be adopted. The reality is that we actually do all sorts of things that aren’t particularly sexy and we adopt them all the time. Very few people who own a home don’t have insurance. It turns out it’s not very sexy but we all do it, and we do it for a number of reasons. We do it because it’s required by our banks when we take the mortgage out; we do it because we have enough experience with disaster that we want to be safe in the moment where that disaster might occur; we do it because there’s kind of a collective decision in society that this is how you perform and how you behave. So I’m not sure that sexiness is the answer exclusively, and I think there’s something in that.

The second thing which I think is relevant is this question about, how do we perceive collective threat? And I think too often we say we can have exactly what we’ve had historically, nothing has to change, except that magic will happen at the backend, you’ll never see it but you’ll actually have a better outcome. To a certain extent, we’ve done remarkably well with that theory, right? A lot of people are not really aware that when you flip the light switch that the power that comes out of your circuit turns out to come from a different place than it did twenty-five years ago. There’s way more renewables in the mix. There’s a lot less coal in the mix. That’s—you never even see that, and yet it’s happened. We’re now trying to accelerate that both because of Russia and because of climate and so the question is, for the acceleration, people need to know.

I’ve been in a number of places—I often use taxi drivers as an interesting anecdotal survey. The last time I was in Washington I asked the cabbie that I was driving with, would he be prepared to pay more for electricity not to have to have any Russian gas in the mix. He said absolutely. He was not—and this is not a high-income kind of guy, right? He’s driving a cab for a living; he’s not making a pile of money. And yet, for him, that was a very clear decision. It wasn’t a question at all; it was an “absolutely.” Now, he couldn’t go super high but he’d go 10 percent. He said he’d probably go to 20 percent increase in his electricity bill.

The last thing I’d say is that there is something rather sexy about some of the new technology. So using Rob’s model of the Tesla, take the Nest as an example. People kind of like the idea you could talk to your wall, it turns your power up and down and it makes your thermostat work exactly as you want it to go; that’s a phenomenal cost savings in terms of total power demand. I don’t actually have to be uncomfortable; I just have a thermostat that learns my behavior. So there’s some very interesting crossovers in all of these areas.

GOODMAN: Wonderful.

OK, at this time I’d like to invite members to join our conversation with their questions. And a reminder that today’s meeting is on the record, and the operator will now remind you how to join the question queue.

OPERATOR: Thank you.

(Gives queueing instructions.)

We’ll take our first question from Aaron David Miller.

GOODMAN: Hello, Aaron.

Q: Hi, Sherri. How are you? Terrific panel, tremendous, really, just sensational.

I came in a few minutes late so I may have missed particularly Helima’s comments, but let’s just assume, for the sake of argument, that there were no political issues related to Saudi Arabia; there was no Jamal Khashoggi, no MBS. How much would the Saudis be willing and able to produce in an effort to compensate Russian losses, consistent with their own market realities and their limited production capacities? I never really understood how limited they really are, and are they limited?

CROFT: No, this is a great question and, you know, I started my career in the intelligence community right after 9/11 and it was always this question about Saudi production and capacity. I remember, you know, right after 9/11 we were all focused on, you know, Matt Simmons, is Saudi Arabia running out of oil, and then we had shale and we thought, well, we don’t need Saudi. I think what we write about is, like, what’s the useful reference point when you want to think about what Saudi Arabia can do under the definition of spare capacity? What can you bring on in thirty days and keep on for ninety? And we look at the production numbers that we saw in April of 2020 when we had the price war between Saudi Arabia and Russia, when they couldn’t make that agreement at that OPEC meeting in March, and everyone essentially said, I’m going to max out production to try to get back to the negotiating table.

And so we call it the kind of scorched earth strategy, by the way, which the Saudis actually won against the Russians. Like, they actually prevailed in that. The question is if we look at those April 2020 numbers, we don’t have a lot of additional spare capacity on production but particularly right now, you know, when we think about what they could do beyond the whole group with Saudi Arabia, we think we’re talking, at most, in that kind of 2 million-barrel-a-day range, and the summer is tricky because that’s when we have the peak seasonal swing in Saudi Arabia when they use more of their oil domestically, and so when we get past summer, that is when you could see some more of those barrels be put on the market for exports. But again, we’re not talking about across OPEC+; we’re really talking about two countries, Saudi Arabia and UAE, and we’re probably not talking about much more than 2 million barrels, at best, that can be brought on to the market to make up for Russian losses.

And so to me the really important question is going to be: What is the scale of the Russian disruption? We’ve had the European sanctions. The question I think is going to be next is, if Europe is not going to take 2 million barrels, is India, China, Turkey? Is Asia essentially going to absorb those barrels? Are they going to be fed out to the Asian market? And some of the measures that the Europeans have taken on I think are really important to watch. I would say, look what’s going to happen with the sanctions that are going to be imposed on shipping and insurance. Given Europe and the U.K.’s outsized role in shipping and in insuring these cargoes, that could potentially make it more difficult for India to continue to take these barrels in such large quantities. And so the question is, if you put all these barrels out there and the Russian gap grows, you’re going to have a problem remaining in terms of price, and the Saudis cannot solve the refinery problem. We have, again, a shortage of refinery capacity, and that’s why we’ve seen gasoline, diesel, and jet fuel prices rise beyond in percentage terms what we’ve had in oil prices.

GOODMAN: Excellent answer.

Thank you, Aaron, for that question.

Kayla, can we have the next question?

OPERATOR: Yes. We’ll take the next question from Tyler Godoff.

Q: Thank you so much.

I wanted—perfect segue here on the refinery problem. My previous role was in Fort Worth, Texas, and the conversation that was happening a couple years ago was the inability to make long-term investments in infrastructure in the oil and gas industry, i.e., refineries. Here we are now, a few years later, where we could really benefit from that additional capacity. You know, Jonathan’s talking about a cab driver in Washington, D.C., increasing his energy bill as, you know, one of the solutions, kind of average Americans enduring a bit more pain. Wouldn’t it be better if we kind of flipped our approach to long-term investments in oil and gas? Because it seems like right here in America we have a lot of the solutions to the pain that we’re encountering. So kind of what are the solutions to fixing it here in America with regards to infrastructure?

GOODMAN: OK, that’s a great question, Tyler.

Jonathan, do you want to start with that or—

PERSHING: Yeah, sure. Let me say a couple things. I actually wasn’t suggesting this was going to fix it. I think that the cab driver was really acknowledging a political reality for him about what he’s prepared to think about in the global world. But I’d say something really very clearly: In my mind there’s a near-term problem and a longer-term problem. I don’t believe, from anything I’ve read, that we could turn around a refinery in time to manage Russian oil or gas demand over the course of this winter, and probably not even adequately by the year 2025. So if the model is to find a near-term solution, I don’t think that new investment is going to do that. And then you have the question of, is the investment a sustainable long-term investment? Because if, in fact, the world—starting with Europe—is looking to decarbonize, they’re not necessarily looking for long-term capital stock that would have a high carbon coefficient. And, in fact, they probably have adequate resources to manage a much smaller carbon footprint, given their existing refinery structure, their existing gas structure, and their existing power plant structure, if they look at that as more a backstop supply than a primary supply for energy. Those questions, to me, are unresolved still; we’re waiting to see what Europe chooses to do. So I think there’s this timing question that is fundamentally at issue. How quickly could we turn things around? What I’ve understood from the market side is they don’t want to make long-term investments, so we could incentivize the short-term ones if we, as a community, are prepared to incur the subsidy loss for the stranded asset.

GOODMAN: OK. Good response. Thank you.

Kayla, can we have the next question, please?

OPERATOR: We’ll take the next question from Pat Spearman.

Q: Good morning, or afternoon.

Here’s my question. I think we’ve been talking a lot about energy policy from the standpoint of energy in one column and climate change in another. One of the things that I’d really like to see is people on both sides get together and when we talk about shared sacrifice, we’ve got to make sure that those of us who are talking about renewable energy and then the bridge to get us from here to there, and we have to make sure that environmentalists understand there’s got to be some sacrifice there, because as long as we continue to make this bifurcated, we’re going to always wind up here because every time you do something new that would help us bridge the gap, then we’re going to run into, well, no, that hurts the environment. So we’ve got to get together, both sides get together and talk about this and talk about it in realistic terms and talk about from the standpoint of the geopolitical implications wherever they may be. Today it’s Russia, next week it could be Mexico, some other time it could be—and so we’ve got to get real about this thing and stop looking at it like this is all for one for energy, renewable energy, or an all for one for environmental. Come together; we’ve got to do that.

GOODMAN: Thank you, Senator, very much for that question.

Robert, do you want—you take a systems approach to things—integrate the system for us here.

LEMPERT: OK. (Laughs.) Yeah, no, no, Senator, I think that’s a really important point. And one of the key things that we need to do a lot better on, at least here in the U.S., in dealing with both energy and the climate crisis, is be able to build stuff a lot faster. I mean, there’s no pathway that gets us anywhere near any of the climate goals that we’ve committed to, either at the national level, corporate levels, state levels, that doesn’t involve building out infrastructure much faster than we’ve been able to do it over the last couple of decades. And there’s a number of things that block us, but oftentimes it’s the way that we’ve organized our environmental impact laws and the way that we review building, which is oftentimes—you know, provides incredibly important input but often empowers people to slow things down in ways which really weren’t intended and don’t have the equity that was intended to—was one of the motivations of those laws in the first place. So changing our—you know, the various environmental review laws that we have that allows us to build stuff a lot faster I think is ultimately both good for energy and good for the climate.

PERSHING: Sherri, I’ll just add one thing to that because I think Rob’s right. Only one additional point on my side: I don’t think we’re going to make the transition as fast as the environmental community wants, which implies more climate change. I’m going to make it faster than some of the people who are in the fossil sector would like because it’s going to mean disruption. So I think it’s managing transitions. It’s pretty clear: I mean, Biden made a pretty clear statement in his campaign that he cared about climate, but he’s gone off looking for additional supply because he looks at the American community and he says, how do I continue to create a transition that is not disruptive? That is a tough, tricky thing to land.

GOODMAN: Yeah.

OK, Helima.

CROFT: Yeah, just the last thing I would add on this is I think there is a unique opportunity now with COP moving to, you know, the African continent with Egypt to the UAE to have sort of a more, I want to say, inclusive conversation over issues around, like, energy access, to bring, I think, more stakeholders to this conversation in terms of the transition and how do you deal with the geopolitical fallout of it. I do think that this—going to be a—some more voices involved in the conversation with the geographic change of where they’re going to be hosting COP.

GOODMAN: That’s a very interesting observation, Helima, because Glasgow was the first time, I think, there was a very notable presence of oil and gas producers and countries that are major oil and gas producers at the COP on climate change, and now we’ll have the next COP, as you noted, in Egypt and after that in UAE, so there’s going to be a real focus on the Middle East, North Africa, and also the developing world, so energy equity in a way that meets a variety of needs in a variety of different economies.

Thank you, Senator.

Can we have the next question, please?

OPERATOR: We’ll take the next question from Bernard Haykel.

CROFT: Oh, hi.

Q: Hi. Bernard Haykel from Princeton University. Thank you so much for a wonderful panel and a big shout-out to Helima, who’s a dear friend.

I want to ask a question about the energy transition and the specific role in place of Middle East producers as this happens. We’re going to assume that there’s going to be demand disruptions; there’ll be less demand for oil and gas as we transition away from fossil fuels. But it does so happen that the oil and gas that’s produced in the Middle East, specifically in the Gulf, happens to be the cheapest and, quote/unquote, “cleanest” of all oil and gas in the world in terms of methane emissions and so on, which, to me, indicates that, in fact, they will remain very important reserves for geopolitics. And I wonder if the panel agrees with this and what this will imply for the continued importance of countries like Saudi Arabia, the UAE, but also Iran and others? Thank you.

GOODMAN: Go ahead.

HELIMA: I’ll pass it along. I mean, one thing I think is so notable is that I remember with the shale revolution and that OPEC meeting where they didn’t put the floor in in November of 2014 and prices crashed and the market commentary was, OPEC is over, U.S. is a swing producer, we’re never going to be talking about the Middle East again. And I even remember with the price crash in 2020 the whole conversation was, we used to think it was peak oil, now it’s peak demand; how is Saudi Arabia and UAE going to stay in business? I would say that now in the Gulf there’s a view that the wind is at their backs because, yes, there may be—there is going to be reduction in demand overall, but the number of producers that are going to continue to invest in traditional fossil fuels is going to be a smaller number of countries; it’s going to be the lowest-cost producers that are going to continue to invest in expanding capacity, and they are going to be the ones that will meet future demand for traditional fossil fuels while investing in solar, in key transition fuels like hydrogen. And so I actually feel like there’s a tremendous sense of confidence in Abu Dhabi, in Riyadh that since they’re going to do all of the above that they will be last man standing. And I will say that in some of these conversations over the years you would have Russian officials say, no, we’ll be the last ones standing as well because we have currency-adjustment mechanisms that are easier for us, they’re not pegged to the dollar; we’re going to continue to invest as well. If you are sitting in the Gulf and you are looking at these sanctions, the financial sanctions that are being placed on Russia, it will mean, even when this war ends, that it’s going to be very, very difficult, I would argue, for Russia to grow production. They are going to see a significant reduction in their productive capacity on the back of these sanctions. So truly I think it will be these Gulf producers that will be last man standing when it comes to traditional oil and gas, and again, they will also make the investments in things like hydrogen.

GOODMAN: As long as we’re talking about that, let’s just have someone address Iran in the mix here as a potential, you know, energy producer back into the global market at some point, or a disrupter.

CROFT: I mean, we’ve seen the news, Sherri, that we’re—and again, we don’t look like we’re poised to get a breakthrough on the Iranian agreement and so that additional million barrels that some were penciling back into the market, it’s not going to come to the aid of this situation. And I do think an interesting question will be—and if we get Aaron David Miller back on the line—is that what happens if we don’t get an Iran agreement and we have—you know, we have these Iran barrels that were leaking out into places like China. Is the administration going to continue to allow Iran leakage because it helps keep more supply on the market? Will they have to crack down on that? And so I think it still remains an interesting wildcard in a no-deal scenario.

GOODMAN: Good point.

OK, can we have the next question, please.

OPERATOR: We’ll take the next question from Lindsay Iversen.

CROFT: Hi.

Q: Thank you. Hi, Helima. It’s great to see you again. (Laughs.) And thank you, everyone, for a really terrific conversation.

This is actually perfectly timed because I wanted to pick up on something, Helima, that you had just mentioned which is about sort of the predominance of low-cost producers in sort of the future oil landscape. And I wondered where you would put the United States in that landscape of low-cost producers. I mean, I think that there has been a lot of political pressure on both—you know, on policymakers to make it easier for U.S. producers to expand production; at the same time, we’re hearing from American producers that they’re under a lot of financial pressure to not expand investment, and also there’s this sort of specter, which Jonathan has alluded to, of future climate policy, which, of course, the oil companies are doing as much as possible to thwart. And so I’m curious, on sort of an academic level, how we should assess the balance of incentives and forces on U.S. oil company behavior going forward, and then sort of on a—I guess on a policy standpoint, you know, and a production standpoint where you see that impacting their actual output.

CROFT: That’s a fantastic question. I’ll take part of that and then hand it over to Jonathan on the climate angle. But U.S. production will grow this year and, you know, we are anticipating U.S. production will grow anywhere from like 750,000 to a million additional barrels. But again, this comes down to the question of what is the scale of the Russian losses in terms of how much that goes to mitigating the impact of that? But certainly I think what’s kind of oftentimes lost in the political conversation about U.S. production is the role of the financial services industry in essentially for years telling shale companies, like, hey, keep it in the ground, your profits—don’t keep it in the ground; return it—keep your production in the ground, return profits to shareholders, because there had been a view that it was not a particularly great investment. And so I do think that that’s why the Biden administration has not only said to U.S. oil and gas companies please produce more, they’re also talking to Wall Street saying, please don’t hold back the investment, you know, to let these companies grow. But one challenge is going to be is that the Biden administration, the White House is saying, we need shale to bridge the gap, so we need you for three to five years, but don’t make investments in long lead-time projects. And so the interesting question is, like, what—is that a sufficient message to ensure the type of investment that you need going forward in the industry? It’s a very, very tricky balancing act the administration is trying to perform, and I will hand that over to Jonathan right now, talk on the climate side.

PERSHING: So I don’t—I don’t disagree at all with Helima. I think that’s the—that’s the act that they’re working. That’s the line they’re working. And it’s not just, you know, states trying to find that line, right? I think Europe is looking for that line. You look at what Robert Habeck has done, his first trip after the invasion was not a domestic trip to look at efficiency; his first trip was Qatar to see if he could find some barrels to buy on the marketplace, and he was prepared to make some German investment into those barrels. So you have the same kind of dynamic, except that I think that he found what Helima already knew, which is they’re just not really available, and what kind of investment you could make and what kind of long-term trajectory you’re on, because he wasn’t able to promise a permanent commitment from Germany because Germany’s got a commitment to phase out its demand. So you’ve got this real constraint as people try to navigate that space in the transition.

I’d only say one more piece here with regard to where the oil and gas companies are. I’ve been interested in what some of the evolution has been and we haven’t talked as much about two things. Helima raised hydrogen. I can’t see very many other companies that probably—or any other sectors in the economy that could move commodity of that sort at the scale we probably need. So the idea that we’re going to build an entirely new commodity infrastructure for hydrogen seems implausible. The idea that we use the one we’ve got, which is oil and gas—which already moves things that are pretty combustible and problematic really effectively—that’s the first piece; and the second was we’ve really not yet mentioned carbon capture.

I personally believe that carbon capture’s going to be much more of a play for industry as we look at things that are much, much harder to avoid, probably gas and high-temperature demand, which could also be hydrogen, so they got to replace the hydrogen with something. So I think there’s going to be an interesting play here and I have to move carbon. Now I’m also looking at a sector that’s really good at moving gaseous substances. Very few people do that. Very few people have the underground expertise that they do, and I put it at all scales. One of the most interesting conversations I’ve had in the last couple of years was with Saudi Aramco, which sees its Gwahar Field as being a carbon repository for Europe. So there’s some very interesting medium-term dynamics which could give very different economic alternatives.

GOODMAN: Rob, why don’t you come in on that? Because that’s a great point, Jonathan. We need to bring the hydrogen and the CCS in here and then we could look at some longer-term, you know, fusion and other technologies that are out there on the horizon as well. OK.

LEMPERT: So in the financial sector there’s a big move now to price in what’s called transition risk into valuing assets, which is trying to get ahold of how do we value the risk of either being on the upside or the downside of some of these transitions, and if you look at some of the long-term energy scenarios—for instance, Princeton’s Net-Zero America scenarios—that the amount of natural gas in the 2050 scenarios for those goes from zero to eighteen exajoules, which is, you know, compared to about thirty-four today, but—so that means just a very—you know, a huge swing in how much gas we might actually use, and these are all, you know, zero—of net-zero economies. And so to Jonathan’s point, what those are is very different sets of technology trajectories for how much gas to hydrogen, how much we use on carbon capture and storage in the economy looking forward.

So we do have this big challenge of both encouraging investment and appropriately keeping the risk—managing the risk of stranded assets. We’re trying to see how much we can do that through financial markets, but the mix of, you know, financial markets and policy is another big question as we go forward.

GOODMAN: OK, I think we have time—do we have time, Kayla, for one more question, or should we wrap it up?

OPERATOR: We can take one more question. Our last question will be from Bhakti Mirchandani.

Bhakti, can you hear us?

All right, back to you, Sherri.

GOODMAN: OK, I think I want to ask you all to just reflect, you know, at the end where—we just touched on hydrogen and CCS, but also we’ve got—the two other kind of pieces that are hanging out, to me, on, you know, the longer-term, the fusion. You know, do we see any of these other technologies coming on in the near term? And then how are we going to manage the green—the critical materials in mineral supply chain that’s so fundamental to the renewable economy, and it presents like oil and gas—and food, another potential system shock, even in the near term, as the demand for those materials for batteries and other parts of the renewable economy increase.

OK, closing round, lightning round.

LEMPERT: OK. (Laughs.)

HELIMA: That’s you, Robert. I saw you going for it.

GOODMAN: All right, Robert, quick.

LEMPERT: OK, great. You know, I think in the past we’ve really focused on, you know, optimizing and making the most efficient supply chains and other aspects of the system. I think, you know, this resilience concept we really need to highlight a lot more and make systems which are designed for inevitable shocks, which not only, you know, bend and not break but actually are designed to use shocks to bounce forward, and as we’re seeing, it’s hard to do that in real time without a lot of preparation, and so we ought to be prepared—build resilience into the systems going forward and prepare for the next shock.

PERSHING: I’ll just go next and Helima can wrap it up because she’s going to have all of the synthesis here.

Three quick comments: I’m really dismayed we’re not using more nuclear power. I’m kind of skeptical on fusion, but there’s an awful lot of fission capacity that we’re not taking up. I was a little bit surprised that Germany chose not to even extend the lifetime of its existing fleet, where I think it would have been perfectly plausible as a mechanism to avoid their near-term gas demand, but it didn’t happen. I think the U.S. could do some of the same things. California was trying to do some of the same things. Gavin Newsom proposed it but it didn’t go forward. So I think you’ve got some real interesting questions there. We should be clear about how long it takes a new technology to enter into the market at scale. We’ve been working on fission for a long time and it’s still less than 20 percent of the global total. Bringing in fusion is not going to be a quick answer, if we ever get it.

The second comment I’d make is with regard to the minerals and the strategic materials. I do think this is a place to pay enormous attention. We’ve only recently begun to elevate this in our policy dialogues, and I think that’s a mistake. It comes from different players, but the control of the existing economies is actually, in some ways, almost more narrow than the OPEC control over oil and gas, and we’ve not really invested and investigated where we want to be on that. It turns out that those are economic resources, but there’s actually geologic reserves, and as a geologist I can tell you, they’re pretty widespread, but we’ve never exploited them. And it might be more costly today, but if we put energy, it might be less costly in the future. And these are the system shocks of where we’re going to go, not the ones we’ve just seen.

GOODMAN: Thank you. Thank you. And that gives you the last word there, Helima.

CROFT: Last word is we need to reconvene, Sherri, on this issue of critical minerals because I agree completely with Jonathan in terms of we always talk about concentration risk in terms of oil; there’s so much concentration risk on critical minerals. I do think the Biden administration you do hear a lot of conversations about elevating the national security focus on particular critical minerals like graphite and concentration risk around graphite. But again, I think that is the future conversation we all need to be having.

GOODMAN: Yes, I know it’s seize the day within the Defense Department; they’re very focused on that for defense systems, as they should be. And I agree with you; it merits a whole nother discussion to talk about the sustainable supply chain and geopolitical implications of diversifying critical minerals and materials.

With that, let me thank all of the members for joining us today. Thank you to all of the speakers. And the video and the transcript of today’s public meeting will be posted on CFR’s website. Thank you all very much.

(END)

This is an uncorrected transcript.

 

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