Oil and Petroleum Products

  • Nigeria
    Massive Borrowing Puts Nigeria’s Future at Risk
    The country’s bloated debt portfolio is the outcome of decades-long economic mismanagement.
  • Energy and Environment
    How the U.S. Oil and Gas Industry Works
    The United States is the world’s top producer of oil and natural gas. Its decision to either continue at this pace or curb production to achieve its climate goals will have global consequences.
  • Nigeria
    Will Economic Collapse Precede Political Transition in Nigeria?
    Nigeria is staring down the barrel of financial bankruptcy.
  • Energy and Environment
    Renewing America Series: Rethinking the U.S. Approach to Energy
    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.
  • Technology and Innovation
    Virtual Roundtable: Reimagining U.S. Foreign Policy to Meet the Challenges of Strategic Competition
    On April 20th, 2022, The Council on Foreign Relations (CFR) Roundtable Series on Technology, Innovation, and American Primacy sponsored the virtual roundtable, “Reimagining U.S. Foreign Policy to Meet the Challenges of Strategic Competition.” The event was organized and moderated by James Dougherty, Adjunct Senior Fellow and the panel included Mr. Earl Carr, founder and CEO of CJPA Global Advisors and editor of the new book "From Trump to Biden and Beyond: Reimagining US-China Relations” and Dr. Carolyn Kissane, NYU Academic Director, Center of Global Affairs, & Director of SPS Energy, Climate Justice and Sustainability Lab. 
  • Economics
    Russia’s War Is the End of Magical Thinking
    In her co-authored 2018 book Political Risk, former U.S. Secretary of State Condoleezza Rice tells the story of an hourlong negotiation with Russian President Vladimir Putin. For what were clearly protectionist reasons, Russia had banned U.S. pork products. To justify the ban, Putin claimed American pork posed an unacceptable risk of the parasitic disease trichinosis because Russians tended to cook their pork less. “You wouldn’t believe it,” Rice recalled. “We spent an hour, an entire hour, on pork. … And we had this long discussion of cooking habits in Russia compared to Alabama, where I’m from.” In the three decades since the end of the Cold War, the world was mostly stable enough to allow leaders to concentrate on pursuing and preserving economic opportunities—not only for pork producers but for all kinds of companies, small and large. The U.S.-Japan trade disputes of the early 1990s, which were mostly about Japan’s reluctance to buy more U.S.-made cars, beef, rice, and semiconductors, were a top priority for U.S. President Bill Clinton. So was the conclusion of the North American Free Trade Agreement with Mexico and Canada, which was driven largely by corporations seeking lower wage costs. For decades, Berlin encouraged German companies to look the other way at Russia’s increasingly aggressive actions in Chechnya, Georgia, Ukraine, and elsewhere; Germany is now Russia’s largest trading partner after China. World leaders made the annual trek to Davos, Switzerland, for the World Economic Forum to discuss the future of a global economy that was highly integrated and seemed to be getting more so each year. Efficiency and seamless trade were top of mind for the world’s government and corporate decision-makers. Russia’s brutal invasion of Ukraine five weeks ago, and the punishing Western economic sanctions that have followed, did not on its own smash this complacency. The U.S.-China trade war launched by former U.S. President Donald Trump had already caused some companies to rediscover geopolitical risk and reconsider their exposure in China. The business lockdowns and travel restrictions triggered by the COVID-19 pandemic left companies around the world scrambling to find reliable suppliers. Right now, more disruptions of the global economy look likely as Shanghai and other parts of China lock down yet again to control the virus. But the losses triggered by the war in Ukraine—and the speed at which they’ve been incurred—are unprecedented. The British energy giant BP, the biggest foreign investor in Russia, is taking a $25 billion write-down and losing a third of its oil and gas production after divesting its share in the Russian oil company Rosneft. European aircraft leasing companies could lose up to $5 billion worth of aircraft trapped in Russia by sanctions. The French automaker Renault has lost 30 percent of its market value as it unwinds its Russia-based production. Nearly 400 large foreign companies have pulled out of Russia entirely or suspended their operations, compared with fewer than 40 continuing business as usual. The result is shaping up to be a great risk recalculation. After decades in which issues such as pork protectionism could be deemed a problem serious enough to engage a U.S. secretary of state, the possibility of truly catastrophic economic losses suddenly looms large. Were China, for example, to attempt an invasion of Taiwan, the costs would dwarf those faced by companies over Russia’s war in Ukraine. Investors are paying attention. Already, foreign owners of Chinese stocks and bonds are fleeing the market; the Institute of International Finance (IIF) has described this divestment as “unprecedented” in scale and intensity, far exceeding outflows from other emerging markets. While the institute’s chief economist, Robin Brooks, cautioned that it was too soon to draw definitive conclusions, he and others wrote in a recent IIF report that “the timing of outflows—which built after Russia’s invasion of Ukraine—suggests foreign investors may be looking at China in a new light.” What are the implications of companies and investors massively recalculating risk? Recent research from U.S. Federal Reserve and other economists suggests there will be both short- and long-term costs. Looking back over a century, economists Dario Caldara and Matteo Iacoviello conclude that big geopolitical risk events such as wars and terrorist attacks usually result in economic slowdowns, lower stock market returns, and flows of capital away from emerging markets toward advanced economies perceived as more stable. Research from Vivek Astvansh and his colleagues suggests more lasting consequences as well. Using data going back to 1985, they find that rising geopolitical risk slows innovation as companies find the future more uncertain and become wary of spending funds on promising new technologies. These negative effects can linger for years even if the disruptions pass. Such a recalculation of risk will be costly—but it was long overdue. Way back in 2005, when the cheerleaders of modern globalization were still full-throated, Barry Lynn—now executive director at the Open Markets Institute—warned that “corporations have built the most efficient system of production the world has ever seen, perfectly calibrated to a world in which nothing bad ever happens.” The global economy, he argued presciently, was enormously vulnerable to disruptions of all sorts, from wars and terrorism to earthquakes and pandemics. In search of efficiencies, multinational companies had blithely ignored such risks for decades. If governments and companies learn the proper lessons, their responses could be beneficial, even if they come at high initial cost. Companies will shorten their supply chains and emphasize resilience, not just efficiency. Democratic and free-market-minded governments, such as those in the United States and much of Europe, are reassessing their dependence on authoritarian states for critical technologies and commodities. The U.S. government began this effort in a serious way in 2019, when the Trump administration ordered U.S. companies to stop using telecommunications infrastructure from the Chinese technology company Huawei and pressed its allies to do the same. Germany and other European nations face a longer road in weaning themselves off Russian oil and gas but are moving quickly to find new suppliers. The danger is that governments and companies will overcorrect by exaggerating the new risks in the same way they previously ignored them. Looming threats, in particular, could be even more disruptive than actual events, such as wars. Facing massive uncertainty, companies and investors pull back, whereas following an adverse event, they become more confident at pricing in such risk. As deep as the economic disruptions from Russia’s war look right now, companies can adjust once the sanctions regime is clear and policies to replace Russian energy are in place. But the mere fear over an intensified confrontation with China could lead to a generalized, disastrous stampede. It is easy to go from underestimating political risk to fearing it too much. Such an overcorrection could, for example, discourage Western companies from expanding in developing countries, where they are urgently needed to prevent economic contractions, help develop economies, and provide an alternative to China’s strategic Belt and Road Initiative. It is hard to imagine the day when a U.S. secretary of state will again spend an hour with Russia’s president talking about pork. Nor should we hope for it. The geopolitical stability of the past three decades produced too much magical thinking by governments and companies alike. The global economy is still highly integrated—but also prone to great disruptions. A sober calculation of risks and rewards is just what is needed now.
  • United States
    Lessons Learned With Admiral Thad Allen
    Admiral Thad Allen discusses his distinguished career in the U.S. Coast Guard, including leading the federal responses to Hurricane Katrina and Rita and serving as the incident commander for the Deepwater Horizon oil spill, his work as the former executive vice president of Booz Allen Hamilton, and his current role at NASA. Lessons Learned is a roundtable series, open to term members and younger life members, which features distinguished speakers who reflect on their career experiences, the choices they made along the way, and the lessons they have learned from them.
  • Diplomacy and International Institutions
    Biden Visits Poland, Anxiety Over Oil Prices, and More
    U.S. President Joe Biden travels to Poland as Russia’s war in Ukraine enters a new phase, leaders from OPEC (Organization of the Petroleum Exporting Countries) and its allies convene virtually to discuss oil production, and international themes abound at the Ninety-Fourth Academy Awards.
  • Trade
    The Implications of Russia’s Invasion on U.S. Trade
    Jennifer Hillman, CFR senior fellow for trade and international political economy, discusses how the Russian invasion of Ukraine is affecting trade in the United States with host Carla Anne Robbins, CFR adjunct senior fellow and former New York Times deputy editorial page editor.   TRANSCRIPT FASKIANOS: Thank you, Erica. Welcome to the Council on Foreign Relations Local Journalists Webinar Series. I’m Irina Faskianos, vice president of the National Program at CFR. As you know, CFR’s an independent nonpartisan organization and think tanks focusing on U.S. foreign policy. We take no institutional positions on matters of policy. This webinar is part of CFR’s Local Journalists Initiative, created to help you draw connections between the local issues you cover and national and international dynamics. And so through this programming we put you in touch with CFR resources and expertise on international issues and provide a forum for sharing best practices. Thank you all for taking the time to be with us today. This webinar, again, is on the record, and the video and transcript will be posted on our website after the fact at CFR.org/localjournalists. And we will also send out a link to the discussion as well as to other resources mentioned. We’re going to talk today about “The Implications of Russia’s Invasion on U.S. Trade” with speaker Jennifer Hillman and host Carla Anne Robbins. I will just give you a few highlights on their distinguished careers. Jennifer Hillman is a senior fellow for trade and international political economy at CFR. She’s a professor of practice at Georgetown University Law Center, teaching courses in international business and international trade. From 2007 to 2012, she served as a member of the World Trade Organization’s appellate body. And prior to her time at the WTO, she served as a commissioner at the United States International Trade Commission and as general counsel at the Office of the U.S. Trade Representative. Carla Anne Robbins is adjunct senior fellow at CFR. She is faculty director of the Master of International Affairs Program, and clinical professor of national security studies at Baruch College’s Marxe School of Public and International Affairs. And previously she was deputy editorial page editor at the New York Times, and chief diplomatic correspondent at the Wall Street Journal. So thank you both for being here today. I’m going to turn it over to Carla to run the conversation, and then we will go to all of you for your questions and comments. So, Carla, over to you. ROBBINS: Thanks so much, Irina. And thank you so much, Jennifer, for joining us. And thank you to all of our colleagues who are here with us today. Thank you for everything you’re doing. It kind of just doesn’t stop, the news. It’s pretty extraordinary, and a particularly grim time—and has been a particular grim time for such a long time. So, you know, I’ve been thinking about this Richard Holbrooke quote about sanctions, when he said, “What else fills the gap between pounding your breast and indulging in empty rhetoric about going to war besides economic sanctions?” You know, and there’s a pretty impressive list of sanctions that we put on Russia. And of course, we’re giving an enormous amount of military aid to Ukraine as well. But in the end of the day, we’re really sort of hoping that the economic pressures are going to change Putin’s mind. So I want to talk about the impact on the United States, and certainly I want to talk about how we as reporters cover all of this. But I thought maybe we would start out, Jennifer, to talk about the sanctions themselves. You know, are these extraordinary sanctions? And are the Russians feeling the pinch? And do you think they have a chance of changing Putin’s mind? HILLMAN: OK, I’m going to start out by saying yes, yes, and not so sure. So are these unprecedented? I think the answer is unequivocally yes. And I do think it’s important to sort of think about why they are so unprecedented. I mean, for me, one is that they’re way more comprehensive than anything that we’ve ever done before for any other kind of sanction—whether you compare it to what we did with respect to Iran, or Venezuela, or others. They are just far more comprehensive. And when I say that, I mean, partly it’s because they cover financial transactions and, again, are very comprehensive in terms of both the number of the banks that are—that are subject to the sanctions, the freezing of the assets, the denial of banks access to SWIFT, the clearing/processing system for banks. You know, again, extremely comprehensive sanctions on the financial side. So it is really depriving Russia of access to dollar-denominated deposits that it has around the world and to other things. But they’re also very comprehensive in terms of when you move over to the goods side of the equation. You know, significant sort of import bans on sending anything into Russia. And I would say, particularly strong bans when you think about goods that have any technology sort of component to them. And so, again, very strong across there. I mean, thirdly, when you think about it’s pretty hefty ban on travel. I mean, you’ve effectively grounded, you know, Russian civilian airplanes. I mean, Aeroflot, the Russian airline, is no longer flying any flights internationally because such a high percentage of all the actual physical planes run by any airlines in and out of Russia are leased, they don’t want to fly them anywhere and have them land and be seized. So there’s kind of a travel ban, if you will. You know, and then you add on top of that the sort of technology bans, to me it’s extremely comprehensive. So that’s part of it. Secondly, to me, it is very unusual, compared to all of the other sanctions, in terms of how many other countries are in on this. It is all of the members of the European Union and some of their individual member states, going even beyond that—Canada, Australia. I mean, even usually always neutral Switzerland joining in on it. So it is much more of a coordinated, you know, kind of a ban. And I would say the last thing that really is usual, and I’m sure is making it really hard for all of the journalists out there, is the swiftness of it. I mean, if you think about it, it was February 21st that Putin decreed, you know, that the—that Donetsk and Luhansk were independent regions. It was less than four hours later that the president of the United States is issuing an executive order, you know, stopping new investments in or exports from those regions. And, again, it’s less than six hours later the European Union is putting on bank sanctions. And so you just keep going, with every single day that something happens in Ukraine there’s an immediate sort of response. So, yes, they are really new and different sanctions from anything we’ve seen before. ROBBINS: And, you know, the thing about sanctions is—as Holbrooke said, it’s the thing between going to war and wringing your hands, pounding your breast. Is it crimping Putin’s ability to fight the war? I mean, he’s certainly probably still eating steak. Or is he a vegan? You know, he’s not changing his—(laughs)—you know, he’s still—he’s still got his black belt—although, I think they took his black belt away. I mean, is it crimping his ability to fight? I mean, are they pressuring enough the people around him? I mean, sanctions at the end of the day probably have to change his mind or really fundamentally limit his ability to fight the war. HILLMAN: Yeah. So I think this is a really hard question, because in general the problem with economic sanctions is they’re not immediate. You rarely see an effect immediately. They take time to sort of starve off an economy or something. But here I think in this instance I think we are seeing—we are seeing a relatively immediate effect as a result, in part, of the ban on goods. I mean, so it is the fact that, for example, many of the parts that are needed to build cars, to build tanks, to build trucks, they are already having an effect. They have to some degree shut down—you know, the largest tank producer in Russia is now shut because it doesn’t have the parts. Lada, which is, you know, the national car of Russia, again, those production lines—at least some of their production lines are being shut down. Their large truck producer, again, does not have access to parts. So in that sense we are actually seeing a bit more of an immediate impact, and an immediate impact on his ability to, again, produce more tanks, supply the tanks that are already there in Ukraine with necessary parts. So in that sense we’ve actually seen an unusually fast response. You know, on the money side it’s a lot harder, because Russia did before this invasion started start pushing money out into various pockets, some of them fairly secret, maybe some of them hidden to some degree in—by the Chinese sovereign funds, et cetera. But they pushed a fair amount of their dollar-denominated holdings out into various secret places. So do they still have access to money at some level? Yes. Again, and that’s the sanction that’s going to take a lot longer to really cut off Russia from access to money at all. But to me, the other thing where I do think there is some immediate impact is the fact that unlike a lot of other sanctions, most—many, many companies—(laughs)—private companies have decided to join in on pulling out of Russia, not doing business with Russia. They’re not necessarily required to do that. Again, this is not necessarily a mandatory obligation. But if you look at them—I mean, it’s Apple, and FedEx, and, you know, Harley-Davidson, and H&M, and John Deere, and, you know, MasterCard, and McDonald’s, and on and on, PayPal. These are private companies that are choosing to stop doing any business with Russia. And that is also, I think, having a pretty immediate impact on the Russian people. And the question is whether an impact on the Russian people translates into any rethinking in Putin’s mind. And I think at this point we have no way to know that and would assume that at this point the answer is it hasn’t happened yet. ROBBINS: So, and of course, you know, in the past, certainly after the sanctions were put on after Crimea, there were all these people who did this research who suggested that as less access to, you know, banking system, less access to borrowing had the opposite effect, that a lot of the oligarchs became more dependent on Putin because he did have access to money, although it was much more limited. So you’re right, we have no way of knowing. And the difference do, in Ukraine, roll a hell of a lot faster than sanctions do. Now, the other side of this is the impact on us. We’ve never seen this sort of yanking an economy—now, granted, it’s a reasonably small economy, but it is an economy that does supply some important things—yanking an economy like this out of the global economy, and coming on top of such major disruptions from COVID, on top of the highest inflation in forty years. I mean, grocery prices were rising, you know, I think in February before the war started, by 8.5 percent over the prior year. So, you know, Biden’s people can, of course, say that gas prices are all due to Putin. Probably not true. But you can say COVID, Putin, all the other disruptions. So how much of the war, you know, is—how much worse are things going to get, I suppose is what I’m asking? And how much of—you know, where should we be looking for disruptions? I mean, I was looking this morning about, you know, what the Russians produce. And is it just what the Russians produce? Or are there just—are there all these other knock-on effects in supply chains. I mean, there’s palladium and nickel. There’s wheat that’s produced in Ukraine and Russia. You know, what’s the impact on the U.S. economy that we should be looking for? HILLMAN: Well, your question is perfect because I think you’re touching on why is this going to have such a significant impact? Because it is—it is not the case that we import directly so much from Russia. I mean, we get, grand total, probably 8 percent of our oil and gas from Russia directly. And ditto on many of the other products. But it is going to have—these sanctions are going to have a major impact throughout the world because of what they do to everything else. And your point about wheat is a really good one. I mean, Russia was a huge supplier. Russia and Ukraine collectively were huge suppliers of wheat to the international market. Maybe not so much directly coming into the United States, but to the rest of the world. And the problem is the whole world is now going to be facing a very great shortage of wheat, you know, and a significant rise in the prices of everything that is made, you know, sort of using wheat. And it is compounded. I mean, wheat is a crop that needs to be put in the ground in April and May. That’s when it needs to be planted in Russia and Ukraine, and in the United States. And wheat is a crop that is heavy in its need for fertilizer. OK, where does fertilizer come from? It’s a derivative of oil and gas. So who is one of the major producers of fertilizer? That’s also Russia. You know, so you start adding on the fact that there’s probably not going to be a wheat crop going into many parts of Ukraine. And we don’t know whether Russia will continue to plant. What we do know is Russia has already banned the export of wheat. They’re going to hoard whatever wheat they have for themselves, and they’re not going to be exporting it. So you’re going to see a huge shortage throughout the world of wheat. And that shortage comes at a time in which the United States has had particularly poor crops of wheat over the last couple of years, in part due to all of the climate change effects of flooding and droughts in various parts of the United States at the worst possible time for a wheat crop. So we have a low stock in the United States, high prices already. And you add all of this on top of it, and it is going to have, you know, again, a very dramatic effect. As you say, the metals that are really essential in the high-tech area, again, heavily produced in Russia. Russia is going to start hoarding those. Again, they’re not going to be likely to sell them on to any of what Russia is deeming unfriendly countries. And we would be in that category. So it is going to make it harder for our manufacturers of semiconductors, microprocessors, and other things to get those hands on those. Even though they need a small quantity, they need them absolutely in order to be able to produce a lot of these components. So the ripple effect is going to be very, very severe. And, I would argue, it goes both ways. I mean, part of the reason why these Russian companies are starting to shut down is they need components from the West. We also will need some of these things coming out of Russia, and we’re not going to get them. So again, from my sense of it, you know, one of the things that has to start happening right now is the United States has to start thinking about how do we have a higher wheat crop in order to support the rest of the world and ourselves? And that may mean things like stop producing biofuels and other things that are produced using grains and put all of our effort into growing more wheat. I mean, don’t grow corn in order to produce biofuels. Grow wheat. Let’s see what we can do to lower the price of fertilizer. Let’s see whether or not some of the funds in the commodity credit corporation or other forms of support could encourage our farmers to start going into the areas where we are going to be deprived of product coming out of Russia. ROBBINS: So let’s sort of break this down a little bit more. So the sectors that we should be watching that are going to have an impact on what we see in the grocery store, of what we see when we go shopping or we pull our cars up to the pump, or potentially our—that’s one set of questions. And the other one is the sectors are then going to drive, potentially, inflation because of scarcity of goods. So before we talk about inflation for a minute, let’s talk about the sectors. So grains are a really important one, and also the things that grow grains, which is fertilizer. So are we talking potentially about shortages of things that produce bread, or shortages for—because wheat and grains are also for animals. So that’s meat production as well. So do you think we’re going to haver shortages in the United States, or is it just going to drive prices up? HILLMAN: I think for us it will just drive prices up, because we are still a very large producer. I mean, even with less-than-stellar crops, we are a very large producer of all of these. So I don’t think we will literally see, you know, shortages of product here in the United States. But what we will see, unequivocally, is higher prices. And what we will definitely see is significant shortages elsewhere in the world. And again, shortages of major important things like food—bread, wheat—you know, has the potential to create huge amounts of domestic problems. You know, you think about how much of the Arab Spring, you know, started over concerns over food shortages. How dependent Egypt and others are for—again, for bread, that is largely produced from wheat that is largely coming out of Russia and Ukraine. So again, the concern in the United States, I think, on food is more on the inflation side. The concern in the rest of the world is going to be on shortages. ROBBINS: So, you know, the car—and then there’s the car issue. I mean, I thought—we’ve seen this problem with semiconductors. And is this going to get compounded, that we’re going to—car prices are going to get even higher, or the availability of cars is going to be—and was that getting sorted out before this? Or was it—was the whole sort of supply chain thing and such disruption— HILLMAN: Well, again, so supply chain disruption is caused by so many things and, you know, largely related to COVID. But I think the semiconductor situation was getting sort of better, in the sense that, you know, the orders in and the producers in—you know, particularly in Taiwan and Korea, where there’s a huge amount of semiconductor production, are sort of fully back online in terms of through their COVID situation, and are turning out, you know, at high, high numbers their semiconductors. So that was starting to get in a better place. But then when you think about it, you know, I mean, some of it may be that—so, right now, you know, the single-largest product, if you pick one good, that Russia imports is cars. I mean, they are a large importer of cars from Korea, from Japan, from Germany. Those are not going to be sold into Russia anymore, because all three of those countries have banned, you know, exports to Russia. So there will be—those cars that were going to go to Russia are, arguably, going to be available in the world. And that’s not maybe huge numbers, but it is some numbers that will be diverted out of Russia into other markets. So we may be OK on the car front, but it will be, again, some increase in U.S. production but largely, potentially, increased imports from Japan, Korea, and Germany. ROBBINS: So I’m puzzled by—I can’t believe—this sounds like such an incredibly naïve question. I’m puzzled by gas prices. (Laughs.) I think everyone’s puzzled by gas prices. I mean, like, one day you go and it’s, like, a dollar higher than you expected, and the next day it’s seventy-five cents higher. It seem as if it’s changing almost day by day at this point. I mean, and then, of course, I mean, I’ve never—you know, the strategic petroleum reserve, of course, is all not real. It’s all—that’s all psychology and there’s not enough oil in the strategic petroleum reserve to have an impact on gas prices. Has the world found a substitute for Russian oil and gas? Can we put more pressure on that? What’s driving oil prices up? And how much of this is fear? How much of this is reality? And if the Russians do something even worse, is this, you know, the next thing that’s going to be totally, totally tamped down? And are gas prices going to go to $5, $6 a gallon? HILLMAN: Well, I’m going to just start by saying I am not a maven on energy or gas prices. So I’m going to share you sense of I don’t know. But a couple things I’ll just throw out there. One is, you know, it’s my understanding that there always is a lag between the price of oil and the price of gas, just because obviously an import of oil takes a lot of steps before it is actually turned into gasoline and sold, you know, at your local gas station. And, you know, prices vary across the United States for reason that never made any sense to me or others. You know, a couple other things, though. I mean, obviously the United States is—has become, you know, one of the world’s largest producers and exporters of oil. The issue I think for the United States is that a lot of what we produce is out of shale, you know, in North Dakota and other places. So it’s fracked oil. And/or it’s now increasingly out of West Texas. And again, that tends to be a lighter, sweeter oil, if you will. And our refineries that are going to turn that oil into gasoline, are geared up to refine heavy, dirty, sulfur-based oil, which is the kind of oil you can buy from Russia, Venezuela, and Saudi Arabia. So our whole industry is geared up to refine a different kind of oil that what we’re producing. And so part of it is going to be how quickly can our refiners—which, again, the answer is not very quickly—I mean, how quickly can we start maybe refining some of what we produce or figuring out other sources? And again, I think, as I understand it, the Biden administration is trying to figure out whether we could start re-bringing in Venezuelan gas or, again, whether we can put more pressure on the rest of the OPEC countries to supply more of the kind of oil that we are good at refining, in order to keep a higher supply. So, you know, at some basic level the laws of supply and demand still operate. And so prices are, at some level, a function of a lack of supply and very high demand, as everybody, you know, decides to start traveling again in the post-COVID world I’m sure there is also an element of profiteering on the part of the oil companies. I mean, if you just look at what their profit levels are, there’s no question there’s a fair amount of that going on as well. And that’s another one of those ones that’s very hard, you know, for the administration or others to really get their arms around what you do about that. ROBBINS: So if I’m, you know, a local reporter—and then I’m going to let people—turn it over to the group. But how do I make this accessible to my readers? This has been our challenge throughout COVID, is to try to see how this big, global, you know, disruption is affecting my local, you know, experience. I mean, is this by comparison—was COVID just sort of a minor blip and it’s pretty much the same story? Or is this a new story, a new way of looking at it that we should be looking at? HILLMAN: Well, I won’t say that it’s as large as COVID, but I think it is far more than a minor blip. And again, to me, the reason why I say that is to go back to, again, the comprehensiveness of these sanctions. So what’s happening where you do this kind of sanctioning on an economy, even an economy that is not the biggest in the world, of Russia, but nonetheless a significant economy. And significant, why? Because it is such a significant producer of oil, of gas, of wheat, and of some of these metals that are absolutely essential. So you sanction them off, and you basically don’t allow any trade in or out of these major products. And, yes, it has a significant ripple effect on the whole world. So in that sense, yes, it is not a minor blip. It is definitely something—and the longer the war goes on, the longer the sanctions stay in place, I think the more that effect is there, and then the more you will ultimately see, you know, everyone scrambling to come up with alternatives. I mean, whether we will, again, create refineries that can actually refine, you know, fracked oil out of North Dakota, that would be a big change. But that is going to be slow in coming. So part of what would be interesting, I think, for reporters to think about covering is how are companies and communities reacting to these shortages and these supply chain disruptions. And that is not maybe a different story than what we saw in COVID, but it is more tailored to the specific items that are going to be heavily impacted by Russia. So it’s not the whole globe and every product that is going to be affected. But because it affects energy, that at some level does have a very major global impact. ROBBINS: So, energy, fertilizer, obviously, for anybody who’s—who lives in a farming community itself. Prices, what’s going to happen to inflation, which of course has a huge political impact as well. HILLMAN: And then all of the grain products. I mean, again, so those are huge. You know, and then, again, Russia is also a major producer of many of the chemical products. So it’s—you know, it’s plastics are, you know, again, one of those things that’s a derivative of oil and natural gas. Plastics, rubbers, fertilizers, soaps, detergents. A lot of those things, again, are affected by Russia. And then, again, Russia is, like I said, a huge producer of wheat but also, you know, barley, sunflower oil. I mean, you know, poultry, meat, et cetera. So, again, in the food area major issues if there are compete sort of cutting off of Russia. It results in significant impacts. ROBBINS: So I see we have, I believe, a question. So Robert Chaney, I hope I’m pronouncing your name correctly, would you like to ask your question? OPERATOR: Robert, you’re unmuted. You may go ahead, if you like. ROBBINS: Or would you like me to read it? Oh, no mic connection, OK. Robert Chaney from the Missoulian. On farm commodities, wheat, et cetera, how does the sanctions disruption of Russian agricultural—or, is it Russian ag—compare to the war disruption of Ukraine’s ag sector? Guessing sanctions can be turned off, but planting can’t be retroactively produced. HILLMAN: Yeah. So, again, I think it is—I think the sanctions are going to have a bigger effect on the world in terms of Russian than Ukraine. I mean, part of that is just the size of the market in Russia is larger in terms of their total wheat crop. And partly because the Russians are, at this point, you know, banning these exports. So that is going to have a big, immediate effect. What we don’t know is whether there will be any ability for the farmers in Ukraine to get a crop in the ground. Again, as I said, the planting season is April and May. And a lot of that crop is—you know, so the question is whether they can get a crop in the ground in the midst of this war. And I think that we don’t know yet. We simply do not know whether there will be that ability. From everything you hear and read, you know, the hope is that any Ukrainian that can continue to do what they need to do will continue to do so. So there’s a possibility that a crop will go in. I think crops will go into the ground in both Russia and Ukraine. The issue will be whether anybody will have access to it. Those crops will be harvested in July for wheat kind of products. So the question is, once that harvest happens are we still going to have Russia keeping it all or sending it only to what it will call its friendly allies, or whether the market will have opened up to some degree then. I think on that sense it’s just too early to tell. But as between the two of them, you know, Russia is the larger producer. ROBBINS: So I think we have—may have another question, or more. So waiting for more questions from you guys. To follow-up on that, have gotten smarter about this, since we’ve certainly had, you know, two years of disruptions. And we don’t really have an industrial policy or, you know, sort of a national—you know, we have national trade policy. We really don’t have an industrial policy that—in which we try to tell industry how to behave. We provide support for farms. Have we gotten smarter about how to deal with supply chain disruptions? And are there things that we have done because of COVID that can now provide support for different industries or for farms, and all that are springing into place now to try to cushion some of this? Or are we still scrambling? HILLMAN: So the answer I think is yes. We’ve gotten smarter. At least, you know, again, for example, in the agriculture area. There is now a multilateral database that is trying to let everybody know kind of who’s planting, what, where, when, how, and what are the expected yields, so that you, you know—again, not that it’s a perfect system, and not that everybody reports into it. But it is still a far better set of data and information than we used to have, so that there can be a better ability to plan. There’s certainly, as a result of COVID, a much stronger awareness in institutions like the World Trade Organization about whatever transparency, and about doing some serious naming and shaming of countries that are engaging in export bans that are harming the world. And so there is a lot more of a sense of, no, you cannot just ban this, because your ban affects, you know, everybody else. So in that sense there is a lot more transparency, a lot more data being put in, I would say, both at the WTO and at this AEGIS—I’m not going to get the acronym right—of this agriculture monitoring international system. And there is in general a lot more information out there about how pernicious these export bans can be, and how harmful it is if countries try to hoard. That there really is a sense of the trading system works when you can count on your trading partners to sell to you and to buy from you under the rules of the WTO. So I think in that sense there is more awareness of the need for transparency, for immediate time information, and for a better understanding that you should not be engaging in the kind of hoarding activity. ROBBINS: So Dana Cronin has a question. Q: Yeah, can you hear me? HILLMAN: Yes, we can. ROBBINS: Yes, absolutely. Q: Great. Thanks so much for taking my question. I’m Dana Cronin. I am an agricultural reporter for Harvest Public Media. I’m based in Illinois. I have kind of a two-part question here on—related to the potential global wheat shortage that we’ve touched on. I wonder, Jennifer, whether you’ve seen evidence that farmers here in the U.S. will plant more wheat this year to offset some of those losses for Russia? And then as sort of a second part to that question, you know, can the U.S. offset those wheat losses, given that most of the wheat planted in the U.S. is winter wheat, and is already in the ground in many cases? HILLMAN: Yeah. Yeah. So both good questions. And I wish I were more of an agriculture maven than others. But I would refer you, for example, Joe Glauber at IFPRI, the—I don’t even remember—IFPRI, is a very good think tank on these issues. I would refer you to him. And for what it’s worth, I happened to hear recently a really good podcast on this. So would recommend to you the most recent Trade Talks podcast that talks about this wheat issue because, like I said, I am not so much of a maven on this. But my understanding from this is this is not something that can be turned around really easily. And for the farmers, obviously their decision on whether they want to plant more wheat or not is going to depend on whether they can—they can get more money for growing something else. So it depends on sort of what their land is, what is the other crops that can be grown on their land? But if we’ve got really high prices for cotton, you know, you may decide, forget it. I’m not going to grow wheat. I’ll grow cotton, because that’s—you know, I can make more money doing that, or barley, or corn. So again, I don’t think in the absence of some, you know, really concerted effort by the government, I think farmers are going to make decisions the same way they always do, which is what do they think is the most viable, valuable crop that they can put in the ground? If all they’ve got is X amount of land that is good at growing Z crops, they’re going to do it based on what they expect the prices to be. And the prices for everything are high. I mean, this is the problem. The prices across the board are high. And so I think it’s hard to know whether we will seriously enhance, you know, sort of our wheat crop. And part of it is going to depend on whether or not, again, the U.S. government could do a number of things in terms of trying to help offset the cost of fertilizer, trying to move money—you know, government money out of the Commodity Credit Corporation to help farmers. Because part of that is, you know, whether they can get financing for what they need to do to plant right now. So I don’t know the answer, but I do know that there are certain things that we probably could and should be doing, and maybe USDA is doing but I don’t know about it, that would try to figure out how to encourage more growing of those things that we’re going to be short of as a result of Russia. ROBBINS: So the things we should be looking for to see is whether there is an agricultural policy, if not an industrial policy, to provide support to persuade farmers to more in that direction. And one would be under helping, support on the finance side and there is money for the Commodity Credit Corporation. And the other one would be to help offset the rising price of fertilizer. HILLMAN: Yeah. And again, and the other one is whether—you know, how fast any of these can be done? So whether there can be encouragement to start thinking about this in advance. We have a lot of land that we’ve been paying farmers for a lot of years, don’t grow anything. The problem is, when you say don’t grow anything and it’s been twenty years, that land is not, like, readily available to just start plowing tomorrow. So, you know, again, if we’re going to move in this direction it’s going to take some thinking, and some foresight, and some pushing, because these things are not going to—not going to turn on a dime. It isn’t going to be as quick as we might think. And so part of that is also hard. How long is this war with Russia going to go—between Russia and Ukraine going to go on? How long are the sanctions going to remain on Russia? Since nobody knows, I think farmers, like everyone else, are reluctant to plunk down a lot of money in the absence of some kind of guarantees, or insurance, or backing if there is a risk that, you know, tomorrow everything could turn around and become very different. And I think farmers are understandably very cautious. They’ve been very burned by significant swings in commodity prices, and don’t want to get burned again. So I think there’s going to need to be some effort to provide some financial support to give some assurances that they’re not going to be caught again in these very wild price swings in basic crops. ROBBINS: Dana, do you have a follow up or is that good? Q: No, I think—I think that answers my question. And I’ll be sure to check out that podcast. Thank you. ROBBINS: That’s great. John Allison, would you like to ask your question and tell us—I don’t have the list in front of me—tell us with whom you’re reporting? Q: Hello. I’m with the Tribune Review outside of Pittsburgh. And I’m speaking to you from a former industrial area along the Allegheny River. Used to be populated by factories and steel mills. And so my question is about reshoring, which has a nice pithy—sounds so easy. Bring it on back. And we heard that in COVID. Well, we’re going to have our means of production right here. Did that happen to any extent after COVID? And could this episode we’re in how accelerate it? Crystal balls, please? ROBBINS: I love this question. It was one I wanted to know, I was going to ask. HILLMAN: You know, I think it’s really—I think the answer is, in some instances, yes, there was some significant reshoring. Particularly in—you know, you think about how available now masks are, N-95 and KN-95 masks, made in the USA, are now readily available everywhere. So to the extent that we used to import all of our masks from China, we don’t have to do that anymore. So again, I think you can find pockets where as a direct result of COVID we have reshored some things. I think there is an effort underway to start reshoring things that are going to take a lot longer. And I would put semiconductors at the top of that list, where there really is a sense of, you know, semiconductors drive everything, and we need to be making more semiconductors at home. Because we may be designing the semiconductor here in the United States, and all of the technology, particularly for the high-end semiconductors, is largely U.S. technology. The problem is, they’re being actually produced—I mean, fabbed and produced in Taiwan, in Korea, in China. And again, that’s one where I think there’s been a huge effort to try to figure out, as part of this CHIPS Act and other measures, to try to figure out whether we can reshore that. The reason why the answer’s also really complicated is because a lot of it is also not just COVID but, if you will, the trade war that we’ve had with China. So again, we’ve put on—tariffs on $360 billion worth of imported products from China. And the theory was that then anybody that was producing product in China to bring it back into the United States would bring the jobs back to the United States. I think on that score, we’ve seen fairly limited amount of coming back into the United States. What we have seen is some of that production move out of China to Vietnam, to Malaysia, to Indonesia, to Mexico. So again, it has to some degree been pushed out of China as a result of these sanctions, but not very much evidence that it’s directly coming back to the United States. The other thing that we clearly are seeing as a result of, you know, some combination of COVID, of, again this China trade war, and in general as part of, you know, companies looking at their supply chains, is a sense of much greater regional integration. So to the extent that you’re seeing reshoring, I think, in the United States, you’re seeing more Canadian-U.S.-Mexican production. And supply chains across all three of them becoming much more dominant, particularly in a lot of the sectors you just talked about—steel and, you know, auto parts, et cetera. We are more integrated with Mexico and Canada than we ever have before. Now, that matters from a—the jobs, kind of community, perspective that you’ve talked about. Because when we import product from China, in terms of the jobs, the vast majority of the work, the jobs, were in China. When we import from Canada or Mexico, an awful lot of the work that was in that product was likely done in the United States. You know, so a huge amount of the jobs are actually local, because we’ll make a part here, we’ll send it across the border to Canada. Canada ships it to Mexico. Mexico does something else. And it comes back in. So we are better off from a jobs and reshoring/revitalizing standpoint, to the extent that we are trading regionally with Mexico and Canada more and with China and other suppliers in Asia less. And that is happening and, I think, will continue to happen. ROBBINS: So does that answer your question? Because I have a follow-up on this, which is—which is if you were called into the White House, and they said, are there particular industries that we absolutely must have based in the United States just for national security reasons—you know, we can’t take the risk again. And, you know, masks, that’s great. We certainly don’t want to go through what we went through with PPE. But a lot of mask manufactures are now going out of business because there’s less demand for masks. HILLMAN: Right, right. ROBBINS: There has to be government support, like you were saying with the agriculture producers. There has to be government policy to support and encourage, the same way there’s—you know, there’s still credits for the oil and gas industry. (Laughs.) But are there certain industries that absolutely have to be based within the United States? HILLMAN: Well, again, to me, those always—so the answer is yes and no. I mean, do we have to make all of it in the United States? I think there’s very few products where you can say, no, it’s important that we make 100 percent of it in the United States. What you don’t want to have is one critical component of a very long supply chain be entirely outside of the United States, so if you’re missing that one little piece you can’t do anything. And I think that’s where, you know, there is this huge effort to really relook at supply chains, to make sure that you are not highly dependent on, you know, again, particularly in China, to the extent that we’re going to have difficulties or trade wars with China. And now I would add Russia into that list, make sure that you are not highly, highly dependent for one essential component of a very large product on 100 percent reliance on China and Russia. And what we clearly saw in this China trade war is there were a number of companies that were 100 percent reliant on supply from China for a piece, a component. And once they could not get access to that, and there were no other sources, you know, it was dramatically negative for the United States to have put these tariffs on China—hence, this whole process to try to exclude certain items, item by item, from those sanctions. But if you step back from it, to me, it is—you know, what are the products that really play to America’s strengths over the long haul? Where do we need to have that in the United States? So to me, that is in these areas of what feeds artificial intelligence, what is going to feed the 6G telecommunications network? What is going to feed all of the high-tech, you know, where are we in terms of producing ultra-high voltage lines, renewable energy? I mean, the technologies of the future are the ones where we need to have a significant U.S. presence, U.S. making it. And it plays to our competitive strengths. I mean, that’s where we have a competitive advantage over others, is in the sort of intellectual property, in the tech areas, in the—you know, in artificial intelligence, et cetera, where we still have a clear competitive advantage and where we need to keep it. So, yes, those are the ones where, you know, a lot of this industrial policy that we’re potentially embarking on need to focus. ROBBINS: So, Antonio—is it Fins, or—from the Palm Beach Post—do you want to ask your question? Because it’s a good follow on from what we’ve been talking about. Q: Yeah. Thank you for taking the question. So we’re seeing a lot of bipartisan solidarity with the effort in Ukraine. And my question is, as we keep seeing—you know, keep seeing prices increase, and inflation and although we don’t expect to see shortages, but at what point does this start to erode public opinion and public support for Ukraine, and particularly complicate some of the measures that you have been talking about, like agricultural policy, you know, more forward-thinking on some of the—you know, on grains and production and products. HILLMAN: It’s an excellent question. I don’t think I or anybody else really knows the answer. I know, for example, the Pew has been researching—I mean, I’m sorry—has been polling this question of, you know, are you willing to pay more for gas to support Ukraine, duh, duh, duh. And they’ve been trying to do this over time to just sort of judge, you know, sort of where the sentiment is. And I think it’s pretty clear right now, as Americans are seeing these horrific images from Ukraine, just horrible, horrible images of the bombing of the maternity wards and the schools and the children. Right now I think the sense is, yes, I’m willing to pay more for gas. Yes, I’m willing to do X, Y, and Z in order to stand in solidarity with Ukraine. And so for right now, I think that’s pretty solid. Whether and how long it’s sustainable I think will depend on both sort of how the war is going, if you will, about whether—how much perception there is of hope for the Ukrainians, hope much there is this sense of we have to stand with Ukrainians because look how far they are going to protect their own freedom and democracy. You know, we need to be on their side. So part of it is going to depend on how the war goes. But part of it, I think, is going to depend on whether we have more success in taking enough steps to ameliorate the inflation, the potential for shortages, the potential for price increases, whether there is a perception that we’ve done everything we can to protect ourselves as much as possible from the negative effects on the United States. And if there is a perception that we’ve done that, and it has some degree of success, then I think there would be more support over the long haul. And if we don’t, I think you’re right. Implicit in your question is at some point Americans are going to say, enough. You know, I’ve paid enough to support Ukraine. You know, I can’t keep doing this. I can’t put myself into bankruptcy in order to have this effect on Ukraine. I’m done with this. In the same way people are sort of I’m done with—I’m done with—(laughs)—COVID, there is going to be this I’m done with supporting Ukraine. So I don’t know that there’s a good answer, but obviously the more that we can do right now to take away some of these negative effects, the longer the U.S. can stay united with others on this. ROBBINS: Lindsay Moore has a question, from MLive in Michigan. Lindsay, do you want to ask your question? Q: Yes. Thank you. This has been really helpful just kind of macro level of the domino effects. I guess my question is, being a statewide economy reporter here in Michigan, for that micro level. You know, if I’m going to tell our readers, yes, this might impact your food costs, it’s going to impact technology, auto. You know, what do people do with that information? Does that change spending or saving habits? I mean, do we just buckle up and prepare for another economic wild ride? I don’t know, what are your thoughts on that? HILLMAN: I’m not sure I really know, because, as you say, it becomes very micro. You know, because, like you said, I don’t know how you know whether, you know, the fact that Russia is a major wheat producer will necessarily produce higher prices, or whether everybody should go out and start, you know, hoarding flour or sugar or, you know, any other things. So I don’t know that there is—that’s a really hard question. I’m curious whether Carla has an answer on that one, because it’s just really hard to know. And in general, I think the inflation is going to affect almost everything. So there isn’t any easy way to get around it. You know, what’s been interesting to me is the big impact has been, so far, on energy, and then everything derived of energy. And yet, what you don’t see, at least not—that I don’t see, is this huge effort to say take public transport more, ride your bicycle. You know, whatever it is—you know, turn up or down the temperature in your own home, I mean, weatherproof. All the things that we can do to be energy saving, that is not something you’re really sort of hearing being pushed at some level. And that’s what I don’t know, is whether we will get to the point where that will be one of the things that will really be suggested, is that all Americans do whatever they can to conserve energy, because that is one of the biggest drivers of all of the change as a result of the sanctions on Russia. ROBBINS: You know, I—you raised a really good question. I’m not an economics reporter, I just play one on television. (Laughs.) No, I mean, I worked at the Wall Street Journal for a really long time and sat next to them. But I have lived in places where there was hyperinflation. And I did go through—I was very young, of course—go through the Carter inflation. And I think as a reporter, because so many people who are reading now have never seen inflation, I think that we have a responsibility and we have good stories to write to just talk—you know, to talk to people who understand inflation and understand sort of news you can use about how you, you know, protect yourself in inflation. You know, what are rational decisions to adapt to inflation? Does it really make sense to, you know, spend your money on durable goods? Does it make—you know, where should your investments be? I mean, how do you protect yourself in an inflationary environment is, I think, you know, really a useful thing. I think other really useful things to report on would be to take a look at, you know, as Jennifer was saying, which sectors are going to potentially be the most affected, and take a look and see how—whether or not our, you know, political leaders are doing everything they need to do to try to mitigate the impact, as Jennifer was saying, and not just saying—obviously, saying to people you should—you know, you should—you should, you know, spend less money on gas by taking public transportation, but the things she was saying about cushioning the agricultural sector. I mean, maybe they are doing those things already, but that’s our job as reporters because I certainly haven’t read stories about them doing it. You know, and, you know, now we have questions to go and ask them about whether they’re doing it. And so those are—I think those are—you know, if we can highlight the sectors that are the most vulnerable and hold, you know, political leaders’ feet to the fire to make sure that they’re doing the best that they can do to mitigate the impact, I think those—I think those are great services that we can do for our readers. Does that make sense? Q: It does, thank you. And I know I asked you a hard question, but it’s because I didn’t know the answer, so—right? (Laughs.) That’s—so I appreciate it. Thank you. ROBBINS: And I think sort of—because I think people can have an irrational response to these things because, I mean, I think there are few things that have a worse—to back to Antonio’s question, I think there are few things that can have a more invidious effect on politics than inflation. I mean, inflation’s terrifying to people because—you know, someone said, well, I got a 3 percent raise and inflation’s at 10 percent. I mean, people, you know, are sort of running and they’re falling behind all the time. I’ve seen this happen having worked in countries and lived in countries with hyperinflation. It’s really terrifying. It’s incredibly politically debilitating. And, yes, right now people can say, well, this is Putin’s, you know, gas prices. But I think it’s—in an already polarized, you know, country, I think it’s—you know, if this goes on, it can have a really, really further, you know, very negative effect. So to understand where it’s coming from and to understand, as Jennifer said, that the government is doing what it needs to do to try to at least cushion the impact—and if they’re not doing it, to ask why—I think that’s sort of our job. But it’s—to do it sectorally is really the best thing that we can possibly do because it’s very hard to hold politicians’ feet to the fire unless you say to them: What are you doing about fertilizer shortages? You know, that’s the—you know, that’s the real question. You know, what are you doing about semiconductor shortages? What are you doing to cushion, you know, the price of—you know, the price for gas right now, and does it make sense? I mean, if I read one more story about the Strategic Petroleum Reserve as if that were really a solution, I’m going to scream. I mean, I think that’s the other thing. I think we have to reality test what they’re—what they’re doing because, you know—and I think that’s—those are all of our responsibilities. And that’s why we’re so lucky to have people like Jennifer who can tell us what questions to ask because—so, anyway, thank you, Lindsay. Great question. And thank you, Jennifer. Steve Patterson has a question. Q: Yeah. I’m in an area where there’s a small amount of export of American LNG that goes to—goes to, like, Caribbean island consumers, goes to small overseas markets. And politicians here have occasionally talked about how it would be a great thing for American economy and for national security to have—to have a market in Europe for American LNG, and I have no idea whether this is going to have any impact on—potentially make that more than just some politician’s talking point. HILLMAN: Well, again, I’m going to once again profess that I am not a real maven on energy products, et cetera, but a couple things I’ll just note. I mean, for example, one of the things that came out of this China phase-one deal. As you may recall, you know, we had this—a bit of a trade war with China, and then right at the tail end of the Trump administration they negotiated what was referred to as a phase-one deal with China. And under that phase-one deal, among other things, China pledged that it would buy $200 billion worth more of U.S. stuff more than it bought in 2017. That was the promise. And the stuff was divided into various categories, including energy. And so the expectation was that China would be significantly more LNG—I mean significantly more LNG—than they had been buying in 2017. And so when—you know, before the ink was even dry on this phase-one deal, there started to be this assessment of can the United States even supply it. I mean, assuming even that China is willing to buy that much more, can we do that? And so there was a fair amount of assessments of the volume and quality and number of our LNG terminals that are at ports that are readily available to export LNG, and there was an effort to increase that so that there would be more ability for the United States to export LNG. So the answer is, I think, at the end of that process that we have more LNG—the physical ability, you know, to—again, to park up that boat and load on the LNG and move it than we had, you know, two or three years ago. Then the issue becomes on the receiving end in Europe. And my understanding, again, is the Europeans are fast working at this issue of being able to be more receptive of LNG that is coming not from Russia but from, you know, other places. So I do think there is some ability—some; not massively, but some significant ability—for the United States to export more LNG to Europe and some ability on the European side to be on the receiving end of it. And that is one of the ways in which, you know, the European Union can get weaned off of Russian oil and gas, is to have supplies from elsewhere including from the United States. And I—my understanding is that is part of the conversation that is going on between the United States and the European Union as part of this coordination of the sanctions. So one of the things that could come out of all of this coordinating the sanctions is much greater purchases by Europe of U.S. liquid natural gas. ROBBINS: So Rickey Bevington, who did come in late because she was moderating another event—we are professional moderators. We just voyage from event to event. And she had asked a question which I had already asked, so—but somewhat, but she’s asked it better: What other kitchen table symptoms that make these issues real to Americans? We’ve already talked about, obviously, the impact on food prices, wheat, gas prices. Is there anything else that, you know, people should be paying attention to as local reporters? Which also goes back—you know, back to, you know, Lindsay’s question as well, things to keep an eye on. That also has a public-policy question, things that we should be asking our leaders about what they’re doing to protect us, as well, or at least to come up with sound public policy now and in the longer term. HILLMAN: Well, the one other one that we have just not touched on at all so I’ll just throw it out there is what are we doing about refugees. Again, we, obviously, have a significant Ukrainian American population in the United States, again, in various pockets. We are, obviously, seeing at this point now Poland become overrun. And the issue is going to be for us and for others whether there is going to be any kind of change in policy and any greater willingness on the part of the U.S. economy to absorb any of these Ukrainian refugees, and what do we make of that? Because I do think we are going to have to at least give more thought to what are we doing to increase our willingness to take onboard. And again, where would those people go? What would they be doing? Again, many of them are coming out of a highly productive, highly capable Ukrainian economy. But that would be another issue that I would throw out that we need to start doing some thinking and planning for. ROBBINS: That’s an incredibly, incredibly important point. And obviously, politically it will—a lot of the anti-immigrant people would be much more willing to take Europeans, and there are so many people who are displaced around the world, but the immediacy and the sympathy for that may make it easier politically to change—to change the policy for that, at least for that group. But, yes, I mean, when you look at the numbers, the disruption is so huge. Jennifer, this has been great. Thank you so much for doing this, and there have been so many great questions from everyone. So, Irina, I’m going to turn it back to you and to thank everyone. I put into the chat one link about—that you—Reuters has an interactive about—just that they’re updating constantly of the sanctions. We’re going to share other things, other reports that Jennifer and other sources to share with everyone. And if you have any questions, obviously, send them on to us. But I’m going to turn it back to Irina. FASKIANOS: Right. Thank you, Carla, and thank you, Jennifer. We will send out a follow-up email with those resources. And just a reminder that you can follow Jennifer Hillman on Twitter at @j_a_hillman and Carla at @robbinscarla. And as always, go to CFR.org and ForeignAffairs.com for the latest developments and analysis on international trends and how they’re affecting the United States. And of course, please reach out to us with suggestions for future webinars. You can email us at [email protected]. So thank you again for being with us today, for all the reporting you’re doing in your communities; and to our experts, Jennifer Hillman and Carla Anne Robbins. HILLMAN: Thank you. FASKIANOS: Thanks so much. (END)
  • Oil and Petroleum Products
    OPEC in a Changing World
    Western leaders have long criticized OPEC’s power to raise oil prices, and the bloc continues to influence the global market even as U.S. oil production has soared and alternative energies have come to the fore.  
  • Russia
    Russia’s Energy Role in Europe: What’s at Stake With the Ukraine Crisis
    Russia’s aggression against Ukraine has brought European dependence on Russian energy into sharp relief and set off a scramble for alternatives.
  • Energy and Environment
    Corporate Virtual Roundtable: Petrostates in Peril
    Panelists discuss the geopolitical and economic ramifications of the current state of oil markets.   KRAUSS: Good morning. Welcome to today's Council on Foreign Relations meeting. I'm Clifford Krauss, national business correspondent for energy at the New York Times. We're in a historic moment. And a sidebar to this moment has been the oil story and energy at large. And it strikes me that we are facing a paradox. For decades since the Nixon administration, we as a country have been striving for energy independence and expanding our domestic fuel production. We reached this point, and now we have a collapse in demand, and so, in the face of coronavirus and the global economic downturn. So what does this mean for our country and the world and especially producers like Russia and Saudi Arabia? We know that Middle East producers cannot balance their books. What does this mean? We're fortunate today to have two fine experts to discuss, neither of whom needs a long introduction. Helima Croft of RBC Capital is one of the world's leading commodity experts. She knows energy and geopolitics and her commentary is closely watched by government officials and investors. And Arjun Murti is a senior advisor at Warburg Pincus and a director at ConocoPhillips. He is an advisory board member at Columbia University's Center for Global Energy Policy. So let's get on with it. So, let's start with looking at this from thirty thousand feet. Saudi Arabia and Russia face a dilemma that has produced tensions within OPEC+. They would like to force down American oil production, but at the same time they want to lift oil prices that support, uh, at the same time they are lifting oil prices or wish to and that only supports shale production in the United States. How do they get out of that box? Arjun, you want to start? MURTI: Well, so I think a lot of attention is placed on how Saudi and Russia are viewing U.S. shale. I think the interesting point to me is, U.S. investors, the public capital markets, had significantly soured on the shale E&Ps unrelated to what OPEC is doing or not doing. The shale E&Ps have been very successful in massively growing production. What they didn't grow was profits. Returns on capital were mid-single digit or worse, balance sheets for many companies are stretched. And so you had this issue where concerns about energy transition, what is the long term outlook for oil and gas demand, concerns about profitability, concerns about balance sheet help, all of these things are going to weigh on the shale E&Ps, actually irrespective of COVID-19. And irrespective what OPEC does or does not do, there's going to be a critical need, in my opinion for shale going forward. But investors funding these companies is a huge question mark. And I think the outlook for that is quite uncertain right now. KRAUSS: And Helima, how about the geopolitical piece to this? CROFT: Well, I think what's really interesting if we go back to what happened on March 6th, in Vienna, when we couldn't get an agreement between Russia and Saudi Arabia, I think part of the reason why Russia was reluctant to cut an additional three hundred thousand barrels of production and prop up the price then was because there was a view amongst some energy leaders in Russia that shale companies were weak and that they should not be giving a constant lifeline to these companies. And I think their view was, why should Russia continue to cut production, allow U.S. shale to grow, and allow a Russian energy company to be sanctioned? And so I think that part of the reason why they were willing to risk low prices, the view from Moscow was, could we potentially, you know, put some of these companies out of business and not have to deal with the foreign policy implications of having the U.S. believe that because of this resource endowment, that they could sanction companies and not pay a price in terms of U.S. consumers. I think for Saudi, it's a little bit different. I don't think that Saudi was primarily focused on U.S. energy companies, I think the Saudis were very focused on everybody having to basically pull their weight within OPEC and OPEC+, including Russia. I think Saudi is more willing, was more willing, to tolerate U.S. companies and their market share because Saudi I think, was more focused on getting a price that made their math work in terms of their budget. KRAUSS: And Saudi Arabia had attempted that same strategy in 2014 and 2015, and it didn't work out. I'm just, I'm wondering, going forward, is there a tension between Russia and Saudi Arabia that seems to be alleviated for the moment? Are we going to see that bubble up again? Arjun, do you want to take that? MURTI: Well, let me start with that 2014, 2015 didn't work out because why didn't it work out? The perception was the shale guys needed $80 or $100 a barrel, the price fell to $50. So that wasn't gonna work. There was, we were coming off a ten year, commodity boom in that period. There was a lot of fat to cut. It was early days in shale, so there was a lot of cost cutting, technology, drilling longer laterals, all the things that lowered the cost. The big kind of thing that didn't work out is the shale guys said, our wells work at $40 or $50 a barrel and they drilled accordingly and production ramped up massively. That was not accurate. Certain wells work at 40 to 50 (dollars). The vast bulk need $60 plus, you can see it in the full-cycle returns on capital. Again, companies were promising 30, 50, 100 percent, internal rates of returns on individual shale wells, they actually delivered 3, 4, 5 percent full-cycle returns. And so in 2015, capital markets flooded in to fund these programs that they thought were going to be very profitable. That did not work out at all. And so this cycle, you have capital markets, in some respects aligned with OPEC. We don't want shale to drill as much. We want more disciplined companies. And so I think I get why people look at 2015 and say, that didn't work out. But there was massive equity offerings, we're not having that this time. Companies are going to spend within cash flow before they would overspend cash flow, and I think everyone gets that the well IRR math just simply failed for the shale E&Ps, and that a different type of business model is going to be needed going forward. So in that respect, I actually think capital markets are more in line with Saudi and Russia, I think Helima will be more insightful and that dynamic between those two companies, but I'd say it's a strategy. I do think the capital markets will be aligned with OPEC in terms of limiting CapEx into shale. KRAUSS: So Helima, it feels to me like we have a different flavor here. And that is this morning, we have the reports of Chevron trying to take over Noble and, which is a relatively small deal, but maybe the beginning of a wave of consolidation, which would lower costs, eventually, if you have economies of scale. Is it possible that once again, the oil patch in the United States will accommodate this change from the international you know, oil patch? CROFT: Well, you know, Arjun is actually the expert on the U.S. story as well. I might actually take a little bit back when you go to Russia question and can that marriage stay together. I mean, I think one of the you know, the key things in 2014 as Arjun talked about is I think Saudi Arabia was really surprised and the OPEC planners who decided to not cut production in 2014 that capital markets remained open to those companies. They were not aiming to have $30 oil in 2014 and 2015. When they made that decision, they were surprised that the companies were able to survive that downturn. And so remember, when Ali Al-Naimi the Saudi oil minister said, I don't care if it's $30, I don't care if it's $20. We're not cutting. I don't think the Saudi leadership ever believed that you'd be looking at a $30 or $20 scenario. They thought you'd be looking maybe at a $70 or $60 scenario, it can be shorts day and the companies would fold. And I think what they learned from that, what they would say they learned from that, is OPEC was not sufficient to deal with U.S. shale, at least that's why you needed Russia. So I think that what 2014 taught them was you needed to bring somebody else into the arrangement to have market share power in terms of being able to manage the market. So I always talk about OPEC+ Saudi and Russia as that sort of shotgun marriage driven by shale. And I think that we had a test of it this year, clearly in March, in April, but when prices collapse and storage started to fill up, all the sudden people decided they needed to get their vows back together. And President Trump played a really important role in actually getting OPEC and Russia back together because when U.S. companies were threatened by the price collapse, and all of a sudden the American energy abundance and American energy dominance was threatened. President Trump had to drag that deal across the finish line and get everyone back together. So I think that is sort of where we are with Russia and Saudi, I think they're back because price dictated that they needed to get back. But again, the future in terms of a couple years from now will be determined. We don't know if this arrangement will last but right now I think they're in it. I will hand it back to Arjun to talk specifically about that Chevron-Noble. KRAUSS: Well, yeah. Arjun? Yeah. I'm glad you put, good. I want to move on to other things but before I do, Arjun, to the point of consolidation, which is widely expected, is that going to save shale? Is that going to improve the economics of shale as we move from the independence to the super majors getting into this driving down costs yet again, is that is that going to happen? MURTI: Not for the reasons typically articulated by the majority of folks. I think that and companies going out of business are the things most misunderstood. So there's always been throughout my thirty-year career, hundreds if not thousands of E&Ps and you merge a couple together, some of the management teams split off and start their own private equity or small cap E&P companies and that cycle just goes on and on and on. You're never, I mean, never is a long time but for, you're not going to have some super consolidated U.S. energy industry, there's just simply too many companies to do that. Consolidation in and of itself is only logical if you end up with a better company. If there are good assets to harvest that are at the low point of the cost curve that can be perpetuated, then it makes sense, but simply slamming two companies together in and of itself is not particularly relevant. As far as putting companies out of business, which is the other angle you always hear. I think that can be a fundamental misunderstanding of chapter eleven bankruptcy in this country, you go bankrupt, you wipe out your debt, you wipe out the equity holders, you simply have new equity holders, the company doesn't really go away. So what is needed here is either disciplined by capital markets for any number of reasons, discipline on the part of boards and managements to simply pursue their lowest cost assets that can generate good returns and good full cycle returns and free cash flow. And there are just too few companies today that do that, we need more companies that do that. And perhaps we'll see that going forward. KRAUSS: I want to go globally again, to Helima. This is something that you've written a lot about. And that is the kind of fiscal pressures that are being faced by Russia, Saudi Arabia, Algeria and these producers. What are the potential political impacts? And are we going to see or may we see more instability in the Middle East? CROFT: Well, you know, I love the question about, you know, people talk about bankruptcies for companies and can you put companies out of business? I think if Ali Al-Naimi was unsuccessful in putting a major U.S. shale company out of business, he put a country out of business. I mean that – KRAUSS: (Laughs.) CROFT: – price war essentially put Venezuela out of business. MURTI: (Laughs.) CROFT: We saw, I mean, really huge pain across the OPEC producers in 2014. And we think about where we stand now and it was extraordinary. If you look at 2012, the Middle East North African producers brought in $1 trillion in oil revenue in 2012. You go to 2019. That was $575 billion. In 2020, according to the IMF, the Middle East North African producers are expected to bring in only $300 billion. So in a span of eight years, we've gone from, you know, $1 trillion to $300 billion. And so that has really huge implications as you know Clif. I mean, the demographics of the Middle East, you know, where you have in certain countries, two thirds of the population under the age of thirty, very high youth unemployment, very high expectations of a social welfare safety net and employment opportunities provided by the state. And so when they don't have the revenue to provide those opportunities, you know, you really do risk social unrest. And if we look at what happened just last year, we saw multiple governments fall on the face of popular demonstrations over the failure to provide economic opportunity and poor governance, I mean Bouteflika and Algeria. He left the scene. You know, you had the government of Sudan fall, you had regime change in Iraq, and other places where the regime did not fall you have mass social demonstrations. You think about Iran, and Iran has been hit so hard by the combination of collapsing prices, but also sanctions. I mean, they've gone from being able to export, you know, over two million barrels a day to basically down to a couple hundred thousand because of U.S. sanctions. So it's not only their hit because of price, it's been hit by volume. And in that period, 2012 to you know, 2019 they've lost $80 billion in oil revenue. And so you know, countries like that really $40 Brent, the recovery of the $40s is not sufficient. I mean, RBC we estimate that the collective fiscal breakeven for OPEC+ is $90. And so this is recovery still means a lot of pain. It means going to the IMF for emergency funding. It means borrowing. It means cutting key social programs, tripling your VAT in the case of Saudi Arabia. So this is going to be an enormous challenge to get through this period of low prices. And then you think about a looming energy transition. And so the outlook is not great for these hydrocarbon states. KRAUSS: I'm glad you brought up the sanctions, because if it weren't for all of this expansion of U.S. oil production in recent years, you wouldn't have had the same sanctions regime on Iran and Venezuela, the United States would not have been able to do that, at least not to this extent. And of course, in the end, any instability in the Middle East while we may be cushioned, China's not cushioned. They're very dependent on Middle East, on Middle East oil, Japan, Korea, the world is interdependent and so this economic, this economic or this energy independence is a chimera. It's not real. If you're reducing dependence, but we remain interdependent in this global economic system. Arjun, this is, I think your wheelhouse. MURTI: I mean, you said it best. It's certainly better that we have some better balance between our production and our demand that that buffers extreme volatility, but certainly doesn't make us immune from it. You know, I think you noted earlier for the first time ever, a U.S. president as Helima mentioned actually helped support an OPEC deal that raised oil prices. I mean I'm fifty years old, that has not happened in my lifetime. And, you know, my former colleagues at Goldman Sachs, I think put out an analysis where these days, higher oil prices are a marginal net positive. Clearly the consumer loses on gasoline but the producing states benefit, it's, it's a marginal net positive from what years ago would have been a major net negative and it does allow us freedom to do things we didn't do before. But we're certainly not un-dependent on international markets. And if the price goes up some other part of the world, certainly consumers in this country will still, will still feel it. So. KRAUSS: Right, in the past oil shocks were spikes in price. Now we have, I live in, I live in Houston. Now the oil shock is a decline in oil prices. Oh, Helima you're, you're nodding and smiling. CROFT: I mean, absolutely. I think what's extraordinary is if you think about 2019, I remember flying into Abu Dhabi, and we had a report that you'd had tankers hit off the coast of Fujairah, that really important port, and oil didn't really move when you had, you know, potential disruption in the Strait of Hormuz, and then you went through a summer of 2019. We'll get pipelines attack, drone strike, tankers seized. And then on 20, September 14, we had a cruise missile and drone strike, knocking out more than half of Saudi's production temporarily, hitting the all-important Abqaiq facility, the world's largest oil processing facility, a facility that was seen as the nerve center of the global energy system. And you know, prices rallied, you know, one or two days, you know, ten bucks, but fell off. If you had said Cliff, ten years ago, Abqaiq is hit in an attack tied to the Iranians, where would you think oil would be? You'd think oil will be over $100. And you also would have thought the Carter Doctrine would have been invoked the doctrine that it was a core national security interest of the United States to protect Middle Eastern oil facilities. That doctrine has been in place since 1980. You would have thought an attack on Abqaiq tied to a sovereign state would have been enough to invoke the Carter Doctrine and President Trump was like, it's not an attack on the world, it's an attack on Saudi Arabia! Following up — KRAUSS: (Laughs.) The Trump Doctrine! CROFT: Right! Following up in January, I was actually in Abu Dhabi it was right after the killing of Soleimani and you had reprisal attacks on the Americans, you know, in Iraq. And you know, he said, we don't need Middle Eastern oil. I think that is what is really to me, which changes all the disruption and the attacks on facilities in 2019. Just didn't move the needle in terms of price and it meant the U.S. didn't feel compelled to have to intervene in a way it might have done so a decade ago. KRAUSS: And now we have these mysterious explosions in Iran, and all of the turmoil in Iran. At the same time, China and Iran are talking about oil deals and other kinds of relations, and I'm wondering what you both think of that. MURTI: Helima, why don't you start? CROFT: Well, I think what's interesting is that, you know, when this, when the U.S. pulled out of Iran nuclear deal, there had been this view in the market, it was not going to be effective, the U.S. was going alone, and that China would essentially back up the truck and essentially take all of those discounted Iranian barrels. What has been interesting, despite the deals that we've seen China sign recently with countries like Iran, these big investment energy deals, is they still abided largely by the U.S. sanctions, because of the ability of the United States now to essentially say, dollar transactions will be targeted. And if you want to do business in the United States, you have to make a choice. And so we have seen the sanctions be more effective, even China to a large extent had to go along with them, because of the power of the U.S. to basically lever the dollar and basically penalize these other companies and countries for doing business with states like Iran. We saw with Venezuela as well, the Chinese largely abided by the sanctions on Venezuela. And so I think we like to focus on the idea that you know China will go in there and take this. They're all to sign these deals. But the Chinese still for now, watch what Treasury is doing with extraterritorial sanctions. For now, they still have fight. Some people are starting to speculate, are we going to see more non-dollar transactions to get around sanctions, but I think that is something just to bear in mind as well. Like even China had to largely abide by the U.S. sanctions on Iran and Venezuela. KRAUSS: Arjun? MURTI: Clifford, the only thing I'd add is really these large oil importing countries of which China is the most meaningful one today, India is growing up in this world as well, is they're gonna have to figure out ways to ensure there is sufficient capital investment outside of the OPEC country. So if you go back over fifty years, OPEC production has gone up and down. But I would defy anyone to point to any individual country within OPEC that has had sustained production growth. Russia, part of OPEC+, has demonstrated that, Saudi has raised and lowered their production between eight and ten and a half million barrels a day numerous times, but never sustainably grown beyond that we know about Iran, Venezuela and so forth. And so whether it's shale, whether it's deep water, or whether it's other areas we're at a time of significantly diminished CapEx. It doesn't matter today, because demand is weak, and we've got COVID. But whether it's three years, five years, ten years down the road, I think people better hope there's an energy transition, because right now, investors significantly dislike the energy sector and there's very little capital investment going in and there will be a supply price to pay at some point, again it may not matter for the next couple years, but that deficit is coming. And so you look at China, they've generally been pretty smart about filling up their SPR when oil prices have been weak. So I think they certainly have an impetus to continue to expand that to try and provide their own buffer. But we are going to need more CapEx in the sector at some point by someone. KRAUSS: Well, well, when prices go up as presumably they would, wouldn't capital flow follow? MURTI: It should follow. I will say right now, when you look at how out of favor the sector is, I think companies are going to have to demonstrate again, I've said this a few times, they're gonna have to be more profitable going forward. But I think there's uncertainty even in shale development. We don't know what future administrations are going to do in terms of allowing fracking, in terms of allowing leasing and all these kind of things. There's always been challenges in many other areas, but I don't think you could just take it as a given, which is what I think people do. I think people presume prices going up and supply will be there. And undoubtedly, it probably will. But, but it can be a challenge. It just doesn't bubble out of the ground for free. It takes real companies with real effort and real capital markets backing and we have almost none of that today. KRAUSS: So, Arjun let's presume that production is in decline, well it is in decline and it remains lower in the U.S. And exports which are lower, remain lower. What does that mean, not just for the industry, but for energy independence in the U.S.? And then Helima, maybe you would also chime in on that. MURTI: You know, we probably have seen our peak minimum dependence, if that's the right word? KRAUSS: (Laughs.) MURTI: Or we've been sort of energy independent. And it does seem like it's going to be a little bit more challenging achieving that going forward. You know, we still are looking at, on my numbers at least, in the worst case of flattish U.S. demand outlook, once we recover from COVID. You can build in a slight growth or maybe even a modest decline, but something that does call for sort of continued healthy levels of demand going forward. And that may be hard to fill with domestic supply. I think you said it again earlier, Clifford. We're still part of the global energy world and so we might be a little less energy independent, going forward, but all these geopolitical risks, all this sort of dearth of CapEx, all these questions about timing of energy transition, the efficacy of the energy transition is going to be a big issue that we face. KRAUSS: Helima, this is a big idea. Please, speak up. CROFT: I always thought that there was a weakness, the whole American energy dominance argument that the Trump administration was making, because every time they had to call Saudi Arabia and ask them to put more barrels on the market. Like we saw that in the summer of 2018, when the U.S. pulled out of the Iranian nuclear deal, you had that rise in prices over the summer as they had talked about ending exemptions for importers of Iranian oil. We had Libyan supplies off the market temporarily. And we had President Trump putting a lot of pressure on Saudi Arabia that summer OPEC meeting to put a million extra barrels on the market. And so I always feel like if you have to still call Riyadh, it means that you are not independent. And then of course, the price collapsed when you had seven or eight exemptions offered in the fall. And I think that was the sort of back and forth between OPEC and Trump in terms of, we'll help you but we don't want to tank the old price. And again, we saw this year the fact that President Trump who'd been a critic of OPEC was having to basically at the eleventh hour, when the big deal to cut 9.7 million barrels was on the line and the Mexicans were stalling. The fact that President Trump was calling Lopez Obrador and Mexico and doing a workaround arrangement to get this thing across the finish line, again, shows that American energy dominance or that shale was always supported by an OPEC lifeline. There was always this interdependence between shale on this OPEC floor. So I think interesting enough going forward, I think the question is, are, is the U.S. going to be as willing to use the unilateral sanctions, you know, apparatus. I mean, are we going to be looking to do again what we did to Iran, on another country? I think those will be interesting questions. I do think a Biden administration, if we do get an incoming Biden administration, will look at sanctions in a different way. I think we could be thinking about next year, you know, not more sanctions on Iran, but potentially Iranian barrels coming back on the market if they react to the Iranian nuclear deal. So I do think we may have reached the kind of peak American energy dominance narrative, but again, I think that was undercut by the price collapse and the fact that shale needed that almost very explicit bailout from OPEC. KRAUSS: We'll open up for questions from our participants in just a moment. But let me ask one last question before we do that, and that is on Saudi Arabia. There's the other news this morning. The king, maybe ill, maybe having an operation. Why do, why should we care? Helima? CROFT: Well, I think we care because we still care about stability in the Middle East, irrespective, you know, we're not independent in terms of oil price of what happens in the Middle East. But we still care more broadly about stability in the Middle East. We still have troops in the Middle East, we still find moments where there is unrest in the Middle East and the U.S. is drawn back into the region. And I do think that it's a really important inflection point for the kingdom right now. I mean, one of the things about, you know, Prince Mohammed bin Salman, the Saudi Crown Prince is you know why there was initially so much enthusiasm about him? Would he really correctly assess the challenges facing Saudi Arabia and that they had to find a way to make this transition away from sole dependence on oil because it wasn't going to be able to fund future generations and so Vision 2030 was an accurate diagnosis of the problems that ailed Saudi Arabia. And so I do think that, you know, right now, it's a real inflection point in terms of will they be able to generate the millions of new jobs to accommodate, you know, university leaders in that country? So I think people will be watching if a potential sensation story comes. And of course, you know, a lot of these leaders are very old in the Middle East anyway. So we are looking at, you know, next generation leaders and Saudi Arabia is just so critical to the overall stability of the region. KRAUSS: Right, and will MBS have the support of the royal family going forward? This is, this is his moment, potentially. CROFT: Again, he has I mean, he has built his base of support on young Saudis. I mean, he's offered, explicitly offered, young Saudis a different at least social contract in terms of, you know, offering them more social freedom. And so it's a question of will he be able to generate the jobs to meet their economic ambitions as well? KRAUSS: At this time, I would like to invite participants to join in our conversation. A reminder, this conference call is on the record. Operator, may we have the first question. STAFF: (Gives queuing instructions.) Our first question comes from Mark Schaltuper. Q: Hi, Mark Schaltuper with AIG. I'm very interested in what you said earlier about, I guess kind of to rephrase it the cost benefit of CapEx versus transition that somebody mentioned, that you kind of better hope that transition accelerates. Would you mind commenting a little bit more about that? I'm just very curious in terms of the next couple of years, if more of the burden of maintaining access to reliable supply falls on China or other countries away from the U.S.? Is it going to be easier for them to accelerate that transition? Or are they going to have to kind of flex their own muscles to make sure that they have access to these strategic reserves? Thank you. MURTI: I mean, maybe I can start on that. So you know, I think energy transition is a huge topic. Clearly there is a need for the world and all countries to take positive steps to addressing climate change. But it's easier said than done. And so where you look at where energy transition, I think is most logical, and maybe has a clearest path and I still think it's going to take a long time is on power generation. We've always had many different ways to generate power. Coal, nuclear, in the old days diesel and residual fuel oil, today solar, wind, and you can like or dislike any of those, but you have choice. And you have opportunity. And clearly solar, wind, and some of these newer renewable forms, they're going to need battery storage going forward. But you can see a trend there where that makes sense. Where I am still very uncertain on how quickly this will happen is in transportation fuels. And so I am the proud owner of a Tesla Model 3, I will never go back to personally buying a gasoline car. But I also know I'm very lucky in my life. I did work at Goldman Sachs and I'm able to afford this Model 3. I think outside of Tesla, I defy anyone to point to car companies that are currently making cars that people want to drive. It's not that they won't, BMW, Mercedes, VW, all these folks will figure it out over time. That takes a while. And if you're someone in China, if you're someone in India, if you're someone in other parts of the developing world, the fossil fuel gasoline car is going to be overwhelmingly cost effective for you and you're gonna want the same benefits that we enjoy here in the United States and Europe. And so the transition when it comes to crude oil, I think it's actually much longer term, unless you have a much weaker economic environment, which is possible. Maybe global trade is peaked. At the same time, in crude oil, if you don't invest, supply declines. Not really true on a lot of those power generation alternatives. Some it's true, a lot it's not. In crude oil, if you don't invest, you're gonna have somewhere between a 5 to 10 percent annual decline in supply. It doesn't matter when we're in the heart of a pandemic. But I think there's a presumption, energy transitions here, we care about ESG. We care about all these things for sure. But you're still going to need a massive amount of CapEx to ensure especially the developing parts of the world have a chance to enjoy the same types of economic benefits we enjoy in the United States and Europe. And I think there are big question marks on that. Energy, traditional energy, traditional gases, very out of favor. Some of it's self-inflicted. A lot of it's self-inflicted, you don't generate good returns, but oil is $100. Why should they trust you when oil is 40 or 50 (dollars)? But you're going to need it, you're going to need CapEx. And I think there's so much emphasis on energy transition ESG I think we're at the risk of having a significant CapEx shortfall that again, may not matter for a couple years, but I think will bite at some point in the future. KRAUSS: Helima, you want to chime in? CROFT: I just want to follow up on Arjun's like terrific point about energy access, because we both go to these conferences all over the world. And I keep hearing from you know certain parts of the developing world, particularly in sub-Saharan Africa, the whole idea that we still need access to energy. I mean, if you have millions of people using biomass to heat their home, they're not talking about going out and getting a Tesla. And so there is some pushback in some of these capitals in the developing world, where they say this is essentially Europe and the United States basically, putting a ceiling on our ability to basically grow our middle class. Like they still are deeply, deeply concerned about getting access to affordable energy. And so I do think there is this sort of tension in this debate that isn't accurately captured, because we're still missing the fact that there are really important parts of the world that still want sort of cheapest forms of energy and believe it's their right to have a stable, cost effective, you know, supply of energy to lift people out of poverty. KRAUSS: Let me, let me bring the conversation back to the pandemic for the moment, its implications for the future. I think we can expect some rather large stimulus packages around the world to get us out of this and it's probably going to take several years. Will that stimulus go make a difference for the development of alternative energy and conservation and the kind of things that we need to do to stem climate change? Arjun or Helima? MURTI: I mean, you know, the foundation for good clean energy programs is always going to be a strong economy first. So if people are in an economically secure position, I think you're more likely to have these things. Now Europe's enacting a very strong green stimulus program. Those kind of things probably are helpful. Under the current administration, that seems far less likely here. You can argue these kind of things do make sense in terms of going forward, but they're still very long term in nature. They end up being, with apologies, a drop in the bucket, if you will. I think what is most important is that you continue to spend money on the R&D and trying to push these technologies that enable people to have the choice. So if there are ways to incentivize auto companies as an example, to continue to pursue electric vehicles, ensuring you have much tougher fuel economy standards. Keep in mind, we've had almost no fuel economy gains in this country because people have subsidized, substituted SUVs for cars. And so yeah, the current SUVs are more fuel efficient than ones twenty years ago. But that SUV is still far less fuel efficient than a car, so we make lots of choices every day. And there's no evidence of that changing. People still generally buy the most luxurious car they can buy. And fuel economy tends to be probably the last reason people buy a car. KRAUSS: Consumers are not on board. MURTI: They, not, they, people don't actually spend their money that way. That's unproven. So can you force it through government action? Perhaps? I think it's hard to force seven billion people in a certain direction. Without the technic- again, Tesla's proven that those cars are not less expensive. They're more expensive. KRAUSS: So that's a fascinating contradiction. MURTI: Can you make something people want to buy? Then they'll buy it. They're not buying, no one buys a Tesla for green reasons, not even clear how green it is. But that's a different argument. You got to make things people want, or it has to be significantly cheaper and we've not seen that combination yet with clean energy. KRAUSS: Helima, you're smiling. CROFT: No, I have nothing to add to that, you know, great analysis. KRAUSS: I think there's a, I think there's an interesting dilemma and paradox here and that is the investors see one thing, and the consumers seem to see another. They still want a gas guzzling, gas guzzler. They may not see it that way. And the investors are not putting the money into the oil companies because there's a disconnect between the gas guzzlers and making a profit. I'm wondering, um, these tensions between the United States and China, what impact does that have on the world trying to push forward with the Paris Climate Agreement and coming to some kind of collective effort. Is that a problem? MURTI: I would say the thing I worry most about in terms of the energy outlook, all forms of energy, would be have we had globalism? And are we moving towards more nationalistic instincts? And you mentioned China - U.S. that's clearly one example. But global trade has been very good, or at least positively correlated with energy demand is probably the right way to say it. I think there is risk that for any number of reasons, those trends are changing, and the more you have protection, you know, the less you have free trade, you know, that could cast a pall on global economic growth and hence energy demand growth. CROFT: Yeah, the only thing I would add, which is interesting on this topic of protectionism, is I feel like the one place that we saw is countries are moving more inward thinking about securing supply chains because of COVID-19, you know, health care, food. We actually saw this in the case of energy, you know, when prices collapsed, we actually saw, you know, the G20 become this forum for addressing, how do we have an oil price that works for consumers and producers? Like I felt like energy in this one instance, was this one place when everyone was on the same page. Negative prices was not in anybody's interest. So you know, whether this holds or not remains to be seen. I actually think energy was the outlier as more countries become more inward looking. What we saw at least this post COVID-19 world at the beginning was an effort to sort of work together to stabilize prices for everybody. KRAUSS: Without embarrassing either one of you with an endorsement of a presidential campaign. We're not going to go there. But what difference could a Biden administration make for the energy transition or relations with oil producing countries? We've touched on Iran just a little bit, but there's also Venezuela and there's Russia. Let's think about that scenario, because it's coming up in a few months, possibly. CROFT: I mean, I'm not totally taken on the sanctions issue. And I certainly think when we think about physical bounces in the oil market, like what could potentially change in terms of a new administration, I do think, you know, there'll be a lot of stipulations on how do you resurrect the JCPOA nuclear deal, but I think that the door would be open to potentially resurrecting that deal if the Iranians would make, you know, significant concessions on enrichment levels and becoming once again compliant with the terms of that agreement. So I do think the path of you know, getting that deal resurrected would be there with the Biden administration. And that's, again, significant quantities of oil. I mean, we're talking about a loss of close to two million barrels of Iranian exports because of unilateral U.S. sanctions. And so I think that is something we would watch very carefully in terms of what could change physical market balances, but also, would we be as willing to sort of unilaterally sanction again, countries like Venezuela to really target their ability to sell their oil to essentially get you know, lending by basically foreign banks and debt restructuring all those things we've gone after in terms of punishing these countries would a Biden administration work more in concert without, I mean would they use the sanctions tool in the same way? I think that could really change under a new administration. It may even be there wouldn't be that the same type of focus though on OPEC, I don't think necessarily that would maybe be as front and center as President Trump was very focused on sort of managing the market. I actually think you could make a case if President Trump became the de facto secretary general of OPEC, I'm just not sure that will be as much of a Biden administration focus. MURTI: The only thing I'd add Clifford and that is a great point by Helima is, if I look at it from the perspective of U.S. oil producers, since you asked about the U.S. election. I think there's a perception that Republicans are good for oil and Democrats are bad for oil. And I don't think you can actually show that that was true in history. I mean, your two biggest oil crashes. This is probably coincidence. We're in 1986, President Reagan, and then the most recent crash to negative $37. And maybe with a crash in 2014 under President Obama, but the point being, you've seen oil companies do well and poorly under both Republicans and Democrats. The shale boom started as a gas boom under President Bush. It clearly expanded and turned into an oil boom under President Obama and then it sort of continued, but now petered out under Trump. And so yes, there'll be different areas of regulation that you'd expect from Biden versus a Trump probably a different emphasis positively on clean energy versus traditional fossil fuels. But whether that is actually good or bad for the U.S. oil industry specifically, I would push back that there's some automatic one side to the other side in fact. I don't think it's proven historically, I think you'll have different areas of emphasis. And maybe there is a competence in running government that one might look forward to under future governments, whoever that is that we've lacked here. Look at the examples of the DAPL pipeline and some of the pipeline blockages. You know, you've had steps taken that I think haven't been super helpful to the oil industry, even though that might have been the original intention. The point being, I don't think we can judge these automatically as good or bad. We'll see what the policies are. KRAUSS: Certainly enough to talk about, but I just want to remind participants that they can ask a question by clicking the raise hand icon. One point, when I got on this beat fourteen years ago, we were wondering where we were going to get the next barrel of oil. And now suddenly, there's the possibility that there's not only more oil out there in the ground, but if there was if there was a change in Iran, or a change in Venezuela, or a change in in Libya, that you would have millions of more barrels of oil coming on the market, which might be nice for consumers at the pump, but could be a disaster for American oil companies. Arjun, do you see that as a possibility? MURTI: I mean so I'd say, even during my most bullish days at Goldman Sachs during the height of the supercycle, our view was never that we were going to, quote run out of oil. I've never bought into the peak supply argument. I suppose it's true in some ultimate multiple thousands of years sensitives? KRAUSS: (Laughs.) MURTI: But there are clearly numerous places to continue to develop oil. It's always been a question to me of, is the investment climate favorable or unfavorable? So where I've been less favorable in OPEC in terms of their ability to sustainably grow supplies, I don't think the countries have had the types of investment climates, either for their own companies, or for foreign investors, whichever you prefer is fine to become a countries choice, but neither opportunities had the chance to develop the oil reserves. Venezuela had a favorable investment climate in the 1990s under Luis Giusti head of PDVSA was the oil minister and they went from some small amount of production to three and a half million barrels a day and then under Chavez and the current regime, three and a half down to effectively zero investment climate. But we've generally had a favorable investment climate in the United States through both Republican and Democratic administrations. North Sea has been a little more volatile, some of the West African countries very positive. But that's where you are, I think in all this. We are not running out of oil, we are very unlikely to run out of oil in anyone's multiple generational lifetime. It is a question of whether the investment climate is favorable or unfavorable. Today, it's unfavorable. Today, investors are out of, out of favor, while these countries are facing challenges. And again, I think that does create supply risks going forward. KRAUSS: Well, I wasn't referring to the geology, Helima I'm gonna set you up here. Not referring to the geology, I'm talking about the political situations in those producing countries. CROFT: Well, I say, I should say Arjun was a total legend at Goldman Sachs. I can tell you when I started my career in the U.S. government in 2001, you know, right after 9/11 with permanent energy security group at you know, U.S. government and you know, there was this sense. Matt Simmons was, you know, people were still reading his work and there was a sense of being dependent on foreign supplies and what does that mean in terms of U.S. policy? And I certainly, I was covering Nigeria, I mean part of the reason I can have a career in the U.S. government covering Nigeria was there was this hope that, you know, Nigeria, all these other Gulf of Guinea producers would grow their production, and we would be less, we wouldn't have concentration risk, wouldn't have to be as dependent on regions like the Middle East. And so I remember there was this expectation, Nigeria in 2001, was producing over two million. There was a view that by 2010, Nigeria will be producing 4 million barrels a day, and that was seen as good for the United States because 10 percent of our imports came from Nigeria in 2001. We wanted to grow that share. It was talked about in terms of political terms. Nigeria was a transitioning democracy. It was seen as favorable to the United States. We liked the new leadership there.  You know, what I think has been really interesting is is that the shale revolution has meant that we don't really need those barrels in Nigeria anymore. Are we as invested in the stability of that country as we were when we thought of ourselves as sort of needing that oil? And I was on actually a CFR task force. I was a visiting fellow at CFR, I was on the task force on energy and national security. I remember, the opening of that report was, you know, we'll never be able to draw our way out of dependence on foreign oil, we have to manage our dependence on these producer states, and that was pre-shale revolution, that report came out, but I certainly feel like we felt the U.S. government, you know, after 9/11 that we needed, not that we were running out of oil, but we needed every barrel because we wanted to make sure we weren't dependent on certain regions alone. There was a huge emphasis on energy security through multiple producers bringing that supply on, I think that's what has shifted. KRAUSS: So we have instead of peak oil, peak demand, potentially. But what I was, what I wanted to get at is we have, you know, large producers out there with political problems that may resolve themselves, at least to a point like Libya, like Iran, like Venezuela, if any one of those countries suddenly resolve the issues that they have, maybe not overnight, what would that mean, for the world? CROFT: Well, I think Cliff, a concentration in Libya, you know, we've missed... the trend line in Libya seems to be, you know, in many ways getting worse as more and more countries become involved in this sort of great game for Libya's natural resources. I mean, there was a fantastic piece in the Financial Times over the weekend, looking at Turkey's geopolitics of energy and their entry into the Libyan conflict as part of an ability to try to secure, you know, gas supplies out of the region. And so I, I guess I'm not as excited or optimistic that Libya can off-ramp as easily but certainly now in a situation where you have two million off of Iran, it could maybe come back with sanctions being removed. If you could have a settlement to Libya to get a million back. I think Venezuela is still a long way back, even if you have sanctions removed. I mean, that country has been in structural decline since Chavez, you can't flip a switch and bring those barrels back. But certainly, you know, as we're working off of the COVID-19 effects in terms of demand, if we start to get a million back from you know, Iran or half a million back from Libya, that certainly puts the burden back on OPEC to try to balance this market and not have it, the market soften further. KRAUSS: Operator, I think we have a question. STAFF: We do. We'll take our next question from Tracy Roou. Q: Hi. Good morning, everybody. I had a question on the title of the series today, petrostates in peril. But talking about or thinking about Russia in the OPEC+ agreements or disagreements in there. Would, do you put Russia in that category of a petrostate in peril right now? Thank you. KRAUSS: Helima? CROFT: Oh I'll...and then I'll hand it over to Arjun, I mean I think — MURTI: Helima has to start. CROFT: I think in March, when they made that decision, I was in Vienna, when the Russians basically said, we're not going to do it. We're not going to cut an extra three hundred thousand. Let's put the burden of adjustment on to shale. I think part of their calculation was that they had a lower fiscal breakeven than the rest of OPEC, they basically said, we're more diversified. We can balance our budget in the fifties. But what we're willing to risk a collapse to the fifties. I think even the Russians though, there were prices that fell through $50, and you started having storage fill up, that is not what they had anticipated, and the Saudis could borrow. I mean, that's one of the differences is that Saudi Arabia is not under sanction. And so while they have a higher fiscal breakeven they can access capital markets. It was harder for the Russians to borrow because of international sanctions. And so I do think that, you know, the Russians quickly had to understand that, you know, sustained low oil prices was putting their regime in political peril as well. I think that is why they were quick to get back to the negotiating table to take a cut that was three times larger than the one they had initially balked at, and why they are for the most part, much more compliant with OPEC than they had been since 2016. I think they saw what the future looked like in terms of price. And that was not going to work for the regime. KRAUSS: Just one point before Arjun, you get to add in. I just want to point out that one of the reasons why the Soviet Union collapsed, was a decline in oil prices. So Arjun? MURTI: I would just add to Helima's comments that I've always thought of the petrostates, they have a somewhat better business model in that they have these handful of sort of government owned, sort of private, but at least independently financed oil companies that ensures relative health to the oil industry, that you don't quite see in some of these other countries where there's one state and one state owned oil company, and they might be very dependent on allocations of dollars either from a monarch or some congress, or some other avenue that often isn't there because they have to do all the social programs and so forth. So there has always been this buffer in Russia that has allowed them a rate of oil production increase that you don't see elsewhere. I mean, only the U.S. frankly has achieved it on any sort of sustainable basis. Clearly, the government is still very dependent on the oil price and oil export revenues. But as Helima mentioned, they have lowered their fiscal breakevens to a much better degree, than you've seen in other parts of the world as far as the oil companies go, they've got a very inverse correlation where oil prices are high, more of the profits go to the government, but when oil prices are low, the taxation is much less so it's created a healthier oil industry, again, relatively speaking, than what you've seen in any of these other petrostates. And it's  to the credit of how Russia has run things, again, at least relative to some of the peer countries. KRAUSS: So Helima, do you want to respond to that, add to that? CROFT: Well there are a couple other things I would add to Arjun’s great points is they have exchange rate flexibility. And so their ability to adjust to lower prices initially was better if you look at 2014, I think they weathered that price collapse better. I think that again, what they didn't expect when they made that fateful decision in March. I think that they believed that the Saudis would blink first. I think they held stoically. I think they thought the Saudis would blink, they look at the Saudi fiscal breakeven being much higher. And they thought either shale collapses, or Saudi will have to just bear the burden themselves. And we're going to be off the hook on this one. And I think they just didn't anticipate that the Saudis would basically be prepared to borrow to basically door low prices to force the Russians back to the table. And again, I think it's been remarkable that even though they have a lower fiscal breakeven, even though they have these companies, that they still, for the most part are now compliant with this agreement. KRAUSS: So I think they may have also underestimated the power of the coronavirus and the impact — CROFT: Oh yeah. KRAUSS: —that it would have. And they're not the only ones that it would have on demand. CROFT: No absolutely, Cliff. I was inside. I was actually in the kingdom in Saudi Arabia for a big international energy conference that major stakeholders were at and there was a view in mid-February that coronavirus was basically contained. That it was contained to China, that we were seeing recovering numbers, and it had yet to spread to Italy. And I think that also influenced the calculus of the Russians, not wanting to cut they did not anticipate what was happening was going to happen in Europe with lockdown conditions. KRAUSS: Good, staying on Russia for a moment, if we have a prolonged period of moderate to lower oil prices, and then oil prices could go down from here, for sure. What impact could that have on Russia, its stability, and its outreach in foreign policy, which has been so aggressive in recent years? Including on elections. MURTI: Helima you want to start? CROFT: Well, I think it's, it's an interesting question again, I mean, they have lower fiscal breakevens. And, you know, we just had an OPEC meeting Cliff, and the Russians, were basically I think, happy that OPEC is going to start putting some more barrels on the market. And so I think that they believe that we're kind of in a sweet spot that sort of works for them, where you can keep shale depressed, and you've had a recovery from negative numbers. And so obviously, if we were to get a major reversal of fortune, I mean, I think it's really important to watch do we get re-position of shelter in place policies that are mandated that have a second wave effect on demand. And I think the Russians, again, they are in better shape than a lot of the OPEC producers, but they're not going to be in a good position if we head back into the twenties. Certainly. KRAUSS: We could go on and on, but it is unfortunately time for us to conclude. I want to thank you all for joining today's virtual meeting. And thank you to our speakers. (END)