San Antonio Express-News (Sunday)
Eyes on the Prize
When energy expert Dan Yergin wrote “The Prize,” his Pulitzer Prize-winning 1990 book on the history of the global oil industry, the United States was dependent on foreign oil to power its economy.
Since the shale revolution transformed the U.S. into the world’s top oil producer, America has become energy independent and, moreover, a net exporter of oil and gas. This shift has upended the energy landscape and global geopolitics, Yergin writes in his latest book, “The New Map: Energy, Climate and the Clash of Nations.”
“We’ve gone through a lot of disruption, of which COVID is only the latest,” Yergin said in a recent interview. “I wanted to try to provide a map to this disrupted world and help people think through where we are and what’s ahead and what the risks are and what the opportunities are.”
Yergin, the vice chairman of global energy research firm IHS Markit, spoke in a Zoom interview about the current state of the oil market and major disruptions to the global energy landscape from the coronavirus pandemic to the shift to renewable power.
Q:
You’ve witnessed many oil boom and bust cycles. How does this downturn compare with what you’ve seen in the past?
A: This crisis has been like no other crisis. The oil industry has often gone through bouts of crisis and periods of supply and demand being out of balance. But this one was really an external factor, which was, of course COVID and the economic shutdown imposed by governments to deal with it. And there was no precedent for that in the history of the oil industry.
Q:
How have oil and gas companies responded to this oil downturn?
A: There have been a couple of major responses. One was maintaining the integrity of operations. The second thing was economic survival. And then the third was learning to operate in a new mode: remotely. It’s been a tremendous job of adaptation. But I think what’s also quite remarkable is given the scale of this disruption, how well the oil and gas industry and how smoothly it’s continued to operate under circumstances that were almost surely not in anybody’s scenario.
Q:
Crude plunged into negative territory, but then rebounded to around $40 a barrel. Were you surprised by how quickly oil prices bounced back?
A: They went down very quickly, and then they came back very quickly because of the unprecedented scale of the cutbacks that were negotiated basically between the United States, Saudi Arabia and Russia. Second, the recovery in China was swifter and the other producers cut back for economic reasons. So all of those got brought to market not back into balance, but certainly enough to get the price out of the abyss and get it back into a range that enabled people to keep operating and go forward.
We survey 15,000 gasoline stations a week, and we saw that demand for gasoline was down 50 percent in April in the United States. Now it’s down about 17 or 18 percent. And it’s kind of stubbornly stuck there, because of the slow, uneven recovery and the fact that the coronavirus keeps coming back. Jet fuel demand is still very slow to recover. We’ve seen airlines expecting a long recovery from this into 2023. So I think it’s a mixed picture. I think people do want to get behind the wheels and drive their cars.
Q:
How long do you expect full recovery to take?
A: It’s a little risky to generalize from where we are because we’re still in the middle of it. And really, there are two pictures. One is that we have a weak recovery because of the depths of the economic wounds that are left, particularly the impact on small business, and so many of them will not be able to survive. The other, we’ve seen some of that in China, is that when this is over, there’ll be a rebound in economic activity because people will be out and doing things and businesses resume. There may be some changes, one of which is of course, commuting. People have found and it’s now acceptable to work at home. And you know, in a city like Houston, where people might have spent two hours a day commuting, they’ll gain two hours a day by working digitally. So I think to some degree, maybe to a considerable degree, the office of the future will be at home.
Q:
We’ve seen tensions between the U.S. and China escalate, particularly in the wake of the pandemic. How do you view this souring relationship in light of U.S. oil and gas companies’ interest in China’s booming market?
A: The shutting down of the Chinese Consulate in Houston was a huge symbol of how relations between the U.S. and China are changing. At the same time, the trade deal that President (Donald) Trump negotiated with the Chinese at the end of last year, a big element of that is for the Chinese to buy U.S. oil and liquefied natural gas. That market is very important to the global energy industry, because Asia is where the growth will be and companies want to participate in the Chinese market.
It’s just that the politics around the relationship are getting more difficult. How do we not get into a situation where it continues to
spiral downward, because that would not be good news for the energy industry and it wouldn’t be good news for everybody in general.
Q: Climate change is not new, but there seems to be a growing concern and action on this issue. How is the oil and gas industry reacting to this?
A: Not only have governments taken the Paris climate accord as their benchmark, but investors have taken that as their benchmark and companies are now adapting to it and taking it (as) their benchmark partly because investors are demanding it.
Biden has laid out a $2 trillion climate plan, which will involve a lot of investment in alternatives and new technologies and so forth. So, I think it’s kind of a central issue for the oil and gas industry of how to adapt. But energy transitions don’t happen overnight. And the world is going to continue to need a lot of oil and gas. And one of the points that I make in the book is if you did have big restrictions on our domestic oil industry, it would simplymean that we would import more oil. That’s because there’s still 280 million cars in the United States, almost all of which run on petroleum.
Q: There was a fear not too long ago of peak oil, that the world was running out of oil. And now, there’s a sense that we’ll be running out of demand for oil as the worldmoves to electric vehicles and net zero policies. There are a lot of projections about where oil demand is heading. What’s your take?
A: Somuch goes back to what is the nature of the economy in the next several years after this crisis. Is growth renewed, or is growth feeble? I think oil demand will continue to grow. Technology around electric vehicles, batteries and renewable energy could change, but I take the view that it’s probably in the first half of the 2030s that we really start to flatten out and begin a decline. Obviously, some people now think it’s going to be a decade sooner than that.
Q: But the transition is underway.
A: I believe that the real thing that will make the difference is technology; we don’t yet have the technology that we need for the kind of ambitions that are out there. Somuch of our world depends upon plastics. You go into a drugstore today, there’s a plastic shield between the salesperson and the customer. Somebody has tomake that and that’s what is made by the gas industry. The N95 masks that people want to wear aremade out of oil and gas. Pharmaceuticals depend upon oil products and natural gas. One of the things that’s come out of this pandemic is a better understanding of the role of plastics and how important they are to help in this fight.
Q:
What does this mean for Houston?
A: I did a dialogue not too long ago with Mayor (Sylvester) Turner on the subject. Of course, the business community is very engaged in this. I think Houston will continue to be an oil and gas center, but it will also become kind of a technology center for energy writ large, not just oil and gas. I think that will become a bigger part of its future. Obviously, when you have a downturn like this in the oil price, it hits Houston hard, but I think oil prices will recover and Houston will remain the oil and gas capital of the world for quite a long time.
Q:
How can Houstonmake this transition successfully?
A: It really takes partnership between the private sector and the city tomake Houston, a sort of broader, innovative center. I think Houston will make the transition. And of course, the companies themselves will change and adapt to this changing situation. But, as I said earlier, I think oil and gas is going to be with us a long time. And Houston has a comparative advantage against every other city in the world.
Q:
A: If you get beyond the rhetoric about the energy transition and projections, what is it really about? It’s about infrastructure. It’s about an investment. It’s about technology. And it’s about scale. And those are all things that the energy industry is good at doing. So I think that Houston and the oil and gas companies here will be verymuch at the center of that. We’re starting from a point where 84 percent of the world’s energy comes fromfossil fuels today. So you’re talking about a huge infrastructure of investment and embedded activity that just doesn’t change overnight. If you’re going to power what is an $87 trillion economy that’s going to be a $100 trillion global economy, you’re going to need a lot of engineering and a lot of technology and a lot of equipment. And that’s what Houston and energy companies bring to the table.
Why is that so?