Oil Market Futures: The Policy and Politics Shaping Twenty-First Century Energy

Amos J Hochstein
Special Envoy, Bureau of Energy Resources
Carnegie Endowment for International Peace
Washington, DC
June 28, 2016

Thank you, Bill. I think it is extremely humbling to be here and be introduced by you, and for anyone who works in the State Department, those are warm comments. I envy all who work at Carnegie under your leadership. We are all grateful for all of the things you have done in your career.

I want to start with saying a simple truth that I believe about where we are in the world as a country. I think it’s important not only to understand the reality of the market, but the perceptions of the market, which are just as important, and when you interlink perceptions and reality- that is what makes for foreign policy. This is a critical aspect and that is that the U.S. is a superpower when it comes to energy. Where once we weren’t, and today we are, we are not only rising, but we are the superpower in energy.

This is a big term. It’s important to state it because of not only what it means to us or to the market, but because that is how so many countries around the world view us today. They see us through that lens. But the question becomes, what does that mean? What does it mean to be a superpower in energy? I’ll get to that in a minute.

This has been a transformational time, and I want to take just the last few years, just the last 5-7 years, and I want to see just exactly what transformations we have gone through. In 2011 or 2010, the oil prices were hovering at around $100/barrel, in fact, in the next several years post that, going all the way to 2014, we had very well-paid people in banks across the world declaring $100/barrel to be the new floor for the future, the question then would be how quick we would reach $150/barrel.

At the same time U.S. production was at 5.5 million barrels a day of crude oil. At the time we were imposing sanctions on Iran, Libya was producing in 2011 1.3 million barrels a day, the Saudi Sovereign Wealth Fund and international reserves were climbing at a rate of almost 20% per year, we were an importer of LNG and growing as a largest gas importer in the world, and solar and wind technologies were significantly less competitive than traditional energy sources.

Now, let’s fast forward just 5 years. Oil today is at $47/barrel and that’s after we almost doubled the price from its low 5 months ago. Our production peaked last year at 9.6 million barrels a day, today it is just shy of 9 (million barrels). For context, we have added in the last few years more than Kuwait or UAE produced in total. Our delta of what we have added in the last five years alone would put us on the list of being one of the top oil producers in the world.

While sanctions on Iranian oil have ended, sanctions against Russia are now in place. Libya is producing about 200,000 barrels per day and Saudi Arabia’s Sovereign Wealth Fund has declined by over 50% last year, and will decline more this year. We are now an exporter of LNG from the continental lower 48. We have already exported to Brazil, Argentina, Portugal, Dubai, Kuwait, which is not the story any of us would have predicted back in 2011. Global renewable energy markets are expanding at an unbelievable pace.

Tom Friedman wrote: “Bring on $200/barrel oil!” That was conceived of how we were going to get investment in renewable energy. Back in 2014 when we averaged $100/barrel, in the U.S. we had an investment of $38 billion in renewable energy, in 2015 in the idle of the big decline in oil prices, we saw almost $45 billion invested in renewables. And now that we have the extended tax credits and the certainty of more than one year extensions, we can see according to Bloomberg, almost $70 billion has been invested in renewable, and globally at $330 billion, and this is all during a massive decline of oil prices. So clearly, the dynamics of the markets have changed completely.

Now the question becomes: what does this mean? And, what are the lessons we have to learn?

The first lesson I learned is what Bill had alluded to earlier. Be careful to listening to prognostication on oil prices, in fact, run the other way. Everything I just said, --none of it was predicted in 2010 or 2011. In preparing documents for the transition of President Obama coming into power, they were writing that gas imports would continue to increase and become exponential, where we would need to use diplomacy to attract natural gas resources, and as I said, today we are exporting. Oil exports have declined as a result, and our production has declined as a result of the price decline, but when it comes to natural gas, we haven’t seen a production decline. In fact, now that exports are starting, even with low prices, we continue to grow. We are continuing to grow even with low prices. And this margin is not only about the shale gas revolution.

The resources that the U.S. has in oil and gas are vast - look at what is happening in Alaska, where some of the increases in production of gas are new. We saw the story in Alaska has been a decline in oil production and exports. But now we are seeing increases in Alaska. And EIA estimates that in Prudhoe Bay, the nation’s 10th largest gas field, while the oil has declined, the production has risen (to) 3 trillion cubic feet. That is equal to the domestic gas consumption of either Germany, the UK or Canada, and14% of current U.S. gas consumption. That is a resource that has yet to be tapped for exports, and can, as infrastructure and changes around the -geographic changes- could lead that area to significantly export gas to Asia.

And here’s another significant difference, just a few years ago, Qatar was the single player in LNG. In comparison to anyone else, they controlled the market the (most compared to anyone else in the world). By 2020, the U.S. will be almost equal to Qatar in exports of LNG, and Australia will surpass both countries and become largest LNG exporter in the world. These all have major implications because it means that if you go to the Gulf or Asia, the conversation around energy is surrounded by “What will the U.S. do?” and every action we take is seen through that prism.

How many intellectual articles have been written in the Gulf looking at “What is the covenant between the U.S. and the Gulf? We provide natural resources you provide security and diplomacy. Now that that has been broken because you don’t need our energy, what does that mean for the United States’ commitment to the region?” My answer to that is: Have you seen the Secretary’s travel schedule lately? We have not moved away from the Middle East, and energy plays no role in that. There have been changes the nature of the relationship however. We have gone from a consumer to a competitor, but not in an aggressive way, what I mean by competitor is similar to partners in the energy sector.

Here’s the next area of dramatic change: renewable energy integration. I believe that (Washington) D.C. still looks at these words as mutually exclusive to everything else in energy and it is used as a political tool of brown vs. green. One has to compete with the other. The reality is that when you talk about a $45 billion investment, this is not because of ideology. These investments are [made] because they make money. At the end of the day, the debate about renewable needs to move away from the (discussion of the) 1990s and 2000s into a new phase, and reduce costs so dramatically that renewable is becoming the energy future, it’s not going to happen overnight.

Natural gas is a transition fuel into renewable energy world, but look at where this is really making a difference. For example, the UAE is a country that relies on oil exports for the largest parts of its revenues, and they have made a commitment to renewable energy. They have been fighting to host IRENA (the International Renewable Energy Agency), creating Masdar - a city of renewable energy, and putting in an enormous amount of resources to work towards these goals. Their leadership says that it will not be a future of oil, but to rely on renewable energy instead. When oil prices declined, the action of this government was removing the fossil fuel subsidies in place, understanding that this is the time to take advantage of the new energy future.

Though, I don’t believe we are simply in another curve of declining oil with a lack of investment, shortage of oil, leading to increasing prices the same as 1980s or 1998. This is not the 1980s and I don’t believe we are in the same cycle. I believe that fundamental changes have happened in the energy sector. But we don’t know exactly how it will play out. One factor is the rise of the U.S. as energy producer.

The U.S. is not a country where you have a single point of leadership to call, there’s nobody to go to an OPEC meeting even if we wanted to assign someone. We have over 4,000 producers, and no central figure who can control production. This means that the market becomes a swing producer for oil. The democratization of the oil market is subject to what price it will be at controlling production. This is a big change. The second is the renewable energy change and efficiency.

And here is where I get to why we are a superpower in energy. It is not only because we have increased production in oil and gas, we are a superpower because of oil and gas, and we are a leader in renewables like solar, geothermal, wind, and efficiency standards, R&D, and innovation. In any way you look at the word energy, we are a leader. And the world is looking to us for that leadership.

You expect around the world when you ask the question: What are the leading states in renewable energy in the USA? They think CA (California) or some say Washington state, because they think that the politics of the state translate into renewable energy. You would say Texas. It’s true. If you look at the amount of wind energy coming online in Texas, it isn’t about politics, is about the business. So that’s why when the twin engines for renewable energy are Texas and the UAE, it is reflective of the new world we are going to.

The reason why I think Paris was such a success was not only from the President’s and the Secretary’s tireless efforts, but recognition worldwide that we are entering into a new era. That we cannot simply stick to the old paradigms on energy of energy vs. climate, now together, it’s all combined. There is recognition worldwide that energy policy is in fact climate policy, and vice versa, and therefore it will take diplomatic efforts to address this on the defensive and on the aggressive side.

We still have energy being used in pockets of the world as a tool, as a weapon. If you look at Europe and how Russia deals with Eastern Europe on the supply of gas, and if you look at our own hemisphere in Central America or the Caribbean, where Petrocaribe has been able to be used as a tool, as a lever, for political purposes.

But what’s changed in the Caribbean or Central America? The same thing I have just described in the Middle East. Caribbean states have full access to 11 months of sun, wind, some cases geothermal, and the proximity to the U.S. gas market where if you look at the size and scale of islands they can better connect, it changes the game. The innovation piece that I discussed before in the U.S. leads to what was thought as completely impossible, gas exports to the Caribbean, to today be possible, to some islands and by the end of the decade, and to almost all islands.

That is the change that every country around the world realizes: they can diversify their supply and make their investments grow, and the U.S. is where they are turning to time and again for the support across that value chain.

So I think what we have discussed today, in this conference today what the future of the market is: I have no idea what the oil price will be today next year. I know it won’t be what everybody tells me it is going to be, so I try to make other plans but I think it doesn’t matter.

I think what matters is the extent to which we can continue to invest across the value chain of energy in renewables but also to the fossil fuel side. So that we can truly grow both our domestic economy, allow other countries to grow as well, and make sure that the basic rule of thumb in economics, you cannot grow an economy without access to affordable and reliable sources of energy, that that part of the equation is removed. The use of technology and the use of innovation and support from the international community and the United States coming together will solve that part of the problem. I think we will soon be able to take energy out increasingly equation as far as geopolitics, and as far as the manipulation of energy by making it more diverse across the planet. That will lead us to a better, easier foreign policy, fewer headaches and a lot more support and interconnection and integration worldwide.

Thank you very much I appreciate it.