Remarks at the Atlantic Council Energy & Economic Summit
Special Envoy, Bureau of Energy Resources
Thanks Ali. I’ll start first off first of all by thanking Fatih for starting his remarks by mentioning Paris. I think that as we talk about energy today part of the overhang obviously from an emotional perspective for all of us everywhere around the world is with Paris but also as we talk about energy and just how fragile the connection between the instability and around the world and geopolitical events can have in a moment on changing all projections that exist before that moment. So not only do I think it’s appropriate to note we’re still less than a week after those horrific events that we’re all here and many from Europe share the… all of us share with the pain in Paris.
But let’s also connect that to how we, how I see the world and connecting some with what Fatih said. And you know last year at the Atlantic Council Congress, the conversation was “the sky is falling” because prices are reaching $80 we’re somewhere between $80 and $85 and is this sustainable and clearly the view was that it was not. It must be a V shape and we’ll be back to a comfort zone of $90 or so and people were willing to agree at the conference that $100 may not be where we’re going but $90 surely is a far better place for us than going towards $80. We’re at $45 today.
So with all of us talking about what we think is going to happen let’s just put it in perspective that we’re glad that we’re not being quoted by ourselves back to us from last year. But there’s a tendency to think that with more… with lower prices and I think that Fatih’s point of people getting giddy about long term low prices I don’t think that he was suggesting that we’re actually going to be at 50 dollars for over a decade but that people have this notion that lower is better if I’m a consumer and this has no implications and I think that Ian did a good job of explaining that it actually does have the implication but I think it’s important for us to understand the world that we are in now without making a projection to the future or an analysis of whether we should ever have been at 100 dollars.
The other thing that happened last year both at this conference but primarily on every TV screen that I could watch anywhere I was around the world was every analyst and every expert was saying that the question now was that which week or month of the lower prices were certain OPEC countries going to cut production there was no discussion of if they were going to and that was obvious but was just about when because clearly the rule has to be that if prices are so draconically down at 80 dollars therefore there has to be an intervention and that producer countries should will be reducing their… cutting production in order to be able to affect price and obviously that too did not happen and we have those same producers that people estimated would be or were projected that they would be cutting production in fact increased production.
And so the question is why, and I think it’s an important question because it changed… it starts talking about the fundamentals of the market that I see and how it connects to the geopolitics of it. There are a few reasons that come to my mind. One is you have to learn from history. You can’t keep making the same decision over again… it’s that old insanity definition of keep doing the same action over and over again expecting a different result. Ian talked about 5 times in his career as he’s seen oil go down 50%, well, producers are aware of that too. And if you look at the reaction of cutting production which was the reaction in the 1980s and in the 1990s, it did not have the desired effect of actually cutting the or stopping the process of reduction of price, and not definitely did not increase it and I think it’s always important to learn from history. I think the second piece though which to me is more important is where I think there’s been a fundamental change in how we view the market. It has not changed the market entirely but it’s introduced new elements to it and that is what happened in the United States. And with the shale development in the unconventional tight oil in the U.S. something different happened and it’s not about the technology. it’s about the who and the where and the how, and that is that the United States, in the private sector, there is no government intervention in deciding quotas or levels of production in any way. There’s also not one NOC or 5 private companies. We have over 4,000 producers that are involved in the tight oil all with different implications, different considerations, different bankers, and different costs of capital and costs of production.
What that changes is that the ability of how to look at the market is no longer government dominated and should injection of a market force that will determine much more based on supply and demand and price. The decision that companies will ultimately have… and therefore again on price and I think that is you know… I’m not in the… for those of you that are familiar with the New York Post, I'm not in the New York Post business of headlines where they you know OPEC. Clearly OPEC is still a very important organization in that it addresses what Ian talked about in spare capacity and I’m going to get back to the point I started with which is the risk.
So even though we’re at a time where low prices -- which makes people happy -- we have a new element of price and element of production which is different today in the United States because of the different decisions by folks and therefore if you reduce production and price rises without any deals occurring at certain boardrooms in Vienna. If you have a price that therefore increases, the shale production can… or the type of production can therefore increase more flexibly and relatively more quickly and easily to address the new reality. The second thing that’s happening in the United States as a result of what Ian talked about which is that it’s not only Chevron. Other companies have gone through the same process. And therefore we’ve seen a far lower cost after looking at efficiency rates and cutting costs and therefore as the efficiency rates go up the cost of production goes down. So the entire conversation that we had when prices that were at about $70 or $80 of what is that tipping point of cost of production in the United States today-- that cost of production is different than it was a year ago which means again that if prices do start coming back up either because of artificial intervention in the market or because of Ian’s discussion of increasing demand and a cutting back of capital expenditures on bringing on new volumes again the U.S. will be able to react slightly more quickly and more flexibly than other places and we’ve seen that in the fact that when projection was… how much would the U.S. decline if prices continue to go to 70 dollars or below they were much more significant than what we’ve seen. So the U. S. market has been far more resilient and even though we’ve seen the reductions in the last in the last several months and we may see some more, the resiliency compared to what the projection was is a direct result of these efficiency rates and going up and the ability to control cost of capital. But we have and we have in addition to that what I would describe Ian’s point as a Darwinian process of projects -- in other words not all the projects that have high cost oil or high cost gas are going to be developed even though we have all the announcements of discoveries and potentials over the last 5 years there’s going to have to be a much more serious look at which ones are the highest value from a dollar perspective of the companies and those are going to be the projects that will be developed.
Now the risk factor for these still, why we’re in this tight market as you refer to it but where I sometimes lose… still think we should lose sleep and that is that risk is not only about price and the risk today is that if there is something catastrophic that happens and that we focus to much in conferences like these about the geopolitical crises that could lead to that could lead to a problem but they could easily be technical, weather related, or an accident. If Macondo, which happened in the gulf of Mexico, which was a terrible accident, but accidents happen elsewhere even if they are avoidable they happen elsewhere, and what happens in this environment if that accident happens or similar consequence in some strategic areas around the world that control the transport of significant amounts of oil. That is why we have to live as though we still have risks, still need spare capacity, still need to work within the IEA context that Fatih just came from and that (International Energy Agency) ministerial of making sure we are all in the same boat that lower prices don’t mean that we can walk away from commitments that we’ve had for 40 years to keep reserves and in case we reach into crisis again and again it doesn’t have to be a geopolitical one.
But there are some other challenges and opportunities that I think we have to address and recognize and look at. And let me just do a couple of them and I’ll leave it there.
One is the fuel subsidies and renewables. This… should be the time that we reduce fuel subsidies if not eliminate them specifically in producer countries. It makes perfect economic sense at this point in time when prices are low and therefore the delta to the actual market price is smaller to be able to take those steps. It’s not only that you’re doing it to save money you’re doing it because it makes sense. The only thing that we know that effects behavior is price. And when you increase price you do to two things: one you save… you get more money for your barrel -- why burn it at two dollars when you can get it at $45 and you change behavior so you increase efficiency rates which are impossible to achieve and near zero cost of energy in some of these countries so this is the perfect opportunity for all of us to get together and push behind on fuel subsidies reform. On top of that I think that it is not an accident that the UAE, an oil producer has taken the lead on fuel subsidy reform as well as honoring renewables, because again it’s not just about the argument of climate change it’s about what makes economic sense. So if you’re an oil producer and you’re not burning your own oil you’re selling it for $45 rather than $2 and you are using renewable energy that is more cost effective while having the subsidies gone from the fossil fuels, it’s not a climate argument it’s a business argument, it’s an economic argument and to me I think this is the perfect time of opportunity to be able to achieve that.
On the challenge front, I think we’ll all be focused on certain OPEC countries and the United States and so on. We have a great challenge facing us as an international community from a geostrategic and foreign policy perspective and that is not every country has a sovereign wealth fund or a future day fund to draw from. There are countries that have 90% or more of reliance for their budgets on hydrocarbons and if this is in fact a lower for longer environment that we’re in where they’re under the 60% below the projections that they had for their own budgets just a couple of years ago, how long can they survive without political social instability? And I think that while it’s -- and we should in these conferences look at some of the big problems that we always do -- we should also look at what are the challenges that we’re not thinking of? Who are the countries that are going to need help where we could have a concern because the answer is you should diversify your economy is a right one as a long-term strategy but not for a short-term strategy an immediate strategy and that’s again a new challenge that we have to recognize side by side -- the advantages of lower prices.
Let me end with the last challenge which to me is a challenge and an opportunity. We are seeing too much, around the world, the use of energy as a weapon and as a tool. And I know that that’s been much discussed here in the last couple of days and will be into the next several months on European energy security and the reliance on a single supply. But it’s not the only place. If you look to central America and the Caribbean where they rely on one supplier it’s a supplier that is giving them dirty fuel oil, at a cost of increased debt when they have the opportunity at low oil prices today to switch to a renewable future not be not only because it’s good for the climate but again because these are islands that have 11 months of sun, wind, and geothermal and natural gas capability. Why rely on one supplier that exerts political influence, political pressure, takes away your freedom, to make decisions when you can be self-reliant on a product where the supply disruption is defined only. That’s a far better future for these countries so again it’s not just the Russia-Europe relationship, it’s true around the world and that’s to me the opportunity in the challenge. The challenge of single suppliers exerting influence of weapon-like influence of oil and gas but the opportunity is oil low prices on how you get out of it. Thank you.